Web Sites Gamble on Giveaways

Forget e-mail, online bookselling and digital pornography. For the next big thing to attract customers, the Internet’s entrepreneurs have turned the clock back to one of the oldest tricks in the book: sweepstakes.

It wasn’t that long ago that the Web was extolled as the consummate medium for augmenting the human search for knowledge, like a limitless university library. In recent months, however, it has come to look more like an electronic midway of wheel-spinning, prize-giving, multimedia games of chance.

Sweepstakes, lottery and coupon sites now litter the Internet like so many betting slips on the floor of a parimutuel parlor. Web surfers can win points toward sweepstakes entries for every Web search they do at IWon.com or every trivia answer they get right at WebMillion.com. They can play Web lotteries at LuckySurf.com, FreeLotto.com, IMustLotto.com and Iwin.com. Merely for leaving an advertising window perched on their computer screen while they surf, they can rack up points redeemable for prizes, sweeps chances or cash at AllAdvantage.com, FreeRide.com and many other sites.

Most of these Web sites are less than a year old and far from profitable, but they all plan to make money, in media terms, the old-fashioned way. Their goal is to attract a stable audience of habitual users, which can then be sold, en masse or sliced and diced into demographic segments, to advertisers.

“The object,” says Gregg Rotenberg, chief executive of Jackpot.com, “is to get as many eyeballs as we can and monetize them.”

That’s why Web companies spend billions of dollars looking for ways to make their sites “sticky”--that is, so alluring that users keep coming back. Many entrepreneurs believe sweepstakes and lotteries are a winning ticket.

Cash-reward gaming “appears to me to be one of the ‘killer apps’ on the Web,” says Fred Kreuger, the founder and chief executive of Iwin.com.

Whether the sweeps sites attract customers more likely to make purchases than the average Web surfer remains to be seen.

But several of them do appear to have turned millions of Web users into daily visitors. Iwin.com’s first million-dollar prizewinner, a 53-year-old Las Vegas financial consultant named Gary Kopp, hit six winning lottery numbers April 2 after he and his fiancee played mah-jongg and the solitaire card game FreeCell on the Iwin.com site every day for more than two months. The game play allowed them to rack up points they redeemed for 10 chances a day each on the site’s lottery game.

“I’m not a hard-core gambler,” Kopp says, “but I was attracted by the fact that in these games you’re playing with the house’s money.” Not to mention that the $1-million award, to be paid in a lump sum, will allow him and his fiancee, a writer, to pursue a dream of spending much of the year traveling the country by Winnebago.

Even by Internet standards, the rush to award prizes to Web surfers has been startling in its swiftness and power. Nine incentive sites ranked among the top 50 in the number of unique visitors for the first week of March, according to a survey by PC Data Online. IWon.com, which was launched Oct. 5, hit the top-50 list before the end of December. By some estimates, about one-fifth of all Web users visit lottery sites regularly, and some Internet professionals believe the figure could easily rise to 50%.

Established Web Firms Also Get in on Trend

Not surprisingly, these sites have made it onto the radar screens of the Internet establishment in a big way. On April 3, Pasadena-based Idealab, the technology incubator best known for creating such high-profile e-commerce sites as EToys and CarsDirect.com, launched Jackpot.com, which will give away $1 million in cash and other prizes every month to players of its slot-machine-style game.

And come Saturday, the CBS television network, a major backer of IWon.com, will turn over a half-hour prime-time slot on its nationwide schedule to air that site’s $10-million grand-prize drawing--easily the most significant broadcast promotion of an online site in the short history of the World Wide Web.

That is a major change from the past, when the Internet establishment treated giveaway Web sites rather like an unsavory stepchild.

“They were all outside the scope of traditional venture capitalists because they looked like offshore gambling,” Kreuger says.

In a way, they still do. Although the sites do not require users to pay to play--which defines gambling--many do appropriate casino imagery, ranging from an animated slot machine that is the centerpiece of Jackpot.com’s site to the keno-like boards employed by the lottery sites.

“It appeals to the same sense as gambling,” observes Charlene Li, an Internet analyst for market research firm Forrester Research, “but it’s not quite as addictive.” Most sites limit the number of times per day a player can enter, say, its lottery game, in part because advertisers want their potential customers “to not just sit there and gamble,” Li says.

Nevertheless, some gambling experts fear the novel sites may foster compulsive behavior in impressionable players.

“We now have a situation where we’re telling people that gambling is legitimate and now it’s on the Web,” says Arnold Wexler, a prominent expert on compulsive gambling.

As for the argument that the absence of a cash wager makes the games innocuous, Wexler says, “What about all the people at the office who spend their boss’ time and money playing?”

Many prize sites are finessing the gambling issue by placing age limits on players, although whether they have to isn’t clear. Jackpot.com’s Rotenberg says he ran that question by two sets of lawyers, and “one said it would be a good idea to set an age limit, and the other said it’s not legally necessary.” He chose to apply an 18-year-old minimum.

Although it may be impossible to enforce an age limit for online activity, the companies can enforce it for prize distribution.

The rise of prize sites reflects an important development in Web demographics: Simply put, the population of Web surfers has come to resemble the population at large.

“A few years ago, surfers were techie white males with high incomes,” says Peggy O’Neill, chief of research for Nielsen/NetRatings. But as the Web has evolved into a mass medium, women have consistently made up more than half of new online users. “And women tend to like sweepstakes more than men,” O’Neill says.

Indeed, the sweeps sites say women not only make up a healthy majority of their users--three out of four of FreeLotto.com’s million-dollar winners since November, for example, have been women over 40--but they also have proved to be particularly enthusiastic online shoppers.

