Internet Gold Rush Hasn’t Panned Out Yet for Most
Even as Internet use continues its dramatic surge, many if most Internet ventures are losing money, and many others--including some run by the titans of the industry--are shutting down, consolidating or cutting back.
The standing joke on the Web is that the letters “ISP” don’t really stand for “Internet service provider” but for “I’m still profitless.”
Already this year:
* Microsoft closed half the Web sites it created last year, fired several hundred part-time employees, announced the termination of 10 programs on its Microsoft Network and was reported to be considering getting out of the Internet service provider business altogether.
* CompuServe, an online pioneer, announced financial losses, the resignation of its chef executive officer and a shift from the mass consumer market to business and professional users.
* Time Warner was said to be losing as much as $10 million a year on Pathfinder.com, the Internet site that features Time, People, Money and other Time Inc. magazines. (Dan Logan, chief executive officer of Time Inc., has described Pathfinder as giving a “new definition to the term ‘black hole.’ ”)
* Politics Now, a popular World Wide Web site run by ABC News, the Washington Post and the National Journal, closed down. So did such Internet magazines as Out and Spiv and an online Web directory called Netguide Live and the Web soap opera “The Spot,” which had been hailed as a prototype for Internet entertainment. American Cybercast, producer of “The Spot,” has filed for bankruptcy protection.
Industry analysts believe these problems are a forerunner of the massive shakeout coming the rest of this year as companies are forced to come to terms with what Bill Bass, senior analyst in media and technology strategies for Forrester Research in Cambridge, Mass., calls the “amazingly unrealistic expectations” engendered by the potential of the Internet.
Many saw the Internet as the cyberspace equivalent of the California gold rush, and having invested hundreds of millions of dollars, they have been stunned to see the glitter of early growth turn into fool’s gold. Although a number of online newspapers and other services insist that they will be profitable by next year, Bass says that in many cases, “that’s because they made three-year plans in ‘95, and if they didn’t show that revenue would equal expenses [by the end of three years], they wouldn’t have gotten funded in the first place.”
Some sites could be profitable already, though, if they weren’t reinvesting their revenue in their ongoing operations.
The question “Are you profitable?” is “exactly the wrong question,” says Dick Glover, vice president of ESPN, whose Web site is one of the most popular on the Net. “The real question is, ‘Should you be profitable now?’ and the answer is no. You should be reinvesting . . . building a business for the future.”
There are exceptions, of course--most of them commercial transaction sites rather than news and information sites--but by and large, as Neil Budde, editor of the online edition of the Wall Street Journal, says with just a hint of hyperbole: “The only people making money on the Internet right now are the ones hosting conferences on how to make money on the Internet.”
Proud Tradition of Free Access
For now, most sites on the Web are free to the individual user. Sex sites on the Web charge for access, as do a relatively few other sites (the Wall Street Journal among them); some other sites (ESPN and Pathfinder among them) permit free access to the basic site but charge for what they call “premium” or “personalized” services. Many more sites say they ultimately expect to charge at least a nominal fee for some services.
But several online publications that said they would begin charging have delayed or--like Slate, the online magazine published by software giant Microsoft--abandoned those plans, at least for now.
“To be honest, we chickened out,” Michael Kinsley, the editor of Slate, wrote in an online announcement in January.
A few weeks later, in an interview, he said he still believed that charging for access to Slate was “the most realistic way for it to become self-supporting,” but he said he had decided “it would be better to establish a brand name with wide readership first, and you would short-circuit that process if you started charging too soon.”
Nathan Myhrvold, group vice president and chief technology guru at Microsoft, pointed out in Slate itself four months earlier that Internet users would not pay for access to one site when “a million free sites are just a click away. . . .. There’s no incentive until people are too addicted to the Net to turn off their computers, yet are bored with what’s available.
“In the very long run,” Myhrvold wrote, “addiction and boredom seem as inevitable as death and taxes, and user fees will then be viable, at east in some cases”--much as some people who are “addicted” to TV but bored with its regular programming now pay extra for HBO and other premium channels.
But the basic culture of the Web is free access, and there will probably always be many free sites. At present, even those who charge for access keep the cost low. That means most of the revenue to support the Internet must come from advertising and commercial transactions.
