Free Stuff on Web Gives Way to Profit Motive

By DAVE WILSON

May 13, 2001 12 AM PT

TIMES STAFF WRITER

After a giddy era of free shipping, free subscriptions and free services, the dot-com meltdown has forced many surviving companies to do something that was unthinkable as recently as a year ago: charge Internet users.

No longer are credit card numbers used mainly for identification or age verification. Outfits such as RealAudio, Salon.com, Yahoo and Outpost.com now send charges to those accounts for formerly free services, from baseball and basketball game broadcasts to product shipping and magazine subscriptions.

Although the vast majority of Web sites remains free to users, companies increasingly are charging visitors as a way to stay in business.

In the process, they are daring consumers to walk away from their offerings, gambling that the market has matured enough to recognize that there’s no free lunch.

“Zero-margin operations are no longer viable,” said Jack Staff, chief economist for Zona Research Inc. in Redwood City, Calif. “The renegade dot-coms that undercut competitive prices to gain market share are folding. Those that remain are going to be charging for services.”

The strategy is not without its hazards. In this most fluid of environments, consumers can switch their loyalties with a simple click or two.

Previous efforts to charge on the Internet often have been disastrous, with sites that imposed feesdiscovering that visitors simply went elsewhere. In April 1995, the San Jose Mercury News tried to impose a $4.95 monthly charge for access to the paper online and watched as thousands of users leaped to other sites. The newspaper ended its fee experiment in 1998.

But the decline in advertising revenues is pushing Web site operators, and presumably consumers, toward a fee-for-services model. It’s been a long time coming. The dot-com boom temporarily turned traditional economics on its head. When the Internet was opened to the public, it already had a two-decade tradition of freebies--mainly because for-profit activities were forbidden until 1993, and even afterward, longtime users were not shy about shouting down neophytes who tried to make a buck.

When Web browsing software such as Mosaic opened the Internet to the masses, the rush was on. Investment money inundated Web site operators who could provide numbers--any numbers--suggesting that consumers were aware of the site.

The idea was that, in the future, when everybody was on the Internet, such “mind share” would pay off handsomely and anyone who tried to set up a competing Web site later in the same product category would be doomed to failure.

Jack Marshall, a co-founder of Photoloft.com, one of the first sites allowing users to share their snapshots on the Web, said the obsession with being first to market and building mind share reached such absurd proportions that many companies paid for the privilege of providing products or services.

Photoloft has a significant business administering photo-display services for other Web sites, but found it difficult to do so and make a profit at the height of the Internet frenzy.

“We wanted to charge MP3.com $60,000 to set up this kind of thing on their site. But Zing.com came and paid MP3.com $1.3 million to get the account. How do you compete against something like that?”

Last month, Marshall sent a letter to Photoloft users announcing that the company was imposing a $2.99 monthly user fee. Marshall said that’s possible now because every Web site needs to turn a profit.

“Buying market share was not an effective strategy,” he said. “And now the people who have been distorting the market, trying to buy market share, can’t afford to do that anymore.”

Similar sites, such as Photopoint.com, also have started charging. And while there are still plenty of Web sites that offer the same services for free--many of them actually run by Photoloft on behalf of another Web site that pays for Photoloft’s expertise--Marshall said that in the brief time the site has been charging he’s seen no mass defections from Photoloft.

“The number of impressions hasn’t gone down,” he said.

Even if consumers used to getting a free ride at Photoloft haven’t left yet, charging for access hasn’t been an especially successful proposition in general, and it’s still too soon to tell whether consumers will accept it even in the new environment. Although some Web sites, such as the Wall Street Journal, which charges $59 a year for an online subscription, have been relatively successful at charging users, most sites have found that telling visitors to pay up is a sure way to lose them.

Slate magazine tried to impose a $19.95 fee in 1998 after a year of giving away the product. A year later, the magazine had about 25,000 paying subscribers but found that 250,000 people used the site’s free areas.

The company dropped that fee after calculating it could ratchet up advertising rates by increasing the number of visitors to the site. When he announced a year later that the subscription fee would be eliminated, Slate Editor Michael Kinsley said subscription-based services were at a severe disadvantage in cyberspace. “There is too much free stuff out there.”

