Can the Dailies Survive by Charging Online?

Both the Chronicle and the newspapers of the Bay Area News Group are hoping to make you pay for your online news. Will it work?

Cast your mind, constant reader, back to those halcyon days of early December. You sit down at your desk, flip open that laptop, and start scanning SFGate for a quick taste of Bay Area news. Perhaps you’ll check on Matier & Ross; they’re always good for some scuttlebutt. Or maybe you’ll read Willie Brown’s column, or Ray Ratto on the Raiders’ apocalypse of a season. But instead, you get a dismaying little note: If you want to read this story, you’ll have to pay for it.

Two months ago, after years of losses so steep that its parent company publicly floated the idea of shuttering the paper, the San Francisco Chronicle finally bit the bullet and started charging for online content. Its editors started slowly, with just a story here and there, but they’ve accelerated the pace and plan to take more and more of their stories behind a subscription firewall. Soon, substantial amounts of content, which we have all so blithely taken for granted, will no longer be free. After fifteen years, the party’s over.

Fine, you say to yourself, there’s always The Oakland Tribune or the San Jose Mercury News or the Contra Costa Times. But you’ll be outta luck there sometime soon as well. Late last year, Dean Singleton, the leader of the MediaNews empire and pretty much every Bay Area daily newspaper that isn’t the Chronicle, announced that he, too, will start charging for much of his papers’ online content. In addition, he plans to lock out the spybots of Google News, even banning that service from scanning his protected content and displaying the headlines. Bloggers can link to these stories, but following that link will just get you to the same firewall.

A little over a year from now, you may no longer be able to read any Bay Area daily newspaper online for free.

And it’s not just happening here. All over the country, after years of bankruptcies and plunging revenues, the largest media and entertainment outlets are finally getting up the gumption to demand that you pay for what they produce. If they succeed, the odd quirk of history that gave us instant online gratification will come to an end.

But will they succeed? While some specialty publications have been able to pull off a subscription-based model, that plan has had its share of spectacular failures as well. TimesSelect, The New York Times‘ scheme to charge $50 a year to read its archives and columnists, is the most prominent example, closing down after two years of middling growth and lost advertising opportunities. Newspapers have spent years and millions in consulting fees trying to figure out a formula to monetize the web, but no one knows if there is one.

Here in the Bay Area, the stakes are no different. Due to a unique combination of operating costs and its awkward position in the marketplace, the Chronicle has been losing roughly $50 million a year; last February, the Hearst Corporation, which owns the paper, warned that it was on the verge of closing the paper altogether. Dean Singleton’s company MediaNews is in considerably better financial shape, but some reporters at its local newspapers, which are known as the Bay Area News Group, glumly doubt that Singleton is willing to spend the kind of money it will take to make much of his content something online readers will be willing to pay for. And both entities are competing with the entire online world, from local television news sites to Perez Hilton. If they can’t make a go of it, there’s a surprisingly good chance that one will gobble up the other and be the last tycoon — current federal law notwithstanding.

What, exactly, will readers pay to read? The answer — if there is one — will determine the future landscape of the Bay Area’s media.

The story of how the media missed the chance to cash in on the web is an old one; they should’ve charged from the get-go, and now everyone’s just too used to getting something for nothing. Calling newspaper moguls idiots for blowing it is a cottage industry, but institutions are always slow to react to events on the ground, especially when they’re clocking double-digit profit margins.

Once the nation’s papers got behind this eight ball, they faced an awkward dilemma. If just one paper took its work behind a subscription firewall, readers would all go somewhere else. But if they all did — if, say, The New York Times and The Washington Post and the Los Angeles Times implemented a firewall simultaneously — well, that’s price-fixing, and that’s illegal. Industry officials asked for an exemption to the anti-trust laws, but the Obama administration said no. American publishers were akin to a group of kids standing at the edge of an ice-cold pool, all telling each other they’re going to jump in, but waiting for one leader to finally take the plunge.

Last year marked the point at which they decided to jump. It started in late May, when representatives from The New York Times, MediaNews, Hearst, McClatchy, and other newspaper chains met in an obscure Chicago hotel near O’Hare International Airport. The subjects of the conclave included what to do about Google and Yahoo, and how to charge for online content, but the real subject, it seems, was how to collude without appearing to collude.

In October, Hulu, the web site that hosts shows from NBC, ABC, and Fox, announced that it would start charging for content in 2010. Everyone perked up at this announcement; folks love their TV shows, and if anyone could make a go of it, it would be Hulu. (The fact that Hulu is owned by all three networks and seems to be a textbook case of collusion seems to have escaped the attention of federal regulators.)

