Online Newspapers: Superstar's Long Tails
So, what's the solution? Well, perhaps you could charge for online news. Matt argues that this would not work because (a) the optimal price is very small and (b) there are transaction costs, both "real" and perceived, that would make the low "optimal" price not worth it.
Another possibility would be not to have an on-line edition, and make everyone pay for the paper copies. This is flawed because, obviously, a lack of an online edition is a competitive disadvantage. If the Washington Post abandoned its online edition, it would likely not gain those $5.5 million in profits back; instead, it's likely that those online readers would stay online, but read other papers. Online news is a prisoner's dilemma for newspapers. They might get that $5.5 million back if they all abandoned online news, but that's not going to happen.
So, what's the end result of this? I think it's likely that what has happened is that online news has created a newspaper "superstar" effect. People still read the Boston Globe or the SF Chronicle for local news, but the reader share of the major, national and international, newspapers is skyrocketing. I, for example, read the Boston Globe for its local sports coverage (I do it for free online, of course), but get my national and international news from the NY Times. Newspapers like the Times, the Wall St. Journal, and maybe some others will be able to turn a profit online, but other, more local papers, will be forced to specialize as local news sources. I think we'll end up seeing both Rosen's superstar effect and Chris Anderson's Long Tail, with a news market much more clearly split into regional and national/international segments.