The Free Lunch is Over: Online Content Subscriptions on the Rise


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The one thing we do know about the viability of the online subscription model is that we just don't know much about it yet. And what we do know about getting people to pay for Web content is pretty much what we have known since 1997 and the continued growth of the usual suspects, WSJ.com (over 609,000 subscribers) and ConsumerReports. org (650,000). We already know that consumers will pay for highly valued, proprietary content that either makes or saves them money. For most other content brands, however, it gets more complicated. The fear of competition from free alternatives, the risks of severe traffic loss, and the overwhelming resistance among users have left the fee-based approach more of a distant pipe dream.

Until the bubble burst. With ad revenues flying south for the recession, where they join the still-vacationing venture capital dollars, publishers have had no choice but to make that pipe dream into some kind of business reality. In the last six months alone, major brands such as Salon, SmartMoney, Britannica, Snowball, Heavy, MLB.com, and RealNetworks have rolled out premium services. Even the very model of ad sales success, Yahoo!, has announced upcoming subscription plans. Meanwhile, sites with existing premium areas, Variety, Playboy, and Hoover's, have radically refocused their efforts behind the sub wall.

Conventional wisdom, always fickle under the best of circumstances, has shifted suddenly, and new mantras (more pipe dreams?) have emerged. Users can be "retrained" to pay for content, we are told. As the free alternatives collapse, consumers will have nowhere else to go and will have to concede that the free lunch is over, others say. And then there are others who openly plead with readers to help them stay open by paying up. Nevertheless, when we checked in with many of these sites, the early returns suggest that fee-based services have a long way to go. Except for the rare few, user fees will not replace ad revenues in any substantial way anytime soon. Perhaps, most importantly, fee-based models are most likely to succeed or fail on a case by case, brand by brand, and sector by sector basis. The task at hand is not necessarily "retraining" consumers across the board so much as retooling content offerings and merchandising strategies.

Getting On Point and On Target
There is ample evidence that more users are indeed pulling out their wallets for online content. RealNetworks' GoldPass service for streaming media is about to rival the two big fee-based brands, claiming over 400,000 paying customers. MLB.com says it lured 120,000 baseball fans to pay up for audio sports feeds and live game coverage last season. Playboy's Cyber Club has topped 100,000 members now, and even the perennially beleaguered Salon claims it gathered over 20,000 paying customers in just a few months.

A number of other publishers tend to slip under the radar in press coverage of the subscription model, but some like spoken audio provider Audible think that users are responding to tangible value propositions. The company boasts 10,000 paying customers, roughly 20% of whom pay for longer-term bundles. It has succeeded in selling year-long memberships by bundling in an MP3 player. "There definitely is a groundswell," says Jonathan Korzen, Director of Public Relations. More than a simple value add, that an MP3 player converts users into lucrative buyers, because owners of remote devices "spend about 66% more on a monthly basis [at the site] than people who listen at the desktop," says Korzen. "The killer app is listening away from the computer."

Similarly, laser-targeting just the right audience with precisely the content and tools it needs has helped Hoover's sell 26,000 individual subscriptions to its famous company profile service. Since the mid-90s, Hoover's had marketed to a broad audience of individual investors and analysts. That strategy required massive amounts of free sample come-ons in order to net a decent subscriber base, and even then these buyers churned like crazy. Jettisoning the general consumer market altogether last summer, Hoover's refocused exclusively on the sales and marketing segment because "We want the longer term customers," says Jani Spede, Senior Vice President of Sales & Marketing. By learning precisely how salespeople were making use of the profiles, Hoover's retooled its search and reporting functionality to make life easier for that market. "If you can find out what customers do and build the tools around what makes their life easier, they are happy to pay for staying," says Spede.

Retraining Content, Not Users
Retooling and targeting content may be a sharper strategy than trying to re-educate users that it is time to pay up for material that has been free. In a joint study, Forrester Research and the University of Missouri tested 100 students to see how price points, quality of information, and availability of free alternatives might affect attitudes about paying for online music, video, and educational material. "The whole hypothesis we were testing was 'Is it time to retrain these kids?'" says Ekaterina Walsh, Senior Analyst, Forrester. "To our disappointment, the hypothesis didn't work at all on video or audio content." No matter what the appeal or pricing, students continued to consider free content the highest quality content in these categories.

