The New York Times paywall has gone up.  Many people I know are disgusted by the idea of paying for something that they’ve gotten used to getting for free.  Does the paywall make economic sense for the NYT?

A newspaper makes money both from paying customers who buy the paper (print or online) and from advertising revenue.   There is a tension between the two: If the newspaper charges customers, this reduces readership and hence advertising revenue.  It may make sense to give away the newspaper for free, maximize readership and extract profits from advertising.  In this scenario, the paywall might be a mistake, driving away readers and hence advertisers.

Online dissemination of news has other ramifications.  Many HuffPo “articles” are simply links to the NYT with some salacious or provocative headline pasted on.  People clicking through from HuffPo generate yet more readers and hence advertising revenue.  This gives the NYT extra incentive to produce interesting news stories go generate more links and profits.  But HuffPo also gets more readers and revenue because people know they can go there to get aggregated information from lots of sources.   HuffPo does not have to hire John Burns or David Sanger to go to dangerous places and do actual reporting.  They are free-riding off the work done by NYT reporters.  The NYT does not internalize the positive externality it exerts on HuffPo and other sites.  This effect leads to underinvestment in journalism by the NYT.

Should the NYT charge HuffPo to link to its stories?  If the extra readership and advertising revenue compensates the NYT for the positive externality it exerts on HuffPo, there is no issue. But if not, a payment from HuffPo to the NYT can increase profits for both firms by encouraging jointly optimal story production.  It is hard to tell if anything like this is part of the plan but it seems not?

We are entering a new world and we will see if it all collapses or changes the equilibrium.