In his usual fashion, Paton announced the paywall rollout by posting his thoughts about the move on his personal blog. He said that Digital First tried several other approaches to increasing revenue — including “hard” paywalls, which don’t provide any free content at all, as well as “survey walls” created in partnership with Google, which ask readers to fill out a questionnaire before they get access to the paper’s content. But neither worked very well.

“Our experiment with Google Consumer Surveys, while initially a success, gradually fell off in its effectiveness and reduced our online traffic growth wherever the surveys were in place. Our newspapers, which had basic, traditional paywalls… failed to generate any kind of significant revenue.”

Trying to manage the decline of print

As a result of the legacy costs associated with the printed newspaper business — costs that forced Digital First to put one of its papers into bankruptcy protection for the second time last year — Paton said that the company was effectively being forced to add metered paywalls (which will be run by Press+) at all 75 of its major newspapers, in order to shore up its revenue while it tries to make the transition from print to digital.

“Print dollars are becoming digital dimes. But costs are still in dollars and, like most newspaper companies, we are radically reducing those costs. Companies like Digital First Media have to manage the decline of one medium while building for – and in some cases, waiting for – the new revenue streams to grow.”

But while most media executives who have announced paywalls have made it sound as though they are striking a blow for the future of journalism — or that readers should somehow feel grateful that they are being allowed to pay for all the wonderful news these papers produce — Paton went out of his way to say that he doesn’t see paywalls as a long-term strategy.

“Let’s be clear, paid digital subscriptions are not a long-term strategy. They don’t transform anything; they tweak. At best, they are a short-term tactic. I have said that often enough in the past. But it’s a tactic that will help us now.”

In February, Paton said that paywalls were “a dangerous management distraction to the real job of adapting a legacy business to the realities of an Internet world,” and that “you don’t transform from a broken model by tweaking it – you build something else.” If the revenue problems of traditional media weren’t already clear, they would be even more obvious now that one of the industry’s most vocal paywall opponents has had to jump on the bandwagon, even for a short time.

Post and thumbnail photos courtesy of Shutterstock / Voronin76

Paton, whose company is one of the largest newspaper publishers in the United States with revenues of about $1.5 billion, didn’t try to sugar-coat his view of where the problems lie or couch it in terms of broad industry shifts related to advertising revenue and so on — instead, he laid some of the blame for the industry’s woes directly at the feet of CEOs and editors (his presentation and related commentary also appears on his blog).

Editors who are resisting change, Paton said, “are aided and abetted by lousy CEOs and news executives who refuse to take the necessary risks to build this industry’s future.”

“Why? Because the past is safe. The past is known. And while holding onto the past will surely kill our future, for many executives it is still a great way to earn a living – just as long as it lasts.”

In more concrete terms, the Digital First CEO said that while his company and others have had some success in growing their digital-advertising revenue — it was up almost 90 percent last year at Digital First, he said, compared with 2009 — the continuing free-fall in print-advertising revenue is still overwhelming any of that growth, as well as the gains from cost-cutting and other financial restructuring.

Profits will fall another 40 percent

The result, said Paton, is that if newspaper chains like his and McClatchy and Lee Enterprises continue to have the kind of “success” that they have had so far in making the digital transition, profits will decline by a further 40 percent or so over the next three years — and even that forecast assumes the decline in print advertising and other factors don’t accelerate during that period. In effect, every $1 of profit today will become 56 cents of loss in five years, if current trends continue.

Paton’s description of the near-term future is a stark one, but it is reflected in the financial results of almost every major publisher in the country — and that includes top-tier publications such as the New York Times, where even one of the world’s most successful paywalls is barely keeping the water from coming in over the side. As I’ve argued before, newspapers are running the Red Queen’s race from Alice in Wonderland, where they have to run faster and faster just to stay in the same place.

Paywalls only buy a little time

The Digital First Media CEO, who has talked before about how media companies have to give up their role as information gatekeepers in order to broaden their reach and engage with their readers, said that subscription plans have a place in the future of media — but not paywalls, which he described as “a stack of digital pennies.” Paton said he prefers “all access” plans that bundle print with digital products, but even those are only stop-gap measures rather than a solution.