In a curious twist that will hearten tuition-paying parents everywhere, the Forrester/Missouri study found that students were most willing to pay for educational content, Britannica.com in this test case. This is borne out by the quick growth of online subscriptions at Britannica.com, which gathered 25,000 paying members within three months of pulling its famed encyclopedia content back behind the fee wall last July. "Our initial thought was we would really attract families with kids," says Patti Ginnis, Vice President, Sales and Marketing. But half of new subscribers don't even have children, she finds. They are information workers, teachers, researchers who, like students, have a high need for reliable content. "What we're finding is that people are starting to realize that information is everyplace on the Internet, but information that is good and vetted is a different story altogether," says Ginnis.

High need, rather than high use, may be what really determines a user's willingness to pay. Walsh construes it as a 2-by-2 matrix in which high and low practical need intersects with the high or low availability of free alternatives. Britannica, as well as financial and investment content, are the most likely to attract paying customers because their audiences have a "high need" in a realm of limited free alternatives. For content types, such as music and TV programming, for which there is a low practical need and a high availability of free substitutes, "These people are doomed," says Walsh. "Napster spoiled it for all of them." Things get fuzzier in categories like premium sports, movies, or games (low practical need, limited free alternatives) or classifieds and archives (high practical need, many free alternatives). Here, publishers may be able to leverage their content quality, pricing, and convenience in exchange for subscription dollars. But clearly the onus is on publishers to make their case with carefully targeted packages. Waiting for a paradigm shift in general user attitudes about paying for online content could be a fool's errand.

Content as Merchandise
The old pros of the online subscription game all recommend that publishers retrain themselves, not just their users, and start thinking about their content as merchandise. "Packaging, price, and positioning are very critical to the success of the business," says Spede. Using a "front porch method," Hoovers gives only a slice of its profiles away and then floods the user with links to deeper content requiring payment. "What tends to work best is making sure users are bumping into a wall. Click on that enough times, and you eventually subscribe," she says. By scrutinizing its own logs, it can gauge the conversion rates of unique users to paying customers, how efficiently page views in different free areas of the site result in subscriptions, and even the most effective page positioning for subscription offers.

If content providers are serious about pushing users into the fee-based model, then they will have to rethink the role and format of their free content. For example, the once-massive Playboy.com has been pared down of content and staff and re-focused principally on driving users to the brand's online store and into the fee-based Cyber Club. President Larry Lux says "Cyber Club is our premiere editorial vehicle at this point. Everything we do on the free site is intended to help it."

And the strategy may be working. Paid membership rolls ballooned in 2001, from 67,000 to over 100,000. All of the real eyeball magnets have been moved wholly behind the subscription wall: celebrity nudes (go figure, Darva Conger was a huge hit for sign-ups), behind-the-scenes photo-shoot videos, and bacchanalia coverage (Mardi Gras and Spring Break). More than traditional media, online producers have to think like merchandisers if they want users to buy in, says Lux. "In any other business, what we call the editorial people would be called product managers, whose mission is to develop new products that have new features and benefits and speak to a new audience."

Even if users do warm up to fee-based programs, however, the subscription model doesn't solve the perennial challenge of good distribution and promotion. Those eyeballs still need to find you to buy you. When the multimedia entertainment provider Heavy.com started charging for most of its satirical animation series ("Behind the Music that Sucks") and youth-oriented streaming media, it converted a respectable 2,000 of its regular visitors into paying customers in the first few months. But in order to move beyond that base cheaply, Heavy is taking a page from online porn's book by creating an affiliate network. The company allows others like eUniverse to resell those subscriptions, providing the partners with free sample episodes and a link back to the Heavy premium sign-up. "They get a percentage of the first year subscription," says Simon Assad, co-CEO. "It's a reverse cable model, not dissimilar to what the porn sites do very successfully."

