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Yahoo mulls charging for services

Five years into the Internet revolution, the time may be ripe for the torchbearer of the free, advertising-supported Web business to diversify its revenue streams.

Is Yahoo taking a closer look at charging customers for access to areas on its site?

Five years into the Internet revolution, the time may be ripe for the torchbearer of the free, advertising-supported Web business to diversify its revenue streams.

Yahoo chief executive Tim Koogle said Thursday that charging for "premium services" could be an attractive option, given the size of Yahoo's audience and the popularity of its services. By "premium services," Koogle was referring to certain areas on Yahoo where the company can charge a monthly or yearly fee for use.

"We always saw opportunities and continue to see opportunities to drive premium services on that (audience) base over time," he said during an interview on CNBC.

This is not new for Yahoo. As far back as 1998, the company stated that it would consider charging a fee for some of its content, and today Yahoo has a handful of pay-for-access areas that produce a small percentage of the company's overall revenues.

Although Yahoo will almost certainly continue to explore such opportunities, it faces a serious challenge. The history of charging customers for content on the Internet is an ugly one, with many sites attempting it but only a handful succeeding. Yahoo faces a further difficulty in fencing off for-pay areas of its site since it has leaned away from creating its own content in favor of aggregation. If subscription fees are ever to become a significant portion of its overall revenues, Yahoo may be forced to invest in content creation, something it has said it does not want to do.

But in 2000, more voices on Wall Street are questioning whether Yahoo can maintain its stellar growth by depending so heavily on advertising revenues.

It is crucial for Yahoo to prove that it can weather the Internet maelstrom by stretching its tentacles elsewhere.

When Yahoo reported earnings for its third fiscal quarter in October, the company said its percentage of "pure play" Internet companies declined and that "financially questionable" advertisers represented less than 10 percent of its revenue. The company added that more mainstream advertisers are turning to Yahoo as an important place to present their messages to Web users.

Concerns stem from the overall health of the Internet sector. Since April, publicly traded Internet companies have taken significant hits on Wall Street. Some, such as Pets.com, MotherNature.com and Value America, have either shut their doors or filed for bankruptcy. Scores of privately held Internet companies have been forced to shut down after failing to attract more funding from scared investors and venture capitalists.

As a result, see Dot-coms: Down and out? many start-ups previously flush with venture capital have slashed their heavy advertising spending. That slowdown has taken its toll on Yahoo. Like other Internet highfliers, the company's stock has plummeted since the summer, when analysts began raising concerns about its growth. Yahoo's stock is down about 75 percent from its 52-week high.

On Monday, Wit SoundView analyst Jordan Rohan cut his Yahoo estimates for the first quarter of 2001 because of advertising weakness. But he said Yahoo's prospects are bright for creating alternate revenue streams such as subscription fees, though they will likely be marginal for the next few years.

"Companies like (America Online) and Yahoo have a nearly universal reach on (the) Web," said Rohan. "They wouldn't have to pay significant money to establish those subscription revenues and have a valuable and profitable (revenue stream) in content subscriptions.

"What they're likely talking about there are value-added services related to music on the Web, enhanced research tools and message boards, and even some proprietary content that they'd hope to secure and distribute."

Will consumers bite?
Currently, less than 10 percent of Yahoo's overall revenues come from areas on its service that charge fees for usage. For example, Yahoo's free email service, Yahoo Mail, offers customers a heftier in-box to store their messages for an additional $19.95 a year. Yahoo Mail customers can also pay $35 a year to register personal email addresses.

Yahoo charges $29.95 a month for small businesses to host their Web sites on the portal and $100 to $300 a month to create an online store on the site. Small businesses can pay a one-time fee of $199 to get preferred listings in Yahoo's search directory, but those listings are not guaranteed. The company also has payment options for some of its bill-paying services.

This could be the tip of the iceberg for Yahoo, which may move into new areas such as charging subscriptions for a bundle of premium services and content.

Subscriptions sound good on paper. They allow companies to rely less heavily on tenuous advertising deals and provide a steady stream of cash.

