Is the Guardian beating its head against a paywall?

The departure of Guardian Media Group's chief executive could isolate the editor of its flagship title and his digital strategy, says Tim Luckhurst

When Carolyn McCall, the chief executive of the Guardian Media Group, revealed that she was leaving to join the low-cost airline easyJet, a question arose for both companies: where will turbulence be greatest?

To easyJet personnel, discomfited by the loss since 2009 of their chairman, finance director and serving chief executive, Ms McCall's arrival is cause for nervousness. Deeper worries lurk at The Guardian. There staff fret that the departure of a leader who has been with the company since 1986 implies a lack of confidence in its strategic direction.

At The Guardian strategy is led by the editor, Alan Rusbridger. He envisages a future in which the newspaper will harness the internet to provide quality reporting, commentary and analysis to millions of readers. No longer just a newspaper for British social democrats, The Guardian will become a global brand. Launched in 19th century Manchester to "zealously enforce the principles of civil and religious Liberty" The Guardian has journeyed far from its origins in Mancunian Nonconformism. Fifty years ago it was hardly available outside Manchester and central London. Today, its internet edition has as many readers in America as in the UK, and readership is spreading.

In his 2010 Hugh Cudlipp Lecture, Mr Rusbridger said: "On the web [The Guardian] is, by most measurements, the second best-read English-language newspaper in the world. If The New York Times really does start charging for access, The Guardian may become the newspaper with the largest web English-speaking readership in the world."

But while its online journalism has brought The Guardian an expanded audience, it has not brought revenue to pay for the journalism they consume. Insiders recall their editor's fondness for a formula dubbed "The Rusbridger Cross", a diagram that depicts revenue from print advertising declining while revenue from online advertising rises. Reality at GNM is that the two lines have not crossed. Mr Rusbridger denies he is arrogant, but his editorial ambition and The Guardian's revenue have travelled in opposite directions.

Last September Tim Brooks, managing director of Guardian News & Media, the publisher of The Guardian and The Observer, told staff that losses had become "unsustainable". He revealed that GNM was losing £100,000 per day. In its annual report for 2008-09 GNM revealed a rise in operating losses to £36.8m from £26.4m in 2008. Job losses followed. In January some 40 editorial staff took redundancy. A spokesman says that when current savings are complete GNM will have shed about 300 staff.

Last month, GMG severed its historic link with Manchester by selling its regional media group, including the Manchester Evening News, to Trinity Mirror, in a deal worth £7.4m in cash.

Inside GNM's glossy new offices in Kings Place, north London, there is concern that Mr Rusbridger's strategy, which relies on funding excellent journalism without erecting online paywalls, is unrealistic. Insiders describe a mood of discord. Several members of the editor's inner circle have been relegated to lesser roles. An analysis of GNM's finances, being prepared by business staff for the newspaper's National Union of Journalists chapel, expresses concern about the future. Mr Rusbridger's view, expressed in his Cudlipp Lecture, is that online journalism must remain free at the point of use. He said: "If you erect a universal paywall around your content then it follows you are turning away from a world of openly shared content ... there may be sound business reasons for doing this, but editorially it is about the most fundamental statement anyone could make about how newspapers see themselves in relation to the newly shaped world."

Mr Rusbridger sees GNM's place in this world as a leading innovator using a variety of revenue streams to fund reporting, commentary and analysis. He is particularly proud of The Guardian's iPhone app. Launched in December it had sold 70,000 editions at £2.39 each by late January. Take-up remains good, though there are warning signs that users may be swapping daily purchase of the printed paper for a single purchase of the app. With The Guardian priced at £1 per day Monday to Friday and £1.90 on Saturday, that exchange substantially reduces income to GNM.

Last month, The Guardian's average daily circulation fell under 300,000 copies for the first time for more than 30 years. Audit Bureau of Circulations figures show it sold 284,514 copies per day, down 16.38 per cent year on year and a 5.88 per cent drop in sales since January. Faced with comparable declines in print sales and revenue, News Corporation's The Times and The Sunday Times announced yesterday that they are to charge readers £1 per day or £2 per week to access their online editions. The company's popular titles, The Sun and News of the World, are expected to follow suit.

In the past 18 months many in the industry have concluded that Mr Rusbridger is wrong: online advertising revenue will never earn enough to pay for serious newsgathering. An academic study of the future of journalism, The Reconstruction of American Journalism, by Leonard Downie Jnr and Michael Schudson, suggests a variety of solutions, including philanthropic support and state subsidy.

Many in the industry are abandoning The Guardian's outdated faith that web traffic can be monetised through large and promiscuous online readerships in favour of a new equation: one reader who pays is worth more than a thousand who do not. Academic analysis suggests that start-up companies, free of the legacy costs that burden traditional newspapers, may fare better than established brands.

These developments present a stern challenge to Mr Rusbridger's strategy to build The Guardian into an international brand capable of paying for swaths of original multimedia journalism. Senior colleagues on the board of the Scott Trust, which owns GMG, express confidence in him. One member told me that Mr Rusbridger has thought harder than anyone about the future of journalism in the internet era and will, ultimately, earn revenue to fund his ambitions. But that assertion is rooted in faith and hints at a lack of scrutiny of the editor at the top of GMG. Some insiders say he is given too much freedom by pliant trustees. In his Cudlipp lecture, Mr Rusbridger acknowledged that attempts to monetise the web are based on huge uncertainties. The question is whether his hunches are being left behind by the pace of change.

Mr Rusbridger's financial judgement is flawed. In 2005 he converted The Guardian to the Berliner format, which necessitated the purchase of new printing presses. "Spending a staggering amount on presses that have made no difference to the print circulation was a huge mistake," says George Brock, the head of journalism at City University. But, adds Professor Brock, The Guardian has not made greater mistakes than rivals. "The Guardian has expanded its ambitions by a quantum, and it is possible that the revenue it makes will not pay for that ambition, but it is not unreasonable to design the ambition first and hope that the business case will follow. Newspapers are among the last intellectual monarchies. Editors set the agenda and have to take people with them."

The Scott Trust's tradition, as defined by the former editor/proprietor CP Scott, is that "Editor and business manager should march hand in hand, the first, be it well understood, just an inch or two in advance". At GNM there is concern that Mr Rusbridger's global multimedia ambitions may be several steps distant from financial reality.

A Scott Trust spokesman predicts that GNM's losses this year will be in the region of £35m-£40m, but, he adds, "GNM does not have to make a profit. It does have to keep losses at a level that are sustainable by the group. We need enough cash to support The Guardian's journalism." He adds that it does not matter if The Guardian never makes a profit again as long as GMG's other assets, which include Emap and GMG Radio, earn enough to subsidise it. The company has cash to sustain current losses for seven years, but the spokesman concedes that GNM journalists are worried. "There are big questions about the future," he says. "This business is only going to get smaller in terms of cost and headcount."

That prediction challenges the editor's vision. When Ms McCall's successor compares editorial ambition with forecast revenues they should ponder another of Mr Rusbridger's observations about the internet. Speaking about the future of journalism, he declared that journalists should now recognise that "wisdom lies outside the newspaper". Such good sense might warn against betting the future on a hunch that a global media empire can be based on the fragile economics of a modest British media company.

Tim Luckhurst is professor of journalism at the University of Kent and head of its Centre for Journalism.