There’s no denying that those eyeballs are devoted ones. Consider Brian Chow, a 24-year-old graduate student at the University of British Columbia. For the roughly 20 hours a week he spends trolling the Web for giveaways, sweepstakes and lotteries, he has racked up an impressive haul: prepaid phone cards, gift certificates to a dizzying range of shops and restaurants, free CDs and books.

“I never pay for clothes anymore because I can trade in my points,” he says.

Never does a day pass on which he doesn’t log on to FreeRide.com and MyPoints.com, which pay him cash or merchandise points for every minute he leaves an advertising window on his computer screen. He makes it a point to check out and report on every new sweepstakes or lottery site for his own Web site, FreeStuffPage.com.

Of course, sweepstakes, coupons and promotional giveaways have always been essential elements of mass marketing. The Web, however, allows marketers to figuratively follow consumers down the store aisles by tracking their mouse clicks and then show them ads and promotions to which they may be particularly inclined to respond.

One of the first Web entrepreneurs to build a business around this concept was A. Nathaniel Goldhaber, a former networking executive at an Apple-IBM joint venture called Kaleida who founded Cybergold in 1995, just as the World Wide Web was bursting through to the public’s consciousness.

Cybergold distributed free samples of its advertisers’ wares. But it also paid online users cash, at the rate of 25 cents to $1 a hit, for viewing online ads and referring friends to the program.

“We believed that there was an implicit equivalency between attention and value,” Goldhaber says, “and that the Internet was a wonderful opportunity to make that explicit, clean and simple, by offering a cash-based award.”

Goldhaber’s idea initially ran into some resistance in the tech community. “They’d say, ‘I don’t get it. Who would look at ads for money? And what advertiser would pay people to look at ads?’ ” he recalls. “It took a little while to show people that it’s less expensive to pay people to pay attention than not. Banner ads on the Web turned out to be more expensive, because if you pay someone, they pay better attention.”

This may have come as a revelation to the Web community, but it was old news to people in another business: direct mail. To them, the idea that you grab people’s attention by offering them individualized come-ons in their own homes was second nature.

The direct marketers brought to the Internet the concept of culling demographic information from customers and using it to aim ads at them with the precision of laser-guided missiles. That’s one reason users of incentive sites often have to fill out lengthy questionnaires before qualifying for their prizes and then find their e-mail boxes filling up with commercial messages.

“The Web is a direct-marketing channel on steroids,” says Stephen R. Chapin, a former database executive at First USA, a direct-marketing credit card issuer, who founded LifeMinders.com in his basement and built it into one of the most successful consumer direct marketers on the Web.

By linking cash or merchandise prizes directly to the viewing of Web ads, moreover, advertisers hope they can more effectively buttonhole Web surfers, whose click-through rates on banner ads have fallen to an average of about one-third of a percent--meaning that three of every thousand viewers actually click on a banner ad for more information.

Getting Around Viewer Inattention

On many of the Web sweepstakes and lottery games, that sort of inattention won’t do. At FreeLotto.com and many other sites, for example, a user’s game entry is not valid until he or she clicks on a banner ad.

“That gives us a 100% click-through rate,” says Kevin Aronin, founder of PlasmaNet Inc., the owner of FreeLotto.com.

The incentive site that has really made the Web community sit up and take notice, however, is IWon.com, the brainchild of Bill Daugherty, former marketing executive at the National Basketball Assn., and Jonas Steinman, a partner at Chase Capital Partners, a venture investing arm of Chase Bank.

Their idea was to combine a sweepstakes promotion with a task most Web surfers perform almost daily: searching the Internet. The result was a search engine almost indistinguishable from Yahoo, Lycos, Excite and a dozen others, except that every search generates chances in a monthly $1-million sweepstakes.

“IWon is a very clever idea because unlike a lot of other sweeps sites it’s disguised as a portal,” says O’Neill of NetRatings. “There’s actually a lot of useful content, so you can tell your boss you’re just searching. And it has managed to come out of almost nowhere.”

Although IWon’s heavy on-air promotion from CBS is a factor, it was combining an essential function with a cash incentive that allowed the site to grow so rapidly. (In the latest figures for February, it ranked 27th in visitors.) The site also blows away most competitors in measurements of users’ average time spent on site at nearly two hours, a peculiarity of its search-engine nature.

The burning question today among the prize sites is whether their sudden success will trigger an avalanche of competition. There are already signs of an incipient war of escalating jackpots. FreeLotto has begun to promote itself as the site with the best odds, for instance, although its million-dollar grand prize is about to be trumped by IWon’s $10-million tax day drawing.

As is usual in novel industries still testing formulas for success, a vigorous debate is going on about what will draw in advertisers and consumers and keep them coming back. Iwin’s Kreuger contends the key is to keep consumers interested not by offering them the remote chance of a huge win, but through compelling games punctuated with frequent, if modest, rewards.

“There’s a segment of people interested in winning the big $1-million prize, but another segment just wants to win $5 or get a $5 discount off a CD,” he says.

In any event, he believes, the Web will not be big enough for too many similar rivals to coexist. The harvest will be a wave of consolidation leading to the formation of a handful of mega-sites.

“There will be a company that becomes the Amazon.com in this space,” he says.

Another question is whether other commercial sites will find cash giveaways so compelling that everyone will have to sponsor a lottery or sweepstakes just to keep from losing customers.

“Will every site have a lottery element?” asks Jackpot.com’s Rotenberg. “To me that sounds like an uncomfortable world to live in. People want to separate their work world and their entertainment world, and we’re entertainment.”