Here's a counter model for newspapers (and the media industry, in general) to free:
Start a club and grant access to (full online) texts to club members, only. Keep a fixed percentage of the revenue for administration. Say, 30 or 40 percent. This is where your profit comes from. Spend the rest of the money for people creating the value: reporters, journalists, photographers, or even club members.
Start with a fixed budget for a year and an initial membership price. If revenue (fee * members) exceeds the budget, send a refund to members or raise the budget for the next year. If it doesn't, stop the club or raise the membership fee for next year. You may let members vote on that issue.
Let people follow (as exemplified by Twitter) the journalists they want to read. Journalists followed by many are obviously popular, and thus valuable. In other words: Make them celebrities, to some degree. Inform club members about new pieces of the journalists they follow by mail or SMS. Provide an interface for members that resembles a feed reader: A member only gets to see information from journalists he or she follows. Let members vote on articles.
Create an incentive to journalists to advertise their commitment to a certain club. For example, make a part of their payment depend on the numbers of followers they have. You may also allow them to employ other journalists (or ghost-writers). Then, they may utilize their blogs and appearances in other media to point to 'their' club. They could engage with their reader community (by answering comment discussions, for example).
In other words: Your sales pitch is not about the news you provide, anymore, but the access you provide to (popular) journalists.
You may also let members follow other members and show only comments made by them (or notify about new comments). Invite members with lots of followers to write articles. This creates an incentive to members to write good comments. You may also increase to incentive to be a club member by letting people become members by invitation, only. Being a "Wall Street Journal Club Member", for example, could mean something. If you provide a page for each member, they may use it on their usual web presence (LinkedIn, etc.)
Offer some free content on the site; for example, general news, introductions to popular articles, outdated articles, or comments (or discussions by your journalists. Make is SEO-friendly so people can link to it and Google can pick it up. You could use advertising to finance the free part.
This has the following effect: Firstly, they have an incentive to advertise the club: the more people participate, the more value they get (or the less they will have to spend). Secondly, there's an incentive for readers to withhold more valuable information to others (instead of spreading them and making money with Google Adwords). They are also less likely to spread their account information to others.
In other words: Create a mix of Digg, Twitter and Feed Readers and add a stronger incentive to keep information private.
Or course, that's just a quick summery. Comments welcome.
"there's an incentive for readers to withhold more valuable information to others (instead of spreading them and making money with Google Adwords)"
There are two problems. The first one is that you make an assumption here, that individuals choose what's in the best interest of the group (if it's only about the individual, the Adwords money might outweigh the information value...). Secondly, even if the assumption holds and people will behave according to this rationale, then still it takes only two or three odd, less-rational individuals to redistribute the information, thereby devaluating it back to free.
That doesn't mean your model won't work. It seems it will (and does already) work very well for something like The Economist - perhaps it simply requires a certain type of readership...
Thanks for the critic. I'd like to explain:
First, I assume self-interest, not group-interest. That's what the club is for: The more people become members, the more content anyone gets, including you as a member. This is guaranteed by the club structure. For additional effect, the club may also own the copyright of the content.
Second, redistributing information is work. You can't simply copy'n'paste articles due of copyright. Even if this still pays for some individuals, finding good information is also work. It's easier to become a club member, especially when you have additional benefits such as being the first to know by automatic notifications, being able to set manual filters by following, being able to get to know other members by following, etc.
The Economist offers nothing like that.
Nice. I'd definitely pay for the patronage and access to my favourite journalists. They act as the best information filters on certain issues.