The internet goes from free to fee

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The internet goes from free to fee

By Matthew Buckland

If only the internet had been invented by a businessman. It’s a common lament of internet publishers who are buckling and wheezing under the financial strain of running unprofitable websites.

These are the web publishers who somehow managed to survive the dotcom crash by the silicon of their circuit boards, but have struggled to find solid business models — this despite bringing in huge audiences that even eclipse many profitable, advertising-rich print publications. But the big question for online publishers is: How to make money out of their huge readerships?

Content websites are mainly free — free for all and a complete free-for-all. There is no cover price such as magazines or newspapers. No price is put on interactivity — unlike cellphones, a medium that must have been designed by a businessman because consumers are forced to cough up for interacting with content. In contrast, a reader visits a content website, reads the content, clicks here, clicks there, clicks everywhere and pays zip, zilch, nada, nothing.

The situation is hurting web publishers — hurting them so badly that many are taking the brave, controversial and probably highly unpopular step of forcing their readers to pay for content on their sites. It’s billed as the next step in the evolution of content publishing on the internet and there is hot debate about whether it works or not.

It’s a raging debate which is causing bloody boardroom battles and raising the ire of many early internet pioneers who feel it breaks with the medium’s long and celebrated anarchic tradition of being a free, pervasive tangle of information accessible to all.

Online publishers in the US are well into this strategy. Closing off websites and making users pay is big business in the US, taking many online publishers into an area where few have gone before: profit.

A March 2003 report from the authoritative US-based Online Publishers Association found that consumer spending on online content, fuelled to an extent by the introduction of broadband web access in the US, totalled $1,3-billion in 2002 — an increase of 95% over the previous year. The study also indicates that the number of US consumers paying for online content rose from 10 million in Q4 2001 to 14,3 million in Q4 2002.

The Personals/Dating category surpassed both Business/Investments and Entertainment/Lifestyles to become the largest paid content category in 2002 with $302-million in revenues. The general news category brought in $70-million, while sport content generated $30-million. (Download and read the report at: http://www.online-publishers.org)

And it gets better: Jupiter Research forecasts that the US paid content market will grow at an annual rate of more than 20% until 2007 when it will be worth a massive $5,4-billion.

Quality news site Salon.com, Hong Kong’s South China Morning Post, the FT.com and the Wall Street Journal, to name a few, have all closed their doors and are now insisting that their readers must pay-as-they-read. The Wall Street Journal, in particular, has been the shining success with about 600 000 subscribers paying to log on to the website and read its articles. But there have also been websites in the US that have struggled to implement the strategy with a great amount of success.

South African publishers, except for a few examples, have yet to start playing the paying game in any major way. But the web publishing landscape is about to change and consumers, used to free content online, are going to have to dig deep into their pockets. In the not-too-distant future, next time you point your browser to News24, IOL, Mail&Guardian Online, M-Web and others, you may be required to submit your credit card details and buy a subscription of some kind before you read an article.

Yet the strategy is not entirely new to South Africa. Early pioneers of the strategy, Financial Mail and M-Web, ran into fierce resistance and criticism, leading to a swathe of bad publicity for closing their websites to paying readers.

When Financial Mail Editor, Caroline Southey, closed off the magazine’s website in early 2001 soon after she joined the title, she came in for quite a bit of stick. It’s a move she admits may have been “too brutal” and sudden at first, but the prevailing logic was: why should we give the same content away for free on the web that our magazine charges for offline?

“I still think there is no justification for offering your entire title free on the web, so I don’t regret the decision at all. There seemed to be an illogicality in all of this: if readers want to read all content from the magazine then they should pay for it. I was potentially damaging the print product’s subscriber base because people wouldn’t bother to subscribe if they could get it for free,” says Southey.

It’s a quandary most print publishers find themselves in. In the dotcom heyday it didn’t matter if print publications lost readers to their online cousins, because the theory dictated the advertising revenue would follow readers to the internet.

