I'm sure many of you have experienced peak Elon Musk fatigue in the news cycle, but an old tweet of his caught my eye. The Tesla/SpaceX/maybe-Twitter CEO called out the insincerity behind the Washington Post tagline "Democracy Dies in Darkness":
Elon attached a screenshot that clarified what he sent to the Jeff Bezos-owned Washington Post when the outlet sent questions to him for an article.
The Washington Post should change its tagline to "democracy dies behind our paywall". If you're so concerned about democracy, stop forcing people to pay for (allegedly) important news! Your boss Besos can certainly afford it, even after buying a support yacht for his yacht." - Elon Musk
The misspelling of "Bezos" is his, not mine. I did not reference this tweet to entertain you with the squabblings of the two wealthiest people in the world but to set the stage for a broader examination of subscription vs. advertising businesses.
Elon is poking fun at the Washington Post tagline, "Democracy Dies in Darkness," that adorns their masthead. He points out the hypocrisy of hiding important news behind a paywall and cutting off most of the democracy's participants from access.
Democracy dies behind a paywall
Does Musk have a point? Paywalls have become more commonplace than ever. I seem to run into a paywall daily now. It has become a running joke in one of my group chats:
We have the means to pay for access to journalism, but we still can't justify paying for all the journalism. Insider, Wall Street Journal, The New York Times, Bloomberg — the list goes on and on. We always hear about the burden of stacking streaming video subscriptions but not as much complaining about death by a thousand news subscriptions.
But this is not surprising given that seemingly everybody has at least one streaming subscription — but what percentage of your friends and family do you think pays for news? One of the largest news subscription businesses, The New York Times, only has 9.1 million subscribers. Compare that to Netflix's 221 million subscribers (warning: NYT article link may have a paywall).
The latest study I found noted that 48% of US publishers and 76% of digital newspapers had a paywall in place in 2019 — a 10% and 16% increase respectively from 2017, and I doubt things have slowed since then.
The number of publishers implementing a paywall is increasing, but are Americans willing to pay? Not really. Another study found that only 20% of Americans pay for online news, and those subscriptions are very concentrated on two prominent brands. From the study:
In the US, over half of these people have access to either the New York Times or the Washington Post,
80% of Americans gather news from free sources or through a different channel like TV. But with the number of free news sources waning, the variety of opinions they can find will also decrease. The concentration of paid subscriptions on two publications further illustrates a possible issue of the lack of variety in opinion consumed.
Freedom of speech is an essential tool of democracy, but what if you cannot even access that free speech? A democracy cannot function effectively if the most helpful and contextualized information is behind a paywall.
Subscriptions create a barrier to information for lower-income populations who cannot afford to pay for something they may view as nonessential — and we are at a point where access to truthful, respectable, and quality information is more critical than ever. Not everybody has the time to discern the veracity of the information they find on social media or even in real life.
Why are subscriptions becoming more popular?
Publishers are shifting their business models to focus on subscriptions to build sustainable and healthy businesses. Investors enjoy the predictable ARR (annual recurring revenue) relative to advertising. Advertising revenue is subject to many external forces outside the control of a company like seasonality, the overall economy, or even war.
Before a recent update, the software I use to run this newsletter/website (Ghost) reminded me every day of the MRR (monthly recurring revenue) I'm missing out on:
Ghost must have eventually realized that not everybody uses their software to run a paid newsletter. In a recent update, they switched to a more pleasant view for newsletters with no paying members:
To their credit, Ghost recognized the opportunity with the rise of subscription newsletters and positioned its product accordingly.
Some individual creators rely on the steady income and simple business model that subscriptions provide. Subscription software like Ghost empowers individuals to disseminate original and thoughtful ideas across all subjects without worrying about the complexities of advertising.
Despite its additional complexity, advertising has powered an open web full of free information, and subscriptions limit access to information to only those who can afford or choose to subscribe. Subscriptions are turning the web into a series of gated islands of information only accessible by those willing to pay.
Why would anybody pay for news when they can find endless entertainment without stressing their mind or delving into a depressing news cycle? TikTok users ages 4-15 spend around 80 minutes per day watching short-form videos in the app — and TikTok is entirely free. When these users grow older, news publishers will have to convince them that boring and depressing journalism is worth paying for relative to the passive, free, and escapist experience of TikTok.
