The Fundamental Problem of Newspapers on the Internet

I introduce you to the fundamental problem of newspapers on the internet: The Krugman Paradox - named by me after watching PetMeds.com (PETS) ads appear next to Paul Krugman for three days after it was announced he won a Nobel Prize.
I couldn't believe there wasn't a better way to monetize his presence on NYTimes.com (NYT). Further investigation revealed that the Krugman problem was not unique.

Here goes.

Definition:
The Krugman Paradox is a phenomenon referring to newspapers' websites and the sites' inability to produce economically sustainable advertising revenue, despite their highest audience reach in the history of their industry. The paradox indicates that newspapers must increase the effectiveness of their online advertising if this is to be their main revenue stream.

Prior Art:
On April 7, 2008, Nicholas Carr put forth a theory he referred to as "unbundling". Boiled down to its core, the theory states that advertisements (bundled with content) in a printed newspaper produce a product worth more than the sum of their parts. The opposite is true online where ad performance must stand alone on a single web page. As he writes,
As soon as a newspaper is unbundled, an intricate and, until now, largely invisible system of subsidization quickly unravels. Classified ads, for instance, can no longer help to underwrite the salaries of investigative journalists or overseas correspondents. Each piece of content has to compete separately, consuming costs and generating revenues in isolation.
On September 10, 2007, Doc Searls wrote about the utility of traditional advertising and how better ways of connecting customers to products and services have been created on the internet. He cautions newspapers who assume advertising will always be around at the levels prior to the existence of the internet. As he writes,
While rivers of advertising money flow away from old media and toward new ones, both the old and the new media crowds continue to assume that advertising money will flow forever. This is a mistake. Advertising remains an extremely inefficient and wasteful way for sellers to find buyers. I'm not saying advertising isn't effective, by the way; just that massive inefficiency and waste have always been involved, and that this fact constitutes a problem we've long been waiting to solve, whether we know it or not.
…The holy grail for advertisers isn't advertising at all, because it's not about sellers hunting down buyers. In fact it's the reverse: buyers hunting for sellers.
On April 22, 2008, Jay Rosen responds to Searls' comments to highlight the idea that whether ad spending grows, shrinks, or stays the same:
Advertisers aren't in business to advertise; they do it to reach customers making a buying decision. If there were some other way of reaching that person, some other way for buyers and sellers to communicate, advertising would become more and more superfluous.

Example:
Despite the highest readership of any newspaper in the United States, the New York Times only generated $330 million in online advertising in 2007. Total operating costs for that same year totaled $2.928 billion.

Assumptions:
It is widely reported that total newspaper operating costs would be reduced by 35% if newspapers eliminated their print product. Using the NYT example again, costs could be reduced to $1.903 billion.
Online advertising in general is growing approximately 12% year over year.
The New York Times is following this trend.
NYT online advertising revenue is projected to be ~$350 million or $29.17 million per month.

Audience:
The NYTimes.com reaches an average 15.6 million people per month (quantcast) and newspaper websites in aggregate reached 69.8 million people (naa).
65.4% of NYTimes.com readers come from the USA.
NYTimes.com is reaching approx. 3.3% of the US population (15.6 million x65.4%) =10.2024 million/(305 million).

Revenue per person:
$29.17 million month / 15.6 million unique monthly visitors = $1.87 per unique per month.
Each unique reader is worth $22.40 annually in online advertising revenue (a far cry from the 1 subscriber = $1000 which is what it was before the arrival of the internet).

Problem:
The gap to break-even is still a whopping $1.553 billion.
If advertising rates stay the same, The New York Times needs to raise its unique audience 5.437 times in order to break even. Here is how it breaks down:
5.437 X 15.6 million uniques per month =
84.82 million uniques per month X $1.86 per unique =
$158.6 million per month X 12 months =
$1.903 billion annual online advertising revenues =Break Even NOT YET PROFITABLE
Questions for further examination or the "Stalin Problem" (reality):
Is it unrealistic for NYTimes.com to grow their national audience reach much more than 3.3% considering their print audience reach is ~1million or roughly .3%?
Generating 84.82 million uniques per month would make NYTimes.com the number 5 website in the entire world, ahead of Wikipedia.org
Preliminary conclusions:
Assuming the Krugman Paradox is real:

Analysis of the Krugman Paradox suggests that pursuing online audience growth strategies to grow revenue may not be the best way to grow revenue
Analysis of the Krugman Paradox suggests that absent online advertising innovations, newspapers must seek alternative revenue streams to achieve economic sustainability.
Notes about my data:
NYTimes internet revenue figures include NYTimes.com, about.com, Boston.com and other company websites. I'm not too concerned though, because parsing out this data would only make their revenue numbers WORSE.
"Correlation does not imply causation", further investigation needs to be done to find out if the Krugman Paradox is real.
Of course, further research needs to be done in order to see if this situation is representative of the industry as a whole.

Source: Seekingalpha.com