NOTE: These are my original notes for the talk regarding revenue sources for web sites before the Association of Internet Professionals, which lasted about an hour. About a half hour of Q&A followed, which, of course, I had no notes for, but centered on various details from points outlined here. I've embellished these notes as much as I can remember so they make more sense.--RL INTRO Thank you for inviting me to discuss ideas about web sites, on-line subscription fees, and Internet advertising. I'm Russ Lockwood, CEO, MagWeb.com, the world's largest on-line archive of military history and product magazines, or as we like to call it, your own personal war archive. We'll start off with a brief company history move into the ... trend towards subscription fees and impact on on-line advertising and then take questions. And I brought some magazines and products to look at, I'll be passing out some handouts you can keep, and we'll have a drawing for a couple goodies, courtesy of MagWeb.com. COMPANY HISTORY The MagWeb.com archive consists of 96 magazines under on-line licensing agreements. They cover 4500 years of war with somewhere around 24,000 articles, and about 19,000 photos, maps, and other illustrations. We cover battles, strategy, weapons, commanders, uniforms, orders of battle, and just about everything else on warfare, including warfare of the future. We also have thousands of reviews of books, computer games, toy soldiers, boardgames, and other products to help you learn about military history and recreate it on your tabletop or computer screen. I started MagWeb.com with three other partners back in 1996. My own background was as an editor and writer for computer magazines from the early 80s to mid 90s. Mostly Ziff Davis magazines, icnluding Creative Computing, A+, Byte, Personal Computing, PC Sources, Windows Sources, PC Computing, Computer Shopper, and others. I did on-line work for PC Magazine and was an on-line editor for Ziff Davis forums on Compuserve and Prodigy. Then in 1995, I became editorial director for AT&Ts New Media Services Division in Cambridge, Mass, creating a giant on-line consumer site. AT&T, however, wanted to create a giant phone book. This is where the editorial vision started to diverge, and ultimately, I signed a bunch of papers, took a little bit of cash, and left in 1996. My parachute wasn't as golden as the AT&T CEOs who were busy running the company into the ground, call it tin, but it was enough to contemplate putting my vision into reality. I then recruited a couple partners who were technical, computer programming and so forth, and the fourth one was administrative. GOLDEN RULE MagWeb.com started in 1996, but it could start in 2001. No shortage of businesses trying to cash in on the Web. Golden Rule: Somebody, somewhere, somehow, has to pay for the Web. Common sense. No money, no service. Yet, the initial culture was the web should be free. It's got a nice ring, but that's not how it works. Most people pay $20-$25 per month for dial up access. $40-50 a month for cable modem or DSL because it's faster. It's not free. You're paying for it. Ah, but you have access via the office. You're not paying for it, your company is paying for it. It's a perk, right? But Funds come out of the bottom line, that affects profitability, and that affects bonus payments and salary increases. And I might add, companies are increasingly prohibiting you from personal surfing, even during your lunch hour. As for school--it's out of your tuition. Somebody, somewhere, somehow, has to pay for the Web. Let's look at Web sites themselves--the destination URLs. Differentiation of three broad categories: content, services, and product selling. Product selling: books, videos, furniture, toys, clothing, pet supplies, etc. When you talk about dot coms that went belly up, you're talking about a lot of these. These are outside our scope here today, but fundamentally, they burned through VC money without generating enough sales. Pets.com had huge brand recognition, but most people still buy cat food or dog food at the store, where they are anyway. Amazon.com is still kicking, but for how long can they absorb losses? WebVan, grocery deliveries, went through $840 million and went belly up. Services: resumes, check paying, banking, stocks, auctions, etc. I think these can work if they're teamed with existing institutions. And oddly enough, all of these charge fees. EBay's profitable--takes a percentage of every sale. Banks charge you fees to do on-line banking. These bill paying companies charge a monthly fee. There's no real product--everything's electronic. Sort of the forte of the Internet. Again, outside our scope, but they're paying their way. There's a certain amount of affluence needed, and a certain trust in security, and crashing in the product selling sector affects this, but users pay fees. Content: My favorite. Information. news, sports, computer programs, video cam feeds, trivia, search engines, and of course, niche information like MagWeb.com. It's stuff you want to read, stuff you want to see, and stuff to download. Two different types: 1st: Company marketing info: product specs, manufacturing processes, shipping schedules, business hours, technical papers, etc. It's to put you in touch with the company and its products. Who pays for it? Company sales and marketing budget. Information to convince you to contact a company. 