“All Access is nothing like a solution for our industry but it could buy some gas in the tank to get down the road. It is currently the rage in our industry because it doesn’t require you to think too much about the digital future you have to build – just what you might be able to charge your print customers today for it.”

Paton said he is trying at Digital First to cut costs as quickly as possible in the legacy side of the business (moves that have included the somewhat controversial bankruptcy filing of the company’s Journal Register unit, where Paton started as CEO) and to invest in new digital programs that could be the foundation of future growth — such as the chain’s Project Thunderdome, a centralized content-management project, and the use of services like NewsCred to replace older tools for publishing content.

The Digital First CEO also tried to drive home what these changes mean for the chain’s legacy print operations and those whose jobs are concentrated there. In effect, he said, editors and reporters will have to find ways to change or be left by the wayside:

To soften some of that blow, Paton also announced during his presentation that Digital First Media will be rolling out a profit-sharing plan for all employees — both union and non-union — in the coming weeks. The plan won’t be available to senior executives of the company, he said, because “they’re well paid and it’s enough already.” He also urged staffers at newspapers everywhere to “hold your editors, news executives, sales leaders and most of all your CEOs to account” and to “demand change.”

Post and thumbnail photos courtesy of Flickr user Zarko Drincic

In case you’re unfamiliar with the players, Digital First Media is a legacy newspaper company with a large presence in California and the Northeast. Its fire-brand CEO, John Paton, has said he loves newspapers but that “newspapers don’t love me anymore” and that “you’re an idiot” if you think print isn’t going away.

NewsCred, meanwhile, is a technology-heavy syndication service that has quietly built an impressive array of partnerships with everyone from Bloomberg to the New York Times. The company this year received another $15 million in funding, and is becoming a go-to for everyone from brands to news websites looking for quality content.

Digital First, which has said it must double its $165 million in digital ad revenue in three years, said the NewsCred partnership will allow it to build new content areas in a short time. The company did not disclose specifics of its strategy but one can imagine a scenario where it will tap into its customer data in order to funnel existing newspaper subscribers into its growing digital properties.

• On paywalls: “I don’t think paywalls are the answer to anything. If we’re swapping out print dollars for digital dimes, I think paywalls are a stack of pennies. We might use the pennies in transition to get where we’re going.”
• On the future of print: “Newspapers in print are clearly going away. I think you’re an idiot if you think that’s not happening. I don’t think that news organizations are dying but are newspapers going to stop running in print? Yeah. Absolutely.”
• On print vs. digital: “We have $1.3 billion in revenue. And of $1.3 billion, $900 million is advertising and $165 million of the advertising is digital advertising. That $165 [million] is going to have to more than double in three years. To do that, we’re going to have to take some risks on the print side. That’s the one thing that scares the [expletive] out of everybody.”
• On newspapers: “I love newspapers. I’m a newspaperman. My father was a printer. I started off as a copyboy. I love newspapers. But they don’t love me anymore.”

Paton also talked about the bankruptcy of one of Digital First Media’s subsidiaries, the Journal-Register Co., which filed for court protection last year for the second time — driven by what DFM said were massive commitments related to pensions and other costs taken on when the newspaper industry was better off financially. A group of funds managed by Digital First’s financial backer Alden Global eventually bought the company’s assets back. Said Paton:

“The process allowed the company to shed a bunch of legacy obligations it could never afford that it incurred when it was a much bigger company. The Journal Register incurred most of its long-term debt, most of its pension obligations, most of its lease obligations when it was nearly twice the size the company that it is today, which is kind of what’s happening to newspaper companies.”

