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Madison Avenue Freeze-Out

New revenue models could be the saving grace for content sites.

Salon.com and IGN.com occupy opposite ends of the Web’s content spectrum. Salon caters to affluent, college-educated readers with an urbane blend of politics, business, technology, arts, and entertainment coverage. IGN gives its visitors–primarily young males–a daily fix of information about the latest computer games, DVD movies, and Hollywood happenings. But for all their differences, the San Francisco-based sites have much in common in the midst of the worst advertising recession in 20 years.

Both are losing money fast. Salon Media Group lost $5.64 million in the quarter ending Sept. 30; IGN’s parent Snowball.com lost $4.9 million in the same period. Both launched subscription services about a year ago that reserve the latest and greatest content for visitors willing to pay a monthly or annual fee. Both are tapping additional revenue streams such as syndication, cobranding, and e-commerce. Both know that they must make a profit soon, before cash reserves run dry and long-suffering investors cut their losses.

Virtually every content site on the Web is locked in a similar battle for survival, scrapping with a dwindling field of competitors for meager revenues in an advertising climate that has turned decidedly cold and nasty in the past 18 months. It’s the Big Chill for online publications, specialty e-zines, lifestyle portals, and other content sites–a time for belt-tightening and frantic retooling.

Long gone are the days when content sites brimmed with ads for Internet startups and the hipper Fortune 1000 companies. The dot-com bust and global economic malaise have decimated the ranks of Web advertisers. And many brick-and-mortar companies aren’t convinced that their messages resonate in an ethereal medium that is still less than eight years old. Playing it safe, they pick the choicest news sites and portals with tens of millions of monthly visitors to carry their display ads, sponsored links, and e-mail promotions. According to the Interactive Advertising Bureau, 88 percent of U.S. ad spending in the first half of last year went to sites ranked in the top 25 in traffic. That leaves sites such as Salon and IGN out in the cold, starving.

“It’s not difficult to see that the trajectory for media ad spending is pointed in the wrong direction now,” observes Patrick Hurley, Salon.com’s senior vice president of business operations. The advertising freeze has doomed a long list of content sites in the past year, including inside.com, on-magazine.com, mademoiselle.com, and garden.com.

Cambridge, Mass.-based Net watcher Forrester Research Inc. doesn’t expect ad spending to rebound until 2003. In the meantime, what can desperate Web publishers do to keep the home fires burning? Their non-ad revenue options boil down to three basic strategies:

Persuade site visitors to pay for content, through subscriptions or pay-for-use schemes. Get another Web site or publication to pay for it, through syndication or cobranding. Delve into e-commerce, peddling products and services directly or feeding traffic to online merchants. Salon, IGN, and dozens of other struggling content sites are trying one or more of these approaches, striving to avoid oblivion in the months ahead.

Content for sale

Subscription is the most obvious alternative means of supporting content sites, an online extension of the time-honored model of newspaper and magazine publishing. But industry analysts question whether subscriptions can fill the advertising vacuum on content sites. Netizens have been conditioned to expect free content wherever they roam, and there’s still a lot of free stuff out there. A phone survey last fall by the Pew Internet and American Life Project showed that 62 percent of adult Web users who had seen their favorite sites vanish found new sites to take their place–and didn’t have to pay to switch.

“I think the subscription model is going to be a very tough row to hoe,” says Thomas Hyland, chair of the New Media Group at PriceWaterhouseCoopers in New York.

To have any chance at all, subscription sites must attract an extremely loyal following by offering content and related services that can’t be found anywhere else on the Net.

Salon.com claims that it commands that level of devotion, pointing to the 20,000 people who so far have paid $30 a year for Salon Premium. The subscription service provides exclusive access to most of the site’s news and politics coverage, throws in extra material from its People and Sex departments, and offers special tools to facilitate offline reading. Another subscriber benefit is the absence of pop-up and full-screen interstitial ads that besiege viewers on Salon’s main site, which is still hungry for advertising.

Two years ago, Hurley says, selling subscriptions would have been “an unmitigated disaster.” Today, a more mature Netizenry is “coming to grips with the fact that they will not be able to access all content and services for free going forward,” he says. The online communities Table Talk and The Well have also been converted into paid services.

Subscriptions accounted for about 45 percent of Salon’s revenues in this year’s second fiscal quarter–which sounds impressive until you learn that all revenues amounted to $567,000. But at least the company’s bold experiment hasn’t yet cut into the site’s overall circulation of 3.8 million unique visitors, who are so vital to hanging onto national advertisers. “The conventional wisdom at the time was, ‘when you do this, scads of your readers are going to flee and your page reads are going to go down,'” Hurley says. “Well, both are either stable or up since we did this, in part because we’ve cultivated a really strong relationship with our readers over six years.”

Snowball, which bills itself as “the leading gen-i network for Web-centric 13-to-30-year-olds,” also apparently believes that it has the right stuff to hook subscribers. Abandoned by dot-coms (ad revenues have dropped 50 percent since 2000), the company has poured considerable resources into IGN Insider, an 11-month-old subscription service on IGN.com. Close to 50,000 gamers pay $19.95 annually for access to articles unavailable on the regular site, exclusive downloads, enhanced message-board functions, and members-only contests.

Snowball President Rick Boyce says that the subscription model makes sense, given IGN’s focus on an engrossing pastime for young men. “I think any time you’re covering an area editorially for which there’s a large audience of people–many of whom are extraordinarily passionate about it–there’s the opportunity for subscription revenue,” he says. Slightly less passionate gamers can see Insider content on the open site after a few days or a week, helping IGN to maintain its monthly viewership of about 2.8 million.

