Making Them Pay

Online businesses are finally figuring out how to make money by charging for content. Here are their secrets.

By MICHAEL TOTTY | Staff Reporter of THE WALL STREET JOURNAL | March 22, 2004; Page R1

Information wants to be free.

For years, this has been the mantra of the Internet, and the reason most Web sites have refused to even think about charging for information. It has been seen as the height of folly to try to build a business selling information, as opposed to stuff, online.


Well, maybe information doesn't want to be free, after all. Millions of consumers are showing that they will shell out for sporting events and business news, as well as information about nutrition, their ancestors, former schoolmates and potential dates. And a host of online companies are finally figuring out what works and what doesn't when it comes to convincing consumers to loosen the purse strings.

So what are their secrets?

Among them: Offer customers something they're passionate about and they can't otherwise get free of charge, like Boston Red Sox games when you live in San Francisco. Or something that's important or valuable to their lives, like the detailed product reviews provided by ConsumerReports.org, the online counterpart of the popular magazine.

What's more, successful online-content companies take advantage of the power of Internet technology -- easily searchable databases and the connection to millions of other consumers. Online dating services, such as InterActiveCorp's Match.com, make available millions of personal ads just like a print publication, but what gets people to open their wallets is the ability to hook up with a potential date. On the sites, visitors can browse all the ads for free, and the ads have all of each person's information, including a photo -- except for name and contact info. So to be able to send an e-mail to a prospect, you have to subscribe.

"People are not paying a lot for just information," says Chris Charron, a research director at Forrester Research Inc. in Cambridge, Mass. "They're not paying for content for content's sake." Adds Craig Sherman, chief marketing and revenue officer at MyFamily.com Inc., which operates popular genealogy Web sites: "To be able to charge, you need a service that's radically easier, faster and more fun than if it were free."

Whatever the draw, sales of online content continue to increase. The Online Publishers Association, a New York-based trade group, estimates that U.S. consumers alone spent about $1.6 billion on online content last year, up from $1.3 billion in 2002. In the United Kingdom, 58% of the members of the local Association of Online Publishers charge for content, and about half of the remainder have said they plan to begin charging in the next year.

Online personals and dating services represent the largest category in the U.S., with nearly 30% of the total, while the personal-growth group -- which includes dieting sites -- was the fastest growing, more than doubling in revenue last year, according to the New York-based publishers group.

"Like any publishing business, there's going to be some percentage [of revenue] that comes from subscription and some from advertising," says Michael Zimbalist, the group's president. "I think there's a lot of opportunity for continued growth."

However, individual sites need to get a few big things right, and a lot of little ones as well. Here are some secrets used by online-content companies to make subscriptions work:

• Give consumers something they can't get elsewhere.


Network-television news ought to be tough to sell online: There are plenty of alternatives -- other networks, 24-hour cable news and no-cost online news sources -- that have the advantage of being ubiquitous, easy to use and free. Yet ABCNews.com, which in 2002 began requiring customers to pay for all its video content, has seen revenue -- about half from subscriptions -- grow more than 15% a year; in 2003, the site was profitable for the first full year, a spokeswoman says.

What the site offers subscribers is the ability to view ABC News programming that either isn't available elsewhere or at times or places that television viewing isn't an option. In addition to archived video from its most popular news programs -- "World News Tonight" and "Nightline," including the latter's first show, broadcast in 1981 -- the Walt Disney Co. subsidiary serves up specially produced features that include a daily online politics show, outtakes from interviews for "Good Morning America," "20/20" and "Primetime," and "ABC News Live," a round-the-clock news program that's available only online.

Web surfers might be able to get all kinds of news content for free, says Bernard Gershon, senior vice president and general manager at ABCNews.com, but "you can't get high-quality news and video content on a PC unless you pay."


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Net Charges
Total paid subscribers of selected online services, in thousands
SITE PARENT BUSINESS JUNE-02 DEC-03
AmericanGreetings.com* American Greetings Corp. Greeting cards 1,400 2,100
ConsumerInfo.com** Experian Personal credit reports 737 1,600
Ancestry.com MyFamily.com Inc. Genealogy 774 1,500
ConsumerReports.org Consumers Union of U.S. Inc. Consumer guide 880 1,300
Real.com RealNetworks Inc. News, sports, entertainment 750 1,300
Match.com InterActive Corp. Personals 604 939
WSJ.com Dow Jones & Co. Business News 646 689
Everquest.com Sony Corp. Games 430 430
GameSpy.com GameSpy Industries Games N/A 275
*Includes BlueMountain.com and Egreetings.com
**Includes CreditExpert.com and FreeCreditReport.com
Source: Intermarket Group LP and the companies

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Newspapers face similar challenges charging their online customers. A few overseas papers, including the Spanish national daily El Pais and Hong Kong's English-language South China Morning Post, require a subscription for their online editions. But nearly all U.S. papers provide their Web content free of charge, with one notable exception: The Wall Street Journal Online.

