The (Hidden) Economic Downside of Paywalls (or Why the Engadget Team Leaving Aol Really Matters)

Last summer before joining True, I found myself at a small lunch gathering where Om Malik was giving a presentation on the future of journalism and media.

To start the conversation, he asked:

“Before the Web, what made the NY Times so valuable?”

Around me there were a few guesses – the brand, large writing staff, experienced salesforce – but nothing seemed to stand out as the “right answer.”

After pausing for a few seconds, Om responded:

“Their distribution network”

He went on to explain that before the Web, the NY Times was a publication delivered around the world.  As a writer, you could get no better distribution than your article being featured in the Times – and writers flocked to work with them because they knew their writing would be widely available to end consumers.

Distribution, as a competitive advantage, created a positive feedback loop.  As the best writers came to work for the Times, quality of the publication increased, which in turn caused increased prominence and reach.  Higher brand visibility led to more talented writers continuing to vie for spaces at the NY Times.

As a consequence of the new paywall on the NY Times website, content and writers will inherently have less distribution.  Less readers will pay for content, meaning that less readers will be reading the NY Times everyday.

The Times argues that this will enable them to continue to pay their writers better salaries and continue to retain the best talent.  If one follows this logic, they fail to account for the effect on the previously positive feedback loop. The payway introduces a negative element into the feedback loop as the best writers will require more and more money for their articles , which will in turn, be kept locked down behind a paywall . As more and more money is needed, less readers will be willing to pay to view the content.

The NYTimes seems to have missed the fact that their most talented writers first and foremost want to connect with their audience.  While they should absolutely be compensated for their work, the paywall is putting a barrier between the writer and the widest, most culturally diverse audience in the world, instead of showcasing the creativity of their writers and giving readers a unique forum to the brightest minds and ideas anywhere.

I’d argue we’ve already seen the first casualty of the paywall with the Freakonomics team moving their column to a new independent blog at  Being Economists – the Freakonomics team has realized the shift that’s occurring in the media world today.

In the past, distribution was expensive and was controlled by only a few companies – enabling them to monetize by controlling that distribution channel.   With the web, distribution has become free – enabling anyone to become a publisher and project their thoughts to the world.

Early on, major properties and portals still could make sense. It was relatively expensive to market online and somehow consumers had to find your site.  The growth of Twitter, Facebook, Digg, Reddit, etc. is causing this shift again as user-generated and recommended content will enable the best content to bubble to the top – no matter where it initially started.

What the Freakonomics team realized – and is now capitalizing on – is that the value of distribution is now the relationship a writer / media property has with the end consumer.  An avid readership that actively follows your site, shares your content, and evangelizes to their friends has replaced the defensible distribution network the NY Times once had.

Relationships: The New, Defensible Distribution Channel.

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I work for True Ventures, an early-stage venture capital fund with offices in San Francisco and Palo Alto. We partner with promising entrepreneurs at the earliest stages in the technology market providing hands-on management support to guide our portfolio companies through the challenges of early growth.