Paton, who took over Digital First Media in 2011 and has published a number of manifestos about the need to put the web first — both at DFM and in his previous job at the Journal Register Co., a unit of DFM that recently filed for bankruptcy for the second time in 4 years — starts his announcement by saying he doesn’t like paywalls and thinks most publishers are implementing them incorrectly (Note: We are going to be discussing paywalls and other forms of monetization at our paidContent Live conference on April 17 in New York). As Paton puts it in his post:

“I think they can be a dangerous management distraction to the real job of adapting a legacy business to the realities of an Internet world… you don’t transform from a broken model by tweaking it – you build something else. I think paywalls, meters if you like, are exercises in tweaking not transforming. Most paywalls in the US are simply initiatives in subscription price hikes – bundling digital with print with no clear plan for sustainable growth.”

That said, Paton admits that since he is the CEO of a company that needs to find new sources of revenue, he is experimenting with paywalls, or what he calls “the Subscription Project.” Part of this involves trying to fix the existing paywalls or subscriptions plans at some of the chain’s newspapers — paywalls that Paton inherited when he took the job of CEO (when paidContent’s Staci Kramer interviewed him about what he planned to do with them, he said they would remain until he figured out whether they worked).

Digital First is experimenting with a Google survey

Paton says in his post that the performance of these paywalls at 22 of the company’s newspapers was “abysmal.” After watching them for a year, he says they had brought in just $300,000 in revenues — not enough to make a difference at a company whose annual revenues are close to $1 billion. Paton says this failure is now internally referred to as “Paywall 1.0.” The second version of this effort is coming soon, the Digital First CEO said, after doing some research with paywall operator PressPlus into best practices around charging subscribers for digital content.

Meanwhile, Paton said the company is also experimenting with a different kind of wall around some of its content — namely, a “survey wall” operated in partnership with Google and its consumer survey unit. At all 75 newspapers belonging to DFM’s MediaNews Group unit, a group that includes the Detroit News and the Denver Post, readers will be asked to fill out a short survey after reading a certain amount of content. Google has been promoting this idea as an alternative to traditional paywalls.

According to Paton, the Google survey experiment is beating the paywall experiment in terms of revenue growth, although he adds that both “cause traffic issues.” And he said Digital First Media is planning a future test that will combine digital subscriptions for some of the chain’s print products and mobile apps with Google’s survey wall. In the end, he says:

“It is too soon to say what will work and what won’t. But I think we can say that emotional arguments over what something is worth in a market economy is a near worthless waste of time at the expense of finding real solutions to the problem.”

With Digital First Media now experimenting with paywalls, and the Washington Post — another prominent holdout on the idea — reportedly considering a subscription wall as well, it looks like the only major players who remain steadfastly against the trend are The Guardian in Britain and USA Today, where publisher Larry Kramer has confessed that the paper simply isn’t unique enough to convince people they should pay money for it.

Post and thumbnail images courtesy of Shutterstock users Daniilantiq and Voronin76

There has been a lot of criticism of Newhouse-owned Advance Publications since the media chain announced it was scaling back printing of some newspapers in Louisiana and Alabama, including the Times-Picayune in New Orleans, which will now only be printed three days per week, with a website picking up the slack. Some celebrity fans of the city have written an open letter asking the Newhouse family to either return to printing daily or sell the newspaper to someone who will, but the chain has refused. Are the critics right? In a blog post on the issue, Digital First Media CEO John Paton makes a strong case that the Times-Picayune has to find some way forward in a digital world, as all newspapers do: There is no going back.

Although the changes announced by Advance affect daily newspapers in Alabama and other states, shutting down the daily printing for the Times-Picayune has attracted the lion’s share of attention, in part because of eulogies written by New Orleans fans like David Carr, a media writer for the New York Times (who initially broke the news the paper would no longer be printing daily and would also be laying off staff). Critics say the bond between New Orleans and its printed newspaper is different than it is in other towns and cities, as a result of incidents like the disastrous flood of 2005.

