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“Here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” — The Red Queen, Alice in Wonderland

When it comes to the evolution of newspapers in a digital age, the New York Times is clearly something of a bellwether — and in particular, a sign of whether paywalls can (or can’t) make up for the ongoing dramatic decline in advertising revenue. Unfortunately for anyone in the industry who was hoping for a definitive answer, however, the paper’s latest financial results are a mixed bag. Subscription revenue rose, but both print and (perhaps most disturbingly) digital advertising continued to fall, raising the question of whether the Times will ever be able to close that gap, or whether it will have to become a much smaller and primarily reader-financed business.

The paper has already crossed the crucial point at which revenue from readers — whether through print subscriptions or digital subscriptions — has eclipsed the revenue the paper gets from advertising, a transition that other newspapers such as the Financial Times are also quickly approaching. But as more than one person has noted, there are two ways to reach that point: one is to have your subscription revenue increase, and the other is to have your advertising revenue decrease. Both of those are happening at the Times, and the only question is which one will slow down first.

Print ad revenue still falling, but digital down as well

As my colleague Jeff Roberts reported, overall advertising revenue for the company — which includes The Boston Globe — declined by 8.9 percent to $182 million, with print ads down by almost 11 percent and digital off by over 2 percent. For print, the story was the same as it has been for the past few years: continuing double-digit declines in real estate ads and other key classified categories that used to be bread-and-butter for newspapers. For digital, however, the picture was less clear. A spokesman for the paper said the drop in digital advertising was a result of:

“The challenging economic environment, ongoing secular trends and an increasingly complex and fragmented digital advertising marketplace.”

On the company’s conference call with stock analysts, the company tried to explain what one analyst called the “shockingly bad” advertising numbers, blaming “an abundance of inventory” and “efficient buying methods such as programmatic buying” offered by search engines and large advertising portals like Google and Yahoo. In other words, CPM rates — what advertisers are willing to pay for every thousand viewers of an ad — are continuing to fall, and the New York Times seems unable to shore that up at all (at least so far).

Subscription revenue was a much nicer story, since it rose by 7.4 percent to $235 million, but at least some of that has come from higher prices for the print product as well as an increase in subscribers to the digital product, where the paper now has 566,000 paying readers (although it’s not clear how many of these are subsidized in some way by discounts, etc.) And even though the boost in subscription revenue amounted to about $16 million for the quarter, that was still less than the $18-million or so drop in overall advertising revenue. So one of those factors is still falling faster than the other is rising.

The risk for the Times — and for a growing number of other newspapers that are making a similar bet on paywalls as a solution for their problems — is that advertising revenue could continue to fall, and even pick up speed, but the same probably can’t be said for the rise in subscription revenue. At some point, the number of people who want to subscribe to either print or digital will stop rising so quickly and begin to level off, the only real question is when.

A paywall can also reduce advertising revenue

There’s related risk with a paywall that the NYT and other newspapers face, but it’s one they don’t talk about much, and that is the effect that charging readers — which necessarily involves pushing some readers away — itself has on advertising. The Times has said that the decline in digital readership (and therefore the potential impact on advertising revenue) has been relatively modest, but results from comScore suggest otherwise: the numbers appear to show that pageviews have fallen by about 15 percent and unique visitors by almost 20 percent.

Newspapers like the Times could theoretically argue that each of their visitors or readers is much more valuable because a large proportion of them have paid to view the content, but it’s not clear whether advertisers will buy that argument, or be willing to pay higher rates for the privilege. It could be worse for the New York Times, of course — it could be reporting results like McClatchy, which saw both circulation and advertising revenues decline. But the question of what the NYT does as ad revenues fall and subscription revenues slow remains to be answered.

It’s true that no one is really doing a booming business in digital advertising right now, even Facebook, because the business is in the process of being disrupted. That’s why it would be nice to hear about how the Times is trying to change the way it does advertising as well as resting its hopes on a paywall — which is part of the reason why I think that if a paywall is your only strategy, you are probably doomed to be a much smaller business than you are now.

I’ve argued in the past that a membership model that provides added benefits for valued readers — whether it’s ebooks or live events or some combination of such features — is a better approach than a paywall, and the experience of some publishers such as The Atlantic seem to indicate that this is so. To me, newspapers like the Times would be better off trying to get to know their readers better so that they could offer them advertising or other features, rather than simply hitting them with an undifferentiated paywall.

In the end, newspapers watching the Times have to ask themselves not just whether they can duplicate the short-term revenue success of the paper’s paywall (which some or all of them may be unable to do), but also what happens when that still doesn’t make up for the decline in ad revenue.

Post and thumbnail images courtesy of Flickr users jphilipg and Flickr user Giuseppe Bognanni