BUSINESSWEEK ONLINE : MARCH 22, 1999 ISSUE
BUSINESS WEEK E.BIZ

Building Global Communities
How business is partnering with sites that draw together like-minded consumers

Executives at Warner Brothers (TWX) Online were fed up. For years, they had looked on as fans of Bugs Bunny, Batman, the Tazmanian Devil, and other characters banded together and hoisted brand images and sound clips onto personal home pages in cybercommunities such as GeoCities and Tripod. What really grated was the way the site operators were selling ad space on those pages. ''They were underwriting the cost of copyright infringement,'' fumes Warner Online President Jim Moloshok.

Warner wasn't about to sue its own fans. Instead, in January, Moloshok formed a joint venture with FortuneCity, a fast-growing online community based in London. Together, they created a site called ACMEcity as a beacon for fans around the world. The site has built home pages for 150,000 registered members in two months--luring many of them away from GeoCities and Tripod with giveaways.

Companies like Warner are finding much to love about online communities. Once the frontier towns of the Net, these sites have blossomed into digital metropolises. Their combined membership probably exceeds 25 million, if you count some 16 million subscribers to America Online Inc. (AOL). Few of the sites are profitable as businesses. But companies are racing to partner with online communities--or build their own--in hopes of solving two of the toughest challenges on the Net: Reaching customers all over the planet and understanding who they are.

Like the Internet itself, online communities are often global from Day One. As Net-based communications obliterate national boundaries, these sites draw together like-minded individuals who would never converge in the real world. A unit of AOL called ICQ, for example, provides instant messaging to hip young members scattered from Fresno to Finland, and provides space for their home pages. Jupiter Communications figures 45% of new home pages at community sites are now going up outside the U.S.

Just as important to businesses, communities thrive on experimentation. First, they popularized online chat and ''buddies'' networks. Today, these neighborhoods are incubators for trends in E-business. ''We've built massive Web sites with millions of relationships to consumers,'' says Bo Peabody, President and CEO of Tripod, a trendy community owned by Internet portal Lycos (LCOS). ''Now, we're finding ways to make those relationships profitable.''

The road to community business is already strewn with advertising. In both GeoCities and Tripod, banner ads blink and scroll across most prominent Web pages. But like neighborhoods in the real world, online communities have unique sensibilities. So site owners and marketers are struggling to invent what Peabody calls ''commerce plus compassion.''

INFO IN EXCHANGE. To see how it works, consider the reasons cybernauts flock to communities. Mostly, it's the desire to know your neighbors and interact with them. Many sites encourage this by offering free or discounted real estate--meaning storage space for personal home pages on a computer server. Many sites build the home page for new members--asking for nothing in return except personal information on a registration form that includes name and address, marital status, and hobbies.

Site owners can use this information to fine-tune the online experience by making advertising, contests, and rewards programs more relevant. At sites for music and film buffs, the banner ads flog online music stores and DVDs. These vendors usually can't access the sites' registration lists. But site owners will give them enough general data for them to target ad pitches.

Even without registration details, marketers on community sites are swimming in info. They can visit neighborhood chat rooms and bulletin boards or browse photo galleries and music rooms on personal home pages. With smart software tools, vendors can parse these snippets for tips on consumer trends. Sometimes, site owners do it for them. Exploiting such tools, Tripod has managed to sort over 85% of its Web pages into categories.

When it comes to raising money, however, most sites are looking beyond banner ads. Tripod's owner, Lycos, is now merging with USA Network to create a sprawling conglomerate that includes an online auction site called First Auction, TicketMaster Online-CitySearch, and a separate community called Angelfire. As these properties become integrated, Tripod and Lycos will be able to aggregate member purchasing power to win discounts on consumer products and services. First Auction will help homesteaders conduct personal auctions from their home pages. ''These online properties will link up to form massive electronic buying and selling chains,'' predicts Tripod's Peabody.

Companies like Warner that run their own sites acquire a precious commodity: knowledge. In return for low-cost giveaways and perks--character images, film previews, and online chat with actors from TV shows such as Friends and Babylon 5--Warner gets personal info galore from the registration forms.

With that comes responsibilities for site owners. Fresh in everyone's memory is the scandal that engulfed GeoCities last summer, when the Federal Trade Commission accused the site owners of selling members' personal information to outside marketers. GeoCities denied the charge but agreed to bolster privacy enforcement.

Even without abuse of privacy, however, advertising can rub homesteaders the wrong way. Stick a Coca-Cola ad in a chat room, and participants will quickly start flaming Coke, notes Jupiter analyst Patrick Keane. So when Japan's Fujitsu Ltd. introduced advertisements on its 3-D site called WorldsAway, it tastefully disguised them as objects. Click on a flower pot, and it takes you to PC Flowers. World manager Timothy J. Lavalli, a PhD anthropologist, is now building incentives into the fiber of the virtual world. For example, members who spend $50 or more in on-site E-commerce might find their $9.95 monthly fee waved, he says. Advertisers also pay more when they see that members are willing to spend money.

A newer community called CyberSites goes even further: It tactfully surveys members before exposing them to ads, negotiates group discounts on products that are sold on-site, and allows each member to edit his or her online profile to accommodate shifting tastes. Step by step, companies and customers are learning to be neighbors. In a community, they can also be partners.

BY NEIL GROSS

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