In a bid to stay relevant (and stay afloat), major free news publications are starting to tighten the noose, putting their content behind a paid firewall. It worked for News Corp’s (NYSE: NWS) Wall Street Journal, because that publication can be considered as a necessary asset for the business community, and thus can easily be expensed by many readers. The rest of the pack may not be so lucky, as we’ll soon find out with The New York Times Co. (NYSE: NYT).

Rumors circulate that the “Old Gray Lady” will soon announce a $20 per month subscription plan for regular visitors to nytimes.com that also want to be able to read the paper on the Kindle and the iPad. (All signs point to a March launch). Standalone web-only access through a browser is rumored to be priced at $10. That’s $120 a year. The price may be appealing to die-hard readers like myself, but surely unappealing to many that appreciate the Times’ impressive website, but would likely balk at such a cost.

This leads to my major concern about The New York Times — and its stock. Shares have rallied in recent months, though this recent move may eventually lead to a full reversal of the stock price.

What could happen…
The lessons from other pay wall-protected websites are instructive. There are currently roughly 6 million active readers on the Times‘ website. The Times assumes that this whole group of active users will pay-up to get continued access. That seems remarkably ambitious. The real figure may be closer to two million. Even at that level, this would be an overwhelming success for any paper not called The Wall Street Journal: A number of sites such as the Times of London have put up a firewall and ended up with a paying base in the tens thousands, not in the millions.

You can argue that the Times had no choice: free access to its website has been steadily cannibalizing print subscriptions, imperiling both advertising and circulation revenue (though the online ad revenue gained from online users is simply insufficient to offset print subscriber losses). At this point, it’s unclear that the move will pay off, and it comes with considerable risks.

For starters, a good portion of the current online user base will defect to free sites such as Google, which already does a fine job of aggregating global news. So you’ll need to lower any future online advertising assumptions. Second, as print users look to switch to the online version, print circulation could drop at an ever faster pace. And print ads are still the key source of ad revenue for the Times. In addition, there are tremendous fixed costs associated with printing, so circulation drops won’t generate commensurate levels of savings.

Shareholders: be worried
For investors, it’s time to do the math on how the new pay wall will impact revenue and costs. Here’s what we know…

Let’s assume the Times comes up with three million users willing to pay $150 a year (most will opt for the $10 monthly plan, a few for the more pricey plan for an average monthly take of about $12.50). That’s $450 million in new revenue. To get to that three million figure, though, we can assume that a fair number of readers that read both the print and online versions give up print for the increasing convenience of the online format. The Times currently has 800,000 paying print subscribers, and up to 35% of them may defect to the online version. That’s 35% fewer subscribers that the paper can guarantee its advertisers.

For the first nine months of 2010, an 18% jump in digital advertising failed to offset an 8% drop in print ad revenue. That 8% drop in print ad revenue came on a 5% drop in circulation revenue. (These figures are companywide and include titles such as the Boston Globe). Online ads still account for just one-quarter of revenue. Yet as noted, the online ad momentum could be blunted by a drop in traffic as casual readers stop visiting the site (one they’ve exceeded a monthly quota of free stories).

Unless the Times is able to put through price increases for the print edition, circulation revenue (and the ad revenue that goes along with it) is likely to keep dropping at a 5% to 10% annual clip as the paid website cannibalizes the printed paper.

What it means
What does a 35% drop in print-based revenue imply? Well, the company currently generates about $1.85 billion for the print properties, about $1.5 billion of which likely comes from the flagship paper. So a 35% hit to that base likely means around $525 million in foregone revenue.

As noted earlier, the paper’s web site may garner a net new three million subscribers (which is again quite generous considering that it would dwarf the print version’s circulation). So the site would add $450 million. With a potential loss of $525 million in revenue from the print side, the Times stands to lose $75 million in revenue from the effort, somewhat offset by decreased costs for newsprint and delivery logistics.

So this move is a money loser even if the newspaper industry is stable. But the Times and their peers have been steadily losing readership — a trend attributed to the economic downturn, but it also has everything to do with people spending more time with DVRs, Netflix (Nasdaq: NFLX), Facebook and the like. So the Times‘ efforts to migrate its base to the web, necessary as it may be, are likely to add fuel to the fire of the negative secular print circulation declines.

How will this experiment turn out? You can expect the Times to discuss the myriad potential positives on its upcoming February 3 conference call, but we won’t get a real read on trends until later this year.

I envision three potential scenarios…

First, the Times comes nowhere close to three million paying subscribers, and shares take a deep hit as the company is boxed into a knot that it can’t undo. (Taking down the pay wall — once again — would likely be permanent this time).

Second, the website hits that target, but print circulation and ad revenue starts posting 10% annual declines, offsetting any gains from the web initiative. Make no mistake, online ad rates are so comparatively small to print ad rates that if the web site truly becomes the dominant platform, it would be a Pyrrhic victory and the Times would move back into the red.

The third scenario entails success on both fronts. The printed paper suffers only a glancing blow and the Times’ website becomes the first of its kind (outside of the WSJ) capable of getting people to pay $150 a year in very high numbers.

Action to Take –> Shares of The New York Times Co. appear much more vulnerable to the sobering reality that “content wants to be free.” The likelihood that the company can pull off a flawless transition appears remote, but necessary — and also highly risky. If you own the stock, you should rethink your position in this light, and short-sellers may find the shares ripe for a fall.

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