Why the Newsday paywall is irrelevant

Much kerfuffle – and more derision than warranted – erupted earlier this week when the New York Observer reported that Newsday has sold only 35 online-access subscriptions since it walled off the site last October.

There was astonishment at the low numbers:

“Michael Amon, a social services reporter, asked for clarification. “I heard you say 35 people,” he said, from Newsday‘s auditorium in Melville. “Is that number correct?” [Publisher Terry] Jimenez nodded.

There was hand-wringing: The Observer’s John Koblin archly observed that Newsday.com’s relaunch and redesign last year cost $4 million … to gross $9,000 in revenue.

That analysis is technically correct, and utterly wrong. Ultimately, that’s why neither side in the Great Paywall Religious War should waste any time thinking about it.

Newsday’s pay wall isn’t about making online-subscription revenue. It’s only partially an attempt to protect print circulation. It’s all about protecting one of the most lucrative businesses around – high-speed Internet access.

The paywall rules first: The only people who get unfettered access to newsday.com are Newsday print subscribers (there’s the modest defense for print circ) and/or subscribers to the Optimum Online high-speed Internet service provided by Cablevision, Newsday’s owner.

Let’s do the math that the Observer, the grumblers in the Newsday newsroom, and just about every blogger out there didn’t bother to do. (I was hoping Alan Mutter would do it for me – lord knows he’s great at it – but he was writing about the iPad today.)

First, understand the economics of the cable-television business: Most of the costs are in stringing the wire past your house. (Lump in the copper or fiber itself, the equipment back at the cable headend and the labor to keep it all running.)

Depending on how tightly houses are packed, it all can run from a few hundred to as much as $1,500 “per household passed” in cable slang.

Oh – Cablevision pays that whether you subscribe or not. Every neighborhood they try to serve is a massive sunk cost.

Now let’s look at the revenue side of the cable business: A subscriber in my wife’s ancestral homeland of Massapequa might pay $50 a month for basic cable. But Cablevision has to share that revenue with the programmers – a few pennies per month per subscriber for niche channels like National Geographic, but more than $3 a month for behemoths like ESPN. Basic cable is a nice business, but not an obscene one.

The obscene ones are those the cable companies entered in the last decade: digital telephone service, and high-speed Internet. They had to upgrade their wiring – and for a company like Cablevision, that meant shelling out billions. But once they did, they could offer bundles of service with essentially zero added cost.

Think about that for a second: They already paid for the wires past your house. If they can get you to sign up, they collect $30 to $40 a month for high-speed Internet. Their cost? A few pennies in FCC fees (oh, wait – they add those onto your bill!), a few more pennies to print the bill (oh, wait – they’re bribing you to “go green!”), maybe 40 bucks once for the cable modem (that’s why they give it to you!).

Let’s round it down and say that every Cablevision high-speed customer is worth $400 a year in profit.

That’s a fabulous business. Until, say, Verizon FiOS comes to town with a competitive product.

So the math gets really simple: If FiOs can convince a mere 100,000 people on Long Island to switch, Cablevision loses $40 million a year in profits.

If you’re Cablevision, you use every tool at your disposal to stop that. Even the blunt cudgel of a pay wall at Newsday.

I have no particular love for the spinmeisters at Cablevision, but the math backs up their words: the paywall strategy at Newsday is designed “to provide Cablevision’s high-speed Internet customers with reasons to remain with Cablevision, reasons to return to Cablevision, or reasons to choose Cablevision.”