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From AJR,   December 1997  issue

Profits in Site?   

When will online journalism ventures begin to make money?


By Scott Kirsner
Scott Kirsner is based in Boston.     


L AST YEAR, IF YOU HAD COMMISSIONED a painter to capture the economic outlook of publishing on the Web, Edvard Munch would have been the perfect man for the job. Publishers were anxious and angst-ridden: Was this medium a potential gold mine or a bottomless cash pit? While the ideal painter for the job today isn't quite Claude Monet, the revenue picture has brightened significantly in the past 12 months.

Publishers are beginning to see evidence that the Web isn't a complete charity case. Some, like Mark DeCotis, who runs the Space Online site for Gannett's Florida Today, have even managed to break in to the black by constructing lean editorial teams, reining in costs and signing up long term sponsors. Most newspapers and magazines, though, are still experimenting with an array of products and services that they hope will transform their Web sites into profit centers.

Along the way, publishers are learning some hard lessons. Last fall, Nando.net, McClatchy Newspapers' flagship news site, sold a capital-intensive service that provided Internet access to its local readers. The Griffin Daily News, a 12,500-circulation daily in Georgia, shuttered its Web site in June, when it proved too much of a drain on the paper's budget and couldn't attract sufficient advertising. As many as 120 other papers have abandoned their Web outposts, according to a recent study by NewsLink Associates. Then there's the Microsoft-backed Slate, edited by Michael Kinsley, which was forced to first postpone its plans to charge admission, then abandon the idea altogether.

Even those Web sites that do establish a steady revenue stream will inevitably need to adjust the level of resources they're committing to online publishing. If the expected torrent of revenue turns out to be a mere trickle, publishers will find it hard to support big Web operations. ``You'll definitely see some consolidation, people looking for efficiencies of scale and staff reductions," says Christian Hendricks, Nando.net's CEO. ``I don't think newspapers will throw in the towel, but we're entering a period of refinement and retrenchment. The days of wild spending and build-ups are over, and the reality is setting in."

But many publishers seem committed to the medium. ``The upside potential is down the road," says Jack Fuller, president of the Tribune Publishing Co. ``We're investing for the longer term, on the belief that if you can get people interested in what you're doing, and needing what you do, you'll make money."

Peter Winter, president of Cox Interactive Media, says Web projects need time. ``Our point of view is that this is long term brand and franchise building," he says. ``If you talk to Cond* Nast or any other magazine company and ask them how long it takes to launch a magazine and make it profitable, they'll say three to five years. If you ask a network how long it takes to build a television program into a hit, they'll say three to five years.... Why people should suspend that logic with the Internet is beyond me."

Winter's comment hints at a change in attitudes about profitability and the Web. The question now isn't whether a Web site can generate a healthy revenue stream, but when and how?

There are two schools of thought when it comes to answering those questions. One group says sites need to be profitable as soon as possible; often, publishers or other executives have set deadlines by which the Web effort must start paying for itself. The ``how" for this group is ``however"--a sort of M*A*S*H approach to bringing in revenue. Others, like Winter at Cox, say the medium is still young, and would-be profiteers must be patient.

According to Winter and other representatives of this latter group--consisting, not surprisingly, of larger publishers--advertising will be the bread-and-butter for the next few years. Eventually, though, consumers will begin conducting more transactions online, buying books, software, plane tickets, even life insurance, and publishers will facilitate those exchanges and pocket a commission. At some point, says Winter, ``we may even be able to charge consumers the occasional nickel for certain content packages, over and above the amount they pay for Internet access."

But how are newspapers making the cash registers ring today? Among the most common revenue-generating products and services are banner advertising, sponsored packages and custom publishing, classifieds and directories, Internet access, subscriptions, transactions and pay-per-story archives. Newspapers are mixing and matching until they hit upon the magic formula that turns red ink into black. They're also keeping an eye on those approaches that might not be quite right for their particular market today, but hold promise for the future.

When Winter is asked where revenue is coming from for Cox's 20 Web sites, including AccessAtlanta, Austin360 and Fastball.com, his response is ``advertising, advertising and advertising." Three varieties of advertising--display, classified and sponsorships--account for the bulk of most Web publishers' income. Reports from analysts who follow online advertising say that's unlikely to change soon. Jupiter Communications recently projected that online advertising will total $7.7 billion annually by 2002, and a report by Forrester Research says that while ``publishing on the Web will be a tough slog... before turning profitable in 2000, advertising will drive the revenue engine."

