Some attribute their grave condition to advertisers suddenly switching huge portions of spending from print to online - an excuse that ignores more than 30 years of declines in those newspapers' printed editions' circulations and readerships. Some others attribute their deterioration to not having transplanted their content into online quickly enough -an excuse that ignores not only the dozen years they've spent transplanting it but how their online editions are now read even less frequently and less thoroughly than their printed editions.

Most of the print newspaper experts who diagnose these companies' condition still prescribe stale nostrums such as more consumer focus groups, subscription price incentives, more stylish typography, or shorter stories. Meanwhile, most of the experts who diagnose these companies' Web sites prescribe balms and accessories such as giving blogs to reporters, adding video, or having the readers themselves report the stories. American daily newspaper companies have long been too financially impatient to submit themselves to anything but ostensibly quick cures and they've even longer been too conceptually myopic to perceive the real reasons for their declines.

I'll declare the real reasons. There are but two and neither has anything to do with multimedia, 'convergence', blogs, 'Web 2.0', 'citizen journalism,' or any ancillary topics you may have heard presented at New Media conferences this millennium.

Nor is either of the real reasons advertisers' abandonment of printed newspapers. Their abandonment is a symptom, not the reason for the decline. Contrary to myopia of many newspaper executives, advertisers aren't newspapers' primary customers. Although advertising revenues may be sunshine for newspaper executives, the roots of their business are readers. A newspaper with readers will attract advertisers but a newspaper without readers will not. Readers ultimately support and sustain the newspaper business.

To understand the real reasons why the American daily newspaper industry is dying, first understand why more and more Americans are no longer reading daily papers and how their abandonment of newspapers has been wrought by changes in their own media economics. Also comprehend why the epicenter of the newspaper industry's problems in post-Industrial countries is America and exactly how grave the situation is there.

The Sporting News has a rich history, starting publication in 1886. I remember my father subscribing in the 1960s. It was thick with box scores and stats for every team and every major sport. In 1977, when the Times Mirror Co bought the publisher for all of $18 million it had a circulation of about 356,000. By the time it was sold to Vulcan Ventures in 2000 for $100 million it had a circulation of over 500,000, but it was being threatened by the successful launch of ESPN Magazine, which had 850,00 circulation within two years of its 1998 launch.

The Sporting News was sold again in 2006, to American City Business Journals. Today the circulation is about 700,000, but at an annual price of only $14.97 for a new subscription—compared to about $61.00 in constant dollars in 1978.

Like many print publications, The Sporting News has been substantially affected by online content. Daily sports news has been particularly hard hit. The Internet is made for getting late night scores, accessing the scads of stats that even casual fans crave, following teams in far-off cities—and all for little or, most often, no consumer cost.

Like most other print publications, it has had an online presence. The Sporting News Today is something else though. It is a magazine formatted for the screen. But it is not like a Web site. It involves no scrolling. It is pdf-like, though it is not read with Adobe Reader. It is not the print edition read online, as with Zinio. To me each screen looked like a double page spread in a magazine—but with no need for a gutter. I sort of felt that I had spread opened the tabloid-sized magazine. You will note that each of the “double pages” has one page number.

By offering to send subscribers an email each day, readers so do not have to bookmark anything. Just click the link.

The content is vintage Sporting News: Right now heavy on baseball, but lots on football—professional and college. There is hockey, basketball, NASCAR, tennis. Even Little League World Series coverage is promised. And, with a nod to WEB 2.0, it will offer readers the opportunity to provide their own input: “You’ll get a byline, file to an editor.” (Actually, a clever spin on “Letters to the Editor.”)

No surprise, the business model for the Sporting News Today is, for the moment at least, advertising, though it was rather light for a first edition. The inaugural issue had a full page from SpeedTV.com, three half page house ads for Sporting News affiliates and a full page promotion for the revamped Sporting News magazine, which will become a bi-weekly. (Management expects to lose 100,000 circulation from current levels to the free online publication).

