Charging for access to a news website may be counterproductive for someone trying to muster a large online audience. Readers asked to punch in credit card numbers to see a news story, even for a relatively small price, are just as likely to surf elsewhere.

But so-called paywalls are a fad among newspaper sites, and not just for publishers trying to recover shrinking advertising revenue. Media companies are balancing the need to mobilize web audience, and the online advertising they bring, with the preservation of print readership.

Consider the curious, more-for-less deals offered by the New York Times and Boston Globe to lure web readers to their print editions.

Last spring the New York Times started charging for access to its website, www.nytimes.com. The Times asked readers to pay $3.75 to $8.75 per week for digital subscriptions, depending on level of access. (The most expensive, “All Digital Access” choice included use of the website as well as access to a smartphone application and the tablet app.)

Anyone who takes the Times in print – including Sunday-only subscribers who pay $3.75 per week – also get full-boat digital access. That means the Times creates an incentive – savings of at least $5 per week – to subscribe to the Sunday paper.

The strategy seems to work, at least from a print perspective.

The Times reported 771,000 print subscribers on the average weekday from May to September of this year, according to Audit Bureau of Circulations data reported by a Nov. 1 Associated Press story. Including online subscriptions, the Times’ counted 1.2 million weekday subscribers. (The ABC, which verifies the circulation numbers newspapers give to advertisers, doesn’t count readers of a free website as subscribers.)

The ABC report showed the Times’ overall circulation growing 25 percent from the previous six months, the AP reported. Unsurprisingly, the newspaper reported slight growth in Sunday sales, according to AP, as “many people bought or kept a print subscription because it comes with free digital access.”

The Boston Globe, owned by New York Times Co., makes a similar pitch to its readers.

The Globe owns Boston.com, the granddaddy of news websites in New England with 3.5 million monthly unique visitors. But Boston.com is no longer the online home of the Boston Globe. As of September, that distinction belongs to BostonGlobe.com.

Boston.com continues to deliver news, sports, entertainment and opinion for free. The new BostonGlobe.com offers news, sports, entertainment and opinion – from the pages of the printed Globe – for a price.

That price now is $3.99 per week (not counting promotions.) But access to BostonGlobe.com also comes with a subscription to the Sunday newspaper. That costs $3.50 per week.

So, even as the Boston Globe mobilizes an audience for its paid site, and maintains an audience for its free site, it really wants people to read Sunday’s edition the old-fashioned way, with sections of newspaper spread over the kitchen table.

Jon Chesto, business editor of The Patriot Ledger in Quincy, Mass., credits this pricing scheme as the reason the Globe’s Sunday circulation inched up during the past six months. The Globe sold more than 360,000 copies of its Sunday paper on average from April through September of this year, according to the Audit Bureau of Circulations.

Chesto writes: “With the heavy preponderance of ads in the Sunday edition … the Globe’s management has every reason to shore up Sunday sales. It looks like they finally found a way.”

Sunday’s edition is important not just because of the large number of ads in newsprint. The fat stack of coupons, specials and circulars inserted into the paper each Sunday is a major source of revenue.

Subscriber numbers are also important. Those dictate how much a newspaper can charge advertisers – for ink-on-paper ads or the inserted variety.

Whether this tactic succeeds – for the Globe or Times – will be in the eye of the beholder. Will success be measured by web audience? Or is it stable Sunday print circulation with digital subscribers paying for access to news?

Complicating matters for the Globe is the challenge of running two news websites – one free, the other paid – side by side.

Globe Editor Martin Baron said dual sites makes perfect sense because they give readers choice. And he doesn’t apologize for asking readers to pay.

“We have a paywall around our journalism already. It’s called what people pay for the newspaper,” Baron said during a panel discussion sponsored by the Nieman Journalism Lab at Harvard in September.

For the Globe, anyway, success will not be either a large online audience or stable circulation. It will be both.

INTRODUCTION
 
On September 28th Jeff Bezos revealed Amazon’s newest invention, the Kindle Fire. It’s a new tablet computer that runs on a tailored version of the Android operating system. More importantly, it uses Amazon’s new mobile web browser known as Silk, which was built to give users an ultra-fast browsing experience. The $199 Kindle Fire was also optimized for Amazon’s digital media products, including its movies, games, eBooks, music, and more.

This tablet isn’t just another e-reader from Amazon. The company’s bigger vision is to use it as a platform for growth by subsidizing the tablet’s cost to consumers to drive mass adoption and then integrating its entire ecosystem of products into the Kindle Fire.

SUBSIDIZATION & VALUE CREATION

During the launch presentation, Jeff Bezos said, “We are building premium products at non-premium prices.” But how can Amazon deliver a modern tablet at such a low price? Subsidization. In fact, early estimates indicate that the components and material costs alone total $262 per tablet. And that doesn’t even include the non-material costs, such as marketing and transportation.

At a price of $199, it seems Amazon is set to lose at least $63 for every unit it sells. However, management and the company’s shareholders believe the consumer value created by the Kindle Fire can be captured later by using the device as an instrument to grow the company’s retail, eBook, video, music, and other business lines. Furthermore, Amazon’s brand penetration and awareness will unquestionably improve.