Internet users have been willing to pay for specialized information or services, such as investment advice or pornography. In general, however, the realities of the Internet environment have made life difficult even for people who had a legitimate business plan.

Royal P. Farros, chief executive of IPrint Inc., which allows people to print things such as business cards via the Internet--for a fee--said watching the madness unfold was terrifying.

“What’s been particularly challenging over the past few years is that the market was rewarding stupidity,” Farros said. “And it wasn’t just one or two sectors, it was the whole bloody market, all the way from the venture capitalists at the top of the food chain down to the mom-and-pop investors.”

Farros said he got into trouble with some of the company’s investors at the end of 1999 because he’d canceled some radio ads after the price of air time quadrupled during an eight-week period as frenzied dot-coms flooded the airways.

“This was a time when everybody was talking about first-mover advantage,” he said. “If you weren’t the first in your product category, basically, anybody could knock you out. So the idea was to spend whatever you had to get that advantage. Of course, profits would follow. And it got to the point where people were spending insane amounts of money to get one single customer.”

Farros said he thinks those days are gone. “At some point, people realized it’s horribly expensive just finding customers you can give stuff away to. I think this is going to make it easier on all of us. The expectations are more reasonable now. And people are going to find that they’ll have to pay for things. And if those things offer convenience, selection, value or some other incentive, people will pay.”

And sometimes they won’t even complain about it.

Darryl Peck, CEO and president of Outpost.com, recently sent a letter to users announcing the end of free shipping. “We got 7,000 responses to that e-mail, nearly all of them overwhelmingly positive,” he said.

Although some consumers probably will be angry enough to take their business elsewhere, the fact is they will have an increasingly hard time finding another service offering free shipping.

Peck said the difficulties faced by other dot-coms made his decision to charge easier. “Who decided that giving stuff away below cost was a fabulous way to do business? We never altered our pricing, like some others, because we knew eventually those people would just go away.”

Peck said his company could offer free shipping because of its location in Ohio near a hub for Airborne Express. Because of the relationship with Airborne, he said, Outpost can still offer low-cost shipping, but not free. “We’re only going to be able to stay here if we stop giving away what we can’t afford to give away. The customers recognize that.”

Not everybody is charging, of course. For instance, although telephone directory service 555-1212.com recently started imposing a fee of as little as $9.95 a month on heavy users to make up for declining ad revenue, well-known Switchboard.com has no plans to do the same.

“We make our revenue from three sources: advertising, syndication and licensing,” said Switchboard CEO Doug Greenlaw. “We went public in March 2000, we have lots of cash on hand, and we have a good business plan. We won’t be charging the public. The companies that are trying to do that, that’s OK as long as somebody else in your category isn’t giving it away for free.”

Many others, however, are at least dipping a toe into the waters of fee-based Web sites, especially for premium services. Giant Yahoo Inc. sells about 15 services, including a long-standing offer to increase e-mail storage space. This year brought four high-profile for-fee services: Yahoo by phone, Internet auction listings, phone calls through Yahoo’s instant messenger service and a market tracker service.

More such offerings are expected.

But it’s not just the big guys asking users to pull out their wallets. Small sites, such as Latinola.com, which covers activities of interest to Latinos, started asking people to pony up this year.

“It’s just a voluntary thing, but so far 200 people have sent in $25, and they’re eligible to win some prizes like CDs and concert tickets,” said Abelardo de la Pena Jr., who runs the site.

He said he has received little negative response from Latinola’s roughly 4,000 users--a sign that the Web site is important to people.

“This showed to us that there is real value in what we are doing,” he said. “I’m very pleased that we’ve had this kind of response, and that people are happy to help support something they find useful.”

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Fewer Freebies

Companies that have started charging for services that used to be free: What they’re charging for

555-1212.com: $9.95 a month for up to 80 directory searches

Photoloft.com: $2.99 a month to store snapshots online

RealAudio.com: $9.95 a month for baseball and basketball broadcasts

Salon.com: $30 a year for advertisement-free content

Yahoo: 2 cents a minute for domestic Internet phone calls

Companies that don’t charge: What they offer

Switchboard.com: Telephone directory

Mapquest.com: Maps and driving instructions

Bigbook.com: Telephone yellow pages