No Golden Parachute
Pursuing a fee-based approach, even in part, is not as easy as dropping the subscription wall. Maintaining ad and pay-to-play business models raises substantial new issues for site managers. It can affect traffic and ad inventory dramatically. Britannica has lost a third of its traffic under the new model, although Ginnis says that the lost ad inventory had been unsold anyway. Neil Budde, Publisher, WSJ.com, warns fellow managers that unless they can push enough people behind that subscription wall, they could face a ton of lost ad impressions. "You can't just say 'today I'm free and tomorrow I'll charge.' You really have to build a product that is compelling and will draw people in."

Juggling fee and free business models also could distract companies from the reality of Web publishing. "They are going to live and die on advertising revenue," says Eric Scheirer, Senior Analyst, Forrester. In the case of Yahoo!, which recently announced upcoming fee-based products, he argues, "It would be a very big mistake to explore subscriptions to the point that they lose focus [of the fact] that they are a marketing-driven company."

If the early lab reports about the subscription model tell us anything consistent, it is that it is no magic bullet for the Web's current maladies. The medicine is not easy to take because success requires considerable merchandising skill. Dropping a toll gate in front of the same old content is not a strategy. Further, one dose will not cure all. Entire categories of content, like music and news, may never be able to convince consumers to pay. And there are side effects, everything from lost ad inventory to new managerial challenges. In the end, however, companies may have little choice but to experiment with the new drug because the alternatives are so untenable. Playboy's Larry Lux echoes many executives when he says, "Advertising and marketing aren't in a position to support this. In the near term, I honestly don't see how a media company can have a profitable site without a subscription component."

Variety Survives the Subscription Model
Variety.com has always been a fee-based site, but until March, 2000, it put a fair amount of content out for free in order to lure new subscribers. In dropping the sub wall around all of its previously free content, Variety risked losing a good deal of its 2.25 million monthly page views. "It's a calculated risk," admits Vice President and General Manager Henry Shapiro. "It's not for the weak of heart or the weak of balance sheet."

Variety.com needs to maintain a robust ad inventory because Shapiro expects that 75% of his revenue will have to come from advertising in order to be profitable. Despite 25,000 registered users to the pay site, "We're not a mass consumer brand. At any price point, there is a natural limitation to how big our paid audience is going to be," he says.

Shapiro negotiated the problem by researching thoroughly what users wanted from a pay service and then reorganizing and enhancing the site thoroughly before moving the toll gates forward. Rather than merely dropping a subscription wall, he was offering a substantially enhanced product. Variety also gave its current print subscribers total access to the online content, and it is hoping to get 20% of that readership online by early 2002. As a result of these moves, traffic not only remains the same after the model change, but advertising revenue is on track to double for 2001. "I won't say we got lucky. We took a risk and it paid off," says Shapiro.

Danni Learns a Lesson
Big Breast Superstore, Danni's Hard Drive has been taking the lead for so long in the online subscription game that it is rare to see a cautionary tale emerge from this ongoing success story. While revenue continues to grow, in large part from DHD's spin-offs into credit card processing and video distribution, "The user base has been fairly static for the past 12 months," at about 30,000 admits Samuel Agboola, Director of Marketing and Publicity. "That's a hard one to get."

Danni's stagnating rolls speak to the ups and downs of promoting an online subscription service. DHD maintains a well-endowed free content area designed to lure new members, and Agboola says it attracts over 100,000 unique visitors a day, a lot of traffic that is not converting to memberships. In fact, the biggest driver for new members came the previous year from massive media coverage of Danni herself, especially on television. Lesson learned. "Publicity is the single easiest way to push subscribers to a Web site," says Agboola. "No matter how much free content you put up, there is still an immediate, visceral difference between seeing Danni on TV and on the Web." Of course, this is one online porn strategy that may not translate well into the mainstream. Sure, getting Michael Eisner or Gerald Levin to show some cleavage and vamp it up on "Entertainment Tonight" would also evoke a "visceral" response, but it wouldn't be an urge to subscribe.