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What goes around, comes around

E-mail from CNET's Evan Hansen to Yahoo: You're about to learn a hard lesson about fickle partnerships.

When I was 10 years old I shared a paper route with my brother, and we had a pretty good time at it until one day it poured rain and he ran home, leaving me alone to confront the soggier side of the content distribution business.

Yahoo is about to learn a similar hard lesson about fickle partnerships.

The media giant has gotten the new Internet religion: Forget the free stuff--it's time to make people pay! That means potential new sources of cash for the company to prop up its sagging advertising sales. But it also likely means higher costs as Yahoo's content partners start asking for a bigger piece of the action.

Though Yahoo already pays for much of its content, it has enjoyed rare leverage as one of the most-visited sites on the Net. A few publishers--including CNET Networks, publisher of the advantages of placement on Yahoo were even worth paying for.

Sweetheart deals seemed to make sense under the old math, when almost everyone was willing to lose money to build online readership and "aggregate eyeballs." Those days are long past, however, and under the new math Yahoo should expect to start paying a lot more for content.

How much more is hard to say. The company's absolute content costs will and should go up if the site continues to grow. But if content begins to make up a bigger percentage of overall expenses, Yahoo could be in trouble and may even be forced to consider walling off a much bigger chunk of its site behind subscription fees to make up the difference.

To be sure, Yahoo remains attractive as a syndication outlet, having just added The New York Times to its stable in February. Scott Meyer, vice president and general manager of, said he considers the company a valuable partner.

Last month, Yahoo unveiled a partnership with Duet, a joint venture between Universal Music Group and Sony Music Entertainment, to launch an online music-subscription service on its site by the summer. (Pricing and other details of the service have not been announced.)

But Meyer also noted that Yahoo's hand in negotiations has weakened of late.

"Their leverage is not what it used to be," he said, declining to discuss the specifics of the deal.

Even Yahoo acknowledges that its content costs will likely climb, singling out the added expense of offering multimedia content. Audio and video, and specifically music, are potential "killer apps" that pose a difficult problem for the company.

For example, Yahoo will almost certainly be forced to charge consumers for any robust online music or video services it might offer.

Prime multimedia content is cheap for now, but it won't be for much longer. In a sign of the times, RealNetworks scooped up exclusive online broadcast rights for Major League Baseball for $20 million over three years. As the Web proves itself as a broadcast medium, prices for that kind of programming are going to climb.

Kevin Clark, chief executive of Internet syndication technology provider Screaming Media, said he believes Yahoo's strong brand will insulate it from cost increases in acquiring new content--with the exception of multimedia.

"There is a technology problem here due to peer-to-peer networks such as Napster," he said. "People won't need Yahoo as a hub to distribute this content."

There was a time when Net media start-ups couldn't consider going public without a Yahoo deal. And until now, Yahoo has seen big benefits from its distribution clout, with content costs steadily dropping as a percentage of revenue.

According to its annual report, the company spent $158.4 million last year on content and other revenue-related costs, accounting for 14 percent of net revenue. That compares with $102.6 million in 1999, or 17 percent of net revenue, and $52.2 million, or 21 percent of net revenue, for the previous two years, respectively.

But Net companies don't go public these days, and a new era of strict fiscal responsibility will almost certainly force Yahoo to make some tough choices.

I can almost hear it now: Yahoo Subscriptions, anyone?