Technology

LinkedIn Joins ESPN, Skype in Shifting from Free to 'Freemium'


Sites that initially gained users with free content are now boosting sales with features you have to buy

By Ari Levy and Greg Bensinger

(Bloomberg) — LinkedIn Corp., Walt Disney Co.'s (DIS) ESPN, Skype Ltd. and other Web sites, which reeled in users with free content, are now boosting sales by adding features that customers have to pay for.

LinkedIn introduced a product last month that helps recruiting agencies scour the networking site for job candidates. In June, ESPN merged its online magazine with its Insider service, which costs $6.95 a month. Skype has added features such as voice mail and calling plans that allow users to dial land-line phones for a monthly fee.

The shift reflects a desire by Web site owners to reduce their dependence on online advertising. Instead, they're attracting visitors with free content and then selling them premium services or subscriptions, a model known as "freemium." U.S. consumers will spend $8.55 billion on Web content such as games, music and dating in 2010, up 13 percent from this year, according to Forrester Research Inc.

"They're finding things that are valuable to people that they're willing to pay for," said Charlene Li, an analyst with Altimeter Group LLC in San Mateo, California. "Diversity in terms of revenue stream is always healthier because they're never dependent on a single stream."

Recruiter Services

LinkedIn said in October that it's ahead of financial targets for this year. While users can create personal profiles for free, the Mountain View, California-based company introduced paid subscriptions in 2005. Those services give recruiters more access to job candidates and provide business professionals with ways to communicate with one another. Prices range from $24.95 to $499.95 a month.

"Professionals have consistently shown a high willingness to pay for unique value-added tools and content," said LinkedIn Chief Financial Officer Steve Sordello. The company doesn't disclose its revenue or the percentage of users who pay for the service.

A feature called LinkedIn Recruiter, introduced in November, makes it easier to search for workers and send messages over the site. Prices vary depending on the number of subscriptions and job listings included.

Spending for online content in the U.S. will increase 9.3 percent a year on average through 2013, reaching $10.8 billion, according to Cambridge, Massachusetts-based Forrester (FORR). While new revenue opportunities are emerging, advertising will remain the biggest source of growth, Forrester predicts. Ad sales will rise 17 percent a year on average to $47.4 billion in four years, the company estimates.

ESPN Online

ESPN, the sports cable-TV network and Web site owned by Burbank, California-based Disney, started charging for ESPN Insider in 1998. Subscribers have more than doubled since 2005 and number in the hundreds of thousands, according to ESPN spokeswoman Kristie Chong.

Sports content also has allowed The Milwaukee Journal-Sentinel, owned by Journal Communications Inc., to charge for a service called Packer Insider. Started in 2001, the feature focuses on the National Football League's Green Bay Packers.

Pandora Media Inc., a music service that lets people listen to songs online for free, added a $36-a-year product in May that features better audio quality and no ads. The company still generates more than 90 percent of its revenue from ads targeting customers who use the site for free, said Peter Rip, a general partner at Crosslink Capital in San Francisco.

'Huge Difference'

"When you pay a subscription on Pandora, you get a higher-quality digital music feed," said Rip, whose firm is the biggest investor in Pandora. "You can hear a huge difference when it goes through your home stereo system."

Variety, the Hollywood trade publication owned by London-based Reed Elsevier Plc, started requiring some visitors this month to sign up for a subscription after they browse two pages. The freemium news model has worked for News Corp.'s (NWS) Wall Street Journal, which has more than 2 million paid customers, according to its site. The subscription costs about $100 a year.

The newspaper's success hasn't been replicated by competitors. That's because so much news is available for free and charging for it reduces readership, making the pages less attractive to advertisers, said Steve Hasker, president of Nielsen Co.'s media and advertising products group in New York.

Of the top 25 newspaper sites visited by Internet users in the U.S., only The Wall Street Journal charges for access to stories, according to ComScore Inc., a research firm in Reston, Virginia. New York Times Co. (NYT) abandoned its last paid-content effort in 2007.

Expect Free

"We've trained people to expect news content, and increasingly video and audio, for free," Hasker said. Advertisers want "eyeballs and large audiences."

Like LinkedIn, Monster Worldwide Inc. (MWW) seeks to attract users with free content—job listings and career advice—while charging recruiters. Monster, the world's largest online-recruiting company, introduced a Power Resume Search feature in October that costs 30 percent more than the previous product, Chief Executive Officer Salvatore Iannuzzi said on a conference call that month.

New York-based Monster, seeking to reverse five straight quarters of declining sales, raised the price because the new product uses "semantic search" technology that understands job-seekers' qualifications better than old algorithms that hunted for keywords. The old and new products aren't comparable, Iannuzzi said.

Online Games

The growing popularity of video games on social-networking site Facebook Inc. has led to surging revenue at Zynga Game Network Inc., maker of "Mafia Wars" and "FarmVille." Zynga, started in San Francisco in 2007, lets users play for free. The company makes money from micro-transactions, which allow players to buy virtual goods like a sawed-off shotgun or wheelbarrow to use in the games.

Zynga received a $180 million investment this week from investors led by Digital Sky Technologies, partly owned by Russian billionaire Alisher Usmanov. More than 1 million of Zynga's 230 million monthly active users buy virtual goods, the company said. Sales may jump 69 percent to $355 million next year, according to Justin Smith, founder of the industry-tracking Web site Inside Social Games.

"People will pay for content totally depending on their necessity for content and the ability to get it free online," said Ellen Siminoff, a former Yahoo! Inc. (YHOO) executive and co-founder of education Web site Shmoop University Inc. in Mountain View. "The key thing is the uniqueness of the content."


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