Change is coming, whether newspapers like it or not

Carr and others have tried to make the case that having a daily newspaper in print — rather than just an online operation — makes a crucial difference in how journalism is practiced in New Orleans, and they point to the low penetration of Internet access in the region. But Paton, who recently took the helm of Digital First Media (the parent company of newspaper owner Media News Group) after turning around the bankrupt Journal-Register Co. chain, argues Newhouse had no choice but to make some drastic moves in New Orleans and elsewhere, as print advertising revenue continues to dwindle. As Paton puts it:

An old and distinguished business in New Orleans has seen more than half of its revenue disappear in five years and has decided to change how it conducts business — before it goes out of business . . . The business is not alone in its problems. Everyone they know in the same industry has the same problems. Everyone knows something has to change.

Much of the coverage has focused on the way Advance communicated (or miscommunicated) the news, the departure of some key staffers from the Times-Picayune and other newspapers, and also the fact that the chain’s websites — including NOLA.com, which is expected to pick up coverage from the no-longer-daily paper — are underwhelming in the extreme when it comes to being bastions of local journalism. Some reporters have also been offered online jobs with odd titles such as “buzz reporter,” which hasn’t exactly helped to dispel such concerns.

No one knows what the right solution is

In his defense of the changes, Paton acknowledges the chain communicated poorly, didn’t have its new digital assets in shape before it made the announcements, let some key writers go when it shouldn’t have, and made other mistakes that “chew[ed] up a lot of goodwill.” But despite those failings, Paton — whose own chain has made some dramatic changes at many of its newspapers in an attempt to deal with a decline in ad revenue — says he supports Newhouse and its desire to try something different:

I support them because their industry is my industry and it will not survive without dramatic, difficult and bloody change. And like them I am willing to do what it takes to make our businesses survive.

In a lot of ways, the criticism triggered by Newhouse’s moves is similar to the backlash some other newspapers have faced for using outsourcing services like Journatic, which was attacked recently after using fake bylines on some of the content it provided to papers like the Chicago Tribune. As I argued in both a post on the topic and a segment on WNPR earlier this week, newspapers of all kinds are trying to find whatever means they can to cut costs, since they are facing an almost unprecedented decline in advertising revenue. Some are trying paywalls, some outsourcing: No one is sure of the right answer.

Could Newhouse have done a better job of handling the printing changes at the Times-Picayune and other papers? Almost certainly. And it remains to be seen whether the chain will actually devote the kind of resources to NOLA.com and its other online properties that they require (although it should be noted the Times-Picayune published online only for several days during the floods of 2005 and later won a Pulitzer Prize for its work). But it is no different from any other newspaper owner, all of whom are trying to find a way of salvaging what they can from the wreckage of their former business model. Trying to return to the glory days of old just isn’t an option.

Post and thumbnail images courtesy of Flickr user Zert Sonstige

As newspaper owners like Newhouse-owned Advance Publications try to stem the cash flowing out of their businesses by shutting down the presses, there are a number of ways to look at their decision. On the one hand, it can be seen as an attempt to manage the much-needed transition from a print-based business to a fully digital one. Media analyst Jack Shafer, however, sees it another way: he suspects that many newspaper companies are in the liquidation business — in other words, they are simply squeezing as much value as they possibly can out of their properties before they discard them. As sensible as this may seem from a financial point of view, however, it misses the larger opportunity that the web represents.

Shafer’s liquidation idea is based in part on a theory advanced by author Philip Meyer, in a 2004 book called “The Vanishing Newspaper: Saving Journalism in the Information Age.” Meyer described what he called the “squeeze scenario” a newspaper owner might use if they wanted to get out of the business but didn’t want to sell — either because they couldn’t find a buyer or didn’t want to accept a low price. In a nutshell, that owner would jack up the price of his product (as many newspapers have been doing) while at the same time cutting back on the content and the quality of the product by laying off staff, shutting down expensive features like investigative reporting, etc.

Unless you are reinvesting, you are in liquidation

While this has the short-term effect of improving profit margins for the publisher, Meyer argued that over the longer term this would amount to liquidating the main asset of a newspaper: namely, the goodwill associated with the brand. According to Meyer’s analysis, this goodwill makes up about 80 percent of a newspaper’s overall value — and particularly the value that allows newspapers to attract orders of magnitude more advertising than would normally be dictated by the amount of time that consumers spend reading them, something that was made obvious by a chart that former internet analyst Mary Meeker used in a recent presentation about media advertising.