The next month, News Corp. head Rupert Murdoch announced plans to start charging for content, as well as blocking Google from scanning his sites. Murdoch runs the second-largest media empire in the world, with Fox News, The Wall Street Journal, and an army of British and Australian newspapers among his arsenal. Interestingly, the first of his properties to slip behind a firewall was The Standard-Times, a 30,000-copy paper in New Bedford, Massachusetts that started charging in mid-January.

Soon, everyone was jumping in the pool: McClatchy, MediaNews, The Dallas Morning News, Long Island’s Newsday, and The New York Times announced similar plans. Everyone has been focused on what the Times model will look like, especially since the editors will spend at least a year developing it and cut a content deal with the new iPad. Meanwhile, Hearst properties such as the Chronicle started implementing a pay-to-play scheme of their own.

In early December, a group of Chronicle reporters were asked to attend a quick meeting. In the paper’s downtown offices, they watched as a web executive walked them through a PowerPoint presentation of what Hearst was thinking about. SFGate algorithms would track the kinds of stories each reader was clicking onto, and how often they visited each section. The first few stories would be free, so as not to scare off the casual reader. But after a certain number of visits, a reader would get a message: We notice you really like our take on Barry Zito’s performances in interleague games. Perhaps you might consider paying a little something to keep enjoying our product?

This is what’s known as a “metered paywall,” and it’s very similar to what The New York Times will be rolling out. But according to Mark Adkins, the president of the Chronicle, this is just one option the paper is considering. Another might be micropayments, a system whereby smartphone users could easily buy stories on impulse for a few pennies while sitting on BART, for example. Even iPhone apps might be thrown into the mix. “We’ve looked at a lot of models, metered models, micropayments, that sort of thing,” he said. “The only thing we’ve selected thus far is what we’re doing right now.”

Here’s what they’re doing. Each day, editors look over the stories that are slated to run on SFGate. If they find a story that they think readers would pay for — typically either important enterprise stories or columns with marquee names behind them — they embargo it on the free version of the site, putting it behind a paywall for two or three days. If readers want to read those stories, but don’t already have a print or electronic subscription, they’ll have to buy 24-hour access to the site for 75 cents. True, people could always wait a few days to read the story, but in that case, they probably weren’t that invested in the story anyway. And releasing it to the free site enables bloggers and other web sites to link to the story for future reference, drawing eyeballs to the archives and enabling the Chron to sell advertising around them.

Adkins won’t release the web traffic stats for his embargoed stories, but claims that so far, it’s working like a charm. “We’re very surprised at how well it has done,” he says. “We weren’t anticipating that at all.” The paper started off with just one story a day in December, but has expanded the roster to between six and eight stories at any given time, with a special emphasis on the Sunday edition. The system has worked so well, he adds, that they’re planning to expand it even more.

In fact, the Chronicle is planning to bifurcate SFGate into two tiers: stories aimed at a mass audience, and stories designed for a more boutique, discerning reader — the kind of reader the newspaper hopes will pay for them. In both the print and paywall editions of the Chronicle, the editors are clearly reorienting their coverage to appeal to a wealthier class of reader. The paper is now printed on glossy, magazine-style pages. They’ve introduced an arts edition called Ovation, designed to appeal to more upscale tastes. “They tend to be more affluent, they tend to have a deeper requirement for local news content and community engagement,” Adkins said of his paper’s paying readership. “They tend to be older than 34 years of age.”

As for the mass audience, all you have to do is examine the most prominent features on SFGate to imagine what the editors think they’re interested in. The Daily Dish. Real estate porn. Grabby headlines like, “Groping dentist to lose license.” Editors know that a substantial portion of its online readers hail from outside the Bay Area, and they don’t care about local affairs. The Gate’s flashiest elements are designed to suck in the peanut gallery and flash ads next to spectacles. “Celebrity gossip gets a significant amount of traffic,” Adkins said. “People love our slideshows. They love our hard news coverage as well. If you’re trying to reach a mass audience, then you have to think about what the masses want as a whole.”

And here’s the good news: It seems to be working, at least a little. While the print circulation has plummeted because of higher subscription rates, SFGate’s web traffic rose 12 percent in October, compared to the same period a year earlier; this comes at a time when web traffic for other news sites flattened out. The paper also outsourced its printing to a Canadian company. After losing untold millions for the last decade, Adkins claims, the Chronicle finally reported a profit for the fourth quarter of 2009.

Still, that was the fourth quarter, the holiday season, when advertising outlets build up the fat they live on for the rest of the year. Alan Mutter used to be a senior editor at the Chronicle; today, he teaches a class at the UC Berkeley journalism school called “Journalism in an age of disruption,” and writes the media industry blog “Reflections of a Newsosaur.” Mutter believes the Chronicle still has a lot of crippling structural problems and that it’s far from clear that the paper will survive.