I’m not a design expert—I’ll leave that to my colleagues at Innovation Media Consulting Group. But the Sporting News Today will feel comfortable to readers who like the look of print and are put off by clicking here and there for do their online reading. The layout feels modern but grounded in print. How that plays may be generational—or not.

As a final note, it may be worth pointing out that while traditional print publications are downsizing, The Sporting News Today is hiring. Indeed, I got turned on to its impending launch by Charles Apple, it’s new art director, who was hired away from the Virginia Pilot newspaper. (Has anyone seen numbers on how many print journalists have been hired by online-only ventures other than self-funded blogs?)

There has been speculation in recent years on when we will get the first announcement that a daily newspaper will shut down its presses completely and switch to digital-only. There are still some big hurdles, like portability. But should services such as Amazon’s Kindle take off, allowing readers to take their digital publications on the go, then the Sporting News Today model may have legs and encourage a general interest newspaper to give it a whirl.

A few weeks back the editor of the Cleveland Plain Dealer on "On the Media" talked about how newspapers in Ohio were reaping great benefits trading material, and linking and cross linking. More importantly, she said she was no longer reliant on The Associated Press for her stories from the region but instead was getting the original versions direct from the other sources around the state rather than paying “a big chunk” of her budget, about $1 million for rewritten AP stories. Picking up directly, on the Web, and putting other papers’ stories directly in the newspaper was also better quality, she said, and readers were noticing:

“I mean, we've always had access to news from all over the state. It was just, you know, it went through the AP mill. I frankly think we're getting better, more distinctively written stories because they're not going through the AP mill.”

I’m not saying this will happen immediately. AP, whose core business is the not-for-profit cooperative dues of member newspapers, has offered to cut its rates starting next year. Newspapers, despite ad and circulation declines for decades, have been notoriously slow moving, and many will be reluctant to pick up content from papers they might think of as competitors; the AP has given them the cover they sought to do so less blatantly. But the economic pressures are only increasing as revenues and readership decline more precipitously, and any success in Ohio could be the thin edge of a wedge. “We've set up this little cooperative,” said the Plain Dealer editor, Susan Goldberg. “I don't know how it'll work in the future, but right now it's working really well.”

Add to that AP’s deal to have its direct results placed higher in Google than member papers, further pissing them off, and newspapers will look harder at the Ohio example. We're talking months or perhaps years, certainly not decades. The example could spread nationally or internationally.

CEO Tom Curley has been leading the AP into a future in which an increasing share of its revenues comes from sources other than member dues, such as direct photo revenues, Web content services and broadcast fees. But the transformation may not be fast enough. AP doesn't have the luxury of Bloomberg or Thomson Reuters in which news gathering can be supported by financial terminals that really bring in the bucks.

AP should own the Web. It has its roots in the trading and sharing of information. It gets a significant chunk of revenue from providing the backbone through which others pass content. It coded and tagged and parsed content with everything from category codes to prioritization markings, and ways to match text and photos decades before those practices became fashionable for everyone. But culture and old habits are very hard to change, and I fear for the company's viability hope it can work out a more creative win-win solution for all.

Here’s another way to look at more by subtraction. David Pogue, a New York Times tech columnist who I find entertaining and quite informative, had a column last month about why a product can be a success even with acknowledged flaws. Referring to Apple’s Mac Air he wrote:

…When your laptop has the thickness and feel of a legal pad and starts up with the speed of a PalmPilot, it ceases to be a traditional laptop. It becomes something you whip open and shut for quick lookups, something you check while you're standing in line or at the airline counter, something you can use in places where hauling open a regular laptop (and waiting for it) would just be too much hassle.

It's the same lesson I learned when I reviewed the Flip "camcorder" a couple weeks ago: if you change the shape and concept of something enough, it ceases to be that thing. It becomes a new thing, or a descendant of that earlier thing. But it's no longer the original thing, and you can't judge it on the same yardstick.

Lesson learned: Form—the products attributes—can create the function. Thus an entrepreneur can break out of a well-defined category (camcorder, laptop, cell phone) by changing some key characteristics—weight, time to boot up, capabilities—even a dramatic new price point.

