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Net ads: The buck starts here

Now that many Web operators have admitted the failure of advertising-based models that relied on attracting visitors with free content, the next step is charging for access to information.

After offering up an all-you-can-eyeball information buffet to consumers, online publishers are now attempting to rein in the Internet free lunch.

Pressured by venture capitalists impatient for returns on their investments, many of these Web operators have admitted the failure of advertising-based models that relied on attracting visitors to a site with free content. They are now moving toward charging for access to information. The question is: Will consumers be willing to pay for services that they are accustomed to receiving for free?

It could be a tough sell. "Once people have gotten things for free, it?s hard to get them used to having to pay for it," notes Wharton marketing professor David J. Reibstein.

Variety.com, Salon.com and the Web site of the venerable Encyclopedia Britannica, Britannica.com, are among those that have begun charging for previously free material. "More and more companies are (considering) this, whether they?re in trouble or looking for ways to stay out of trouble," says Betty Cho, an Internet analyst with NetRatings in Milpitas, Calif. "A year or two ago they were desperate for traffic. Now it?s all about accountability. Lots of eyeballs don?t necessarily mean money" will follow.

A report by Jupiter Media Metrix found that 78 percent of publishing executives said they plan to offer some subscription content by 2003. However, 69 percent of consumers said they are unwilling to pay for content on the Internet.

Encyclopedia Britannica went online in 1994 with a subscription service that grew to reach 75 percent of all U.S. college students. But in November 1999, the company went with the crowd and began offering free content on the bet it would draw advertising and sponsorship revenue. "What changed in 2000 was the economics of that model," says Tom Panelas, a spokesman for Encyclopedia Britannica. "When advertising rates plummeted, we decided we needed to diversify our sources of revenue."

A year or two ago they were desperate for traffic. Now it's all about accountability. Worse, the move to free content cannibalized the company?s online business with college and university libraries. Part of the site is still free, but on July 18, 2001, Britannica.com said it would begin charging $50 a year for the bulk of its content. Consumers can get a free two-week trial. So far, the conversion of trial subscribers to paying customers has exceeded expectations, Panelas says, although he would not disclose specific numbers.

Panelas points out that Encyclopedia Britannica?s new premium subscription program is part of a larger strategy to diversify its revenue streams. That includes a greater focus on its more traditional products, such as the first new edition of its 32-volume printed encyclopedia since 1998. "We put so much emphasis on becoming an Internet publisher in 1998 and 1999 that we now realize it?s time to get back to basics," he says.

But industry analysts said Britannica.com, and other online services switching to a pay-for-content model, will have problems in an information universe that remains awash in free content. "I think Encyclopedia Britannica is going to have a very hard time moving into a pay-for-content model. The amount of information available online through a search engine dwarfs what you can find in Encyclopedia Britannica," says Jim Stroud, an analyst at The Carmel Group in Monterrey, Calif.

For the time being, he adds, consumers need not worry about search engines adopting a pay-as-you-go model. "I don?t think a search engine will ever go (that route) unless it is incredibly compelling--unless it can know exactly what the consumer is searching for."

Paying the price
David Croson, Wharton professor of operations and information management, predicts that clever consumers will surf around until they find ways to slip past information tollbooths. "They?re going to find another way to get the information that is almost as good and still free," says Croson. "It?s the uninformed who are paying."

The free information will still be out there, note both Reibstein and Croson, because even though companies are beginning to charge for some of their information, they will still wrap it around free content aimed at maintaining at least some of the remaining advertising and sponsorship revenue.

It's the uninformed who are paying. "Businesses are starting to charge for their real product, but they will continue to give other information away free," Croson says. Reibstein points to one example of a service that consumers did pay for after receiving it for free: Telephone directory assistance. But in that case, there was no other competition. Cable television, he adds, was an easier sell because it was dramatically better than free broadcast television.

Consumers will agree to pay for some content, but only if it is truly valuable and impossible to find elsewhere, Reibstein and Croson contend. In other words, the content "has to be proprietary and differentiated," says Croson.

The Wall Street Journal and Consumer Reports are two examples of information products that analysts say are worth enough to earn subscribers. "We have no advertising in the magazine so historically that has been our model," says John Sateja, vice president and general manager of new media at Consumer Reports. "Our revenue is generated directly from consumers and subscribers. That model transferred onto the Web in November 1997." The service now has more than 600,000 subscribers willing to pay $19 a year, or $3.95 a month, for access to its articles.

But even Consumer Reports is looking for ways to tinker with its model, exploring new distribution channels and pricing structures with partners and offering content through wireless and mobile applications. "We have a lot of things on the board here to move this forward," says Sateja.

Adds Stroud: "In the next two to three years there?s going to continue to be a search for business models and for what content is compelling enough for consumers to pay for."

But experimenting with new models, such as charging subscription fees, may only stall the inevitable for some Web sites. "There will be some that will just fall by the wayside," says Reibstein. "They?re doing this as a mode of survival. But that process is totally a function of how deep their pockets are."

Reibstein does see the move from free to subscription content as part of a larger evolutionary process. He says the era of totally free content might eventually be viewed as a marketing device similar to a free month?s subscription to a magazine or a trial period for a credit card, allowing consumers to try before they buy. "While it was not planned, it may prove to be viable for those sites that do have value to their users."

 
To read more articles like this one, visit Knowledge@Wharton.

All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.

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