The reason for charging for subscriptions and at the news stand was to determine readership metrics. It was a very good model, as people would only pay money to buy something that they where interested in, so the more people you had buying something the more readers you had, and thus the more you could charge for your ad space. This was a simple model, which Murdoch understood.
Newspapers and most lay periodicals (technical/professional/trade journals and consumer reports not-so-much) for decades have made almost all their money from Advertising. Advertising boycotts have previously had a major editorial impact on the Media. Charging people for print subscriptions is basically a mechanism to track and understand readership dynamics, and to understand how much ad space is worth. Now, with the internet, we get much more detailed metrics directly on what people are reading on our websites, and what they are not, and what the space is worth, which is basically volume driven now, price-per-view, and price-per- click. So the metrics of what people are willing to pay for to read is basically redundant, because why would I pay for something, when I can get it (better) for free?
As before it matters how many people look at something, but now also on how many people directly act on that ad. Page 3 ad's have always been the most expensive, because the most people look at those ad's, but we would only have a rough idea on conversion. Now we can put an ad on a website, a person can click through and buy something--obviously the most case scenario from an advertisers point of view, and now very easy to measure the success or failure on for everyone involved, or they can ignore the ad, and we'll hope that they might come back someday.
From a print sense, Murdoch is basically imposing an Advert boycott on himself, which is insane from a business point of view.
The paywall is a complete failure, both in the sense of Murdoch's understanding of what IT is--how information is now created and consumed--and the real sense on how best run his business. Being an information reseller, as that what Murdoch is, is now much more nuanced, and finely grained. It's not this simple equation of how many readers I equals how much I can charge for ad-space, but how many people I can get to click through.
Perhaps the real reason is that Murdoch is trying to get a larger cut from Google/MS/Yahoo for adspace, as he thinks his ad-space is more valuable than Joe-blogger. Or perhaps Grandpa Murdoch doesn't get it. Either-way, my view is that paywalls will actually increase diversity, and increase traffic to independent media sources, so in some sense, I'm all for paywalls, as sites that put their content behind pay-walls won't get indexed by search engines, and then will be come irrelevant.
I can't wait for a paywall on Myspace!