Strategic gaps in the paywall

paywall? what paywall?At Slate, Matt Yglesias reports that advertising revenues are down, but subscription revenues are up, at the New York Times:

I’ve been skeptical about digital subscription models for a long time, but I’m turning into a believer. A key change has been the development of technological means of making the paywalls actually pretty porous, which turns them into more a form of price discrimination than anything else. A well-designed paywall attracts revenue from hardcore fans of a website while still making it possible for casual fans to read the occasional article and thrifty people to sneak around it. The Times Company is announcing a “New Strategy for Growth” today that seems largely focused on developing finer-grained forms of price discrimination, such as making it possible to buy a cheap subscription to just a sub-set of the overall NYT content.

Why does a well-designed paywall allow some people to sneak through? There are two ways papers make money: subscriptions and advertising. The pricing model for subscriptions needs to take into account the advertising side – make what you can from people who are willing to pay for the subscriptions, but from people who are not, do not worry about letting them through, since it helps boost advertising demand. It can’t be made too easy to sneak through, since in that case the subscription base would collapse. So in the same way that Broadway theatres make it possible, but inconvenient, to buy day-of-show tickets at half-price, so the Times will make it possible, but inconvenient, to get through the paywall.

There is another consideration. I would venture that the consumer demand for the Times is in some degree dependent upon network effects. That is, I am more interested in reading the Times the more I believe that other people are reading it – I want to be ‘in the loop’. When demand is influenced by network effects, it can make sense for the producer to allow some people (but not all!) to sneak around the paywall, in order to build the size of the network. For example, if I were making an office software package that I wanted to become the dominant seller worldwide, I would not be upset if some users, especially from places with low ability or willingness to pay for the good, found a way to get free copies.

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