Walter Hussman deserves a good laugh. Hussman, publisher of the Arkansas Democrat-Gazette, defied conventional wisdom and walled off his local reporting content, back in 2002. Why give away on the web what you made people paid for in print? Looking at the web, he reasoned that readers would stop paying for print if they got the same stuff for free online. Further, online ad revenue rates paled compared to print ones.

His simple explanation was lampooned for a long time. Now, though, into the middle of 2011, it’s a model, much tweaked, embraced by many of the companies putting up pay structures. As we survey that landscape — largely populated by smaller publishers (“Moneyball and paywalls: Lessons on paid content from smaller papers“) — we see a new game being played. We can divide it, importantly, between offense and defense. Defense is leading the way at this point, so let’s take a look at the newsonomics of defense and offense and what it tells us about news competition.

As publishers peered into the paid content darkness a year ago, they first confronted their fears. Primary among them: What if they lost so much traffic that their online ad revenue — the only revenue line growing at their companies — began to shrink? Now, with initial testing, we know that with conservative, and largely metered, approaches to charging readers, digital ad revenue doesn’t shrink. Yes, pageviews have shrunk anywhere from a few percentage points to more than 30, but ad revenue can be maintained. So that’s good defense. Check one box off.

Go back to Hussman’s simple appraisal — readers will drop the paper if they can get similar, local content online for free — and we can now update it. Most of the papers that have launched paid tests have seen their print churn drop. People aren’t stupid. They do the math and say, okay, I’ll hold on to the paper, if you include “free” digital access. That stealth strategy (“The newsonomics of Sunday paper/tablet subscriptions“) is playing out. We’re likely to see initial indications of that in the next set of circulation reporting this October, and more by next spring. Defense: Hold on to as many of those print subscriptions as you can for as long as you can. In fact, a chart prepared by the Arkansas Democrat-Gazette, and shown at a recent RJI conference at the University of Missouri, starkly shows what defense looks like.

The chart covers the period 2000-2010 and shows the the daily circulation change of mid-metro papers. At the top, the two papers owned by Hussman’s family-owned WEHCO Media: the Arkansas Democrat-Gazette and the Chattanooga Times Free Press. Their (paywall-based) experience: modest increases of circulation of 3.2 percent and 1.0 percent, respectively. The rest of the list is breathtaking, portraying the stark decline of print, among them The Nashville Tennessean lost 31.7 percent of its circulation, while the Kansas City Star lost 22.9 percent.

So, if newspapers newly putting up walls can staunch churn to some degree, check off another box.

Defensive position, number three: In smaller cities at least, and for New York Times readers, the reader psychology is in motion. The free lunch has been replaced by a complimentary sampler appetizer. People are beginning to re-associate money and value, for at least certain kinds of news products. Mind-changing may not yet be equated sufficiently to dollars, but it begins to counterbalance the “content must be free” mindset. Check off a third box for defense.

It’s the offense that represents a problem. Most pay tests have yielded relatively little new revenue. Digital circulation revenues, if broken out, would be minuscule for most, leaving publishers underwhelmed. While buoyed by the defensive wins, without significant new circulation revenue, they’ll have a hard time reversing their business fortunes. If they were looking to new circulation revenue to bolster profits, pay down debt, or reinvest in news products, there are few new dollars to go around. Morris Communications, for instance, counts $42,000 in four-plus months in new digital circulation revenue since its two tests in Augusta and Lubbock launched in January.

Overall, we’re seeing less than one percent of unique visitors open their wallets. For The New York Times, even one percent — or 300,000 — would be significant, and when achieved, will be a milestone. For smaller papers and sites, it’s a long, long ramp.

Maybe it’s just a matter of time until the offensive tally grows meaningfully. “It took The Wall Street Journal Online and the Financial Times site several years to get to 10 percent of their total online users paying for unlimited access,” says Journalism Online co-founder Gordon Crovitz. (In building toward that number, publishers may be able to take advantage of Apple’s market reach in new ways; see my companion piece on “As Apple Uses Publishers, Publishers Can Better Use Apple“.)

Of course, that was one decade — the first one of the millenium, when the FT and WSJ took off on an alternative path — and this is another. In this digital decade, there’s lots more competition erupting, and reader expectations are evolving quickly, given the advent of the tablet.

We do have to wonder whether the trendlines will be similar among big national/now global news companies like the FT, the WSJ, and the NYT, metro-based media and smaller community media. Metro-based media continue to appear to be the odd-man out, as globalism and localism offer great new benefits in this new digital reading and marketing world, and straddlers are penalized. In addition, those top global companies — joined by the likes of the BBC, Bloomberg, NPR, ABC, NBC, and a few others, a group I’ve called The Digital Dozen — still have significant resources to invest in the future: ad tech investment, tablet product investment, and investment in high-value journalists. Most recent case in point: NBC just paid $4.3 billion for the rights to the 2012 Olympics; imagine its video rights married to mobile digital media, just for starters. That’s going to make competing for Olympics attention harder for everyone else.

News is not just newspapers, a lesson still, amazingly, dawning on many in 2011. From CNN’s online leadership to AOL’s hyper-aggressive hiring to Bloomberg’s multi-market forays to Atlantic Media’s digital re-loading to National Journal’s new weight in the news marketplace, most of the innovation is coming from outside newspapers. On a local level, Patch’s influence is no longer a joke to newspaper publishers and the regional start-ups, from Bay Citizen to Texas Tribune to MinnPost, are increasingly embarrassing the older dailies with which they’re competing. Companies like expanding Main Street Connect are using the efficiencies of digital publish to compete in smaller New England towns. News entrepreneurs will figure out low-cost models that work, whether next year or 2015.

Of course, it’s a question of how much time newspapers have, and that’s a complex brew of print ad revenues, overall circulation — and what’s happening in the non-newspaper parts of the news world.

So, we’d expect more offense out of newspaper companies. More investment in offense, and not just in defense.

We do see some movement.

This week, the Chicago Tribune is going public with its reinvestment (in newsroom and in print product) plans, paralleling what The Dallas Morning News has done over the past two years. The Arkansas Democrat-Gazette itself is reinvesting digitally, now under the leadership of Conan Gallaty, an alum, of both The New York Times Regional News Group and Morris. Yet, as the tablet revolution dawns, throwing publishers a potential lifeline, news publishers badly need reinvestment in technology (web apps, per the FT innovative approach announced this week), in product development (mainly tablets), and in simply upgrading their reporting power and quality, so much of which has been lost in the last five years. There’s far too much waiting, and far too little impactful innovation. Too much, for metro and smaller papers, innovation is measured in onesies and twosies.

So circa mid-2011, we’ll have to give an incomplete grade to paid digital circulation tests. One hurdle, a hurdle of fear, may have been surmounted, but the obstacles of finding significant new reader revenue lines still lie largely ahead.

Photo by Ed Yourdon used under a Creative Commons license.