In his post on the liquidation theory, Shafer notes that newspaper owners who are executing this strategy likely won’t describe themselves as doing this — for obvious reasons, since it would make them look cruel — and may in fact protest that they are doing the opposite, or that they have no choice. But as he puts it:

Sellers of newspaper goodwill might protest that the financial losses they’re absorbing constitute a serious investment in the newspaper’s future, that they’re harvesting nothing. But don’t be fooled. If you’re winding your company down with no strategy to wind it up, you’re burning goodwill even if you don’t acknowledge it.

Liquidating a company in this fashion is something that professional “vulture fund” investors often do in damaged industries (such as the railway business, the traditional telecom industry, and so on). That is, they acquire assets cheaply and then squeeze as much value out of them as possible until they are virtually worthless. In fact, it’s the kind of thing that investors like Berkshire Hathaway billionaire Warren Buffett are very good at — which raises questions about what Buffett’s long-term strategy is in buying newspapers. He claims that he is committed to the industry for the long haul, but what exactly does he mean by that?

Without a strategy for adapting to digital, newspapers are lost

One of the things that makes it hard to cheer for Buffett, or for Advance Publications — unless you are a die-hard devotee of print for print’s sake, of course — is that neither has advanced a plausible strategy for making the transition from print to digital. Buffett has said that he doesn’t see the point in shutting down the printing presses a few days a week, as both Advance and Canada’s Postmedia are doing, and in fact he sees this is a step backward. So then what is his strategy for moving his community newspapers online as print declines?

Advance, meanwhile, has said that it plans to invest more in digital as it cuts back on staff and stops printing every day. But those promises have been noticeably vague, and the evidence from places like Ann Arbor and Seattle — both of which lost their daily newspaper in recent years — doesn’t exactly fill anyone with confidence. One of the prominent themes in criticisms of Advance from people like actor and New Orleans resident Harry Shearer is that Nola.com, the company’s online portal, is lackluster at best and embarrassing at worst when it comes to doing actual journalism.

In order to avoid the accusation that they are just liquidating the goodwill of a generation of readers (and advertisers), newspaper owners need to at least have a plan for reinvesting some of those proceeds in the digital end of their business. The best-case scenario is that they re-engineer their papers the way John Paton has at Digital First Media, by putting the web first and print second — and by hiring or promoting people from within who understand the challenges and opportunities of an online media business. In my view, they also need to think less about how to erect a paywall and more about how to benefit from what Guardian editor Alan Rusbridger calls “open journalism.”

But the bottom line is that without some kind of strategy, as I tried to point out in a recent post, an online newspaper becomes simply another voice among thousands of other digital information sources — and that too will result in the eventual liquidation of goodwill, whether its owner wants to admit it or not.

Post and thumbnail images courtesy of Flickr users Shironeko Euro and George Kelly

This article originally appeared in GigaOm.

What happens to the MediaNews paywalls? It is too early for me to figure the future of Media News Group’s paywall experiment. They have just started and I have to come up to speed on their rationale for launching and criteria for judging success.

Is there a chance you could wind up deciding paywalls — or at least trials of them — make sense in some places while staying away from them at JR? It is possible but clearly I would have to be convinced paywalls are worth management’s time in pursuing and that they are part of a comprehensive strategy to grow audience.

Were you aware of the Bay Area consolidation (from 11 newspapers to two) and do you approve? Will you change it at all? I was not made aware of the Bay Area consolidation prior to that initiative. Again, I have to come up to speed on the rationale before making a comment.

What is the single greatest change MediaNews needs to make to be digital first and how do you go about it? The single biggest challenge at Media News Group – is the same that exists at any newspaper company – culture change. To understand the nature of how news is created and consumed today and what role journalists and newsroom play in the new news ecology.