Does this insight provide any guidance for the media industry? Should the local newspaper continue trying to be a general interest publication even when online? Is it already something else, in which case it needs to be evaluated by a different metric (i.e., time spent, return visits) than what has been used in the past (i.e., hits or clicks or gross eyeballs or total page views)? Or, perhaps, should legacy media be creating new “things” based on the old? What is the media equivalent of the Mac Air or Flip camcorder: a product that is recognizable but, by changing—often removing—product attributes is used by consumers (and advertisers in this case) in new ways?

Experiments with short form videos—first popularized from the bottom up thanks to the YouTube platform—have now become mainstream with the traditional video programmers. Viacom purchased short film pioneer Atom Films in 2006. But most attention continues to be on finding outlets for conventional programming, such as NBC Universal/News Corp.’s Hulu.

If I had the answer I’d offer it (though probably not here—a guy’s got to feed his family, or in my case, start paying college tuition). But I think it is an area ripe for brainstorming and another round of informed trial and error.

Ready. Fire. Aim.

Wilson looked at many of the more successful Web ventures and observed that what they had in common was a basic service that they offered for free and a step-up premium service that they charged for.

The basic voice over IP service Skype, for example, lets users call anyone anywhere for no cost, so long as both the caller and callee are at broadband-connected computers. However, if you really want to be able to call anyone anywhere—that is, to a land line or cell phone -- there are per minute charges. Want voice mail? Upgrade to Skype Pro.

A wonderful service I use called LogMeIn employs a similar approach. It gives me access to my desktop computer from any other computer, anywhere. A free version lets me see all my directories and files and transfer them to my remote laptop. The upgraded version actually displays the screen of my desktop, with access to any program or file, as though it was on my remote computer.

There are many other examples.

But for the Freemium model to work, Wilson observed there are other characteristics that demarcated the more successful implementations and the others:

• Ideally, they don’t require any downloads or plug ins to start. Lots of exceptions here, but it is a helpful goal.
• Support every browser with any material market share. There is no excuse these days to be FireFox or Safari challenged
• Make sure the service works on various flavors of Windows, OSX, and Linux.

In short, he says, eliminate all barriers to the initial customer acquisition.

But unlike 30 day free trials before having to pay, a true Freemium experience ensures that whatever the customer gets day one for free they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch.”

If Freemium is such a great approach, why wasn’t The New York Times’ foray into this model more successful? It gave away a basic service and, with Times Select, offered a premium upgrade.

Part of the answer (there is sometimes but not usually a silver bullet) may be that the model is most likely to succeed when the customer implicitly understands why the paid service has to cost money. Free e-mail accounts that offer greater storage for a fee. Termination cost on other carriers networks in the Skype model is explicit justification. In the case of TimesSelect, it would be obvious to most readers that arbitrary withholding of access to some portions of content was not related to significant costs. It may have made some sense as a “value” play, yet it clearly did not work. “But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results,” concludes Wilson.

The Freemium model was augmented one year later by another venture capitalist, Josh Kopelman. He has labeled his observation “The Penny Gap.” I recall meeting Kopelman when I was teaching at Temple University in Philadelphia. He had started Infonautics Corporation, the predecessor of today's High Beam Research, in the early Internet days. I assume from that he learned some lessons about offering a subscription service that gave users access to a wide range of magazines, journals, reference and newspaper material. (And that he was more successful with a subsequent venture, Half.com, acquired by eBay).

The Penny Gap says in essence that getting a user to go from free to any sort of payment, even a penny, is harder that getting a paying subscriber to pay more. Going from free to $1.00 is a much higher hurdle than from $1 to $2, even though the difference is the same. The Penny Gap is a disconnect with classical economic theory, which would hold that demand increases as the price decreases. As Kopelman illustrated in the accompany figure, getting users to make any financial commitment is the greater hurdle than the amount itself.