Display Advertising

Display advertising on the Web is already slightly different from its print cousin and is rapidly evolving into an entirely separate species. Advertisers buy impressions--opportunities for users to see their ad graphic, click on it and visit their site. On a site like the New York Times on the Web, advertisers pay $20,000 to have their graphic displayed 500,000 times on the site's pages. The Times' cost-per-thousand (CPM) impressions, then, is $40; the Wall Street Journal Interactive Edition charges a $55 CPM for a similar buy. Search engines like Yahoo! and Excite, by comparison, charge about $20 per thousand impressions.

Since most advertisers pay for a predetermined number of impressions, sites must make sure that enough users visit, in the same way newspapers and magazines guarantee base circulation rates. ``The winner is going to be the one with the most traffic," says Jeff Coakley, classified advertising manager at Boston Globe Electronic Publishing. ``You want to put content out there, build an audience and let the ad dollars follow that."

But the pay-per-impression model may be about to go the way of the punchcard. In 1996, Procter & Gamble struck an unusual deal with Yahoo! to pay the search service based on how many times users clicked on its ads and were delivered to a P&G site, rather than just how many times the ad was shown. This ``pay-per-clickthrough" model worries owners of content sites, since it doesn't account for the benefits of displaying ads to users who may not elect to visit an advertiser's site. Things got even hairier when some sites began selling ads on a ``pay-per-transaction" model, where advertisers only pay if visitors to their sites actually buy something.

Neil Skene, the editor in chief at Individual Inc., a company that provides customized business news, isn't wild about the new models. ``It's an example of how the advertisers are in the driver's seat right now, since so many sites are trying to make money off advertising," he says. ``They can hold the publisher accountable for failing to make the sale if they have a bad product. It's a terrible thing."

Winter at Cox says the shift to pay-per-clickthrough and pay-per-transaction is inevitable, no matter how troubling it may be to publishers. ``It's always worrying to a media company to get into a position where the black magic sophistry is suddenly revealed for what it is," he says. ``On the Internet, increasingly, there's no place to hide, and advertisers know it."

Online newspaper analyst Bill Bass of Forrester Research says another hurdle regional papers will face is luring national advertisers to their sites. And national advertising will be crucial to sites' survival, since it will represent as much as 75 percent of the $4.5 billion Forrester expects to be spent annually by online advertisers in 2000. The problem, according to Bass: ``If you're the Wichita Eagle, you're not going to be able to show up at P&G and talk to them about your Web site." He says that ad sales networks like DoubleClick, New Century Network and Knight-Ridder's RealCities will help regional papers win some revenue from national advertisers.

Sponsorships

Perhaps the biggest sponsor success story, though, is Space Online, the site run by Florida Today. When editor DeCotis was developing the site in 1995, he approached a number of local space-oriented organizations to sign up as charter sponsors.

DeCotis bagged the Kennedy Space Center, the Astronaut's Memorial Foundation, Port Canaveral and the county tourism board. (Eventually, the Memorial Foundation was replaced by Melbourne International Airport.) Florida Today's publisher insisted that the Space Online site be in the black from day one, and DeCotis says he didn't consider that an unreasonable demand. ``Going into this thing with our revenues covered took a lot of pressure off everybody," DeCotis says.

``They're partners with us," says DeCotis of his site's sponsors. ``They put up a significant amount of money to be involved. We work with them to help develop their sites, and they've got exclusivity." The drawback to relying so heavily on a small number of sponsors? A site is vulnerable if one or two pull out unexpectedly. ``We've got to make sure that they're happy and that they're getting enough value so that they renew their commitments," says DeCotis.

One concern that online publishers raise regarding sponsorships is whether users will be clear about who produced the content. Is this an infomercial or newspaper-generated editorial content? ``Our integrity is our best asset, and we don't want to damage that," says Robert Schafer, publisher of startribune.com. ``You need to make it clear to your users what represents paid content and what represents editorial content." Schafer points out that different sponsorship models have arisen for television, radio and newspapers. ``I wouldn't be surprised if there's a new model for the interactive medium," he says.

Classifieds and Directories

Editorial issues aren't so much of a problem with online classifieds and directory listings, another source of revenue for Web publishers. Here, business issues crop up instead. If advertisers have the option of running a cheaper classified in just the online edition of the paper, will they abandon the print product? What if newspapers charge classified advertisers a few dollars extra for the privilege of appearing in the online edition? Will that drive them off? And if it's a choice, will too few advertisers elect to appear online, lessening the value of a digital database of jobs, houses or cars?

The Globe's Coakley says the display-classified revenue mix online will eventually match that of print. By 1998 he expects as much as 35 percent of the Globe Online's revenue to come from classifieds, up from less than 5 percent in 1996. But he's adamant that the online offering won't harm sales of classifieds in the wood pulp version of the Globe. ``After one-and-a-half years we're finding that cannibalization is not a problem," Coakley says. ``Help Wanted in print is having the best year it's ever had at the same time as we're introducing these new online products."

