The Price of Information
What happened yesterday? This simple yet crucial question has been asked for generations. The answer has varied as well. Before the age of digital media, technology, and the aptly named “Information Superhighway”, many people found their answer in the daily paper. Newspapers acted as the intermediate between people and the millions of things happening each day. However, the rapid expansion of the Internet dramatically altered this. According to the 2011 State of the Media Report, in 2010, for the first time, more Americans went online to get their news than to newspapers. (http://stateofthemedia.org/2011/online-essay/data-page-7/). In response to this demand, many online news sources have cropped up. These sources can be sorted into a few categories. There are the news aggregators like Google, Yahoo, and AOL that pull together news articles, videos, and images. There are also content generators, which usually are specialized companies like CNN, BBC, the New York Times, the Wall Street Journal, and the LA Times.
But this transition from paper to screen has not been without major problems. With the internet, the standard is that everything is free. While people are accustomed to paying a monthly subscription fee for print sources, many balk at the thought of having to pay to use a website. Take for example the panics that spread whenever the rumor arises that Facebook will start charging its users (http://www.ibtimes.com/articles/227570/20111008/facebook-charging-hoax-users-paying-social-network-amway-mlm.htm) .This unwillingness to pay poses a problem for newspapers, which generate about 20-30% of their revenue from sales and subscription. The remaining 70-80% is from ad revenue, which is directly related to the number of readers a newspaper has (http://en.wikipedia.org/wiki/Newspaper). So how are newspapers supposed to make up this lost revenue in the online setting? Can they charge online readers a subscription fee?
This is a real world occurrence of the Prisoner’s Dilemma. Let’s set up this game, keeping in mind that millions of dollars and thousands of jobs are at stake. We will also make several simplifications to highlight the concepts. We have the Wall Street Journal and the New York Times. If the WSJ charges its online readers and the NYT does not, we assume that the majority of readers will switch to NYT. Why pay for news when you can get if for free? The NYT has more readers, generates more revenue from ad sales, and has a payoff of 20. The WSJ loses ad revenue, and has a payoff of 0. In the reverse situation, if NYT charges and WSJ does not, WSJ gets 20, NYT gets 0. If both parties charge both will generate subscription revenue and some ad revenue, payoffs are WSJ: 10, NYT: 10. If neither charges, both will lose the subscription revenue, but retain some ad revenue. Thus, both have a payoff of 5. The Nash Equilibrium of this game is that neither charges for its online news. However, it is clear that both companies would be better off if they both charged. Extend this situation to thousands more newspapers, and the situation becomes clear. Every online news source wishes it could generate more revenue by charging its readers for its services. However, if a newspaper tries to put a fee on its information and others do not, that paper will suffer while others reap the benefit.
So what have newspapers done about this situation? Efforts have been made to act together. The Wall Street Journal headed this effort by beginning to charge its online readers for certain content. On March 28, 2011, the New York Times started requiring an online subscription for readers who read more than 20 articles a month (http://www.nytimes.com/2011/03/18/business/media/18times.html?_r=1&pagewanted=all). About 3 dozen newspapers have followed suit (http://stateofthemedia.org/2011/overview-2/major-trends/). This effort to cooperate is tentative at best. Within the group of cooperating newspapers, it is very tempting for one company to defect and stop charging for its services, effectively “stealing” the readership and the revenue. Also, the majority of online sources remain free to all readers. Yahoo, AOL, Google News, and the Huffington Post are all example of popular free news sources. Whether or not this model for revenue generation can be and will be sustained remains an open question. According to Game Theory, this solution is inherently unstable. Yet in the real world, there are many other factors. The quality of the news sources, consumer habits, and actual revenues have been neglected in this model. Perhaps they will be enough to overcome Nash’s bleak prediction. Nevertheless, in order to survive, news companies and print sources will have to come up with innovative ways to reassign a price and a profit to information.