The pundits pointed to the projected online advertising millions, billions and gazillions and the graphs all pointed skyward. But of course this hasn’t quite happened and the lion’s share of advertising money has largely stayed with print, television and radio. Publishers found they were potentially losing their audiences to a content medium that did not have a sound business model and bunkered down, retreating to their tried-and-trusted business models in print and other more established media.

Online advertising accounts for less than half a percent of the South African advertising market, which is below international averages. Although that figure is growing and is showing signs of improvement, it’s still hardly enough to sustain big web operations like News24 and Independent Online (IOL).

“Nobody has worked out a revenue model through putting information on the net and this is the underlying problem with all of this. No publisher has come up with a model on the net that generates money…. Besides the retail websites, the net is not generating revenue. It’s a huge headache. It’s an intractable problem and for dailies it’s worse. You can get a huge amount of traffic to your site but it doesn’t generate revenue. There isn’t a business model out there,” says Southey.

Surprisingly, Southey says there has been no major shift in magazine subscriber or reader patterns since closing off the Financial Mail website. The website did experience a dramatic drop in readership but Southey claims it has now recovered to levels before the site was blocked.

Most importantly, however, Southey says the website is not losing money and is generating some revenue via online advertising, albeit off a small cost base. She says the most sensible system is to make a website a lot more integrated with its print product and use it as a marketing tool to bring readers to you: “You tease them, but if they want it they will have to pay.”

Similarly, Independent Newspaper’s internet presence IOL started a tentative lockdown of their content in early 2003, based on newspaper subscriptions for their branded newspaper sites such as The Star, Cape Times and The Mercury. While most of IOL and its archives remain open and free, selected areas of these newspaper sites are only accessible to readers who have subscriptions to the print newspapers. The idea here is that if you want the content, you buy a newspaper subscription.

Says IOL Managing Director Howard Plaatjes: “Currently we are not trying to attract online only subscribers but rather subscribers to our print products… The titles will be looking to lock down their archives in the future…I am in favour of the industry locking down their archives but each publisher needs to structure their own destiny.”

Media24, as a group, say they are looking at a similar model with its Afrikaans newspaper titles. Already, the group has begun a registration across these sites as a precursor.

But the burning question is how do you get users to pay for something they once had for free? M-Web Studios General Manager and South Africa’s Online Publishers Association (OPA) Chairperson, Russel Yeo, believes that publishers will eventually succeed in broaching any resistance consumers have to paying for content on the net.

“There is a strong belief that the ‘spirit of the internet’ is a religious right to get things free. Look at the impact that has had on the music industry,” says Yeo.

In fact, he says the charging model is “the only way” the general internet publishing business can be made to work and points to the US where it has “succeeded very strongly” where, for example, subscription revenues are a key growth area for Yahoo!.

They will pay, says Yeo, because “consumers aren’t stupid. They know in the end they must pay for quality… it’s no different from the emersion of pay TV. People were just as sceptical then — but today pay TV dominates, and free TV has found its niche, which requires audiences in the 100 millions, or very local catchments.”

Like Financial Mail, M-Web was to some degree an early adopter of the paid-content model when it controversially closed its site partially in February 2001 to paying M-Web subscribers only. The sites behind this subscription zone also included SuperSport Zone, News24 and the Mail&Guardian Online, which is 65% owned by M-Web.

As an indication of just how sensitive the issue is for some, the move at the time caused a well-documented, high profile spat between the Mail&Guardian Online and M-Web, at one time even prompting staff walkouts.

Then, office LAN users and overseas users still had free access to M-Web and the block only applied to competing ISPs. But now M-Web is looking at a more aggressive strategy that aims to charge office users and overseas users.

It’s the overseas readers in particular that News24 have set their sights on.
News24 Publisher Cobus Heyl, who has recently returned from a “Digitial News Management” conference in Washington, says the news site plans to make their pound and dollar-rich South African readers pay their way. It’s an audience that makes up a surprisingly big 30% — once reaching 40% — of the website’s purported 975 000 readers.

“There are several reasons for targeting the international market: obviously there is a huge cost associated with bandwith from international visitors and the ability to moneytise that international audience through advertising is limited. Your South African-based advertiser does not necessarily want to target the international market because they are of little value to them. While there is a slight interest in the international market it is not nearly as big as the South African market,” says Heyl.

