Thursday, March 17, 2011

Economist's Notebook: On-Line News and the Prisoner's Dilemma

I received this today in my e-mail box:

Dear New York Times Reader,

Today marks a significant transition for The New York Times as we introduce digital subscriptions. It’s an important step that we hope you will see as an investment in The Times, one that will strengthen our ability to provide high-quality journalism to readers around the world and on any platform. The change will primarily affect those who are heavy consumers of the content on our Web site and on mobile applications.


If you are a home delivery subscriber of The New York Times, you will continue to have full and free access to our news, information, opinion and the rest of our rich offerings on your computer, smartphone and tablet. International Herald Tribune subscribers will also receive free access to

If you are not a home delivery subscriber, you will have free access up to a defined reading limit. If you exceed that limit, you will be asked to become a digital subscriber.

This is how it will work, and what it means for you:

On, you can view 20 articles each month at no charge (including slide shows, videos and other features). After 20 articles, we will ask you to become a digital subscriber, with full access to our site.

This has been coming for some time now and it will severely hamper my blogging as I rely on The Times for a lot of my content. There is a lot of talk among those who study the news business about this model and if it will work - will people really (finally) pay for content on the web?

NPR recently had a nice piece on The Times of London's experience with a pay wall where they lost about 95% of their audience after instituting it.  So there is every reason to expect the NY Times' experiment to fail as well - though the London Times is still sticking with it and embracing the remaining 5% as the right sort of people (how very British).

To me this is a classic game theory problem: the payoffs to any one news outlet's decision to charge is a function of other news outlets' decisions. To wit, if all the major news organizations decided to charge for on-line content then to read news on-line consumers would have to pay and all the news organizations might be able to sustain healthy readership as there would be no other alternative to those seeking news.

Of course this is not how it works. There are so many sources of news that any one decision to charge sends readers scurrying elsewhere ala The Times of London. But if all of the players could coordinate and contract over charging for the service, they would all be better off.  If there was no one free alternative there would probably be enough custom to go around and keep many papers in newsprint microchips.

This is the classic market failure that we associate with strategic situations in economics and is precisely the point of the prisoner's dilemma game: in strategic situations (where an individual's outcome depends on the decisions of other players) acting in your own self interest can lead to inefficient outcomes. In fact the best outcome is to be the one provider that doesn't charge - gets an amazing amount of visitors and can charge a decent amount for advertising.

Not coincidental, I think, that in the same week as the New York Times institutes a pay-wall, the still free Washington Post unveils a major web-site redesign. Ah the games we play...

1 comment:

GeoGeek said...

Sure, if they all got together and established a cartel, the margins would improve. I'm not sure the FTC would be too happy about that.

Also, if readers drop by 90%, but each of those remaining provides above 10x-marginal cost of new revenue, then it's a win. I think this must be part of the calculation, since print subscribers get it all for free, undoubtedly because ad revenues per person from print are higher (around 10x, IIRC).

Plus the NYT isn't a completely substitutable good. There's arguably the WP as a substitue, as you point out, but then what? You're rapidly into the second tier of US newspapers. Let alone down to the Oregonian tier, which is at best a local compliment to a tier 1 paper. I can't imagine anyone would consider them substitutable.

If the NYT thinks this move will reduce costs/increase revenue then it may be a way for them to hold on while the others around them burn down. Even the WP itself loses money at a hefty clip, it's just that the WP Company's primary (i.e. not news) business is profitable enough to subsidize it - for now. But it's pretty clear the current model is failing.