The paywall at the Times of London's web site has led to a drop of at least 65 percent in the newspaper's online readership, according to early estimates. Although the paywall is still very new and these numbers are not official, they seem fairly plausible compared to some other paywall experiments in the mainstream media. By most normal measures, losing two-thirds of your readership would seem like a huge blow, but managers at Rupert Murdoch's News Corp. are said to be satisfied with that figure. Why? Because the Times' paywall is likely just as much about keeping existing print readers in as it is about keeping freeloading web readers out.
In reality, however, blocking casual readers — who are seen as less valuable to advertisers because they don't spend as long on the site and aren't regular visitors — is just one by-product of having a paywall. And even generating income from those readers by convincing them to sign up for a monthly subscription is only a by-product. For many newspapers, the main driving force for instituting a paywall is to keep print readers from migrating away from buying the physical product (which still generates the majority of advertising revenue at most newspapers) to reading for free online, where their eyeballs are worth less than they would be in print. Think of it as eyeball arbitrage.
Take Newsday as an example: The daily newspaper covering Long Island, N.Y. instituted a paywall in October of last year. After three months, it had driven away a huge number of online readers and accumulated a whopping 35 subscriptions for its efforts. But as Techdirt noted in a post about the site, erecting the paywall was as much about preventing churn among Newsday subscribers as it was about actually generating revenue from subscriptions (Newsday's parent company is a cable provider; subscribers to the cable service get free access to the newspaper site). Newsday said as much itself.
The problem with this strategy is that it is fundamentally a retrenchment approach — in other words, a fall-back rather than a move-forward strategy. While it may be true that keeping out casual web users and forcing regular readers to pay may improve online advertising revenue somewhat (since advertisers will perceive paying readers as more valuable than non-paying users), and putting up a wall may prevent some continuing slippage in print readers (although not as much as the paper probably hopes it will), it does little to grow the online side of the equation. Contrast that with the approach taken by The Guardian, which is making its content freely distributable through an open API.
If anything, in fact, the paywall approach prevents further growth for an online entity because it puts a wall between the content and those who might help to spread it — in effect, marketing it to others — by linking to it, posting it on Twitter and other social networks, etc. It is fundamentally a resignation from the open web.
Related content from GigaOM Pro (sub req'd): What We Can Learn From the Guardian's Open Platform