In the earliest days of the Web, it was widely assumed that the free spirits who used it would not tolerate the intrusion of advertising. But most Web sites have ads now--AOL even sells ads on about a third of its chat rooms, a heretofore sacrosanct precinct--and users often have to click their way past two or three ads, rejecting various commercial come-ons just to get to the site they want.
In time, commercialism on the Net will grow. Black Sun Interactive of San Francisco has developed what it calls ad “robots,” avatars that, in effect, will be able to eavesdrop on chat rooms, and when they “hear” a phrase that matches one in their memory bank, they could make an advertising pitch. (If a user mentioned that he was having car problems, for example, the avatar might recommend a particular kind of car or car dealer.)
Because many online sites require users to register and provide demographic data on themselves, software is being developed that will ultimately allow Web advertisers to achieve the merchandiser’s dream--targeting an audience far more precisely than it can with either newspapers or television by advertising a product only on sites that draw people likely to be interested in that product.
Moreover, they will be able to get nearly instantaneous electronic feedback on whether their ads are effective: How many people saw the ad? How many “clicked” on it and went on to a more detailed presentation? How many bought the product right then, online? Relatively crude versions of some of these technologies are available now.
Web Makes Ideal Marketing Tool
The Internet has the potential to be the best sales tool--the best advertising and direct marketing vehicle--ever devised. The Internet can turn any advertiser--any product manufacturer or service provider--into the equivalent of a direct marketer. On the Internet, consumers looking for a particular product or service can shop over the entire country--the entire world--looking at photographs and comparing prices, features and terms, and then buy what they want with a credit card and arrange to have the purchase delivered to their door.
During the last Christmas season, 14% of all retailers were online, up from 4% the previous year, according to a survey by the accounting firm of Deloitte & Touche. That’s why retailers ranging from FAO Schwarz to Macy’s to Eddie Bauer have created Web sites.
Meanwhile, one online shopping mall--America’s Choice Mall--already has more than 1,200 “storefronts,” Dell Computer Corp. has sales of more than $1 million a day, and Amazon.com has been so successful selling books online--more than $16 million worth since July 1995--that Crown Books has expanded its online site, and both Borders and Barnes & Noble recently launched their own sites.
As a story in Slate pointed out this year, Amazon.com isn’t necessarily as convenient, as quick, as cheap or have as encyclopedic an inventory as it claims. But it is a comprehensive, user-friendly service, and it does provide links to many book reviews and comments by typical book buyers, thus creating a unique, online book community.
Many other sites also take advantage of the special features of the Internet. Omaha Steaks can’t let you taste a porterhouse online--not yet anyway--but CD-Now, the most popular compact disk site on the Web, does allow customers to hear 30 seconds of various songs before making a purchase. In time, people may be able to log on to a Web site, type in a credit card number and download a full CD onto a blank disk.
Online shoppers spent more than $500 million in 1996, and Forrester Research predicts that that number will increase more than tenfold, to $7 billion, by 2000.
Newspapers would like a share of that money--both advertising money and fees for serving as a middleman in various commercial transactions--to offset the losses they are likely to incur if advertisers shift dollars from the print media to the Web. USA Today has created an Online Marketplace that links breaking news to both commercial product information and opportunities for electronic shopping.
Security Concerns Over Purchases
But for all the online shopping that’s available, the Web still accounted for less than 2% of all retail sales last year--and 10% of those sales involved sex-related merchandise.
Many people do like shopping for cheap air fares and other travel-related services on the Internet, but for the moment, online shopping is more of a threat to travel agents and mail order businesses than to retailers. Many problems remain before shopping by computer replaces a visit to the department store, toy store or any store for most Americans.
Some shoppers enjoy the personal contact with sales personnel and the serendipity of walking into a story looking for one item and then finding something altogether different that proves suddenly and irresistible.
Of far greater importance, many people remain uneasy about sending their credit card numbers into cyberspace, despite the insistence of various online entrepreneurs that online credit card transactions are at least as safe as faxing a credit card number or leaving a receipt with a credit card number on a restaurant table. To counter this uneasiness, most online merchants offer customers the option of not providing credit card information by computer but of listing a telephone number at which they can later be called.
InfoDial, a Malibu company that develops software for online merchants, announced in April that it had developed the online equivalent of “checks”--software that makes it possible for shoppers to pay for goods purchased online by giving merchants, in encrypted form, all the information that appears on a check.
