Matthew Shanahan's Blog
Paywalls soften but don't alleviate the online advertising problem
February 1, 2011
As print circulation and revenues decline, digital audiences and revenue have to take their place. Because online advertising has not yielded the same revenue as print advertising, many publishers are looking to paywalls to solve the digital revenue problem, but paywalls only soften the blow.
The reality is that the yield from online advertising has to improve or many shareholders will lose on their investments. An analysis of the 2009 Annual Report from the Washington Post Company illustrates the financial impact of a paywall on digital revenue and publisher valuation.
In 2009, total revenue from the Washington Post newspaper operations was approximately $529.4 million. Print advertising revenue was $317 million, or 68% of the total; subscription revenue was 29% ($133.2 million); and 3% ($13.8 million) came from other sources. Overall digital revenue was $99 million across all newspaper operations, but washingtonpost.com was the majority ($70 million is assumed for this analysis). Although not the case for the Washington Post newspaper operations in 2009, this analysis assumes a steady-state business with a pretax profit of 15%.
Maintaining profits for shareholders
To maintain valuation on the move from print to digital, the newspaper operations need to continue to deliver the same profits (i.e., P/E ratio). From a shareholder perspective, the 15% profit from the $459.4 million of print revenue needs to turn into digital profits. Because digital does not have the print production and distribution expense structure, a lower amount of revenue should be able to generate the same profits. Assuming circulation revenue roughly covered print and distribution costs, digital would need to produce $325.2 million ($459.4M - $133.2M) of incremental revenue to maintain the profits for shareholders. The total digital revenues would need to be $395.2 million ($325.2M + $70M).
The 2009 average revenue per user for digital was the $70 million we assumed divided by 23.9 million monthly uniques stated in the annual report, or $2.93. Generating the $395.2 million requires either an increased ARPU or a larger audience – or, of of course, both.
To produce the $395.2 million on current digital ARPU, the Washington Post would need an audience of 135.2 million, or 5.65 times the current audience. Because dramatically changing the size of the digital audience is not likely, the logic is to increase ARPU – specifically with a paywall.
Financial impact of a paywall
Let’s assume the Washington Post decides to put up a paywall and assume it has a meter, such that once a reader reaches a predefined limit on articles per month the reader needs to subscribe. As a result, only fans of the newspaper are likely to purchase an online subscription. Our studies have shown fans make up about 5% of an audience. For the Washington Post, this would translate to 1.19 million fans in 2009.
Assuming the paywall has the same rate as the print product ($280/year) and 50% of fans convert to a subscription, the revenue from the paywall would be $167 million. To reach its revenue target ($395.2 million) would require $229 million in advertising revenue. But digital advertising is currently only yielding $70 million – that's a $159 million shortfall.
At this point, a newspaper operation would have one of two options: cut expenses to achieve profitability or increase yield of advertising revenue. Cutting the expense would result in lower profits and lower valuation – the shareholders would lose money. To generate the necessary profits, the yield in advertising revenue has to be addressed. Yes, paywalls can soften the blow, but advertising yield has to be 3 times or more its current yield to keep existing shareholders whole.