From the start, the publishers of the Online Journal believed that subscribers would be willing to pay to get access to the paper's business and financial reporting over the Internet, just as they shell out a premium for its print edition. Since it was launched in 1996, the Online Journal's circulation has climbed steadily, to 689,000 at the end of last year from 574,000 in April 2001.

• If you're going to put up a wall, make sure it's in the right place.


Even sites that charge for content still offer up lots of material for free. Some newspapers and magazines, for instance, let visitors view headlines or the first few paragraphs, but require payment to see the whole article, while others give away some pieces but not others. But what to give away and what to charge for? Where should a company place the "wall" separating the free and paid parts of the site?

MyFamily, based in Provo, Utah, caters to family-history buffs. Subscribers to its Ancestry.com site pay as much as $240 a year for access to its database of birth, death and marriage records, census data and newspaper clippings. Most of the information comes from public records and is theoretically available to anyone who wants to spend time in libraries or courthouses digging it up. But MyFamily makes it available to anyone with a computer.

When the company went online in the late 1990s, charging for content was widely seen as a losing strategy. Much of its attention was lavished on its free site, which offered e-mail, photo-storage and other family-friendly content and which was designed to bring in lots of visitors and advertising dollars. After the dot-com bust and the collapse of online advertising, it was the subscription-supported Ancestry.com site that was bringing in the dollars, and MyFamily shifted its focus to emphasize for-fee services. The move has paid off: Today the closely held company has annual revenue approaching $100 million, has been profitable since the third quarter of 2001 and boasts 1.5 million paid subscribers.

Still, roughly a third of the three billion records on Ancestry.com continue to be available to anyone who signs up. So visitors can view hundreds of millions of names in family trees that have been created by Ancestry members. But paying subscribers can also view official documents, such as copies of actual reports from the 1880 or 1930 census, or search 200 newspapers from the U.S., Canada and the U.K. published from the late 18th century through the 1990s. "When you find the really juicy thing you're looking for, we charge," MyFamily's Mr. Sherman says.

The logic: There are hundreds of no-cost genealogy sites on the Web, so MyFamily gives away any information that can be found elsewhere for free. What it charges for are the billions of documents that the company has digitized, placed into easy-to-search databases and posted on its site.

• After putting up the wall, make it easy for visitors to climb over.


One of the hardest tasks for online publishers is to get visitors -- even those who take the time to register -- to take the next step and sign up to pay. Even at the most successful sites, paid subscribers represent only a fraction of total visitors; MyFamily's 1.5 million subscribers come from a pool of more than 33 million registered users. Classmates.com, which helps members connect with old school chums, has about 38 million members, but only about 1.8 million subscribers.

To help visitors leap over the paid-content wall, many sites let potential subscribers sample the paid offerings before buying. At MyFamily, visitors can sign up for a 14-day free trial of the subscription service, during which they can tap every record in its database.

RealNetworks Inc.'s SuperPass gives people access to a host of audio and video selections, including audio feeds from National Basketball Association games, video news broadcasts from ABC and CNN, and radio programs from more than 60 digital stations. Like MyFamily, RealNetworks also extends a 14-day free trial, which allows unlimited access to its full line of programming. (Its Rhapsody music service, which RealNetworks acquired last year, offers a seven-day trial.) In addition, visitors can sample 30-second to two-minute clips of individual broadcasts.

"Rather than getting consumers to imagine what [the service] might be like, we're letting them actually sample, and they can see for themselves what it's like," says Richard Wolpert, RealNetworks' chief strategy officer.

• Setting prices: Start low, aim higher.


Once you get visitors to agree to pay, how much do you charge?

With most goods, setting prices is fairly easy: Just see what your competitors are charging. But in the online world, where most of the competition is giving away content or where there are few, if any, rivals, settling on the right price isn't so easy.

Some sites that started out with relatively low prices are finding that they can raise rates as they become more established. The Wall Street Journal Online initially charged $49 a year for an online-only subscription, compared with $164 a year for the print edition. The cost rose to $59 in 1998 and to $79 recently, without causing a notable flight of subscribers.