Publishers in South Africa are desperate to rein in their international readers who create backbreaking bandwith costs. It’s one of the biggest, if not the biggest, cost for the Naspers’ news portal says Heyl. He says that there are no immediate plans to charge local users — so the move marks a tentative toe-dipping exercise for News24 into the charging-for-content arena.

It makes sense to hit the pockets of international readers because for many of them, the internet is their sole link to news from South Africa. Heyl is banking on the fact that international users will have little choice but to pay up for this news simply because there are few alternatives they could get their local news from while overseas. News24 believe that their Afrikaans-language content is the ace up their sleeve: this may just be their unique selling point that tempts expatriates to part with their hard currency.

The sceptics have dubbed the strategy the “one percent solution” – the approximate percentage of readers that online publishers around the world have so far converted from “free to fee”. That nasty, singular percentage point may be miniscule, but it shows just how determined online publishers are to start making money, even if it means alienating the other 99% of their audience who refuse to pay.

Supporters of the strategy will no doubt point to their healthier ledgers.

“You are going to lose readers and you are going to lose loads of them, we accept that. We took a very conservative line and that is one percent, and besides, if you cannot monetise that audience they do not do your bottom line any good. It does not leave us much of a choice… if we hang on to that audience it won’t do us any good because it is going to chase up our costs. Of course, it’s great to boast huge audience numbers but then it’s very difficult to explain the bottom line if they associate cost. So with restriction of access the challenge is to retain readers that are valuable to you,” says Heyl.

Internet sites have raked in huge readerships over the past few years but find themselves in a strange predicament where they actually don’t want any more readers. IOL recently claimed to have broken through the landmark one million reader threshold a few months ago.

Adds Yeo: “For general publishing, more users are just more cost. The more you have, the more money you lose. The same is often true, for example, of niche magazines, but on the free internet you can’t limit the number of users. Also a flood of users degrades the experience of the average user.”

Heyl is quick to point out that charging for content alone won’t sustain the business and that there is still something to be said for online advertising as part of your business model.

“You cannot proclaim the advertising model dead because there are encouraging signs. We have seen good year-on-year growth, albeit in a flat market and off a low base. News websites are the number one medium to reach users at work. Online advertising is about 4,9% of all advertising in the US. Ours is about 0,5%. The UK’s online advertising share sits at about 1,5%,” explains Heyl.

“Even though advertising would remain one of the main revenue streams for news websites it is not enough to sustain them. You have to look at all your revenue streams and ‘pay-for-content’ is one of these multiple revenue streams, but not the only one.”

Heyl’s statement is backed up by Jupiter Research which forecasts that, despite massive growth in online paid content, internet advertising in the US will continue to be the main money-spinner for online media outlets.

He mentions that a good way to charge consumers may be a system whereby major South African web publishers form a network and insist on payment together as a united front. That means users pay once and get access to a bouquet of content websites, not too different from the idea that you pay once for satellite and get access to a range of channels.

Readers may be more willing to pay for a service like this because of the enormous value they would be getting. Such a model also limits the available free alternatives a reader could switch to should websites start charging and therefore make it harder to for a reader to avoid payment.

Making people pay is the hard part. Publishers will no doubt price any pay-for-content service cheaply to draw users to it and test the waters. ISPs like M-Web who already have a billing system in place are well-placed to charge users by adding small amounts to their monthly dial-up bills should they wish to buy content. One solution publishers could look at is harnessing the power of the cellphone where users could access articles after sending an SMS or making a call. The consumer is then billed via the cellphone service provider.

Heyl thinks the jury is still out on charging for content: “I think there is a lot of debate around on whether it is feasible or not. The models that are starting to develop have free components as well as paid for components. I don’t think anyone has completely got the model right yet…”

Matthew Buckland is the editor of the Mail&Guardian Online http://www.mg.co.za

NOTE TO SUBS: You may want to use this graph below referred to in the article. It was sourced from http://www.online-publishers.org – you probably need their permission…

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