What does this say about the content-heavy online ventures of the legacy media business? In large measure it helps explain why they settled for the most part (well, except for The Wall Street Journal) on an advertiser supported Web model. From USA Today to Slate to The New York Times media sites have tried and failed to make a user pay model stick, despite offering some high grade content.

But by dissecting the successful non-media sites that have achieved a substantial user-pay component, could media firms find areas where they can truly find value added to justify a premium? I’m not optimistic. Two years ago I might have offered that a comprehensive ad-free video service could be sold at a premium. Recall CNN tried that with its Pipeline service, providing real time video streams and an archive of telecasts. It met many Freemium characteristics, including a presumption of additional cost for all the storage and bandwidth. Apparently Time Warner determined that more advertising revenue outweighed the subscription dollars. Hulu, the new NBC Universal-News Corporation joint venture, is all free, all the time. It has not made noises about offering paid-for premium content.

The bottom line is that as a generalization the media business may not get over the Penny Gap chasm. For those firms that have been on the electronic side, where advertiser supported has long been the total revenue stream, maintaining that model may be easiest to accept. For that segment of the print media that has been used to drawing at least some of its revenue from consumers, resigning itself to only advertising may be tougher. And perhaps a bit of a blow to its self-esteem.

I say this as an outsider. I don’t have access to the crunched numbers and five year outlooks no doubt ginned up by the Microsoft investment bankers. And, to be sure, many business pundits have a similar pat justification, all along the lines that both Microsoft and Yahoo have persistently tried to best Google but failed. “No one can compete with Google on their own anymore,” says Jon Miller the former chairman and chief executive of AOL. “There has to be consolidation among the major players.

Suddenly Microsoft, just a few years ago the bad boy of the computer galaxy, is—what—the white knight? Mark Read, director of strategy for the WPP Group, which owns ad agencies like JWT and Ogilvy & Mather, opined, “It is good for investment. It is good for competition.”

A combined Microsoft and Yahoo, notes The New York Times, would beat Google in Web traffic and come closer in ad revenues. Most importantly, the pair would give Google a greater challenge as it tried to enter display advertising, because Yahoo has the largest share of that market.

But wait a second. What does a merger with Yahoo really do for Microsoft—to the tune of a cool $44 billion? Lets look at some numbers.

Google has grown dramatically, going from zero to $17 billion in revenue. It is highly profitable, a bit (well, $200 million) over $4 billion in 2007. Very impressive. But Microsoft had almost 3.5 times that revenue -- $58 billion—and four times the profit-- $17 billion.

So what does Yahoo bring to the party? Not even $7 billion in revenue and a piddling $660 million in profit. It brings a search engine that’s technically pretty good. But Microsoft already has a comparable piece of technology. Yes, most of its revenue is derived form online advertising, nearly twice that of Microsoft.

And what’s the synergy of Microhoo? (or Yahsoft?). Not much that is obvious. Microsoft forecasts at least $1 billion in annual cost savings for the merged entity, from synergies in areas such as combining engineering talent.

Sure, a merger of this magnitude—pegged to cost savings rather than market opportunities-- would make sense if Microsoft was a struggling enterprise. It's not -- and a 29% profit margin at that. It has $21 billion in cash and short term investments. Assuming it actually realized the savings—so what? Microsoft already has the resources to compete with Google—if it is possible at all.

Then what does a Mircohoo end up with? Despite trying, Microsoft has not come up with a strategy to erode Google’s dominance in search and online advertising. Its share of the search market ended last year at 9.8%, down from 12% in mid-2006. Yahoo does better, but fell from an estimated 28.8% mid-2006 to 22.9% last year.

Now, let’s see. We take Microsoft’s failed strategy and add it to Yahoo’s failed strategy... and the best they can come up with is some savings effect, as the combined entity slides further behind.

I understand that the hope is that the two combined would bulk up to a third of the search market—perhaps in aggregate enough to prime the pump to attract more advertisers. But Yahoo alone had nearly a third of the search business in 2005 and that did not keep it from sliding downhill since then.

