Saving paid journalism from the Internet

You may be shocked to learn that at dinner this week with a group of economists and journalists, the conversation turned to the economics of journalism. In particular, what is the future of paid journalism? As high-quality journalists face increasing competition from low-quality unpaid bloggers, the market wage for high-quality journalists will continue to fall. Putting aside whether this is a market failure (says the low-quality unpaid blogger), suppose that you really wanted to save high-quality journalism: what would you do?

My answer was what I’ll call a super-paywall. Paywalls get trashed a lot on the Internet with good reason: they don’t raise much money and they annoy people who aren’t subscribers. But here’s the thing: everyone is doing paywalls wrong.

The important thing to realize is that there is a network externality associated with paywalls. Recall the logic of bundling. On average (using some not-so-heroic assumptions), adding an item to a pre-existing bundle raises profits relative to the case where the bundle and the item are sold separately. Paywalls, therefore, are characterized by increasing returns to scale. Putting aside the costs of management and organization (herding journalists), the minimum efficient scale is infinitely large. This is the state of affairs that we typically call “natural monopoly.”

But we don’t observe a monopoly paywall. Instead, we observe a lot of little paywalls; this is very inefficient and not surprisingly seems to be unprofitable. Exacerbating the problem is that the mini-paywalls each bundle content that is related, the value for which is positively correlated. Optimal price discrimination with bundling occurs when you offer content that is negatively correlated in value, so the New York Review of Books and NASCAR magazine should be bundled together.

So the way to save paid journalism is to put all journalism together behind a single paywall. Individual pieces could be sold separately (mixed bundling is slightly more profitable), but the optimal price of stand-alone journalism would be high. Most people who consume journalism of any sort would be subscribers to the super-paywall.

Since the super-paywall is more profitable than the status quo, there is in principle some way of dividing the pie in which all contributors are better off. It’s not clear exactly what formula or criteria should be used to pay people. It would take some entrepreneurship. Since most readers subscribe to the super-paywall, it might be difficult for a writer to make a go of it solo, so there would be some leeway with getting the pay right, but not a lot.

The biggest change from the status quo is that the super-paywall would no longer be able to serve as a certification of content quality. If you read something in a reputable publication, you know that the story bears some resemblance to the truth, that it has been fact-checked, etc. The paywall itself would need to not just allow, but actively recruit, all the crappy bloggers that are currently making life difficult for paid journalism. Consequently, it would need non-existent standards. The key to making this all work is to bring the low-quality work behind the paywall so that the price difference at the margin between high-quality and low-quality journalism is zero.

You could imagine that within the super-paywall, sub-publications exist; authors that mutually certify each others' work, that apply high-quality journalistic standards, etc. These sub-publications could perform the certifying function, but payment would come not from subscription sales, it would come from whatever royalty is worked out with the super-paywall.

The bottom line is that high-quality journalism is not going to do well in competition with low-quality journalism when there is a big marginal price difference. The beauty of bringing low-quality journalism behind the paywall is that it levels the price differential. It’s funny; high-quality journalists seems to have thought all along that the way to compete against the blogs is to differentiate themselves. In fact, the better solution is to bring the blogs back with them behind the super-paywall. As the saying commonly misattributed to Sun Tzu (see, fact checking!) goes, “Keep your friends close, and your enemies closer.”