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Is the Web's Free Ride Over?
Dot-coms, both big and small, have realized that giving away products and content for free is not a smart business model. Slowly but surely, online businesses are moving from free to fee-based subscription models. Is this the end of Internet's free days?

by Isabel M. Isidro
Managing Editor

The Internet crunch has put to test the accepted practice of offering everything for free on the Web. Sites offering free information, free web sites, free shipping, and other Web freebies are shrinking in numbers, if not disappearing totally.

(article continued below ...)

Both big and small online businesses have realized, some more painful than others, that running a business by giving away free products is not workable. There are overhead expenses to pay -- salaries, rents, marketing costs, and others. Small online entrepreneurs, even the part-time hobbyists, are not spared from expenses: they need to pay for server or hosting fees to continue their operations.

As costs increase, advertising revenues have steeply declined making it difficult for a business to survive by displaying banner ads alone. To cope with the increasingly difficult market, dot-coms are cutting their budgets by laying off or reducing salaries of their staffs. Many have already closed their businesses altogether.

As a result, online businesses are taking a mad scramble to find other means to increase revenues. Yahoo announced that it is going to expand its porn offerings (only to retract it after a deluge of negative feedback). NetZero, a free Internet provider, has reduced its free offering to 40 hours and introduced paid subscriptions. Bizland now charges for Web hosting it used to provide for free to small businesses. Salon.com, the online magazine, will now carry fee-based premium content.

What used to be free is now slowly changing to fee-based.

The Dilemma of the Content Provider

Content sites, such as portals, news sites, community sites, and online magazines, have been most affected by the market's downturn. Users visit their site, read their content or participate in their community-building activities, without paying a dime.

Unlike e-commerce sites that sell products online, content sites rely mostly on advertising to support their businesses. Content sites are designed to provide content, not to sell things: just like newspapers are designed to present articles, radio is designed to showcase music, and TV is designed to entertain.

As online content businesses struggle to stay alive, one trend is emerging: the days of free content may be coming to an end.

The low ad rates and poor affiliate returns have forced many small entrepreneurs to face two options: to charge or go under. The state of running a free site only to earn $1 for every 1,000-banner impression per month can only last so long. With the current slump in ad market rates, a site generating 100,000 page views a month can only expect to earn $100 - an amount that is not even enough to cover dedicated server fees.

Even small online entrepreneurs are finding it hard, if not impossible, to maintain quality and quantity of information without any source of income. Anything more comprehensive than the average home page requires a huge amount of time and money to keep running.

The dilemma, however, lies in the fact that people are used to getting everything for free on the Internet. To begin charging people for use of content entails changing established consumer behavior. It will take time for an average visitor to get used to the idea of paying for something that was once delivered for free. Why will they pay for something that they can get free elsewhere?

What Can a Small Online Entrepreneur Do?

While traffic of many small sites has increased five-fold or more, ad revenues have steadily decreased. Hence, small publishers feel hard-pressed to change the way they do business online.

To stay alive, they need to act fast. If the big boys feel compelled to restructure their own operations, so do the small publishers. Below are some options being explored by many small publishers, some of which have never been tried before:

1. Shift to a subscription-based model. Many small sites are seriously considering charging for access to their content, either through a monthly subscription fee or a one-time access fee. The success of WSJ.com in creating a subscription-based model has inspired both small and big publishers to explore the same approach.

Some publishers are looking to combine free content with fee-based content. A significant level of content will remain free, while paying members can have access to their best content with no banner ads and other "special" features. Using this strategy, the site can still generate the same amount of traffic overall, while subscribers enjoy special treatment and publishers earn revenue to pay for the bills and time spent developing the site.

For this model to succeed, however, a small site with no strong brand must cater to a niche market with information that nobody else has. Users will not likely to pay the subscription fees if the site offers information similar to a hundred other free sites.

The site has to be dynamic, comprehensive, and the data needs to be accurate. It must provide users with a sense that they belong to something special in order to increase the perceived value of the site.

The drawback, of course, is that the shift may turn-off a lot of people, resulting in a significant drop in traffic. However, proponents of this model believe that having 100 paying visitors per day is still much better than 100,000 free ones.

2. Holdout a virtual "tip jar" to satisfied readers. A number of smaller sites have thrown pride to the dustbin and have started to beg for donations just to keep their sites afloat. Visitors are requested to donate any amount - from $1 to $1,000 - if they are satisfied with the site's offerings and content. This is a novel and fun idea that might work for a small site, but it's unrealistic and unreliable for big-budget companies.

Amazon.com, smelling a huge opportunity in this area, has offered to collect donations in behalf of these small publishers. Called the Amazon Honor System, Amazon lends its name, reputation and patented payment technology to allow publishers to accept voluntary payments - for a fee, of course. Amazon.com takes a 15% cut, plus $0.15. The program also assists small sites needing help in charging for their content.

3. Cut down costs. Like any other business facing tough times, small sites have looked to cutting down expenses to survive. Some lowered their hosting costs by moving from dedicated hosting to sharing a server space.

4. Widen revenue streams. Small content sites are also looking to other sources of revenues to improve their bottom lines. Some are adding a slew of affiliate programs that can both compliment their site and increase revenues. Others are offering their content for syndication to bigger sites. Still others are developing a CD version of their sites for sale.

While every online business is thinking hard how to make money, change may be inevitable on the Internet. Users may learn to start accepting that the free days of the Internet may be over.



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