The combination of Time Warner with AOL in 2001 has been a disaster. However, it was primarily the outlandish $112 billion price tag, negotiated at the peak of the Internet bubble, that made it ridiculous. The notion of an old time content company wanting to modernize by associating with the new media start-up had some strategic sense, even if the conflicting cultures and stratospheric valuation doomed the combination. I could understand the potential synergies, even if not to the degree that could justify the cost.

I can also understand Microsoft’s necessity to segue from the operating system and packaged software business to a greater reliance on Internet-derived revenue. It knows it needs to modify its current business model. But I can think of better uses of $44 billion to get there. Glad I sold my Microsoft stock last year.

I’ve been asked more than once, “Why should I help you?” Some folks I’ve interviewed have even pointed out that I’m being paid to report, that the organization I’m working for (whether a newspaper or TV show) is money-making, even for profit, and so why should we reporters feel sanguine about asking or requiring that the grist for our work be provided for free? It’s a hard question to answer, when you can’t say “for publicity that will help your business,” or if someone isn’t buying the argument that getting the word out may help others in other situations or that simply getting it off their chest will be liberating.

In Japan, it’s common to pay sources, especially when they’re experts -- and, yes, they also get the advantage of publicity. There is, in giving over a token amount of cash, a display of gratitude, and acknowledgement that value has been given. I had one uncomfortable interview in Tokyo while working for Newsweek, when an expert in the construction and maintenance of the Bullet Train gave me some inside information about troubles the line had had in its earlier days. I wondered why he was telling me such info so frankly. At the end, he expected -- as he had come to expect from journalists -- a gratuity, and it was left to a Japanese co-worker to explain to him, with both in considerable discomfort, that American organizations didn’t do that. I was uncomfortable, too.

As OTM co-host Bob Garfield and guest Robert Boynton point out in the radio piece, even when no money is exchanged there is a currency of those who give their time and information in exchange for exposure, perhaps the chance to flog their point of view. Some journalists talk of disinterest in how money is made by the organization they work for, which I find a little odd. Is there another such for-profit industry, where the folks steeped in producing the product are willfully ignorant of how it's sold and makes money? There is certainly a coin of the realm, and one in which journalists spin and get spun, journalists and sources use each other in various ways. Boynton says it would be OK to pay, if it were disclosed that someone had done so. That would be an open and honest way of doing it. Let the consumer make his or her own decisions. And it would be more open than the hidden agendas the public sometimes can’t see.

We had some discussion here last summer on the scenarios that might justify a free strategy, wherein lower ad rates and foregoing $60 million or whatever in subscription revenue could be made up by 10x greater readership.

Apparently the new owner of Dow Jones is backing off. A report on a Wall Street Journal bureau chiefs’ meeting last week says that “Murdoch has scaled back his ambition to make WSJ.com entirely free.” According to one who was there “He said he originally thought making it free would bring in the biggest audience, but that after studying it it’s not as simple as he thought.”

It rarely is.

Local advertising traditionally has accounted for about 85% of total revenue for newspapers in larger market, even higher for small market newspapers. Local TV stations receive a far higher proportion of their revenue from spot national advertising, while radio stations have tended to be in between, though in most case closer to newspapers than TV. The primary local competitor for newspapers has historically been directories (e.g., Yellow Pages) and direct mail. Increasingly, cable has been able to siphon off local dollars with the capability to insert advertisements down to the neighborhood level.

What must be most unnerving to newspaper publishers and, to a lesser extent other local media players, is that pure play Web sites now have the largest share of local on-line advertising revenue—43.7% by the reckoning of Borrell Associates.

How can this be? Didn’t the publishers take solace in the fact that their local papers had a built in advantage over the upstarts thanks to their identification with the local market? And that all-critical brand equity?