2nd: Pure content sites. CNN News. Shareware downloads. Contentville. Fish Bowl Cam. Yahoo. Alta Vista. MagWeb.com. This is directly in our scope of subscription fees vs. advertising support. Who pays? What do you pay for? What happens to your payments? How do you know if you pay, you'll get the value out of it? How do you know if you pay, the company will be around long enough for you to get the value out of it? And hey, isn't everything on the web supposed to be free? INTERACTIVE The Web is nothing if not interactive, so maybe you can help me answer these questions with a show of hands. How many of you have gone to a company site for product specs or other info? How many have used a search engine? How many of you love to wait for a banner ad to load first, before the rest of the page shows up? How many have clicked on a banner ad in the last week? How many people like banner ads? Note: For the record, everyone raised their hands to the first two questions, and no one rasied hands to the last three questions. -- RL And yet, most pure content sites are supported by advertising--banner ads, mostly. The web, after all, should be free. But how are you going to pay for a site? Hardware Infrastructure like servers, routers, and networks; the software to control it like credit card processing, database development, and report generation; the sales and marketing expenditures for advertising, brochures, and convention displays; and the personnel to run the entire operation, like programming, to customer service, content creation, and other aspects. Banner ads. The same thing that people hate to see. Works on TV. Radio. Newspapers. Magazines. Why not the Web? STATISTICS Now, I'm going to cite a few stats and numbers from market research companies, and I'll try to make it short so you're not overwhelmed or your eyes roll back in your head. I'd also like you to keep in mind the words of Mark Twain: There are three kinds of lies: lies, damned lies, and statistics. THOSE THAT SELL ADVERTISING Talk to sites that sell advertising and they tell a rosy tale of 100 million web surfers, lots of hits, lots of click throughs, and lots of sales. Year 2000 advertising was $8.2 billion--about half of cable TV advertising sales of $15 billion. Year 2001 advertising is not yet available, but suffice it to say it will be real flat, and I'm not quite sure 2002 will be any better. Certainly not the $22 billion forcast by Forrester Research for 2004. Internet Advertising Bureau noted in 1998 58% of all on-line ad spending were for banner ads (22 billion ads) 29% for corporate sponsorships 6% pop-up ads Jupiter Communications noted banner ads were 61% Forrester Research says per capita digital marketing: 2000 $105 2001 $128 2005 $430 (vs. todays $421 for newspapers) It tells me that everyone is spending $100 on me and that if I don't buy $100 worth of stuff, the Web will not be paid for. In a few years, that'll be $430. Technically, MagWeb.com did its part: we bought a $10,000 server from Sun on-line. Although I did call my credit card company and tell them I just bought a server, so don't freak when this comes through. Other than that, my purchases come from stores and mail order. And I'm a prime target. You know how I can tell? All the Spam e-mail... Now, let's flip this: THOSE THAT BUY ADVERTISING Is 100 million people real? I say no. Use the 90% rule. 90% of them are duplicate accounts, kids without credit cards, non-US surfers without currency exchange, and other non-purchasers. Of the 10 million left, 90% don't care about whatever product category your company is in, in MagWeb.com's case, that's military history. That leaves 1 million. And 90% of those will not drop money on the web in general or for your specific product. That leaves 100,000--and that's what I considered MagWeb.com's audience to be. I run across it everyday. I was at a convention Saturday at Gettysburg. Small 1,000 attendees, but every one of them a military history buff with excellent demographics. Affluent. Web connected. Male. Military history buffs. And at a rough guess, about 100 of them were paying MagWeb.com customers. When I bought banner ads at a military history site, I found it took 10,000 impressions to sell 1 membership. Let's go back to 1999 and some stats. Jupiter Communications noted that on-line banner ad spending woulddrop from 61% to 40% by 2003. This is an incredible number--at the heyday of banner ads, 61% to 40%, a 1/3 drop. eMarketer noted in 1998 that 39% of surfers NEVER looked at banner ads, and it went to 49% in 1999. This is heyday of banner advertising. Let's look at click through rates: Spring 1998: 2.1% (2 of every 100 click on a banner ad) Spring 1999: 1.3% Spring 2000: 0.7% Spring 2001: 0.3% We are conditioned to ignore them. The effectiveness is dropping. They don't apply, they're annoying, and they're wasting your time. BUT IT MUST WORK, RIGHT? FIRST WHO USES THE WEB? NetRatings survey 1999 average user: 4 1/2 hours a week, 330 pages