But as history has shown, charging subscriptions for content has had limited success, most recently illustrated by the experience of TheStreet.com. The company initially tried charging subscription fees for its editorialized financial information--only to reverse course. The glut of financial information online made paying for it seem less appealing, as start-up sites such as CBS MarketWatch and online versions of popular publications such as The Wall Street Journal or Business Week have made financial news a commodity.

On Thursday, TheStreet said it would slash about 100 jobs, a move that will cut 20 percent of its U.S. work force and mean the closure of its U.K. office.

The challenge in charging for content is convincing Web users that they should plunk down their credit cards to access certain areas on sites. Net users are accustomed to surfing a free Web, with the exception of AOL users, who pay a monthly fee for Internet access and content. Arguably, AOL is one of the only companies that can charge for its content, and it also offers customers additional services, such as dial-up Internet access.

Some others are trying. Powerful Media, which launched media news site Inside.com in June, has areas on its site that only paying members can use. The site charges $199 a year for membership, which includes a subscription to its upcoming magazine and access to premium industry data and information on its site. The company is targeting media and entertainment industry executives, who it believes will pay for more information about their competitors.

"I'd say that if the information is unique and relevant and useful, and packaged correctly, you can sell content or information on the Web," said Deanna Brown, CEO of Powerful Media.

Brown would not disclose the number of Inside.com's subscribers, nor would she estimate the percentage of revenues generated by subscriptions. But she insisted that the venture needs to have multiple revenue streams to survive. Advertising must be bolstered by subscriptions.

"I think what we're doing is securing our future by having more than one revenue stream," Brown said. "We couldn't build the company and the product that we've built based on the talent base on our editorial site without charging people for it."

Singing a new tune?
Robert Hertzberg, an analyst at Jupiter Research, a division of Jupiter Media Metrix, said Web companies are increasing seeking to add fees for premium content.

"More companies are trying to do it. We looked at the Media Metrix 100 (most-visited Web sites) and found that 11 percent have some paid content this year vs. 6 percent last year."

Nevertheless, he said paid content is secondary at most sites.

"The companies aren't positioning these paid content initiatives front and center," he said, adding that any future reach by Yahoo into this area will likely aim to preserve its ad-based business model, rather than replace it.

"Yahoo isn't going to start charging for access to its core site and muck up its advertising business," Hertzberg said. "Yahoo will position paid content as an ancillary service in a way that doesn't upend businesses they have that are already working."

Charging for content continues to be a questionable business. But analysts such as Wit SoundView's Rohan say Yahoo has the advantage of sheer traffic and brand. Since the company has a strong online brand and audience, it could introduce subscriptions for popular functions such as a music playback service.

Online music has become one of the most popular functions on the Internet. An array of companies are trying to get into the business, including the media and entertainment giants, a flurry of Web start-ups, and the Internet elite such as AOL and Yahoo. Each party owns an essential piece of the puzzle, such as music copyrights, music encoding or encryption technology, or sheer Internet audience.

Putting all the pieces together could justify charging a monthly fee to access a comprehensive library of songs that people can listen to online, Rohan said.

"Let's not belittle what's happening with music on the Web," Rohan said.

Yahoo and other highly trafficked Internet services such as AOL and Microsoft's MSN, may be positioned to turn their daily visitors onto an online music service. And given the popularity of online music services such as Napster, subscription-based music offerings could become popular, and potentially lucrative, features on their sites. AOL is already working on a music subscription service, and Yahoo has inked a deal with the Recording Industry Association of America to broadcast music performances through its site.

"Whatever revenue opportunities the record labels are exploring, we are certainly open to exploring those with them," Matt Rightmire, vice president of Yahoo Media and Entertainment said in a statement.

However, the Yahoo and other Net heavyweights have largely remained promotional vehicles for the labels. Despite their deals, it could take a considerable amount of time and negotiation before the recording industry and Web portals see eye to eye.

Regardless, paid services may not make a big splash on Yahoo's earnings report for the near future. But the company may agree with Powerful Media's Brown that it takes more than one leg to remain standing on the Net.