It is becoming evident that the value of ad placement based on search terms, Zip code or Internet address proves more effective for the local advertiser even if the page viewed does not directly contain information that is congruent with the location of the user. That is, the value of the local newspaper or radio station has been that the advertiser had a high degree of confidence that anyone listening to that station or reading that paper was in their local trading area. But online the advertiser may not only be assured that the ad is placed in view of an individual within their target trading area, but may also have specific demographic or other characteristics desirable for that advertiser. Not to mention the added delight of knowing when an ad may have been seen and responded to in the form of a click or more.

Of course, this is true for the online site of any local medium. Too often, however, it seems that while the publisher’s sales force was working on convincing the paper’s current advertisers to try the online version, the new players had no such blinders. They were marketing to anyone, which often meant new service providers and merchants who had not been print advertisers: smaller in size but far greater in number. A version of the long tail effect. And that is where much of the growth is coming from. It’s not just old advertisers in new bottles.

Of course, we will know in the long run, when some media historian looks back on this time from 20 years hence. But that doesn’t help today’s decision makers. That is why the research of University of Chicago economist Matthew Gentzkow published earlier this year in The American Economic Review is so helpful.

In this highly data driven paper with the typically academic title, “Valuing New Goods in a Model with Complementarity: Online Newspapers,”, Gentzkow blends consumer data from the Washington, DC market with newspaper operating results to address three questions: What is the relationship between print and online versions on 1) the demand for either diversion, 2) on the welfare of consumers, and, crucially, 3) on the impact of charging consumers for the online product?

With 30 pages of assumptions, explanation and calculations, Gentzkow makes a well substantiated finding that, The Washington Post would have been better off charging a modest sum for its online version (on the order of $6.00/month) until about 2004. After that, however, the growth in online advertising expenditures crossed over to affirm that it is significantly more profitable to set a zero price for the online edition when one factors in even a small transaction cost for online payments. He suggests that his findings are robust enough that they would likely apply to other big city newspapers.

Along the way, Gentzkow upends the early assumption that the print and online versions of a newspaper were complements. Applying a more sophisticated demographic model than had been used in the past, which simply looked at newspaper readers and online readers, Gentzkow concludes that the substitution effect is “nonnegligible." He does add that ”it is “small, however, relative to some earlier predictions.” In other words, real but not likely “to threaten the survival of print media,” at least right now.

Gentzkow further quantifies the “consumer welfare benefit” created by having a zero consumer price for online newspapers, which he put at $45 million annually for The Washington Post’s market. For the 2000-2003 period that came at the expense of Washington Post Co. stockholders, as he calculated it lost money by giving away the online edition when it could have made a profit by charging for it. (Among the factors here is that, as substitute products, by charging for online, some print subscribers would have continued with their subscriptions instead of switching to the online offering). Starting in 2004, however, the Post was more profitable with the free online version that it would have been with an online use charge

Having seen considerable discussion about whether The Wall Street Journal would be better off making its online version free, as the The New York Times has done Gentzkow’s approach is another data point (a rather large one at that) to reinforce the advertising supported model, for mass market newspapers, at least. There are numerous instances, however, where a consumer-paid model will still be needed. In the magazine business, for example, advertising revenue for many of the mass audience magazines, such as People or TV Guide, can be 50% or more of total revenue. But there are many niche publications, such as The Nation or Weekly Standard, that are highly dependent on subscriptions for the bulk their revenue. It is likely to be the same for niche online sites.

Yesterday he declared that "the sky's-the-limit profits from traditional broadcast TV are over….Free-to-air television faces a lot of challenges, just from the sheer fragmentation of the audience.” Overall he characterized broadcast television as a "highly challenged industry in America."

This may actually be on the minds of some of the striking Writers Guild of America members. The Wall Street Journal reported than some of the writers who work for the soap operas are resigning from the union and going back to work. The audiences for the soaps have been sinking for years. “Writers and producers in the genre fear that by the time the strike finishes, their audiences won't return.”

On Monday Murdoch publicly admitted that he expected the online version of The Wall Street Journal will soon be free. News Corp. will likely close the deal to acquire Dow Jones next month. "We are studying it and we expect to make that free, and instead of having one million [subscribers], having at least 10 million to 15 million in every corner of the earth, keeping up-to-date minute by minute with all business and economic news from around the world," he told an audience in Australia.

