Why a paywall might make sense for the Telegraph this time

Earlier today the FT broke the news that the Telegraph is (probably) joining the Times, FT and indeed News of the World by putting up a paywall next year. A spokesman told Reuters by email that "absolutely no decisions have been made on the introduction of a paid-content model," but a number of Telegraph execs appear to have confirmed to the FT that there would be a paywall in place before the end of 2011. 

Paywall experiments over the past ten years have been a disaster for online newspapers. However, the Telegraph's move could perhaps be justified by two fundamental changes to this market - an increased scarcity of professional journalism online, and the effective collapse of the Telegraph's current commercial model, occasioned primarily by Facebook. 

The Times' paywall has cost it somewhere north of 90% of its pre-paywall audience. The News of the World paywall, contrary to widespread claims, has cost it something between 90% and 100%. Older experiments, such as the Irish Times moving Ireland.com behind a paywall in 2003 (which it abandoned in 2008) converted one quarter of one percent of its pre-paywall audience to paying subscribers, a figure commonly quoted last decade as the maximum likely success rate for news publishers trying to convert free readers to paying subs. Arguably therefore newspapers have got a lot better at charging for access to their websites over the past ten years. But it remains that erecting a paywall means accepting the loss of at least 90% of your audience, and being left trying to make back in subs what you lost in ad revenues.  The economics of this choice have not, so far, added up for any (non-specialist) newspaper that's tried it.

The Telegraph announced a return to profitability last year, so the paper can hardly be dismissed as a millionaire's vanity project kept afloat to peddle political influence. The Telegraph is being run as a real business, and - especially given that hiding its website behind a paywall inevitably means accepting a massive loss of influence - there must be a real business strategy behind its choice of online model.

The paywall strategy makes sense for the Telegraph if its management believes two things.

First, that the online news landscape is changing so that professional news - especially, perhaps, professional conservative newspaper journalism - becomes markedly scarcer online. That's no longer an absurd belief. The News Corp titles have their own unique reasons to go down the paid content route, but now those papers have disappeared from the web it could be argued that it makes more sense for the Telegraph to do the same. As Beehivecity points out, if the Telegraph joins the Times, the FT and the News of the World news paywalls begin to look more like a split between two competing business models than an experiment Rupert Murdoch is conducting on his own.

Second, that the Telegraph's current monetisation strategy - which is to attract a mass audience and show them display and search ads - is coming to an end. This is hardly a foregone conclusion, but it is not an absurd one either. As the number of total available ad impressions rises rapidly, and as Facebook accounts for an increasingly high percentage of that total (69 billion or 31% of all UK ad impressions in 3Q2010, says comScore) the relative value of each ad impression everywhere is very likely to fall, and fall hard. The number of ads available is simply accelerating faster than the market for them, depressing yields across the board. Moreover, a user-generated social network can produce impressions at a tiny fraction of the cost of a newspaper relying on expensive professional writers for every page and every eyeball. Ad-funded newspapers rely on a display ad market that is going through a fundamental change in scale. What looked last year like a large website with a mass audience might look next year - compared to Facebook - like a relatively small site that is unjustifiably expensive to produce.

There are, of course, no shortage of counter-arguments. CPMs at Facebook are estimated between fifty cents to a dollar. Professional news sites can command five to ten times that and, because (some) premium brand advertisers are wary of appearing next to unmoderated UGC, news sites could be insulated from the effects of Facebook on the wider display market. By this argument there is not one market for display ads but several, and Facebook is not in the same one as the Telegraph. Tesco, one might say, does not compete with Fortnum & Mason.

It is also very plausible to argue that the disappearance of a handful of UK newspaper sites from the web will not in fact create any significant scarcity value given the vast richness of the global online news ecosystem - the BBC, HuffPo, Google News and a million blogs will still be there whatever the Telegraph chooses to do.

These are all good and sensible arguments, and they have been made many times before. But newspaper paywall experiments are usually dismissed out of hand. We say that their proponents are cutting themselves off from the conversation, the experiment has failed a thousand times before and will fail again, there just isn't the money in subs to justify the move. I am just saying that... things change. What if there is no longer the money in advertising to justify leaving things as they are either? What if some, many or even most professional news producers see the threat to their current ad-funded model posed by Facebook and put up a paywall too? I am by no means saying that the Telegraph is definitely right - hell, we're not even sure they're definitely doing it yet. But I can see some increasingly solid arguments for why, this time, it's different.