Upside and Downside Scenarios for NYT’s Online Paywall

The New York Times (NYSE:NYT) competes with publications like News Corp’s (NASDAQ:NWS) Wall Street Journal (WSJ) as well as Yahoo (NASDAQ:YHOO), Google (NASDAQ:GOOG) and AOL (NYSE:AOL) for online advertising dollars. NYT is expected to launch a new paywall for its online site in the near future. ^[1] According to the report, the NYT is planning to charge around $20 for a digital bundle that includes Times online and Apple iPad app access, and less than $10 for web-only access.

We estimate that NYT’s most valuable business remains within its print circulation and advertising business, through which it derives an estimated 60% of its stock value. The company derives an incremental 20% of its stock value from its online advertising business.

With the introduction of this paywall, NYT is bound to gain subscription revenues. On the other hand, the new restrictions could reduce the number of page views on its site. Here we quantify these offsetting factors, and examine whether the move is good for NYT’s stock value.

We currently maintain an $8.46 price estimate for NYT stock, nearly 20% below market price.

See our full analysis and $8.46 price estimate for New York Times

Upside Scenario for Paywall Introduction

According to the WSJ report, only about 15% of online readers are “heavy users”. These are the potential users that could hit NYT’s paywall. ^[1] NYT’s content is renowned worldwide for its quality and has won several awards over the years. This means that there will likely be a substantial number of loyal users willing to pay the subscription fee for content.

We estimate around 30 million unique visitors per month using NYT.com site as of year-end 2010, and anticipate that this will increase to around 54 million per month by the end of our forecast period.

Although $20 could be perceived as a steep price for content access and an iPad app, users can still opt for NYT’s web-only access for $10. ^[2] According to the WSJ report, News Corp’s Times of London saw roughly 50,000 monthly subscribers sign on in the first three months after implementing a similar paywall. ^[1]

In a hypothetical scenario in which 1 million users register at the $10 per month web-only fee, it would imply $120 million in incremental annual revenues. Extending this forward through our forecast period, a back-of-the-envelope calculation suggests an upside of around 15% to our price estimate for NYT stock.

Downside Scenario for Paywall Introduction

With the paywall introduction, NYT’s online advertising revenues are likely to take a hit as the number of page views diminish. Some users may shy away from using NYT’s site as frequently, and shift to other ‘free’ news sites despite the difference in content quality. In a scenario in which the number of monthly page views per unique NYT.com visitor drops to around 85 by the end of our forecast period (vs. our estimate of 100), it would imply 5% downside to our price estimate for NYT stock.

1. Wall Street Journal report, New York Times Readies Pay Wall, January 2011 [↩] [↩] [↩]
2. See Russell Adams view on iPad app paywall, January 2011 [↩]