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Analysts: The New York Times Paywall Must Pay

With fierce competition for digital ads, the paywall is necessary for revenue
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Thanks to a flurry of stop-gap grabs for capital, the New York Times Company has emerged from the recession with enough cash to disprove predictions of its imminent demise. But a few real estate maneuvers and a sizable loan won’t be enough to save the world’s leading newspaper if it can’t convince readers to pay for news online.

When it convenes its annual meeting on April 27, the Times will have some good news to report. The company ended 2009 with only $36.5 million in cash. A year later, it has $400 million.

But this turnaround didn't come from an uptick in newspaper readers or ad sales. It came from the company's decision to sell some of its most enticing assets. "They did what they needed to do to survive," said Michael Hirschorn, who wrote a 2009 article for The Atlantic in which he correctly predicted the company would sell real estate and part of its stake in the Boston Red Sox.

But there are only so many Renzo Piano buildings and baseball teams to unload when cash runs low, and the Times' interest in a Canadian newsprint company isn't the sort of thing that makes investors salivate.
The key, then, is the Gray Lady's new digital strategy. Rather than just a bid for incremental revenue—by some estimates the paywall will only affect 15 percent of readers—many analysts believe the wall must work for the company to remain viable. This is one Hail Mary pass that has to go for a touchdown.

"They need to ramp up a second pipeline of digital revenue, given all the competition of digital advertising. But it’s also replacement revenue as print circulation declines. It's offensive and defensive," said Ken Doctor, a news analyst and author of Newsonomics.

Despite an online readership larger than any other newspaper's—NYTimes.com attracted 44.8 million people in December—the Times' digital advertising can’t yield the money print ads once did. William Bird, a media analyst at Lazard Capital, estimates that each dollar the company makes from print ads translates to only 24 cents in digital.

With its major debts—including the $250 million loan from Mexican business mogul Carlos Slim, who saved the paper in 2009—not due until 2015, the Times has some room to maneuver. If the paywall shows signs of working, it "buys time to figure out the next steps," said Leo Kulp, a publishing analyst at Citi.

But this means the paper's future rests on an untested model that many experts believe can't work in the oversaturated news market. And the Times has to pray the ad market won’t decline faster than analysts predict.

Analytics company Experian Hitwise recently published the first look at the Times' postpaywall traffic. On most of the 12 days that Hitwise studied, traffic was down between 5 percent and 15 percent. The Times expected losses, but they're still left with one big question: What happens if the paywall doesn't work? "The Times is in a box," Lazard's Bird said, comparing the paper to the Huffington Post, which cannibalizes news from around the Web. "They have their content, and it's the only content they can sell ads against."