First off, for all the layoffs the paper has deployed, its operating costs are still draining money away. “They have a very high wage scale, and a very high headcount,” Mutter said. “The cost structure is out of whack with its revenues.” More to the point, Mutter believes the Chronicle suffers from a serious identity crisis.

A significant portion of its readership lives outside San Francisco, and even inside the city, thousands of readers are childless young professionals. The Chronicle can’t rely on crime or schools or other homeowner issues, so they have to appeal to a San Francisco state of mind: sophisticated lifestyle, business, and political coverage. Unfortunately, many of their readers read The New York Times, and that paper will beat them on those subjects every time.

“The Chronicle can’t go deep on the school lunch menu in Concord, because they have to appeal to all these readers from all over the place,” Mutter said. “So they have to pick more thematic coverage. And to the degree that that’s what readers and advertisers want, that will be fine. But if readers decide that, say, I don’t have to read about kitchen do-overs in the Chron, then that’s a problem. … The Chronicle may be caught in the middle by the meat and potatoes of the BANG and the superior business and political coverage of The New York Times.”

So far, it appears, the Chronicle has been able to find some happy news in the grim, epic tragedy that has been the last decade. But it has yet to prove that it’s come out of its tailspin.

Over the last twenty years, Dean Singleton borrowed every dime he could and went on a massive acquisition binge, buying papers all over the country, including the San Jose Mercury News and the Contra Costa Times. This left him incredibly leveraged, but he figured his practice of cutting costs down to the bone would see him through. But when advertising plunged to earth, Singleton found himself in despair. No matter how profitable his papers, he still couldn’t make the payments on his $930 million debt load.

But Singleton had one last trick up his sleeve. In late January, he filed a prepackaged bankruptcy deal, in which his creditors surrendered all but $165 million in debt, in return for 80 percent of the company. Singleton and his partners own the remaining 20 percent, and he still runs the operation. Industry analysts suspect that Singleton was allowed to continue running the company because, unlike other media tycoons, who still hold onto romantic notions of journalism’s higher calling, Singleton will do whatever it takes to stay in the black: outsource to India, break unions, you name it.

The end result is that Singleton is now relieved of the burden of servicing most of his prior debt. He suddenly has a lot of money with which to experiment on taking some of his content behind a paywall, locking out Google’s bots, and charging subscriptions.

So what will Singleton’s model look like? No one knows, and no one will know for months. According to Chris Howard, the Bay Area News Group’s director of online content, the first firewall won’t go up until at least November, and it will happen first at Singleton’s papers in Chico and York, Pennsylvania. “We don’t have plans to do it right now,” he said. “And we have not announced plans.”

But Howard has a few ideas about what it might look like. Like SFGate, he sees the Bay Area News Group’s sites divided between free and premium content: “Not unlike something as simple as what you see at an app store, there are some things that you get for free and some things that a smaller audience will pay for, for better and more functions.”

The difference between the Chronicle‘s vision and Howard’s is simple: Howard — and Singleton — place a great deal more emphasis on local, local, local. “An example would be an enterprise story that is highly unique, represents a lot of work, and is local,” he said. “So if there’s a three-part series on a local hospital, that’s the sort of thing that local people care about, and it’s important to pay for, and there’s not a hundred versions of it on Google News.”

Of course, that’s exactly the sort of investigative piece that SFGate would charge for as well, but in Howard’s vision, everyday local stories could slip behind the paywall. The Merc and the CoCo Times are still good reads, and even Singleton’s longtime East Bay properties — The Oakland Tribune, The Daily Review in Hayward, and the Fremont Argus — have improved in quality thanks to stories borrowed from the chain’s newer papers. But to a much greater extent than is true of the Chronicle, you don’t so much read the Bay Area News Group’s papers because you want to, but because you need to, for traffic and crime and bread-and-butter stories that specifically appeal to homeowners who are more tied to their communities than the Chronicle‘s more mobile readership. Howard thinks that his papers’ value lies in offering the kind of local detail you can’t get anywhere else. In fact, he’s so confident that he might let blogs and other media outlets crawl through the first paragraph of his stories.

“The idea is that a newspaper breaks a crash on I-80, and the rest of the media is waiting for someone to break it and then summarize it,” he said. “The question is, what’s the value to readers? Readers will realize that in that world, both the copied and the copier need to know who their audience is. We need to make sure that a one-paragraph summary is a poor substitute for the whole article.”

