How not to do a FREE calculation

I love Bear Stearns analyst Spencer Wang, but he can do better than this. According to PaidContent, Wang calculates that if the Wall Street Journal online goes free, as its new owner Rupert Murdoch has said it will, it would have to increase its traffic 12x to make up for the lost subscription revenues.

WSJ.com revenue is currently pegged at $78 million annually, based on an estimated 989,000 subscribers paying $79/year. Including non-subscriber traffic, the company claims 122.4 million monthly page views. Based on an estimated CPM of $6 and a few other assumptions about sell-through rate and ad impressions per page, Wang arrives at the 12x conclusion.

The problem, Wang concludes, is that going free would only increase its traffic 6x. Thus a downgrade of 1 cent a share, which Bear Stearns made today.

Now putting aside the fact that a $6 CPM is absurdly low for a site like wsj.com (and the more important fact that I haven't read the whole report, which may be more subtle than it appears in these reports), there is one thing clearly missing in this analysis: the indirect benefits of the Wall Street Journal reappearing in the online business conversation that it has largely ceded to others due to its subscription wall.

For instance:

• What about the new newspaper subscriptions that a 6x increase in web traffic will generate? (Print subscribers are typically worth five times what online viewers are worth, due to the higher effective CPMs of print media.)
• What about the increased buzz and respect that the ability for bloggers everywhere to link to wsj.com stories will engender, bringing the paper back to the front of mind of media buyers and thus bringing in more ads?
• What about the fact that, in a fierce competitive battles with its cross-town rival, the the New York Times, once nytimes.com went free, wsj.com had no choice but to do the same to maintain mindshare with an audience who are increasingly shifting online?

I don't know how to quantify any of those factors, but I know they're all non-zero, and in the case of second, at least, could be large.

And then there's the small matter of simply migrating a powerful twentieth century brand into the twenty-first century, by understanding the forces at work in the new media landscape. It's ironic that it took a septuagenarian oligarch to understand that free will be the only viable price for mass media online in a world of information abundance and attention scarcity. But as a fan of the WSJ who doesn't read it often enough because it doesn't show up in my RSS feeds, I'm glad he did.

Comments

[Elad]

Chris,

You raise valid points, but the problem is that it's practically impossible for an analyst to make even a remotely reliable estimate of their effect on WSJ's bottom line, or how soon that effect is going to really kick in. I guess that Mr. Wang would rather err on the safe side.

Also, regarding your last point, that the WSJ had to open up because rival NY Times did, note that it doesn't mean that WSJ is going to make more money by going open. If anything, it means that they just had to sacrifice income due to increased competition, so the downgrade is warranted.

[Terry Heaton]

And then there's the not-so-small matter of using CPMs to judge future value...

[Draeke Weseman]

A fourth category of indirect value can be added: Political Value.

Rupert Murdoch used FOX NEWS in a similar way - by the then under-valued all-news all-the-time cable channel concept. His method has been well documented by the film OUTFOXED, and so I'll direct inquiry there. I would also encourage anyone to compare tactics with CNN and owner Ted Turner.

I personally would be skeptical of anything owned by Rupert Murdoch, i.e. FOX NEWS, MySpace, and now the Wall Street Journal. The reasons for Citizen Murdoch's purchase of the Wall Street Journal (and these other media outlets) goes beyond merely seeking to generate increased revenue.

If Rupert Murdoch started his own online economic newspaper, let's call it Rupert's Online, and began running stories spun to benefit the political elite he associates with, many reader's would notice. Under the tag, the Wall Street Journal, however, this political action is less noticeable because of the Wall Street Journal's reputation as apolitical.

In this instance it appears that the indirect political value is for Murdoch to be able to present his own political view(s) of the world as fact rather than opinion. What Murdoch has purchased is control of the discourse and a disguised outlet for his political views.

[Barry Ritholtz]

The error in Wang's analysis is that advertisers pay a premium for high end consumers (such as paid WSJ subscribers), and much less for general readers.

By setting the WSJ totally free, Murdoch will give up BOTH the subscription revenue AND the high end advertiser revenue that now graces the paid subscriber WSJ.com.

Sometime ago, I proposed a hybrid model: WSJ: Free or Paid? (Yes). Move the WSJ/Dow Jones archives out from behind the subscription-only firewall. Keep the most recent WSJ subscription only -- perhaps 30 days, but certainly no more than 90 days maximum.

That solves all problems nicely . . .

[JB]

Bear Stearns is stupid. I'm downgrading them based on this crap analysis. $6 CPM. That fool obviously doesn't know what he is talking about.

[Adrian P.]

I third the idea that a $6 CPM is ludicrous. As an advertiser, I can say my clients have paid a helluva a lot more than that...
And although opening up the site may mess with the higher end demographic the WSJ currently enjoys, it's still not going to completely dismantle it; I'd be pretty confident of all the outliers canceling each other out.

[joshMshep]

as a 24 year-old business marketer, i would relish having the Wall Street Journal available online.

even though i consider the New York Times a liberal rag, i invariably end up printing 2-3 or their extensive articles every week just to get the reporting (then sift out the leftist views).

the day all of wsj.com goes free is the day i don't link to or print another nytimes.com story. ever.

[Bob Calder]

The only thing that will keep me away from wsj.com is their attempt to pass off the dead brain of Charles Murray as somehow relevant.

[kabin]

thanks...
Kabin
Konteyner