But as with credit cards and various Internet tracking devices, this raises further concerns about security and privacy. One survey this year showed that one-third of Internet users say they give false demographic information on the Web because they are concerned about how such personal information will be used.
Web-savvy snoopers can go online and find such once-private information as driver’s license registrations, probate records, Social Security numbers, previous telephone numbers and addresses, individual financial information and encounters with the law. The Social Security Administration suspended access to one of its online programs amid concerns that the privacy of individual wage, tax and benefit information was at risk.
Yet another hurdle for online merchants: Women account for 70% of all retail sales in the United States, but so far, men outnumber them in the online world. Although a Business Week / Harris Poll in May said the percentage of women on the Net has jumped from 21% a year and a half ago to 41% today, women tend to spend less time online than men do. The Worldwide Internet / Online Tracking Service of IntelliQuest in Austin, Texas, said this year that among heavy users, men still outnumber women by a 3-1 margin.
The Question of Regulation
Prospective advertisers--and the Web sites who need their support--face many other problems as well.
One involves government regulation. Last year, Congress passed the Communications Decency Act, a bill that outlawed “indecent” material on the Net and was designed in large part to protect children from such material. Last week, the Federal Trade Commission conducted a public workshop that included hearings on complaints by children’s advocacy groups that many online marketers take advantage of kids’ susceptibility to certain gimmicks by using interactive games, contests, quizzes and video clips to ignite their interest in various products. Online marketers use some of these same devices to do market research on kids without their parents’ approval.
The Communications Decency Act is now before the United States Supreme Court, and with an estimated 4 million children under 18 using the Internet regularly, it seems well within the bounds of probability that a similar legal battle will be necessary to resolve advertising material on the Web.
But online advertisers have enough issues to worry about even without the threat of government regulation.
No one has ever been sure just how effective any particular advertising is, which is why John Wannamaker, the department store magnate, once said, “Half the money I spend on advertising is wasted, and the trouble is, I don’t know which half.”
On the Internet, Wannamaker would be even more uncertain.
Advertisers base their spending on the size of the audience they are likely to reach, and while five separate companies--including Nielsen I/PRO, a subsidiary of the company that provides ratings for television shows--now measure the Web audience, none has yet attained the industrywide credibility that Nielsen’s parent company has in television or that the Audit Bureau of Circulation has in the newspaper industry.
“Advertisers will not be totally comfortable advertising on the Web until confidence builds that Web advertising measurement is accurate and auditable by a reliable third party in a ‘Nielsen-like’ way,” says Mary Meeker, managing director of the Morgan Stanley investment banking firm, in a 142-page report on Internet advertising.
In the beginning, Web sites measured their audience in terms of “hits,” but everything downloaded by an individual user counted as a separate “hit,” so amid the hyperbolic millions of daily hits reported by many sites, there was no way of knowing how many individual people were visiting any site. Many sites now measure in terms of “page views”--the number of pages that are downloaded. But that figure, too, is meaningless because one user might download just one page while another downloads 20.
The best audience measure would be what is known as “unique users”--i.e., individual users. But the only way to get that number is to require everyone to register, and most sites don’t do that. Even those that do require registration can’t be terribly precise because, for example, everyone who comes to a site via AOL is counted as being the same, single “unique user.”
Most estimates of “unique users” are little more than educated guesses, based on widely varying methods--some of them seemingly about as scientific as throwing a fistful of pennies into the air and trying to count them as they come down. Bernard Gwertzman, editor of the New York Times on the Web, says his site receives 80,000 unique users “on a good day.” But Boots Rykiel, editor of the online edition of USA Today, says his site receives almost 500,000 unique users a day.
Is that possible? USA Today has 50% more circulation for its print edition than does the New York Times; could it actually receive 500% more online visitors? Rykiel refers the question to Allegra Young, who is in charge of such matters for USA Today.
Yes, she says. In fact, she pegs the exact number of unique users each day, on average, at 447,222.
She may well be right. But how did she arrive at that number?
“We have 264,000 distinct hosts--like Harvard University or America Online--that people come to our site from. We multiply that figure by 1.7.”
Why 1.7?
“We figure that there is probably more than one person and, on average, not more than two for every distinct host.”
How does she know that? Aren’t there likely to be tens, hundreds, thousands of users from some sites? How does she know the average is between 1 and 2--and why decide on 1.7 rather than 1.5 or 1.3 or 1.8?