Many sites offer several pricing levels. At MyFamily, for instance, subscribers can choose from an array of options, ranging from a basic "starter collection" for about $8 a month or $40 a year, to a "premier collection" of historical newspapers, census, immigration and birth, death and marriage records, and historical journals, for about $30 a month or $200 a year.

Others have more-limited pricing choices. Classmates.com, one of the largest online subscription services, makes it possible for members to track down old friends from high school, college, the military and former workplaces. Members can submit their personal information and search for basic information about the site's 35 million members. But they have to subscribe to get access to more details about an individual to initiate contact. Until recently the site had only one pricing tier, a $39 annual subscription, but in September it introduced a $59 two-year subscription, and it plans to add later this year a 30-day offering as well as a free trial.

"It's not like a retail business where there's a cost of goods," says Michael Smith, Classmates.com's chief executive. Instead, he says, pricing is based on what customers are willing to pay -- and that depends on being able to connect with more and more former classmates. "As the database grows, and there are more people there, people are willing to pay more," Mr. Smith says.

• Bundle Up.


Despite all the attention given to the success of such companies as Apple Computer Inc. at selling songs for 99 cents each, single-payment sales of online content remain a rarity and monthly or annual subscriptions remain the rule. Less than 12% of the companies surveyed by the New York-based online publishers group offer single-payment options.

Instead, many content sellers are bundling their offerings together to give subscribers the sense that they're getting more for their money. It's a lesson from the cable-television industry: Consumers who would find it too inconvenient and too expensive to subscribe to one channel at a time are willing to pay for a package that contains a wide selection of choices.

RealNetworks, which creates no material of its own, bundles sporting events, news broadcasts and radio programs for a single $9.95-a-month fee. As part of its broadband service, Time Warner Inc.'s AOL unit delivers Time Inc. titles such as People, Entertainment Weekly and Fortune, as well as video from ABCNews.com, the National Football League and Nascar. In addition to AOL and RealNetworks, ABC distributes its offerings through such Internet-service providers as SBC Communications Inc. and BellSouth Corp.

For ABCNews.com, which also enables customers to pay $4.95 a month for only its service, letting other Internet companies bundle its product gives it a bigger potential audience and allows it to tailor special programming for different groups of subscribers -- AOL subscribers, for instance, can have "ABC This Week" anchor George Stephanopoulos answer questions on video. "As part of a bundle, it's a more compelling proposition," Mr. Gershon says.

• Hang on to your subscribers by giving them more for their money.


Customer churn is a problem in any subscription business, but the online world is especially volatile. David Strassel, a partner in San Diego-based Intermarket Group, which publishes a survey of subscription-based content, estimates the typical online subscriber stays around for only about 10 months. Turnover can be particularly acute for some subscription-based services, like dieting or dating, where customers sign up with a particular goal in mind.

"I've been 20 years in the direct-marketing business," Mr. Smith, the Classmates chief executive, says. "Churn is always higher than you want it to be."

EDiets.com Inc., which provides nutritional information and personalized diet programs, sells a basic 13-week subscription for $65, and the average membership lasts only about five months. Alison C. Tanner, eDiets' chief strategist, says that isn't bad: It compares favorably with the two-month average of many offline, classroom-based diet programs, and even a short-term membership is profitable because customer-acquisition costs are low.

Still, the company has added new services that aim in part to give subscribers a reason to stay longer. In 2002 it launched a companion site, eFitness.com, which for an additional $1 a week provides a customized workout plan and provides animated exercise suggestions. Subscribers who add the eFitness option so far stay on average about a month longer than those who sign up for the dieting option alone. Between 30% and 40% of eDiets' 200,000 current subscribers have signed up for the eFitness option.

"We're not just about weight loss," Ms. Tanner says, adding that the site increasingly emphasizes general nutrition and fitness in addition to losing weight. "We think that concept has legs."

• Get subscribers to upgrade.


So you've figured out how to hang on to your subscribers; now the challenge is how to squeeze additional revenue from them.

EDiets has added a recipe club for an additional $2 a month. When visitors subscribe, they are given the option of adding the fitness or recipe programs, and pitches to upgrade are included in eDiets newsletters that regularly go out to subscribers.

MyFamily is even more aggressive in promoting its upgraded subscription services. When a subscriber signs up, a MyFamily representative will call to thank the customer -- and to remind him or her of the company's other offerings. Customers are also called when their subscriptions are up for renewal, giving the company another opportunity to pitch service upgrades. Although they're relatively expensive, Mr. Sherman says the calls generate an average of $100 in additional sales.