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SMART ANSWERS
By Karen E. Klein
FEBRUARY 17, 2000


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Q:  I am creating an Internet startup, and I am confused about whether I should charge a fee for access to my site. I see companies like Yahoo! and AskJeeves.com, but I can't understand how they make money. They don't seem to be selling products or charging a fee.
--S.L., Stockton, Calif.

A:  Welcome to the Internet economy. You have put your finger on its fundamental paradox. Everyone agrees that it's a revolutionary business tool. Yet few have been able to make money from it. Indeed, there's even a consensus in some circles that it's not necessary to make money from Web businesses -- at least for now. It's enough to drive traffic to your site and hope ad revenues will suffice. That works as long as you have regular infusions of capital -- yours or someone else's -- to keep your company going. Of course at some point, Web businesses will have to be self-sustaining. But for now, their potential alone has kept stock prices high enough that investors are more interested in capital gains than profits.

The problem is that consumers have come to see the Internet as a source of unlimited, free information. As a result, unless you have an extremely strong, proven brand, you will have an uphill battle trying to get visitors to pay for your service. "The Web is first and foremost used as an information resource on a wide range of vertical and horizontal topics that were previously almost impossible to access, concatenate, or update easily. The vast majority of this consumer-oriented information needs to be free -- or perhaps a blend of free and pay-per-use options -- in order to guarantee return visits," says Jonathan Hirshon, whose Silicon Valley-based public relations agency represents many Internet companies.

For most content sites, revenues come from advertising, partnerships, and the sale of goods and services that are related -- sometimes only peripherally -- to the primary focus of the site. For most young companies, those sources aren't sufficient to cover costs -- especially given the expensive marketing they must do to rise above the masses of similar sites.

Charging a fee for information is probably not going to work, unless your information is so controlled and proprietary that your site visitors absolutely cannot get it anywhere else. Even so, "you'll be putting people off by charging them at the front gate," says Rob Frankel, an Internet-branding expert whose Los Angeles-based firm is called RobFrankel.com. "It's much better business to give some information out freely, so that people will come back to your site and perhaps upgrade and choose to pay for additional content if they need it further. You'll cultivate tremendous good will that way."

Andrew Kraft, executive director of the Association of Internet Professionals, a professional society based in New York City (www.association.org), agrees. "Charging subscription fees for content sites is an unproven business model." Even some big-name sites have tried and failed to get paid subscribers, Kraft points out. "USA Today has got a very powerful brand, and they failed outright at attracting users for a pay-per-view model. Britannica.com also tried putting in a subscription or pay-per-view and failed, then came out with a free site because they had to," he says.

For now, your best strategy is to post information free of charge, perhaps as a carrot that will bring visitors back to you for additional information or services that they will pay for once they're convinced of your expertise. The need to offer free content on the Web may not be permanent, however. "I truly believe this is a temporary situation," Kraft says. "If you look at the Web five years down the line, I think you'll see more people willing to pay for very specific content."


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