Is a large circulation newspaper likely to generate more revenue by charging for its online edition or making it free to maximize advertising revenue? Is the online version of a newspaper a complement to the print version—or a substitute? The stakes are high and the answers have been elusive. With few exceptions, since the dawn of the Internet Age, newspapers have been wrestling with whether this new conduit would be its friend or its death.
Of course, we will know in the long run, when some media historian looks back on this time from 20 years hence. But that doesn’t help today’s decision makers. That is why the research of University of Chicago economist Matthew Gentzkow published earlier this year in The American Economic Review is so helpful.
In this highly data driven paper with the typically academic title, “Valuing New Goods in a Model with Complementarity: Online Newspapers,”, Gentzkow blends consumer data from the Washington, DC market with newspaper operating results to address three questions: What is the relationship between print and online versions on 1) the demand for either diversion, 2) on the welfare of consumers, and, crucially, 3) on the impact of charging consumers for the online product?
With 30 pages of assumptions, explanation and calculations, Gentzkow makes a well substantiated finding that, The Washington Post would have been better off charging a modest sum for its online version (on the order of $6.00/month) until about 2004. After that, however, the growth in online advertising expenditures crossed over to affirm that it is significantly more profitable to set a zero price for the online editionwhen one factors in even a small transaction cost for online payments. He suggests that his findings are robust enough that they would likely apply to other big city newspapers.
Along the way, Gentzkow upends the early assumption that the print and online versions of a newspaper were complements. Applying a more sophisticated demographic model than had been used in the past, which simply looked at newspaper readers and online readers, Gentzkow concludes that the substitution effect is “nonnegligible." He does add that ”it is “small, however, relative to some earlier predictions.” In other words, real but not likely “to threaten the survival of print media,” at least right now.
Gentzkow further quantifies the “consumer welfare benefit” created by having a zero consumer price for online newspapers, which he put at $45 million annually for The Washington Post’s market. For the 2000-2003 period that came at the expense of Washington Post Co. stockholders, as he calculated it lost money by giving away the online edition when it could have made a profit by charging for it. (Among the factors here is that, as substitute products, by charging for online, some print subscribers would have continued with their subscriptions instead of switching to the online offering). Starting in 2004, however, the Post was more profitable with the free online version that it would have been with an online use charge
Having seen considerable discussion about whether The Wall Street Journal would be better off making its online version free, as the The New York Times has done Gentzkow’s approach is another data point (a rather large one at that) to reinforce the advertising supported model, for mass market newspapers, at least. There are numerous instances, however, where a consumer-paid model will still be needed. In the magazine business, for example, advertising revenue for many of the mass audience magazines, such as People or TV Guide, can be 50% or more of total revenue. But there are many niche publications, such as The Nation or Weekly Standard, that are highly dependent on subscriptions for the bulk their revenue. It is likely to be the same for niche online sites.
Of course, we will know in the long run, when some media historian looks back on this time from 20 years hence. But that doesn’t help today’s decision makers. That is why the research of University of Chicago economist Matthew Gentzkow published earlier this year in The American Economic Review is so helpful.
In this highly data driven paper with the typically academic title, “Valuing New Goods in a Model with Complementarity: Online Newspapers,”, Gentzkow blends consumer data from the Washington, DC market with newspaper operating results to address three questions: What is the relationship between print and online versions on 1) the demand for either diversion, 2) on the welfare of consumers, and, crucially, 3) on the impact of charging consumers for the online product?
With 30 pages of assumptions, explanation and calculations, Gentzkow makes a well substantiated finding that, The Washington Post would have been better off charging a modest sum for its online version (on the order of $6.00/month) until about 2004. After that, however, the growth in online advertising expenditures crossed over to affirm that it is significantly more profitable to set a zero price for the online editionwhen one factors in even a small transaction cost for online payments. He suggests that his findings are robust enough that they would likely apply to other big city newspapers.
Along the way, Gentzkow upends the early assumption that the print and online versions of a newspaper were complements. Applying a more sophisticated demographic model than had been used in the past, which simply looked at newspaper readers and online readers, Gentzkow concludes that the substitution effect is “nonnegligible." He does add that ”it is “small, however, relative to some earlier predictions.” In other words, real but not likely “to threaten the survival of print media,” at least right now.
Gentzkow further quantifies the “consumer welfare benefit” created by having a zero consumer price for online newspapers, which he put at $45 million annually for The Washington Post’s market. For the 2000-2003 period that came at the expense of Washington Post Co. stockholders, as he calculated it lost money by giving away the online edition when it could have made a profit by charging for it. (Among the factors here is that, as substitute products, by charging for online, some print subscribers would have continued with their subscriptions instead of switching to the online offering). Starting in 2004, however, the Post was more profitable with the free online version that it would have been with an online use charge
Having seen considerable discussion about whether The Wall Street Journal would be better off making its online version free, as the The New York Times has done Gentzkow’s approach is another data point (a rather large one at that) to reinforce the advertising supported model, for mass market newspapers, at least. There are numerous instances, however, where a consumer-paid model will still be needed. In the magazine business, for example, advertising revenue for many of the mass audience magazines, such as People or TV Guide, can be 50% or more of total revenue. But there are many niche publications, such as The Nation or Weekly Standard, that are highly dependent on subscriptions for the bulk their revenue. It is likely to be the same for niche online sites.
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