The Globe's classified strategy has involved posting real estate, employment and auto ads on the site at no extra charge for the print advertiser. The Globe offers its advertisers alluring online add-ons. Help Wanted advertisers can pay between $5,000 and $7,500 a year, for example, to get an ``Employer Profile" page, which includes a description of the company, a link to its Web site, an e-mail button for submitting resum*s electronically and a list of all of its job openings currently in the database.

Directory listings are another way to bring in revenue. Some sites construct their own directories, and others have entered into partnerships with national Web directories like Zip2, Big Book and Big Yellow, online guides that typically encompass white and yellow page listings, along with mapping and search features. Philadelphia Online, for example, the Web site of the Philadelphia Inquirer and Daily News, has the right to sell access to Zip2 directory listings in its geographic area, and it bundles those with a three-page mini-site, e-mail and Internet access for $900. ``It's a way for companies that might not even have a computer to take advantage of what the Web has to offer," says Hugh McGoran, the site's online advertising coordinator.

Part of the Daily News' directory sales effort has been to train the paper's 200 salespeople on the Internet. It rotates seven people through a three-month program at a time, giving them a one-week introduction and then 11 weeks of selling nothing but Internet ads and listings. ``They go back into the sales force as an incredibly savvy Web salesperson," says McGoran. ``They become champions of the site when they go back to their territory."

Gale Wiley, the executive director of new media at the Houston Chronicle, concurs with McGoran that a well-trained sales staff is vital. ``We only have four online salespeople," says Wiley. ``But one of their main jobs is to do training of the newspaper's sales force. And then we go out and educate the potential advertisers. We do demos for 300,000 to 400,000 Houstonians every year, at conferences, bookstores, schools and trade shows."

Wiley is even more evangelical about online publishers working closely with their print counterparts to develop and sell new ad products. ``The bottom line is cooperation," he says. ``The newspaper has been around for nearly a hundred years, and our belief is that everything we do should use the momentum of the paper product." He says the Chronicle's homegrown yellow pages directory booked more than a million dollars' worth of annual sales in its first four months, a trend he says is partly attributable to the fact that advertisers also show up in the printed edition. Wiley says he expects the site to be in the black by the end of the year.

Internet Access

Most newspapers own delivery trucks and employ people whose job it is to toss the morning papers onto readers' front steps. So why not control distribution on the Internet, offering access service to readers so that they can get the digital version of the daily paper on their computer screen? Some papers are investing tens of thousands of dollars in a technical infrastructure that will enable them to become Internet Service Providers (ISP). Put simply, becoming an ISP entails purchasing pricey hardware, software and a reliable, high-bandwidth connection to the Internet, as well as hiring skilled employees to run the service and respond to customers' problems.

A few papers have opted to become their own ISPs; others have eschewed the business entirely, and still others have cut deals with commercial ISPs to refer readers to their service in return for a fee. The Knight-Ridder chain took something of a middle road, purchasing one-third of ISP InfiNet (the other shares are owned by Gannett and Landmark Communications) and funneling customers to its service.

``We didn't want to provide Internet access ourselves," says Schafer at startribune.com. ``It's too capital-intensive, and we figured it would be a big distraction." Instead, startribune.com allied with AT&T's WorldNet service, promoting WorldNet to its readers. ``We send customers to them. It provides us with a small amount of revenue, but it gives our readers a browser that has the startribune.com set up as the default home page," says Schafer.

Few papers that provide their own access are feeling quite as gung-ho as they were two years ago. Several have already extricated themselves from the business. When Hendricks was named president and publisher at Nando.net last year, one of his first decisions was to sell Nando's ISP business, which had been a big money loser. But Ian Murdock, the director of new media at the San Antonio Express-News, says his paper has no intention to cease providing Internet access. ``It's profitable in the near-term, and it lets us offer a [comprehensive] package for consumers," says Murdock. But he does question the long term viability of operating an ISP as the industry consolidates and price wars ensue.

Subscriptions

Murdock is far more confident about the Express-News' decision to require subscriptions for access to much of its site. He says that while the expectation on the Web today is that all content should be free, ``it was only three years ago that people were saying that there shouldn't be any advertising on the Web." Murdock, as well as executives at the San Jose Mercury News' Mercury Center and the Wall Street Journal Interactive Edition, feel they're at the start of a growth curve with respect to readers' willingness to pay for content.

Although the Journal offers very little content to non-subscribers, other publishers have had success with hybrid subscription models. ESPN's SportsZone site announced a plan in 1995 to grant access only to subscribers, then backed down under pressure from its audience of ardent sports fans. Now much of the site is free, though users must subscribe for premium pieces of content, like audio and video clips, in-depth statistics and analysis, and columns by big-name writers. The site was also one of the first to experiment with selling daily, instead of monthly or annual, subscriptions, a venture Jim McGee, the director of sports games, terms a success. SportsZone also charges users to participate in competitions like Fantasy Football, where players manage their own virtual teams throughout a season.