Using Press +, MediaNews launched metered paywalls — digital subscription required after five free pages a month — at 23 of its papers last month. Unlike the New York Times or some other papers, digital access isn’t bundled with print. Instead, print subs get a discount of $1.99 per month or $19.99 per year for online access, while non-print subscribers who want full access have to pay $5.99 per month or $59.99 per year. Home pages, classifieds, obits and announcements are also free. The Chico Enterprise-Record, York Daily Record and York Dispatch have older online subscription plans in place. Dean Singleton, the CEO at the time, promised in 2009 MNG would avoid a “cookie-cutter approach” in favor of a market-based strategy. Singleton, chairman of the Associated Press, remains chairman of MediaNews.

Despite his feelings about paywalls, it’s not a stretch to see Paton trying a variation that would include bundling to encourage more digital adoption by print subscribers or to look for some other options that may work on a market-by-market basis — particularly if local advertising get hit. It’s also not a stretch to see him shutting it all down.

It’s a huge jump for Paton, who will be managing nearly 11,000 people and running the second-largest newspaper chain in terms of circulation with a presence in 18 states. He comes in just weeks after a major MediaNews shakeup in the Bay Area. More to come; in the meantime, here’s the way Paton’s pitching it on his Digital First blog.

Paton firmly believes “digital dimes can replace print dollars”, offering Journal Register as an example:

Since implementing our Digital First strategy in mid 2010 our Digital audience has doubled to more than 12.3 million uniques and our entire audience has grown from 14.9 million monthly customers on all platforms to nearly 21 million customers.

That’s more customers for what we have to offer. A lot more.

In Q2 of this year, 10 of JRC’s 18 dailies are up year over year in advertising or within 2% of last year’s ad revenues because of digital advertising growth. JRC newspaper digital revenue grew more than 81% year over year in Q2. That’s against an industry average of less than 10%.

How this will apply to the MediaNews papers remains to be seen. For instance, most of the smaller papers are trialling versions of paywalls now while Paton is firmly on the record preferring open ad-supported access. I’ve reach out to Paton on that and other aspects and will update when I have more.

————————————————-
Journal Register Company, one of the nation’s leading local news and information companies, announced today the creation of Digital First Media Inc. Digital First Media will manage both Journal Register Company and MediaNews Group Inc.

John Paton, as the Chief Executive of Digital First Media, will act as CEO of both Journal Register Company and MediaNews Group.

In a separate release, MediaNews Group, the nation’s second largest newspaper company as measured by circulation, announced its appointment of Mr. Paton as CEO and the new agreement with Digital First Media. Mr. Paton, a director of Journal Register Company, has also been appointed to MediaNews Group’s board of directors. Mr. Paton and Digital First Media will report to the boards of both MediaNews Group and Journal Register Company.

This arrangement provides MediaNews and Journal Register Company with immediate cost benefits, and the ability to leverage the combined scale and expertise of both companies for their mutual benefit.

“This allows these two great companies to accelerate our Digital First strategy of transitioning from what have largely been print-centric businesses to modern, multi-platform media companies focused on local news and advertising,” said Mr. Paton, who is also a director of the Newspaper Association of America. “I am very excited to be working with MediaNews Group and the Journal Register Company teams. This initiative creates a local news powerhouse with more than 880 multi-platform products in 18 States serving more than 57 million Americans per month for the benefit of our communities, customers and employees.”

“Media News is intent on continuing its transformation from a print-oriented newspaper company to a locally focused provider of news and information across multiple platforms. At the forefront of our efforts is developing a successful digital strategy. With ‘Digital First,’ John has implemented just such a digital strategy for Journal Register Company. We are delighted to tap into John’s experience as we accelerate further our successful transition to a digital world,” said Dean Singleton, who will step down as CEO of MediaNews Group. Mr. Singleton, who is the Chairman of The Associated Press, remains Chairman of MediaNews Group and the publisher of the Denver Post and Salt Lake City Tribune.

Digital First Media represents the codification into a management company of a digital strategy that Journal Register Company has been pursuing with great success since February 2010, when John Paton was named Chief Executive Officer of Journal Register Company. MediaNews will benefit from that experience, and from cooperation with Journal Register Company, as it continues its own evolution to compete in the new media landscape.