Sees 112 banner ads, clicks on .71 of them--about 1/2 a percent. Sites usually sell on the basis of hits or impressions or page views. You click on a page, that's 1 hit, click somewhere else, that's 2, and so on. Every thousand gets the company X amount of dollars, from $20 to $100 depending on the site. So, if you take the 0.3% who click on an ad, that comes to 3 out of every 1000 impressions. So, say you're paying $20 for that 1000, that means you're spending almost $7 per person. It's relatively cheap. Now, think about what you sell and how many of these you have to sell to break even. Now, think about all those dot com companies that spent $2 million for a 30-second spot on the Superbowl. That would be 100 million banner ad impressions at $20 per 1000. Now think about all those companies who spent $20 million dollars a quarter on TV, radio, and magazine advertising to get people to come to their site. That would be 1 billion impressions. Money and traffic. Money and traffic. Money, traffic, and revenues. But how do you think people find sites? From Forrester Research: 1999 Top 5 58% search engines 38% e-mail 35% links from other web sites 28% word of mouth 25% magazine ads. Banner ads are no where near there. SO WHAT DOES IT ALL MEAN? First off, in 1999, eMarketer found 81% of all banner ad space went unsold. I don't have numbers, but I suspect it's about the same--fewer buys vs. fewer sites. Remember the golden rule: Somebody, somewhere, somehow, has to pay for the Web. For content sites, that means subscription fees. And surprise--the trend is there. In 1996, MagWeb.com may not have been the lone voice in the wilderness charging subscription fees for content, but it was lonely in the woods. The Wall Street Journal Interactive was the only other major site charging fees. Now, there's been a number of sites charging for access: Time magazine, Consumer Reports, various newspapers like the Rochester Post-Bulletin and Orlando Sentinel, and even the on-again, off-again Microsoft on-line magazine, Slate. NY Times is coming out soon, I believe with a pay archive. How much? Time $50 a year or $5 a day. Consumer Reports $19-$47 per year. Wall Street Journal: $29-$59 per year. Rochester Post Bulletin $60 per year. Orlando Sentinel, 25 cents to $2.50 per article, depending on how many you pre-pay for. And MagWeb.com, $19.95 for 1 month to $59.95 for 12 months. I believe you'll see more and more companies moving content to a pay service. They could own the content outright, like Time, or be aggregators like MagWeb.com. Companies have to pay for the hardware and software infrastructure and the personnel needed to run it. In the case of MagWeb.com, we also pay royalties to the magazines, so intellectual property gets paid for. You can only last so long on Venture Capital money or stock money. Contentville folded even after getting $100 million. And if you can't make it with advertising, as so many content sites have found, that leaves subscription fees. Advertising won't go away. In fact, I believe there will be ad-supported "free" sites. But I also believe consumers are going to have to pick up the price of good content. Take TV. 20 years ago, if I told you you'd be paying for TV, you'd think I was crazy, and yet, I suspect most of you have cable TV. History Channel, A&E, Discovery--on cable, and what's more, you pay for cable plus or cable extra plus service to get these channels, and they still have advertising on them. You're paying for ads. If you don't want ads, like you want your movies without commercial interruption, that's a premium channel like HBO. You pay extra. That's how I created MagWeb.com--a premium cable channel for military history and related products on the web. You pay for it, but there's no ads inside--no banner ads, pop-up ads, or any other ads. We try to form a bond with our members by updating content a couple times a week, and I think you'll find that over the next few years, Web advertising will change from passive banners to a more interactive approach. Amazon.com does a good job with database operations to push new book recommendations based on previous purchases. Of course, they got caught taking payola from publishers for posting favorable reviews, so take it with a grain of salt. Still, their massive database manipulation is their greatest asset. Expensive, but there are some possibilities there. So if you are buying or selling ads, be prepared to haggle a little, ask questions, and be a little creative. Note: Q&A: Several questions about why publishers join the MagWeb.com coalition, how the royalty arrangements work, web design aspects, customer support issues, and other aspects of running a subscription-based web site. The door prizes were three packs of USSR-printed Napoleonic-era Russian Army uniform cards, and a grand door prize of an M-1 Abrams tank (1/285 scale). I suspect this is the first tank ever given away at an AIP meeting. --RL Back to War Lore: The List Back to Master Magazine List © Copyright 2001 by Russ Lockwood. This article appears in MagWeb (Magazine Web) on the Internet World Wide Web. Other military history articles and gaming articles are available at http://www.magweb.com