Such comments give some insights in News Corporation's strategy and business model. Clearly, advertising will play a larger role in the business model for online content. On the other hand, he is hedging his bets on advertising from broadcasting. First, he advocates making television productions very high quality, so they can be sold to the global market “and then be brought back to America--or to anywhere in the world, for that matter --and be sold as DVDs.”

So, television becomes more consumer financed, while online becomes the prime advertiser-supported medium. At least in Murdoch’s view. How will this be affected, if at all, should DVD’s be supplanted by online delivery, such as by Netflix or Amazon’s Unbox or iTunes video service? Actually, News Corp has a bet there, with Hulu.com, its ad-supported online video venture with NBC Universal.

News Corp. has developed a “portfolio strategy”: When the crystal ball is cloudy, invest in a range of possibilities. Not all need to be a success. Two or three big ones will do.

"We are studying it and we expect to make that free, and instead of having 1 million (subscribers) having at least 10-15 million in every corner of the earth."

No ambiguity there.

What Google is apparently working on is not the hardware per se, but an open operating system and applications that play to its strengths in search, mapping, YouTube and, of course, targeted advertising. Various accounts has it speaking with Verizon Wireless, Sprint and T-Mobile in the U.S., possibly others globally.

The first question anyone following this thread would ask is why would any of these players consider opening up their tightly controlled phones? Right now, for example, Verizon customers who want GPS directions pay $10/month or $3.00 daily for data that cost Verizon almost nothing to provide. Other mobile phone data services bring in anywhere from $5 to $45 month. Why would Verizon agree to an open system that would blow open this cash cow?

The answer lies in the same metrics that lead The New York Times to forgo $49 from 220,000 subscribers to its Times Select service. And it is the same calculus that my colleague here Dorian Benkoil (and various commenters) put together for scenarios that might make it more profitable for The Wall Street Journal to give away its online product and forego the $60 million, plus or minus, in subscription revenue. That is, the potential for advertising revenue is greater than the current and projected revenue from the walled cell phone garden.

What are the stakes? In 2006, an estimated $301 million was spent on ads for mobile phone in the U.S. One research firm guesses that should increase to $2.12 billion in 2011. (How can they predict to two decimal places four years from now? Someday I will examine a bunch of these past forecasts and see how they line up with what really happened). But this projection likely assumes that the current cell phone industry model prevails. If a more open network evolved, with advertising dollars available to replace lost subscription revenue, that $2.1 billion would be higher. How much? Ah, there’s the rub.

What I am suggesting here is some credibility to the notion that the carriers, like much of the media industry, might do better from an advertising model than from user revenue for their data services. The most likely carriers to be amenable to a deal with Google would be number three Sprint-Nextel and number four T-Mobile. Word is that the latter may be closest to a deal. But Verizon could want to get in on the act as well to counter AT&T’s excluive with Apple. In any event, Google would likely need to split revenue more generously with the carriers than it does in the media world because the carriers are in a much stronger bargaining position.

If Google does get its foot (or whatever) in the mobile phone world, the impact could be every bit as great as has been its impact in the Web universe. It might force Apple to open up the iPhone even more than it has planned to, as much to accommodate its current partner, AT&T, than out of true belief.

I’m not ready to buy Google stock at $700—but then, I thought it was rich when its IPO priced it at about $85, so don’t take advise on this from me. Still, if they pull this off, $700 may look cheap by 2011.

Calculated from the Times’ press release , TimesSelect had about 227,000 subscribers beyond its print base. This was generating an estimated $10 million annually. By online subscription standards, both are substantial numbers (though dwarfed by The Wall Street Journal’s base of one million online subscribers).

The Times’ release clearly points to the strategic basis for its decision: It could do better than $10 million in advertising by opening up its columnists and archives to a larger audience. No subtlety here: Denise Warren, chief advertising officer expected that “with the removal of the pay wall… Advertisers on the site can expect to see an unprecedented number of Times readers interacting with their brands." American Express is the first “sponsor” of the newly opened site.

