FEELING THE BURN As the costs of online publishing continue to exceed ad revenues, web publishers are devising increasingly elaborate ways to make money.

By Constance Loizos

We phoned Reel-Time editor David Churbuck (who - "schizophrenically," he says - is also the editor of Forbes's online publication, Forbes Digital Tool) to ask him how he had achieved his site's success, but he wavered: "Well, we can say we're profitable as long as we don't pay ourselves." Mr. Churbuck runs the site with just one full-time employee.

The fact is, online publishing has serious problems. It's a money loser as a standalone business. News, information, and entertainment sites, launched on the supposition that ad dollars would emerge to support them, have been floundering financially for years. Ad revenues are up - the Internet Advertising Bureau (IAB) reported that $1 billion was spent on Internet advertising in 1997, while the International Data Corporation (IDC) more conservatively puts the market at a little over $500 million - but the money still comes nowhere close to covering expenditures. In 1997 content sites spent an average of nearly $3.1 million on operations, three times what it cost them in 1996, according to Forrester Research.

Waiting online Baffled by how these sites plan to endure until more revenues materialize, The Herring decided to look at a sampling of established "brands," including the news and information sites CNet, ZDNet, and The Wall Street Journal Interactive Edition, as well as the entertainment sites Salon, Feed, and Slate, to determine which had created the most sustainable business model. What we learned is that while each relies on some combination of banner ads, subscriptions, and sponsorships to generate revenues, none of them really knows which, if any, of these variables will push them into the black.

Web-based publishing makes editorial sense. Nothing rivals the immediacy of online news or readers' ability to respond to it. And at first glance, online publishing makes business sense, too: the economics of producing content electronically is enviable in comparison with the costs of print production. And the potential audience is increasing faster than that for traditional media: IDC projects that the total number of Internet users worldwide will grow from 65 million in 1997 to 291 million by 2001.

But convincing advertisers that one's site will tap into this potential audience has proved a big challenge for many producers of original content. The good news, according to Stefanie Syman, who cofounded Feed, is that "advertisers are no longer scared to be anywhere near the Internet," which they apparently were in 1995 when Feed was launched. Media buyers are still playing it safe, though, spending the lion's share of their Internet budgets for space on big aggregation sites, where they can depend on exposure to thousands of viewers. According to the IAB's estimates, of the $1 billion spent on online advertising last year, the likes of America Online and Yahoo walked away with 55 percent, news and information sites captured 7 percent at best, and entertainment sites received only 3 percent.

Analysts predict that this breakdown of ad dollars is about to change. "Although advertisers may be reaching big audiences at portals, or entryways to the Net, the sites are too massive to be effective," says Mr. Bass. David Card, director of new media at IDC, believes a shift has already begun. "Just in the next year or two," he says, "a higher percentage of ad dollars will be designated for specialty sites, especially those with technology news offerings."

Parental guidance For companies that can afford the investment, quickly expanding and diversifying is one strategy for cultivating brand recognition and attracting advertisers. CNet, for example, has since its 1992 founding spun off 11 new sites, each of which serves as both a destination for the banner ads of advertisers and a promotional tool for the other sites. To extend its brand reach, CNet also produces 2.5 hours of technology television programming weekly. Similarly, the media holding company Ziff-Davis (which has a minority stake in The Herring) runs an online network called ZDNet; like CNet, it has numerous disparate sites with a wide variety of offerings to lure advertisers. Ziff, too, exploits TV as a cross-branding medium: it has aired two shows on MSNBC (both have been canceled) and, at our press time, was planning to launch a 24-hour technology news cable channel, ZDTV, last month.

There is a major difference, however, between autonomous enterprises like CNet and enterprises like ZDNet that have a corporate parent on which to lean: the latter aren't relying on Internet ad revenues for survival. While it's sink or swim for CNet, depending on ad sales, the wealth of Ziff-Davis and its profitable print magazines like PC Magazine and PC Week have kept ZDNet from having to watch its bottom line. (ZDNet president Dan Rosensweig beams that the network "was profitable for the entire fourth quarter" but grants that this was the first profitable period since ZDNet's launch.)

More important, Ziff can absorb ZDNet's mistakes, whereas CNet, which reported losses of $6.3 million last year, is on its own. Ziff can afford a multimillion-dollar debacle. CNet can't. Last year its $2.2 million investment in Snap, an aggregation-cum-search site like America Online's, had Volpe Brown Whelan analysts saying the company had gotten ahead of itself financially by "focusing too much on new products at the expense of generating enough advertising for its ex

"We thought Snap was a good opportunity," responds CNet CEO Halsey Minor. "Nothing more or less than that." He objects strongly to Mr. Bass's suggestion that Snap "is a step too far afield" from CNet's core competency ("Bill Bass didn't say that," Mr. Minor says gruffly) and to the suggestion that CNet has been overextending itself.

