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A massive WTF moment interrupted my reading of The Observer's review of the paywall going up around the Times and Sunday Times.

Shortly before the end of John Naughton's piece, he declared:

Think of all the costs involved in the physical processes of printing and distributing a paper – all those rolls of newsprint and vats of ink, the thundering presses, the trucks, the drivers, the delivery vans, the newsagents' returns. No wonder it's impossible to make a profit on the cover price alone.

But publication on the web magically takes all the printing and distributions costs out of the mix, leaving only the editorial costs.

The emphasis is mine. The one thing that makes me bang my head against the screen more than any other is the idea that shifting whatever you do online is automatically cheaper than doing it offline.

There are all sorts of costs associated with running a website.

Just looking at the distribution costs of online, there are servers to operate and protect, bandwidth to pay for, search engine optimisation to invest in, social media to manage, designs and redesigns to oversee (along with additional staff such as information architects to ensure people can find your content), testing to plan (or not), apps to build - and this is on top of the additional online editorial costs such as online image rights to buy, the relentless race to keep up with your competitors in terms of functionality, comments to moderate, video to pay for .... 

Naughton may be right that:

As every economist knows, in a competitive market, the price tends to converge on the marginal cost of production, which, in the case of online news, appeared to be zero. 

However, the fact that the price converges to zero is not the same thing as saying that the cost does or that "publication on the web magically takes all the printing and distributions costs out of the mix".

Websites cost money to run. It may cost more to successfully run an online operation than a print one. Whatever methods Murdoch uses to sell his paywalled sites (even if he insists on the inefficiency of running two sites), the paywall is not going to be a success due to it being free to run a website. Because it isn't (and as MySpace contributed to a $150 million loss in the last quarter, he knows that better than anyone ...)

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Published 5 July, 2010 by Malcolm Coles

Malcolm Coles is Director at Digital Sparkle and a contributor to Econsultancy. He also blogs at malcolmcoles.co.uk. You can follow him on Twitter here.

16 more posts from this author

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Nick Jackson

This is an all too common misconception. I've spoken to so many clients who are not only appalled that building an effective website actually costs money, but fail to understand that it needs ongoing investment if it's going to give them a return on their investment. Frustrating that John Naughton is perpetuating this myth.

almost 6 years ago

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cyberdoyle

true, there is no such thing as 'free' really, but a truly digitalbritain will save itself a fortune by using online facilities instead of analogue ways which also add to our carbon footprint.. I think that was the point he was trying to make. And yes, websites can cost a lot of money, or they can be quite cheap and as people get better at using them and the ways to make them get faster and easier the cost comes down further. Far cheaper than having call centres, printing presses, office workers and stuff.

almost 6 years ago

Ed Stivala

Ed Stivala, Managing Director at n3w media

Spot on Malcolm. It infuriates me too that some people are still labouring under the misconception that if you put a process online then it is automatically cheaper than doing it offline. Whilst the operational costs may well arise from different sources they will still exist. In fact, I think it is quite conceivable for online to be more expensive than offline, but offer other operational and commercial advantages.

I suspect that more commercially astute businesses have already understand this and the rest are about to catch-up? 

almost 6 years ago

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Robin Buxton

Biggest online costs are human resource and time

Totally agree Malcolm. However I would say one of the biggest costs of running a successful online marketing department are human resource and time. Sure you can set up a basic website in no time at all. But to make it successful takes a lot of time and skilled human resource. Often the skills that you need are simply not available. A lot of people in the online world talk a good story, but when it comes to implementation and ROI then it's another story. I've personally found it takes a lot of time, sweat and testing.

Ongoing training is another huge cost, not just in training course but also having a team who is commited to self-learning. The online world moves so fast, you have to donate a considerable amount of time to training and this needs to be understood by companies.

So as you say - websites are completely free to run!

Robin

almost 6 years ago

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Ron Weinberg

As expectations for online media continue to rise, the costs for running a successful and profitable site are not always initially apparent. The barriers to entry might be lower, but now you have to deal with a horde of new competitors that are going after your audiences, and providing value added benefits that you don't provide. And a platform requires compelling and updated content on very compressed cycle times. 

almost 6 years ago

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Maria Korolov

There's a difference between marginal cost and total cost. Marginal cost is how much it costs you to reach one additional reader. For a print publication, that means you have to buy the paper and the ink, pay for the time for your staff to print the extra copy, buy gas, and pay for time it takes the delivery guy to add another stop to his route. For an online publication, the additional costs for one more subscriber aren't zero, but they're so close as to be almost indistinguishable. This means that if you're a small paper with fixed costs to run your website, and you split those costs among all your subscribers, and there's another paper next door with fixed costs to run their website, that splits their costs among all *their* subscribers, they can poach all your customers and put you out of business by cutting their costs in half. And they can keep lowering prices and expanding their customer base until their subscription fees are hovering around their marginal costs. And if the additional income from advertising is enough to cover these marginal costs -- not total costs, mind you, but marginal costs -- then they can offer free online subscriptions. For a real-world example of how this works, look at the television or radio industries. Once you've got the broadcast antennas set up in a particular coverage area, there's no additional costs to add new viewers. They just turn on their TVs and voila -- they can watch your programs. Cable TV does have marginal costs -- they have to wire up your house -- and cable subscriptions cost money. It doesn't matter how much it costs your local television channel to hire the talent, build the sets, buy those fancy weather graphics, or anything else. They still will not be able to charge their viewers to watch the program. They could, if they wanted to. They could broadcast their programs in encrypted form and charge you a monthly fee for the decryption box. But if they did so, their local competitor would immediately grab all their viewers by continuing to offer their programs for free. The competitor would be able to double their audience *at no additional cost*. (Except maybe a promo spot bragging about how they were going to stay free.) This is what marginal cost means. This is why the Internet is not like print. And why your fixed production costs don't matter. -- Maria Korolov Editor, Hypergrid Business

almost 6 years ago

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Malcolm Coles, Director at Digital Sparkle

Maria - I do understand the difference (I have a degree in economics - admittedly a long time ago) and the reasoning behind the price reducing to marginal cost.

But the original article was about the shift from print to online and the fact that this removed a whole load of costs.

It does remove some costs - but it adds new ones. And while print is fairly static in terms of development (they shifted to colour, they added sections, they hired other commentators nothing terribly exciting) websites suddenly have to roll out video to compete or add interactive elements etc. All of which cost a fair bit of cash. 

Anyway, I love your conclusion that "fixed production costs don't matter". Er, tell that to the shareholders...

almost 6 years ago

John Braithwaite

John Braithwaite, Managing Director at Ergo Digital

If you take the recent Govt. statistics into account for some of their ridiculously expensive websites - then you can quite clearly see that running a website is so far from zero that my head hurts when I think about it. However, let's forgive the orginal journalist... after all, he probably has trouble with his home-economics, let alone understanding the detail of running a business! And, at the same time his statement is flawed, the operational costs of running web to the same size of audience as print is much lower. And so it should be.

almost 6 years ago

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Bangalow accommodation

Obviously people that think that running a website is free - has never run a website ! Or engaged designers, SEO's and the rest. A good laugh thankyou, but good to see a balance of opinions out there surrounding the internet.

almost 6 years ago

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