Advertising may have many drawbacks, but it does offer one key advantage: free access to information. Advertising enables a practical business model for a genuinely open web without gated content and paywalls.
Still, users are becoming increasingly aware of the actual cost of "free," and publishers are grappling with existential threats to any business model based purely on advertising. Consequently, the aspirational and utopian vision many have of a genuinely open web may be fading away.
The problems with advertising
Unfortunately, advertising has obtained a laundry list of drawbacks, partly due to a system of enablement by the advertising industry. Publishers are turning to subscriptions as a respite from the constantly-changing and sometimes grim-looking future of digital advertising.
A few walled gardens overwhelmingly capture most advertiser spend, and fraudsters siphon off a huge chunk of whatever is leftover. Advertisers are also coping with the loss of their known methods of targeting and measurement.
The giant problem
The last remaining "free" destinations may be the giants we all love to hate. The truth is that social media platforms like TikTok, Facebook, and Instagram have a much easier time monetizing their users with advertising, making them "free." The wealth of data handed over by users or collected through usage creates a treasure chest of targetable attributes.
Amazon and Google also leverage their vast trove of user data to provide advertisers with a buying experience almost impossible to replicate on the open web. It is the same open web that news publishers would need to earn advertising revenue on to make their content freely available.
Users willingly log in to Facebook/Instagram, Amazon, and Google, which allows these companies to build targeting profiles en route to capturing 74% of all digital advertising spend in 2021.
Many publishers on the open web cannot provide the same precise audience targeting and conversion measurement at scale, especially with the ongoing deprecation of cookies and device IDs. Now publishers must scramble for solutions as advertisers funnel ad revenue towards the most prominent platforms in tech that can accurately identify individual users, facilitating precise ad targeting and measurement.
Without a workable universal identity solution at scale, the open web could become a sea of anonymous users, giving advertisers no remaining method to target and measure effectively. Advertisers will always spend their budgets on effective advertising, and as cookies fade away and the digital advertising industry fumbles around with universal ID solutions, the open web offers a less effective method of advertising than the giant platforms make available within their walled gardens.
The quantity, not quality problem
Advertising (specifically, programmatic advertising) rewards properties that can generate massive volume. Low-quality websites and fraud have created a seemingly infinite amount of web advertising inventory and a race to the bottom regarding the cost per thousand impressions advertisers will pay on open exchanges.
Made-for-advertising websites extract money from advertisers that could be flowing to legitimate publishers by arbitraging clickbait placements peddled by content recommendation companies. (Those silly article links you see at the end or besides web content.) These dubious publishers come out on top as long as they earn more revenue on each website visit from the deluge of ad units on the page than they pay for the click to bring someone there.
The convoluted and automated nature of programmatic advertising coupled with large and not closely monitored brand advertiser budgets enables this business model. If an advertiser's goal is to plaster their message far and wide without keeping a close watch on performance metrics, then they may be less inclined to keep an eye on where their spend goes. Supply-side platforms and advertisers either turn a blind eye or fall victim to subtle tricks these made-for-advertising destinations perform.
If you visit a made-for-advertising website directly, you will see content of questionable quality but very few ads. These websites check how visitors end up on the websites before deciding how to display the page. If you visit directly, you will see the cleaned-up version. But if you visit through a referral (like a click on a content recommendation widget), you will see a horrendous abomination of capitalism — a website packed with mostly ads.
Ad fraud also contributes significantly to the problem of excess inventory, but we all know this is an issue. I could tell you it's a $68 billion problem globally, but the billions become meaningless at some point.
Advertisers on the open web must essentially roll fraud into their budget as a cost of doing business. The digital advertising industry seems to be collectively content with paying ad verification companies and moving on with their lives as the problem grows unabated.
It's supply and demand when it's all said and done. The excess supply introduced to the open programmatic ecosystem created by low-quality websites and fraud will continue to drive down the price advertisers are willing to pay. Private marketplaces offer a route to prop up prices, but this requires additional resources to set up, maintain and monitor — out of the question for independent creators or upstart publications.
The privacy problem
If something is free, you are the product — don't believe everything you read on the Internet, but this phrase is mostly accurate in this case. Whether you willingly fork over personal data or not, publishers and platforms package and sell your personal data as a product to advertisers.