Young has no explanation.
Many other sites don’t even try to arrive at these numbers. Nor can advertisers agree among themselves how the audience should be measured and how advertising rates should be calculated. Should it all be based on the number of people who see the Web page with their ad on it? Or on the number of times people “click through,” moving from that first small ad to a more detailed sales presentation on another linked site? Or, given all the hoopla about the Web as a boon to direct marketing, should ad rates be based on actual sales? Or on some combination of these?
When Forrester Research polled more than 50 advertisers on these questions recently, they were so divided that not one of these four mechanisms was supported by more than a third of the respondents.
While some advertisers insist on paying only on a click-through basis, many people who run online sites are resistant.
“It makes me responsible for something I have no control over,” says Bob Ingle, president of new media for Knight Ridder Newspapers. “I can get people to see your ad, but if you did a poor job” [designing it, and no one clicks through], why should I lose money?”
Indeed, click-through rates generally hover in the low single digits--3% or 4% or so--and many in the Internet community say that’s because most Web ads are just not very creative or imaginative. Although some advertisers use animation and interactivity, most ads are static “banners”--generally small, horizontal, rectangular graphics at the top of a Web page.
“I don’t know what ads on the Net will look like in the future,” says Nick Donatiello, president of the Odyssey research firm in San Francisco. “But I know what it’s not going to be. It’s not going to be . . . banner ads--which are just billboards on the Web. Someone is going to come along and say, ‘This is not like anything we’ve had before,’ and he’ll define advertising in a new way for a new medium.”
One of the problems with banner ads is that if a user does what the advertiser wants him to do and clicks on the ad to go to fuller presentation of the advertising message, he leaves the original site--which creates a Catch-22 situation for news organizations and other creators of online content: They want effective advertising so they can make money, but they don’t want advertising so effective that it lures users away from the non-advertising information they’re providing. Unlike printed newspapers (in which most ads are right next to the stories) or television (in which commercial breaks lead right back into programming), Internet ads are only successful if they pull the user-cum-customer away from the site.
Net Traffic Lags Far Behind Papers, TV
Most important of all--both in terms of shopping and advertising--no Web site has yet attracted the huge volume of traffic that warrants the massive advertising expenditures made in traditional media.
The Los Angeles Times Web site, for example, estimates that it has 50,000 “unique users” on an average day. But the printed edition of The Times sells a million copies every weekday, and most studies suggest that each copy is seen by at least two other people--a total audience of about 3 million.
The gap is even greater--astronomically so--between online sites and television.
ESPN’s SportsZone is the most popular destination site on the Web--i.e., it has more users than does any other Web site except the browsers and search engines. That translates to 480,000 “unique users” a day--one-sixth of the audience of the largest daily newspapers in the country and one-sixtieth of the most popular television programs in the country. Even the 15th-rated cable TV show in a typical week draws more than six times as many viewers as does the ESPN Web site.
A Nielsen I/PRO independent audit last fall suggested that Netscape, the leading Web browser and, as a result, the single most frequently visited site on the entire Web, was receiving more than 2.9 million visitors a day. Netscape now claims 4.5 million to 6 million visitors a day. Even assuming that the latter figure is correct, that’s still fewer people than watch about 90 of the 114 prime-time network television shows.
No wonder each of the three major television networks received several billion dollars in advertising last year, while Netscape--which earned more advertising revenue than any other online company--received only $27 million.
Apart from Netscape, the Internet search engines are the most heavily trafficked sites, so it’s no surprise that they received about 40% of the total online ad revenue last year, almost quadruple what the news or general interest sites received.
Much advertising on the Internet today consists of a small group of companies taking money from their left-hand pockets and putting it into their (or each others’) right-hand pockets. The companies spending the most money on Internet advertising these days are, almost without exception, companies that have a major stake, directly or indirectly, in the Internet--Microsoft, AT & T, IBM, Netscape and four Internet search engines, Excite, InfoSeek, Lycos and Yahoo! The biggest recipients of online ad revenue also tend to include Netscape and several search engines.
On television, the networks also spend a lot of money to advertise and promote themselves and their programs--$500 million per network this season, according to the Wall Street Journal--but they at least are not alone. Both Procter & Gamble and General Motors are expected to spend about the same amount--or more--in network advertising in 1997, and half a dozen other companies also spent more than $300 million apiece in network advertising last year; that sum represents more than all advertisers combined spent on all the sites on the World Wide Web.