Quid pro quota Of course, most online publishers can't afford wild expansion, so they work on smaller-scale marketing efforts to boost visibility and attract ad dollars. Many culture magazines, like New York-based Feed and San Francisco's Salon, work with strategic partners quid pro quo to get themselves seen. Feed, for example, served as the New York bureau for HotWired last year in exchange for links on the news site. Salon has a partnership with Borders whereby Borders underwrites Salon content and carries Salon banners on its site; in return, Salon's book and CD reviews link to order forms on the Borders site. Salon is also pursuing syndication efforts: according to its publisher, Michael O'Donnell, it has already licensed its content to United Media and roughly 30 magazines worldwide. Both Feed and Salon remain far from profitable, although "we're not losing a huge amount of money," says Ms. Syman. Mr. O'Donnell is more circumspect. He says Salon will "probably" turn profitable by early 1999.

Another possible supplement to ad sales is subscription fees, for access to all or part of a site. The Wall Street Journal Interactive has garnered more than 150,000 subscribers, who pay an annual $49 access charge. (Those who also subscribe to the print edition pay $29.) Salon, which is currently free to readers, is hoping to cash in on its growing audience, too. At last year's end, Mr. O'Donnell announced plans to offer readers access to premium content for a $3 or $4 monthly fee, as well as discounts on books, travel, and CDs. Slate, meanwhile, the Microsoft-sponsored entertainment news magazine, is trying for the second time to transform itself into an entirely subscription-based site, after shying away at the last minute from similar plans in January 1997.

Mainstreaming Subscription models have proved unsuccessful, aside from a handful of adult entertainment, sports, and finance sites like WSJ Interactive, but online publishers are finding reasons to try them anyway. "Right now the timing is good," says Mr. O'Donnell. "The people using the Web have been classic early adopters and heavy tech users, but the next wave of readers is going to be more interested in mainstream content" like arts and entertainment. Slate publisher Rogers Weed, meanwhile, gives credit not to changing Internet demographics but to the "inspiring numbers of people who are more comfortable with paying for things on the Web." Moreover, he reasons, "there isn't an exact substitute for what we offer."

But while the content of magazines like Salon and Slate may appeal to readers, there are alternatives, both online and print. Most analysts are skeptical of the pay-for strategies. Mr. Card of IDC predicts that "Slate is going to have a huge drop-off. I don't know that I'll renew my subscription if they start charging." Mr. Bass is more direct: "Nobody is willing to pay anything for entertainment news. Anyone who thinks otherwise is in fantasyland." Still, both publishers are resolute. Says Mr. Weed, "My goal is not to gouge people for as much money as I can. It's to show a business plan that is sustainable and that is not losing money indefinitely - and I can't do that at present."

Surprisingly, neither can The Wall Street Journal Interactive. Despite its esteemed print edition and its ability to cultivate a paid online readership, WSJ Interactive's profitability is "not something we're willing to talk about in terms of an exact timetable," says Editor Neil Budde.

Church bows to state The latest scheme for generating revenues is sponsorships, either in the form of advertorials like the controversial "Intel Inside Optimized Content" online campaign, which pays publishers to create a Web page touting Pentium II performance, or the sale of exclusive rights to advertising space on sections of a site. For example, under the sponsorship model of Forbes Digital Tool, Fidelity can pay to be the only financial services advertiser within a designated section of the site. Every publisher we surveyed has sold sponsorships except Feed and WSJ Interactive. "We don't use them," says Mr. Budde, "because we don't want to suggest that any particular advertiser has control over what appears in any section." Interestingly, Digital Tool claims its sponsorship has made it profitable three quarters in a row. But its fisherman editor, Mr. Churbuck, says he'll refrain from calling the online property profitable until it has enjoyed at least one full year of moneymaking.

On the whole, it's evident that no cure-all has emerged to make online publishing a business for anyone interested in turning a profit, and it's not because the business models of these Internet entrepreneurs are impractical. It's simply that despite selling banner ads, subscriptions, and sponsorships, no one can make money unless enough advertisers flock to the medium and lend a helping hand.

Which begs the big question: when will that happen? "Online publishing won't be profitable in 1998, but it has taken hold," insists Internet analyst Charles Abrams of the Gartner Group. "There's no doubt that people can make a profit, probably by 2001, as Internet usage and the amount of content grows exponentially." Mr. Card of IDC agrees that online publishers should remain optimistic. "Online advertising is still trifling compared to offline," he says, "but the growth curve is sharp enough to encourage Web sites that are trying to build businesses around ad revenues."

We all know about analyst projections, though. Sometimes they're right, and sometimes analysts have to revise their time lines or abandon their projections altogether. And even assuming that they are more right than wrong, assuming that the Internet ad revenue influx desperately needed to support online publishing will materialize in the next few years, only those Web-based publishers with either deep pockets or the rare ability to control their burn rates will survive to enjoy it. For most, however, even a few years from now will be too many.