NY Times Co.'s Strong Q2 Earnings Raise Question About Pay Plan

It's a bad idea to go grocery shopping when you're hungry, and it also may be a bad idea to make major strategic decisions about your revenue model in the midst of an advertising recession.

The New York Times Co. (NYT) had mostly good news to report in its quarterly earnings on Thursday, but that good news casts doubt on the flagship newspaper's commitment to adopting a pay regime for its website at the start of next year. The company's swing from a 3.2% decline in revenues in the second quarter of 2009 to a 1.2% increase in the year-later period owed much to a 21% increase in digital ad revenues, which more than offset a 6% slide in print ads. Online ad spending has finally come of age at the Times Co.: For the first time, it accounted for more than a quarter of the company's total advertising pie (26%, versus 22% last year).

CEO Janet Robinson had nothing but positive things to say about the digital advertising picture. She talked about the "impressive growth" in display advertising at nytimes.com, and said, "We find the general trending to be fairly encouraging."

Yet, in moving ahead with its plan to begin charging readers for website access in 2011, Robinson and the rest of the Times Co.'s management are behaving as though the digital ad picture weren't bright and getting brighter. As Robinson noted on the earnings call, nytimes.com is the most popular U.S. newspaper website. Surely it risks losing at least some of its audience once its metered pay plan is in place, if not the 67% to 90% reduction suffered by the Times of London after it erected a rigid pay wall. Even assuming the Times is able to charge its advertisers more to reach its paying readers, the math may still not work out in its favor.

And it's not as if the move to a pay model is without structural costs. Robinson said the company has moved " into active development mode, building systems and infrastructure needed to support commerce." When one analyst guessed that the company might be spending $5 million to $7 million per quarter developing its pay system, chief financial officer James Follo said the actual price tag is "a little higher than that."

Worst case scenario: The Times spends more than $15 million in what's left of 2010 building a system it will ultimately decide it doesn't need as rising digital ad spending makes it possible to keep its website free.