McGee has noticed an interesting dynamic among SportsZone's subscribers. ``Sports fans are attracted to the highest tier of membership," he says. In addition to offering daily subscriptions, McGee says the site might begin ``splintering" the different subscription offerings, so that a user who just wanted stats could just pay for them without having to pay for video or audio or games. ``We definitely want to get more flexible in our subscription offerings," he says.

McGee disagrees with the conventional wisdom that subscription schemes won't work for the vast majority of publishers. ``I think sports sites like ours and finance sites like the Journal are the bellwethers. We need to set the pace and provide the examples," he says. ``But the numbers we're seeing show that there are lots of interesting niches for traditional publishers to exploit."

Others say that now is the time for papers to build an audience, not try to convince readers to pay for admission to a site. ``You don't want to do anything to limit the size of the audience or its growth," says Fuller of Tribune Publishing. ``This is a time when you have to reach people as they come onto the Web and make them interested in your product. Charging money for the product isn't worth sacrificing market share."

Transactions

Of all these online revenue streams, transactions may be the least mature. ``We believe that a lot of value lies in transactions," says Winter at Cox. ``But there are changes in consumer habits that must take place first, and there's an underlying technology infrastructure that must be developed." Forrester Research buttresses Winter's bullish view, predicting that by 2000, $6.6 billion in consumer transactions will take place annually over the Internet.

At present, publishers exploring the profit potential of transactions tend to be doing so with the help of partners. In return for referring visitors to these partner sites, the publisher gets a piece of the action. USA Today visitors who buy life insurance, Nando.net visitors who arrange vacations, Wall Street Journal visitors who order books, and Boston Globe visitors who request a report on recent home sales in a particular neighborhood all contribute to those papers' bottom line.

Like Winter, most publishers view their third-party transaction arrangements as test-runs. ``We're working with Amazon.com to sell a few books," says Baker at the Journal, ``and we're real happy with the results, but it's not a real significant revenue contributor. I view it as an interesting and useful experiment."

One question about transactions looms large: Does linking users to a third-party transaction site constitute an endorsement by the newspaper of that product or service? Executives at the New York Times waved off concerns about their decision to link Web readers of book reviews to the Barnes & Noble commerce site, saying that the divide between advertising and editorial would be the same online as it is in the paper (see The World of New Media, page 52). Bass at Forrester also downplays such worries. ``The editorial issues will fall by the wayside," he says. ``Transactions will increase the utility of your site. They're a great customer service."

Pay-per-story Archives

Newspapers are also discovering hidden treasure in their morgues: old stories. While the electronic databases that preceded the Internet, like Lexis/Nexis and Dialog, were designed and priced for the business audience, today's Web archives are geared more toward the average surfer. Rather than signing up for monthly or yearly service, Web users can buy articles a la carte using a credit card.

Most Web archives let users search for free, charging only when they request a full text. The San Jose Mercury News, part of Knight-Ridder's network of ``news libraries," charges a dollar per article; at the high end, the Dow Jones News/Retrieval Publications Library (available through the Journal's site), which stores content from over 3,800 sources, gets $2.95 per story. ``It has performed beyond our expectations," says Baker, ``and it's encouraged us to think about developing other premium services."

One drawback for some newspapers is not having enough old stories in digital form. Another is the complexity of billing and customer service. Some papers have decided not to grapple with those tasks themselves, and instead have contracted with outside vendors. The Globe, while not a part of the Landmark, Gannett or Knight-Ridder chains that own InfiNet, uses the company to manage its online archives, which reach back to 1980. Startribune.com is currently negotiating with several companies to handle its archives. Schafer expects it to go online by the end of the year, with stories dating back to 1990.

No one, it seems, has found the perfect formula for turning a profit on the Web, though Bass jokes that pornographers don't seem to be doing too badly. Until consumers get more comfortable using credit cards, advertisers increase their Internet budgets and attitudes about paying for content change, publishers are likely to remain in experimental mode. ``You want to develop as many revenue streams as you can," says Bass. Lately, there has been a flurry of directory deals, between the Washington Post and CitySearch, and the New York Times and Zip2, for example, book deals with Amazon.com and Barnes & Noble, sponsored content, and new ad tracking and billing models. No one professes to have all the answers yet, but for the time being, optimism that there are answers persists.

``The vital signs are there," says Christian Hendricks at Nando.net. ``But I don't think anybody's clicked on the golden goose yet. We have found copper ones and tin ones, though."