But hold off on the champagne, Luddites. There’s a little problem with that analysis: it’s wrong. True, success is by no means guaranteed on the Net. And yes, Web profits are trickling in as slowly as video clips downloaded over a phone line. But a close look at commercial activity on the Web tends to back up the hypesters, not the balloon-poppers. There’s plenty of evidence that the Web is indeed on its way to becoming the major business story of our time. Consider some recent signposts.
A new Ernst and Young study, based on a survey of the Magazine Publishers of America, reports that, instead of shutting down their unprofitable Web sites, publishers intend to put more money into them. Most of them are planning profits by 1998, and by the year 2000 they expect their Web sites to deliver 10 times their 1996 revenues.
Another study, released last month by CommerceNet/Nielsen Media Research, reports a “startling increase” in Netheads who use the Web for shopping. And that’s just the beginning–Forrester Research estimates $6.6 billion in online sales by the time the millennium speedometer turns over. “All the graphs are up, up, up,” says Forrester’s Bill Bass. “Those [negative] murmurings are ill conceived.”
Most businesses on the Web are young and aren’t planning for profits right away. But some are making money even without selling pictures of naked people! (Those selling such pictures are, of course, raking in big bucks.) Even some costly sites like USA Today’s elaborate operation and the flashy CNN Interactive are reporting operating profits in recent months. And the computer manufacturer Dell racks up more than $1 million in sales per day.
While some businesses moan that the Internet culture regards paying for information as almost a mortal sin-even Microsoft’s much-touted Slate magazine backed down from charging readers fees-media giants are betting that people will indeed pay for Web content. The Wall Street Journal boasts that 70,000 readers fork over an annual fee to subscribe to its interactive edition. And just last week Disney announced a subscription-only Web site called Daily Blast, and then purchased a controlling interest in Starwave, the Web content operation that includes ESPN’s sports site. “The time is ripe for us to be launching our [online] products,” says Disney’s Jake Winebaum.
In other words, the future hasn’t changed, a circumstance that will bring little comfort for those millions of you who had hoped that if you ignored the Net, it would just go away.
So why are some sites, including the gay-oriented Out.com and the edgy Spiv, going dark.’? And why are some people losing heart? Two reasons. First blame goes to a gold-rush mentality, particularly in the investment community. A lot of Internet businesses are funded by venture capitalists, and after megasuccesses of Internet stock offerings like Netscape, the VC crowd has been urging companies to go public long before a company even contemplates its first profitable quarter. The market began to balk, and some offerings, like Wired Ventures (which includes the magazine and the Hotwired Web site), had to be pulled back. Similarly, too many big businesses were conned into thinking that simply by throwing a lot of money into creating an elaborate Internet presence, profits would be quick in coming, or at least the losses would be tolerable. They didn’t seem to understand that, just as in the “real” world, starting a huge new business requires deep pockets, patience and a raison d’etre.
The second reason is that, like any new medium, the Internet requires new approaches, and people are still scrambling to figure these out. The Net’s commercial promise hinges on its interactive nature and its ability to allow advertisers and retailers to target customers, even those tucked away in the most obscure demographic cubbyholes. But instead of devising strategies to exploit those characteristics-an admittedly difficult and somewhat risky process-too many businesses have simply grafted business plans cloned from older, less nimble media.
The most glaring example of this is the way people regard advertising on the Web. Since there’s no good way yet for people to pay for content by the page, online publishers generally expect to make back their investment by advertising. But since everyone on the Web wants to sell ads, there’s a lot of competition for the relatively modest amount of advertising (about $300 million in 1996) that corporations have budgeted for the Web. Some advertisers, accustomed to the mass-market reach of television, are disappointed at the relatively meager number of eyeballs they attract on the Web. Will they bail?
Publishers don’t think so. In fact, many profess to be doing fine. “The main thing you have to do is build circulation, just like any magazine, and you can bring in more advertising,” says David Talbot, CEO of Salon, an award-winning online mag. The Wall Street Journal claims that some of its space is sold for weeks in advance. And in what may be the best news of all for those hoping to build ad-supported businesses online, Yahoo!, one of the Web’s most ambitious sites, is now reporting a profit.
In the future, watch for the ad industry to figure out how to take advantage of the Web’s ability to identify who the user is-and to precision-aim its ads. (You can get a little taste of this now by using some search Web sites: type in “car buying,” for instance, and your search results are accompanied by a Toyota ad banner.) Analysts predict advertisers will drop about $5 billion on the Internet by 2000. That is half of what all print magazines currently get-not bad at all for a new industry.
Bezos understands that the Web can allow modest start-ups to build up their brand names-and become the giants of the next century. But they’ll do this only by finding the right means to exploit the Web. “Online commerce does take significant investment and time,” says Cliff Sharpeis, CEO of Garden Escapes, an Austin, Texas-based Web site devoted to servicing the recent boom in dirt-heads. “A lot of our time is focused on how we can get consumers to change their behavior and trust, and look to the Internet as a viable consumer or retail channel.” Finally, some firms have found the Web a tremendous boost to their business without having to collect a dime from customers or advertisers. The best example is the FedEx Web site. You can track your packages on it, and every time you do this, it saves a few bucks for FedEx. How much? The International Customer Service Association calculates more than $1 million a month saved in people-hours.
The FedEx experience signals not just savings, but a new way of dealing with customers. “The Internet isn’t as much a publishing medium as it is a two-way-communication medium,” says Kyle Shannon of Agency.com, which builds Web sites for big businesses. “To make the most of it, you have to be ready to change. We’ve been helping our clients develop pilot programs in conjunction with Web sites-with MetLife, we’ve started online price quoting.” It’s like putting a toe into the waters of change-and preparing for the true sea change ahead, when the Internet rules the world of commerce.
The bottom line? The Great Web Shakeout is only a shrug. Even Russell Collins, the founder of American Cybercast, which lost a heap of money producing The Spot (which despite the company’s bankruptcy can still be viewed), considers himself merely a random casualty in the pioneer days of what will be a world-changing medium. “It’s going to happen,” he says of the boom in Internet profits. “There’s just the question of when.”