Howard even believes this formula could lure in young readers, the very people most loathe to pay for news. “The casual and conventional wisdom is young people won’t, and people with homes and established people will pay for content,” he said. “Lawrence Lessig makes this point that young people have never paid for content. It’s a catchy hook, but I’m sure Apple has tons of people who have paid for music, even after Napster.”

If only his reporters shared his confidence. BANG’s East Bay newsroom staffs recently emerged from a bruising battle to save their union, one that included allegations of retaliatory firings and underhanded attempts by management to disband the local. Reporters went through the second round of a 3 percent pay cut, and morale is, well, subdued. “Those of us who are still here are very cognizant of the fact that we’re still here,” said Josh Richman, one of a dozen reporters still employed by The Oakland Tribune. As for the bankruptcy, he added, “Reorganization is better than liquidation.”

According to Eric Louie, a BANG reporter and a union representative, Singleton’s no-frills operation has left everyone stressed and overworked. “The deadlines got moved up for a lot of our staff as part of the cost cutting,” he said. “They’re doing things earlier and things like that. And with less staff, people are asked to do more, covering more areas and filling in when they can. Just because something’s not on your beat doesn’t mean you’re off the hook. Nowadays, it’s whoever’s in the office that day. And the paper itself is using a lot more freelancers.”

Louie claims that this threadbare approach even extends to the web sites. “There’s this push to have things online, but I think there’s a general feeling that there isn’t really a plan,” he said. “One common gripe is you can’t find anything on the web site. If you can’t navigate on the web site, how are you supposed to have a web presence? I talk to a lot of people who don’t work in the main newsrooms, and if you ask them how much of a role the web plays in their lives, they’ll say, well, I try to turn my stories in on time, and I hope my editor puts it on the web.”

But if the Chronicle is putting more effort and creativity into its web site, that’s because it has to; its business has been losing money. On the other hand, and debt notwithstanding, Singleton’s formula — local news, squeeze every dime, pay your reporters in kittens and make ’em do more with less — has paid off. In addition, he has an economy of scale and an advertising and content-sharing infrastructure that leaves his papers much better positioned to confront the future. “The Bay Area News Group, their stuff is prosaic, but it’s news you can use,” Mutter said. “It’s about your community: what the city council did last night that’s going to screw up your garbage collection. If they keep doing that while everyone else in the Bay Area is talking about the Apple Tablet, they’ve got an edge.”

In fact, Mutter believes that the Chronicle‘s new paywall strategy is largely hopeless. Charging for online content only works if you have something unique to sell, he argues; The New York Times might be able to pull it off, and so might small, isolated, rural and suburban dailies that give you information no one else will. But major metro dailies are caught in a bind, neither big enough to effectively cover national news nor small enough to cover the county fair. Without a niche, he claims, there’s no way to stop the inevitable.

“Publishers are charging for content because it makes them feel like they’re doing something,” he said. “But I consider it palliative. Someone’s dying of cancer, and they want to smoke a joint. I’m down for that, but don’t think it’s going to cure the freakin’ cancer.”

Back in October, the Long Island daily newspaper Newsday took most of its web site behind a subscription paywall. Company officials spent $4 million redesigning the site to make it more appealing so they could attract customers who would pay $5 a week and rake in the cash. Three months later, how many readers bought a subscription? Thirty-five. Meanwhile, web traffic had plunged from 2.2 million unique visits to 1.5 million. Newsday‘s position in the market is very similar to that of the Chronicle‘s — it’s a major metropolitan daily that competes with both The New York Times and picayune community papers — and its online experiment has been a complete disaster.

And the Chronicle‘s condition is even worse than it sounds. Years ago, its parent company Hearst bought an equity stake in Singleton’s empire to the tune of $317 million. But when Singleton filed for bankruptcy, he set in motion a process that gave Hearst’s equity to his creditors. According to a Dow Jones story earlier this week, the Chronicle‘s parent company’s entire stake was wiped out.

Phil Bronstein, the executive vice president for Hearst and former editor of the Chronicle, did not return a phone call seeking comment on this subject, and other Hearst representatives have refused comment when contacted by other media.

Mutter suspects that the most plausible next step would be this: Singleton completes his conquest of the Bay Area by adding the Chronicle to the Bay Area News Group. It’s against the law, sure. But times have changed since the anti-trust laws were updated. Newspapers everywhere are gasping for what little oxygen is left. If the Chronicle‘s latest experiment fails, and another round of multimillion dollar losses begins, the Justice Department may just be persuaded that Singleton represents the only hope of saving the paper. Which means that his brand of journalism would inevitably come to San Francisco.

But you never know — maybe enough people will buy “Willie’s World” to save the San Francisco Chronicle. Anything’s possible.

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