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Someone Has to Pay the Freight


Late last fall, heavy users of Juno Online Services Inc.'s (JWEB) free Internet-access service suddenly found it harder to go online during peak evening hours. The misconnects were no technical glitch. Juno was deliberately curbing heavy hitters' access to prod them into switching to its $14.95-a-month plan. The reason: A survey of its subscriber base revealed that a mere 5% of users of its free service accounted for more than half of Juno's online costs. "The heavy users have to be prevented from eating us out of house and home," says Juno Chief Executive Officer Charles E. Ardai. Juno has 4 million subscribers, 21% of whom pay.

Juno's move was a clear signal that after all these years and billions of venture capital dollars, the formula for making money on the Net is still trial and error. Pressured by investors to boost sales and profits, Web companies increasingly are charging for the access or shipping that they once offered gratis. E-tailers are jacking up prices on goods they peddle online. A legal challenge is forcing Napster Inc., the pioneering music file-sharing service, to charge for copyrighted music downloads. And Net players from Amazon (AMZN) to Yahoo! (YHOO) are coming up with new fee-based services to generate more revenue. "People who once gave something away are now trying to charge for it," says AOL Time Warner Inc. (AOL) Chief Operating Officer Robert W. Pittman. "The chickens have come home to roost."

And what a messy roost it is. For every AOL, Juno, or CNET (CNET) that is building a business on subscriptions, advertising, or e-commerce, a raft of newspapers, travel sites, and investor channels is draining cash from old economy parents or investors. The romantic notion of the early Web as open-to-all cybermarket for ideas and goods has been eclipsed. In large part, that's because the ads that were supposed to foot the bill for the democratic digital bazaar simply aren't delivering. "The free Web was a temporary aberration," says Jakob Nielsen of Norman Nielsen Group, a Web consulting firm in Fremont, Calif. "It is just not sustainable."

While vast stretches of digital roadway are likely to remain free, Nielsen predicts the Net will evolve into even more of a toll road over the next five years. "More and more of people's time online will be spent on paid experiences," adds Bruce Kasrel, a senior analyst at Forrester Research.

FEE-FOR-ALL. Internet access companies are the bellwether. Today, only three--Juno, NetZero (NZRO), and Kmart-owned BlueLight.com--provide access for free, and all push pay services, too. Analysts expect AOL to hike its $21.95-per-month subscriber fee for dial-up service by $1-$2 later this year. High-speed broadband connections are boosting Internet access bills to as much as $49.95.

The ease with which consumers could bargain-hunt on the Web was supposed to drive down prices. But that's not happening. Amazon, like other e-tailers, is scaling back free shipping offers. And it has joined Buy.com (BUYC) and other Net merchants in boosting prices for such things as books or electronics gear. Karen B. Clay, an assistant professor of economics at Carnegie Mellon University, says studies show consumers don't often use price-comparison "shopbots" and aren't that price-sensitive. Many are willing to pay more to shop at sites that offer convenient services, such as one-click shopping, she says. But it may be getting harder to push through price hikes in cyberspace. Prudential Securities analyst Mark Rowen figures Amazon's price hikes are a key reason U.S. sales of books, music, and videos grew only 11% in the fourth quarter.

If the early vision of the Web was a free bazaar, then today it's more akin to a suburban mall where counters near the entrance are stocked with the most tempting--and profitable--stuff. Log onto America Online, and you'll be greeted with entreaties to sign up for its $4.95-a-month e-mail service or its $19.95-a-month mobile e-mail. Soon to come: a subscription music service and pay-per-video. Forrester's Kasrel expects upscale retailers to set up fee-based clubs for trend-conscious shoppers who crave discounts, say, on Prada handbags.

Electronic cash registers won't be ringing all over the Internet. The Web will still be a great place to do free comparison-shopping for everything from cars to homes. Charging an entry fee would defeat the purpose of luring potential buyers. In these cases, success will depend on linking the shopping experience to the buying decision. Then the dealer or agent can figure out whether their Web site is generating enough business or whether the independent site is worth paying a commission to.

FREEBIES. Perhaps the stickiest dilemma involves what the Web world has come to call content: news, information, entertainment. Once broadband rolls out, music and movies, which have found a paying audience in cable TV, will probably command a price online--if they can skirt the Net pirates. News pays for CNET, which specializes in tech news and buying guides and earns money from ads and commissions. Likewise, Consumer Reports has enough paying customers for its online product rankings to turn a profit. But elsewhere in the Web media world, profitable sites are few and far between. Generic data widely available elsewhere--such as news, weather, and stock quotes--are probably doomed to be giveaways used as teasers for paid content. "With the exception of porno sites," says Carnegie Mellon's Clay, "paying for content hasn't worked yet."

The prospects for media sites would be rosier if the Web had a micropayments system. Then sites could charge, say, 10 cents a page and skirt surfers' reluctance to buy a subscription to a site they may visit only occasionally. The big stumbling block is that the credit card system, the mainstay of Web shopping, can't handle micropayments yet.

Just as it took years for cable companies to figure out how to hook Americans on shelling out extra for new channels, a period of trial and error is inevitable for Web companies. The end result, experts say, will be similar, too: More and more of our time online will be a paid-for experience. By Amy Borrus in Washington


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