Online advertising increased more than fivefold last year, from $55 million to $300 million, but that’s still less than one-fifth of 1%) of the $173 billion spent on advertising in all media in 1996. Even cable television--the smallest of the existing media-- outdistanced the Internet by a 20-1 margin, with $6 billion in advertising revenue.
The Internet is still in its infancy, though, and its potential is enormous. As technology continues to improve and its audience continues to grow--as users and advertisers alike become more comfortable with it and knowledgeable about it--the Internet could ultimately attract the kind of audience and generate the kind advertising revenue that would enable it to revolutionize human communication even more dramatically than Johann Gutenberg’s first printing press did more than 500 years ago.
David Shaw’s e-mail address is david.shaw@latimes.com
Jacci Cenacveira and Rebecca Andrade of The Times editorial library assisted with the research for this series.
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Web Sites
These are the names and Internet addresses for the primary Web sites mentioned in today’s stories:
Alta Vista
https://www.altavista.com
*
Amazon Books
https://www.amazon.com
*
America Online
https://www.aol.com
*
America’s Choice Mall
https://www.choicemall.com
*
Barnes & Noble
https://www.barnesandnoble.com
*
Borders Books and Records
https://www.borders.com
*
CD Now
https://www.cdnow.com
*
C/NET: The Computer Network
https://www.cnet.com
*
CompuServe
https://www.compuserve.com
*
Crown Books
https://www.crownbooks.com
*
CyberWireDispatch
https://www.cyberwerks.com/cyberwire
*
Dell Computers
https://www.dell.com
*
Electronic Newsstand
https://www.electronicnewsstand.com
*
ESPN SportsZone
https://www.espn.sportszone.com
*
Excite
https://www.excite.com
*
Forrester Research Inc.
https://www.forrester.com
*
Herring Communications
https://www.redherring.com
*
InfoSeek
https://www.infoseek.com
*
Knight Ridder Inc.
https://www.knightridder.com
*
Los Angeles Times
https://www.latimes.com
*
Lycos
https://www.lycos.com
*
MSNBC
https://www.msnbc.com
*
Netscape Corp.
https://www.netscape.com
*
New York Times on the Web
https://www.nytimes.com
*
Nielsen I/Pro
https://www.ipro.com
*
Pathfinder (Time Inc.)
https://www.pathfinder.com
*
San Jose Mercury News
https://www.mercurycenter.com
*
Slate magazine
https://www.slate.com
*
USA Today
https://www.usatoday.com
*
Wall Street Journal Interactive Edition
https://www.wsj.com
*
Washington Post
https://www.washingtonpost.com
*
Wired magazine
https://www.hotwired.com
*
Yahoo!
https://www.yahoo.com
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Advertising Spending in the Media
Advertisers continue to spend more money in daily newspapers than in any other medium.
Market Share 1995
Daily Newspapers: 37%
Broadcast Television: 32%
Magazines: 15%
Radio: 11%
Cable: 5%
Source: Morgan Stanley
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Preferred Pricing Mechanisms
Some advertisers prefer paying based on the number of users who see their ad (CPM-cost per thousand). Some prefer to pay only for those who “click through” their original ad to a more complete presentation. Some prefer paying based only on the number of people who actually buy their product. Some prefer a combination of these methods--a hybrid.
% of 52 Advertisers Interviewed
Hybrid: 33%
Click-through: 29%
Cost per lead or buyer: 23%
CPM: 15%
Source: Forrester
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About This Series
Sunday: A Times reporter--an admitted “technological idiot”--gropes his way through cyberspace, trying to come to terms with the Internet and its potential to revolutionize virtually everything we do.
Monday: Will the Internet ultimately replace newspapers and other traditional media--or will it give them an opportunity to reclaim the dominance they once enjoyed?
Tuesday: Different strokes for different newspaper folks--a look at the strikingly divergent paths that various newspapers are taking in transferring their journalism to the World Wide Web.
Wednesday: Online magazines, online city guides and Microsoft’s drive for hegemony in cyberspace. But does WWW stand for “World Wide Web” or “World Wide Wait”?
Today: Can anyone make any money on the Internet? Will readers (and writers) like the computer screen as much as the printed page?
The entire series will be available today on The Times Web site at https://www.latimes.com/media