Last May Snowball introduced an annual subscription service on HighSchoolAlumni.com, a virtual meeting place for high-school graduates. But the company has no such plan for ChickClick.com, an online community for young women. Why? Because ChickClick visitors aren’t as committed to the site as their male counterparts are to IGN, Boyce says. Part of his reasoning is based on competitive assessments; female-oriented lifestyle sites abound on the Web.

If exclusivity breeds loyalty, the Web sites best positioned to take advantage of the subscription model may be those that offer services as well as pure content, both tailored to a specific lifestyle or business market. “If you’re purchasing personal services from a site, that’s an approach that’s much more likely to be successful with subscriptions,” says Eric Scheirer, a senior analyst with Forrester Research.

One lifestyle site that’s growing fat on subscriptions is eDiets.com. Last December the Florida-based weight-loss and fitness company expected to report its first full year of profitability on $25 million in revenue–almost all of it derived from subscriptions to personalized meal plans. There’s free content on the site–a newsletter, weight-loss tips, animated exercise demos–but more than 300,000 people opt for the company’s fee-based, online diet programs, paying $10 a month. Advertising accounts for less than 5 percent of sales.

Other content-rich service sites that peddle subscriptions include AmericanGreetings.com, a forum for exchanging virtual greeting cards; financial-market watcher Barron’s Online; and pressplay.com, a new online music service owned by Sony and Universal.

Let’s make a deal

To stay solvent, content sites deprived of advertising are also reaching into a grab bag of ancillary revenue sources–e-commerce and behind-the-scenes syndication, cobranding (sophisticated partnerships that share content, look, and feel between sites), and licensing deals of which most visitors are only dimly aware. Individually, each of these strategies may not amount to much; together, they can make a vital contribution to the bottom line. “You just keep adding on,” Hurley says, “and eventually the confluence of all those revenue streams gets you to profitability.”

Syndication and cobranding can help carry the water for Web sites with high-quality or unique content coveted by other sites or offline publications. Salon Wire, Salon’s syndication arm, feeds about 100 articles a week to media outlets such as the Chicago Sun-Times, Mercury News, and TechWeb, bringing in more than $100,000 annually. HR Tools.com, a resource site for human resources managers, derived a third of its 2001 revenue from licensing deals with HR-related companies, such as Professional Employment Organizations, that want to offer their clients online software and advice on best practices.

“For a fraction of the money that it would take them to build on their own, they can license it from us, and cobrand it, within the framework of whatever they’re offering,” says Michael George, vice president of marketing and Internet services for KnowledgePoint, a Petaluma, Calif.-based software publisher that owns the site.

IGN.com also cobrands its content to retailers such as CompUSA and EBgames.com; visitors to CompUSA’s gamefixx.com can peruse game reviews bearing the IGN logo.

E-commerce can be lucrative for lifestyle-oriented sites that aren’t as committed to the informational high road as Salon or Slashdot. Snowball rakes in more cash from e-commerce than it does from subscriptions. IGN takes a contextual approach, accepting a monthly marketing fee to place “buy now” links next to product reviews that whisk the reader straight to the appropriate e-tailer catalog page. HighSchoolAlumni makes hay with a twist on e-commerce called subscription underwriting: American Express pays Snowball $40 for each visitor who accepts a “free” subscription and qualifies for the Amex Blue card.

Of course, at some point in the pursuit of mammon, a site ceases to be about content. Ultimately, like offline rivals Weight Watchers or Jenny Craig, eDiets wants you to pay to lose pounds. HRTools’ free content and pay-per-use (see “Micropayments and macroheadaches”) software are bait dangled in cyberspace to land the real prize–desktop software sales that constitute the bulk of the site’s revenue.

Waiting for the thaw

Media pundits maintain that pure-content sites are kidding themselves if they believe that alternative forms of revenue will fill the void left by the collapse of Web advertising. In 2005, according to Forrester, subscriptions, syndication, and e-commerce will still account for only one third of the $40 billion in total revenue available to U.S. content sites. “If a content site cannot make it through advertising support, there’s very little chance that some other means of revenue is going to allow them to be sustainable instead,” Forrester’s Scheirer says.

Web properties that exploit specific passions or business needs–such as IGN, pressplay, and HRTools–may be able to thrive on some combination of pay-for-use, cobranding, and online sales. But that’s probably not realistic for news and general entertainment sites, the experts say.

Music and games sites will bag the lion’s share of income from subscriptions and pay-for-use. Affiliate marketing and revenue sharing with e-tailers will net content sites only a tiny fraction of the $50 billion-plus in online sales that Jupiter Media Metrix forecasts this year. Only a select number of category-leading sites will strike lucrative cobranding deals. By the time somebody figures out how to make micropayments work, half of today’s flagging content sites will be dead, and those still alive will be back in favor with advertisers eager to reconnect with buyers in a resurgent economy.

That’s the silver lining in the dark cloud hanging over content sites: If they can hang in there until next year, they’ll benefit from consolidation as the number of available page views drops, making them more attractive to advertisers. Hyland of PriceWaterhouseCoopers predicts that ad spending will trickle down to smaller, less expensive sites as the top 50 become saturated with banners, pop-ups, and e-mail come-ons.

But Hurley of Salon.com says that there’s no going back to abject ad dependence. “Even in a bull market for advertising, we will continue this hybrid strategy, with subscriptions,” he says. The legacy of the Madison Avenue freeze-out may be a realization that diversity is essential; even if advertising remains the lifeblood of pure-content sites like Salon, subscriptions, licensing, and other forms of revenue can hasten them to profitability or provide a hedge against hard times.

“We knew that we wanted a more diversified revenue stream for years,” Hurley adds. “It’s just not healthy to be dependent on one particular source of revenue.”

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