Many in digital advertising know this, but the general populace is catching on. There is no denying that third-party cookies and device IDs facilitated an unchecked mass collection of user data and tracking to increase the effectiveness of digital advertising.
Now that both tracking vectors are fading into oblivion, the net result is most publisher websites require a login so advertisers can use your email to...facilitate a mass collection of user data and tracking to increase the effectiveness of digital advertising. Users can't escape tracking and now need to expect advertisers to track them anytime they share their email.
Despite a slow shift to a user-consent model, the partially true narrative of tracking leaves a foul stench on an ad-supported business. Publishers understand the negative sentiment towards ad tracking and its privacy implications and may want to distance themselves from the practice altogether — hence the shift to subscriptions.
The onus is on publishers more than ever to earn users' trust and act as reliable stewards of personal data. Offering transparency, control, and the reliable security of personal data should be top of mind for any publisher running an ad-supported business.
Evolving business models
The good news for anyone working in digital advertising is that subscription and advertising models are not battling it out in a zero-sum game. The two can coexist in blissful harmony — and a combined model may be the most ethical, practical, and lucrative business practice available for publishers of any type.
Content publishing businesses can allow individuals with disposable incomes or a penchant for quality journalism to purchase ad-free subscriptions while offering others free or low-cost subscriptions with ads.
We can see examples of entertainment services like Hulu and soon-to-be Disney+ and Netflix following this path. It is a no-brainer as long as the service can make up the difference of lost subscription revenue (from a lower subscription price point) with incremental advertising revenue. They will increase the overall subscription count without negatively affecting the bottom line.
But what about the original issue mentioned at the beginning of this article? Can news content offer this mixed business model?
There is a solid ethical argument to make all journalism free or low-cost and subsidized with ads, but do the economics make the same sense as they do for entertainment services?
Hulu, Disney+, and Netflix have some extraordinary tailwinds relative to news services. For one, they offer exclusive content unavailable anywhere else, whereas nobody can own the news, but only how they present, analyze, or contextualize it. Also, the entertainment services can offer the most premium ad inventory available — connected TV (CTV) video.
Disney+ is supposedly charging a $50 to $60 CPM for ad slots on its service (paywall 💀). In contrast, Joe Shmo, a blog owner with no ad sales or programmatic experience, is lucky to make a few bucks per thousand impressions on any given ad placement through open programmatic channels.
Although, to be fair, established brands with seasoned sales teams and a valuable niche like Adweek charge between $68 - $95 CPM for a run of site display banner placement. But given the content Adweek covers (advertising industry), there is no ethical reason to open up access to a free ad-supported version of the publication. But what about companies delivering written news that affects our democracy?
The New York Times and The Washington Post restrict access to content but still engage in advertising. The New York Times brought in $1.4 billion in subscription revenue (up 13.9% YoY) in 2021 and $497.5 million in advertising revenue (Up 26.8% YoY). So it appears the NYT is using advertising as an incremental revenue stream relative to their primary business income from subscriptions.
So should companies delivering general news consider offering free ad-supported tiers? From a purely ethical perspective, yes — and it is worth noting that news publications often remove paywalls from especially impactful news to keep a healthy balance between morality and business.
But these are businesses, after all, and The New York Times is a public company with a fiduciary duty to increase revenue continually. If they opened up an ad-supported free tier, they would need to ensure they don't cannibalize enough subscriptions to offset the increase in ad revenue.
But then they would also have to cope with the erratic nature of ad sales that can change at a moment's notice. Look at what the pandemic did to the New York Times. Despite a 26.8% increase in ad revenue in 2021 from 2020, the publication still brought in 6.2% less advertising revenue than in 2019.
Publishers also have to deal with advertisers not wanting to run their marketing messages alongside articles that are not brand-safe, like reports about the war in Ukraine, for example (paywall!). Shout out to Brand4News.org — they are creating solutions to combat this unfortunate side effect of brand safety and its impact on less desirable but essential news topics.
Despite its issues, advertising can support a more open and free flow of information to everybody, including those who cannot spring for a subscription. We've seen stagnation in subscription revenue drive companies like Netflix to embrace ad-supported tiers, so maybe news outlets like The New York Times could follow a similar path one day. But as long as subscription revenue continues to grow, don't hold your breath.