To download the complete version of "The Story So Far: What We Know About the Business of Digital Journalism," a new report on digital news economics from the Columbia University Graduate School of Journalism, click here.

But Paton does acknowledge that moving revenue online amounts to “trading dollars for dimes”—or perhaps, if he’s successful, quarters. The gamble is that the Journal-Register Co. will be able to cut costs and increase its online audience quickly enough to compensate for the lower revenue that online advertising brings.

The notion of “trading dollars for dimes” captures the impact of digital distribution on the economics of the business. Newspapers, magazines, and broadcasting are all characterized by high fixed and low variable costs; it’s quite expensive to produce the first copy of a newspaper, but it’s far cheaper to produce the second copy—or the millionth. A local broadcaster faces much the same set of costs whether it reaches 100 viewers or 100,000. Hence the traditional media’s profound economies of scale. News outlets that could not build a large enough base of readers or viewers to cover their steep fixed costs have tended to collapse in a few years, mired in debt. But those that surpassed that break-even point and went on to establish a mass audience could become immensely profitable—and those steep fixed costs created a natural barrier to competition.

Online, the equation changes dramatically. Observers sometimes underestimate the expense involved in running a high-quality, high-traffic online publication. But the barriers to entry are radically lower than in print or in broadcast. While a number of aspects of the online ad market have favored advertisers over publishers, simple audience fragmentation goes a long way toward explaining why news outlets have seen their revenue squeezed so tightly. Today, someone wanting political news or movie reviews has dozens of alternatives to choose from or stumble across.

Thus both revenue and costs are lower online. To be more precise, the cost curve has been stretched out. The steep initial investment required to launch a media business is gone, and that has opened up opportunities for low-cost local or topical sites that aim to build an audience in the thousands or tens of thousands. This is the niche occupied by many moderately successful blogs as well as community sites like Baristanet, with modest ad income and even more modest expenses.

At the other extreme one finds large-scale media properties that have substantial technology or editorial costs but that amass enough sheer traffic to turn a profit. The dominant example here is Google, whose 175 million monthly users in the U.S.—generating billions of page views per month—allow it to capture more than 40 percent of the entire U.S. online advertising market. Even considering only “display advertising” (that is, excluding search ads), Google accounts for 13 percent of ad spending. Yahoo and Facebook, the display ad leaders, each claim an additional fifth of the market.

However, most legacy news producers operate in the large and difficult middle of the cost curve, with traffic too low to compensate for the fixed expenses of news production, despite the savings that come from publishing online. In 2010, total operating expenses at The New York Times Co. ran to $2.1 billion, about two-thirds of the $2.9 billion total for Yahoo Inc. Of course, somewhere between a third and a half of the newspaper’s expenses would disappear if it no longer printed a paper edition. But Yahoo has many times more monthly visitors (roughly five times as many, if one counts traffic only to nytimes.com). And while monthly visitors to all Times properties generate fewer than 2 billion page views, Yahoo serves out a staggering 100 billion pages each month.

Justin Smith, president of Atlantic Media Co., argues that these dynamics explain both the opportunities the Internet affords and the stark challenge it has posed to established news providers. “There is a whole wave of new journalism models that have been developed at a fraction of the cost of traditional media,” he says. “Traditional media players are way too set in their ways for reducing cost. They can’t sustain the revenue to support their costs.”

Bill Grueskin, Ava Seave, and Lucas Graves are the co-authors of "The Story so Far: What We Know About the Business of Digital Journalism." Grueskin is dean of academic affairs at the Columbia University Graduate School of Journalism. Seave is a principal of Quantum Media, a NYC-based consulting firm. Graves is a PhD candidate in communications at Columbia University. For further biographical details, click here.