TimesSelect was a bit controversial from the start, and not just with consumers. Many of its columnists, who, after all, get both ego satisfaction and presumably greater impact with a bigger audience, were unhappy being sequestered behind the pay wall.

Although the venerable Times yielding to the advertising-over-consumer payment model seems to add further credence to the “information wants to be free” trend, I have gotten wind of a new venture that aims to succeed as a user payment model for content providers where micropayments has failed. I will supply more details when available.

For today, I want to highlight the data and analysis published last week by the media-centric private equity firm, Veronis, Suhlis & Stevenson (VSS) in its latest Communications Industry Forecast, covering through 2011. This has nuggets which, if accurate (this is a forecast) would bring to higher resolution the winners and losers in the media arena. For example, total spending on all communications grew substantially faster than GDP between 2001 and 2006. Furthermore, VSS predicts that communications industry spending will continue to grow faster than the overall economy through 2011, making it the third growing sector of the economy.

That’s some good news. On the other hand, the report finds that, for the first time since 1997, consumers spent less time with media in total last year than in the previous year. VSS believes this decrease, though small in percentage terms, is due to changing consumer behaviors and digital media efficiencies. “The drop in consumer media usage was driven by the continued migration of consumers to digital alternatives for news, information and entertainment, which require less time investment than their traditional media counterparts.” It continues: “Consumers typically watch broadcast or cable television at least 30 minutes per session while they spend as little as five to seven minutes viewing consumer-generated video clips online.”

VSS does not see this decrease as part of a long term trend, expecting consumer media usage to stabilize in 2007 and increase slightly through 2011. However, this would be driven by time spent with out-of-home media and videogames as the only major segments to achieve accelerating growth in this timeframe. Overall consumer time spent with media is forecast to increase at a compound rate of 0.5% from 2006 to 2011, down substantially to the 0.8% in the previous five-year period.

The real headline, however, is this prognostication: “In what would be a watershed moment in communications history, VSS predicts that Internet advertising – including pure-play websites and digital extensions of traditional media – will replace newspapers as the largest ad medium in 2011.”

I assume they mean that advertising in printed newspapers will be supplanted by advertising online—which includes the advertising that newspaper publishers generate from their online sites. Still it would be another stake in the heart of what once the biggest rooster in the barnyard.

But here’s another bombshell: “In addition to shifting their attention to alternative media, consumers are also migrating away from advertising-supported media, such as broadcast TV and newspapers, to consumer-supported platforms, such as cable TV and videogames.” Time spent with consumer-supported media grew at a compound rate of 19.8% from 2001 to 2006, while time spent with ad-supported media declined 6.3% in the period. This is not a measure of revenue but of consumer time spent. But with all the buzz about everyone moving to totally ad supported models (see Rebuilding Media’s latest foray into this space), this finding more than suggests that consumers are willing to part with their discretionary income for the right content or platform.

Another data point is found in a piece by Bobby White in The Wall Street Journal (sub. required). "Across the cable TV industry," writes White, "… independent channels are also turning away from TV to the Internet." Black Family History, The Lime Channel, The Employment and Career Channel, Horror Channel and HorseTV are among those that pulled the plug on their cable affiliation in favor a going Internet only.

“The shift illustrates how the Internet is offering a second chance to certain segments of old media. Web-based TV is now becoming a more viable business route, and Internet video is exploding. Running an online-only video channel, which doesn't require expensive cameras and broadcasting gear, is cheaper than operating a cable TV channel. While starting a new cable channel today takes an initial investment of $100 million to $200 million, a broadband channel needs just $5 million to $10 million to get going, says Boston-based research firm Broadband Directions.”

It’s a constant challenge when in the midst of change to separate trends from simple data points. One needs a series of data points over time that show direction. The Journal article may well be a data point that fits into the trends the VSS study provides. It seems though that enough data points are aggregating to confirm some direction with far reaching strategic implications for and broad array of players in the media industry.