For now, the low price mitigates adoption risk for consumers, providing Amazon with increased sales volume and a larger installed base to harvest by cross-selling its other products.

INTEGRATION & CAPTURING VALUE

In order to capture the value it passes along to consumers through “non-premium” prices, Amazon has successfully integrated its other offerings with the Kindle Fire. The list below outlines how the company’s other businesses will benefit from the new tablet:

Shopping and e-commerce

Retailers are discovering that the number of consumers who shop on their websites using tablets is steadily increasing. Even more interesting is that those users have higher conversion rates than shoppers using a traditional PC (4.5% for tablet shoppers versus 3.0% for PC shoppers). Additional research has shown that tablet shoppers also spend 10% – 20% more per order than traditional PC users. By delivering the low-priced Kindle Fire, Amazon will help expedite the growth of the overall tablet market and provide its users streamlined access to its many online e-commerce properties.

Amazon.com’s redesigned website

If you’ve visited Amazon.com recently, you may have noticed some changes. The new design is a simple, tablet-friendly site that will make mobile shopping easier. Since its flagship web property is suitable for mobile devices (especially the Kindle Fire), Amazon won’t have to create separate mobile apps. Instead, shoppers can simply navigate to Amazon.com using their mobile device’s web browser and use all of the functionality available to PC users.

eBooks

Last year Amazon announced that its eBook sales outpaced sales of traditional printed books. This is a startling figure given that e-readers have only been on the market for five years. The Kindle Fire will certainly play an important role in expanding the company’s eBook market.

Amazon Prime

The Kindle Fire will come with a free 30 day subscription to Amazon Prime, which gives shoppers two-day shipping on all Amazon purchases. In addition, Kindle Fire users will also have free access to Amazon’s ever-growing library of digital videos through the Prime service.

Amazon App Store

Although the Kindle Fire runs Google’s Android operating system, it comes with a pre-installed version of Amazon’s App Store, not the Android Market (which is most common among other Android tablets). Platform control will surely drive more traffic to Amazon’s App Store.

Media Content

In addition to its already large inventory of movies, songs, newspapers, and magazines, Amazon has announced new content deals with Fox, NBC, and CBS in the past two months. These contracts will significantly expand the company’s online video streaming service, which will yield substantial synergies with the Kindle Fire.

Cloud Computing

In an effort to promote the use and benefits of the company’s cloud computing offerings, the Kindle Fire is equipped to remotely back-up all of a user’s content on Amazon’s servers.

FINAL THOUGHTS:

Many companies have tried breaking into Apple’s dominant share in the tablet market without much success. In a recent interview, Jeff Bezos said, “Some of the companies that have made tablets and put them on the market … the reason they haven’t been successful is because they made tablets. They didn’t make services.” Since the company’s broad product portfolio provides it with dozens of ways to capture value, Amazon is essentially delivering services, not just a product, to consumers. This is something other technology giants, including Apple, will struggle to match.

When Netflix announced that it was separating the subscription models of it

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s Streaming and DVD services (eliminating the combination subscription package that offered a discount), there was a huge uproar from customers. Months later, it then decided to further divide the two services by spinning off the DVD mailing service into a completely separate website and brand from its streaming service. Again there was a huge amount of negative backlash from the customers that it is trying to better serve.

Why did Netflix choose to make these large changes in the first place? Unfortunately, while Netflix (correctly) made these organizational decisions in order to isolate what was increasingly becoming a company with diverging business models, they clearly didn’t think about the impact that the decisions would have on their customers (which just over half subscribe to both DVD and Streaming services).

Netflix has for some time seen that the future of their business is based in its streaming services, and has made many efforts to build that business by offering more and higher quality content. This strategy has worked well, in conjunction with offering streaming access to current DVD subscribers for a small additional monthly fee. However, as more studios began to closely guard the digital rights of their content, Netflix needed to change their strategy in order to keep bringing top tier content to their service. The first step, while unpopular, was to make the pricing structures completely stand alone for both services (instead of the discounted or included offerings that existed previously) in order to understand the true value to its customers. This step was necessary to understand what its customers were willing to pay, and in return be able to understand how much it could rationally spend on procuring new content. While it was understandable given the increase in content costs, their price increase was too large to expect customers to understand without any visible increase in content provided.

The biggest mistake that Netflix made involved the belief that the roughly 12M customers who use both services would be ok with using two different websites, managing two different queues, and using two different ratings systems that Netflix utilizes to power its personalized recommendations. Part of the appeal of using both services is that while looking for a certain movie on DVD, they would also see that they would have the ability to stream it immediately. This type of convenience, along with the recommendation offerings, created a system of reinforcement that encouraged users to subscribe to both services.

What Netflix should have done, rather than creating a completely separate subsidiary and site, is to only internally separate its two businesses with both sides sharing the burden of maintain its website and marketing. This failure to focus on the online user experience will likely result in a significant decrease in subscribers. Instead, this move is going to increase the total costs to serve each customer while providing an overall negative user experience.

