When advertising is icing on the subscription cake

There are four words that no media owner will enjoy using to describe their business in 2013, and they are “overly dependent on advertising”. How much easier would it be to be in the subscription game, with company coffers stuffed by the regular payments of loyal and economically resilient customers?

At the Royal Television Society convention in Cambridge last week, Netflix chief content officer Ted Sarandos was in the happy position of explaining that it won't be saying how many people watch its shows, because with no advertisers to please, it has no requirement to do so.

Jay Hunt, the chief creative officer of Channel 4, was naturally envious. "I'd just like to say to all journalists here, henceforth, from now on, all Channel 4 shows are successful, and that's it. That's sorted," she joked.

Netflix, of course, is an extreme case. But there are other media companies with business models that are weighted towards subscriptions rather than advertising and they have the potential to make competitors grouchy.

BSkyB, for example, saw its advertising income drop 4 per cent to £440 million in the year to the end of June. No cause for alarm. Its total revenues arrived at £6.8 billion, meaning its ad revenues are just 6.5 per cent of the total anyway.

Sky's relationship with advertising income – mere icing on top of the subscription cake – hints at why its ever-expanding collection of advertising opt-outs in the Irish market leaves RTÉ executives testy. Its sales division, Sky Media Ireland, not being at all dependent on what advertisers pay, has the luxury of charging whatever it likes for spots on the channels for which it sells local advertising (27 of them, following the addition of MTV Music and Nick Jr 2 yesterday). It chooses to go cheap and undercut.

Mike Darcey, who these days is the chief executive of News UK (formerly News International), but was previously the chief operating officer at BSkyB, followed Sarandos and Hunt onto the Cambridge stage. Darcey's new business seems familiar, television industry veteran Peter Bazalgette observed. News UK, via the hard paywalls of Sun+, The Times and The Sunday Times, is essentially taking a bundle of news, sport and entertainment and selling it to subscribers, he said: "It sounds very much like BSkyB."

Darcey was not disagreeing. “I think the uncharitable version is that I only have one strategy… and it’s worked pretty well for me for 15 years.”

The alternatives employed elsewhere by the newspaper industry are not working so well, or will soon falter, Darcey said. There is “a very respectable case for a wholly free proposition” in newspapers, just as (notwithstanding Netflix-shaped challenges) there is in television. “But the middle ground of being sort of free while charging as well, I think that is sort of untenable. And it is unravelling.”

Even before they embark down the digital subscription route, newspaper groups in Ireland are seeing the balance of their earnings shift away from advertising, for the simple reason that print ad revenues are falling faster than circulation ones. Independent News & Media’s financial update for the first half of 2013 showed that ad revenues had plummeted 12.7 per cent, while other sources of income fell less steeply.

For RTÉ, too, advertising revenues have plummeted to a much greater extent than licence fee income. It still earns what TV3 has long regarded and what RTÉ has come to regard as an awkwardly large portion of its funding from advertising – double the average of public service broadcasters in Europe, according to RTÉ's five-year strategy document. Advertising, in kinder times the source of a lovely bonanza, now can't be relied upon, and it wants certainty.

Expediently, RTÉ is now hoping higher income derived from the proposed public service broadcasting charge will serve to lessen its reliance on the ad market. For newspaper groups, that option is not available. But there are at least some clues as to how many digital users can be converted to paying subscribers.

International experience has suggested that 1.5-2 per cent of a newspaper site's online users have a propensity to pay for the digital product, INM chief executive Vincent Crowley noted recently. It's a figure that points to an initial INM digital subscriber target range of 76,500-102,000.

Stable paywall income of any kind will reduce newspaper groups’ exposure to ad markets. But the harder the paywall, the more pronounced this effect will be. “The middle ground”, as Darcey describes the metered middle, is about keeping a foot in both camps and praying you get the balance right.