By: Matt Davidson

Network effects invite strategic blunders.Just as mobilizing many participants is necessary in order to deliver value, losing participants can destroy a company.

On July 13 this year, Netflix announced that it would separate its DVD-by-mail from its instant streaming video businesses into a new company, quirkily named Qwikster.Netflix also effectively doubled prices, from $7.99 for its traditional DVD+instant package to $7.99 for each, purchased via two separate billing systems on two distinct, nonintegrated Netflix and Qwikster sites.

During the following two months, the announcement ignited 17,000 comments on the company blog and Netflix reported that a million of its 25 million U.S. customers had dropped their subscriptions—only the second time in its history that it experienced a drop.Netflix’s stock price has fallen 52% since the announcement.

Of course, as we know from the eBay Partner Network, blog-based rally cries do not necessarily signal poor strategic judgment, and only time will tell whether Netflix’s decision was prescient or naïve.But it’s hard not to question Netflix’s decision in a context where network effects matter so much.

Netflix’s business is built into a two-sided market between content-viewing users and the entertainment studios that produce that content.Here, the value of Netflix’s service depends upon the number and identity of users and studios connected to the service.Users want more high-quality movies from more studios, and studios want more users to view their content, but links between users and the produced or not-yet-produced content they choose to watch are difficult to predict in advance.

When Netflix lost its 1 million users, it also lost the value those users had provided to the network.(If we try to apply Metcalfe’s Law to a two-sided network here, the company lost about 2 times its network coefficient.)

But, more interestingly, Netflix’s decision did not just weaken its network’s membership.Instead, it snapped apart and disaggregated one strong network into two more brittle networks—Netflix’s streaming video and Qwikster’s DVD-by-mail.

The combination of those products had been key to the company’s compelling value proposition, which Netflix readily admitted in its 2010 Annual Report:

The $305.6 million increase in our revenues was primarily a result of the 26.6% growth in the average number of paying subscribers arising from increased consumer awareness of the compelling value proposition of streaming and DVDs by mail for one low price . . . . (italics added)

Moreover, Netflix’s uniquely large library of DVD titles (currently over 100,000) attracted a loyal installed base (many early adopters of its introductory service in 1997), which motivated their use of the much more limited library of videos instantly available for streaming (currently 20,000, and dominated by less-frequented independent titles).Prior to the separation, users could search for a film in both databases at once, and then upon discovering how the content was available, select it into their DVD and/or instant queue(s).In a market where differentiation relies on the volume and quality of a library, the synergy between the instant and mail-order products, driven by Netflix’s format-agnostic aggregation of content, attracted users, which in turn attracted studios.

What do snapped networks mean for the users of the formerly integrated Netflix?

Now, without the magnetic force of its DVD library, the value proposition provided to the users, over which entertainment studios salivate, is compromised.

There are fewer users in each network (2.2m DVD-only subscribers, and 9.8m streaming-only subscribers, with 12m so-called “combination” subscribers choosing what to do next), and less content in each.More unfortunate, there is little backwards compatibility for current users, who will now have to pay for and manage two separate accounts for the two services.

Looking forward, disaggregating the businesses may also undercut the ability of each to collect and analyze data about each consumer’s consumption and to provide stronger predictive algorithms that formerly fueled Netflix’s powerful customer experience.

Netflix and Qwikster—standing alone—are less flexible in negotiating revenue sharing contracts with film studios via packaged offerings combining physical DVD and digital video distribution.Each network now proposes the new question: Which network would you like to join?, versus Will you join our network?

Perhaps Netflix will stand strong.Wal-Mart, Amazon, Apple and Hulu all compete with similar services to Netflix’s, although none have mastered complements, as Netflix has.Netflix earned its current ubiquitous monopoly on streaming content by orchestrating built-in integration with game consoles, blu-ray players, HDTVs, home theater systems, smartphones and tablets.

But this monopoly may not spring eternal.Earlier today, at it its “Stream Come True” conference, Dish Network (the lucky owner of once-giant Blockbuster) announced its entry into digital and mail-order video rentals.And it’s armed with a strategy to attack a strong two-sided market incumbent: easy, targeted switching for Netflix customers, entry through its Dish Network segment niche (at one low additional fee for customers), partnership with Blockbuster stores from which users can also rent at no additional cost, sexy get-people-in-the-door discount offers, and a viral distribution strategy that means business.For a flavor of Dish’s spirited attitude towards Netflix, consider the following Twitter posts and sponsored ads accessible by searching for “Qwikster:”

All this said, Netflix’s diminished subscriber base still represents a 37% increase from a year ago.The barrier to entry posed by Netflix’s hard lock on integrated complementary consumer electronics products remains significant, and if the company is correct that the DVD business is soon going under, the value provided by inevitably dwindling DVDs-by-mail consumers would expire anyway.

Asked about his vision for the company, Netflix’s CEO Reed Hastings reported in 2002 that his “dream 20 years from now [would be] to have a global entertainment distribution company that provided a unique channel for film producers and studios…. As Starbucks is for coffee, Netflix is for movies.”When strong network effects prevail, his dream hangs in peril.

By: Andrew Sternlight