Online Commerce: Making Money On The Web

Internet mavens joke that the only people making money online are early investors in Netscape Communications Corp. But the truth is that thousands of companies are making money online. Today the Internet is serious business.

In fact, a great deal of money is being made on the World Wide Web in ways unforeseen by industry experts. In the first seven months of 1995, 11 companies--a small subset of the complete Web universe--took in total Web-related revenue of nearly $25 million. (For a list of services making money on the web click here. Note: Your browser must support tables to view this document)

In the roughly 18 months since the Web began its stratospheric growth curve, thanks to graphical browser interfaces, four distinct revenue models have emerged for doing business in the nascent marketplace:

• Direct selling or marketing of a company's existing products and services.
• Selling advertising space.
• Charging fees for the actual content accessible on a Web site.
• Charging fees for online transactions or links.

Direct Selling
While a diverse group of companies has begun selling their products directly on the Web, its power as a sales vehicle has proved to be inversely proportional to the size of the seller--small companies are doing better than big ones. The reason: The Web's worldwide reach can instantly transform a small outfit into a global distributor.

By contrast, large corporations that already have their distribution networks in place often find the Web to be a niche channel, with direct Web sales registering only a fraction of their total revenue. Even the most successful Web merchants' direct sales have y et to reach $1 million. While that would be quite a lot for many small companies, it's just a drop in the bucket for corporate behemoths.

Yet scores of large companies say Web sites enhance their marketing message. But when companies are asked about actual revenue streams from the Net, the three most common answers heard are: "We just got started," "It's not secure," and "It's too new."

That's not to say those excuses aren't valid. "Buying products on the Internet is still in its infancy," says Bill Rollinson, VP of marketing for the Internet Shopping Network in Menlo Park, Calif., an online company that sells mainly PC software. "I compare it to when automated teller machines first came out, and very few people used them. Changing behavior takes some time."

Mary Cronin, author of Doing More Business On The Internet (Van Nostrand Reinhold, 1995), agrees: "In many cases, it's still a couple months too soon. By fall, there will be a lot of actual transa ctions and real revenue."

Holiday Inns Worldwide in Atlanta is typical of large companies selling directly on the Internet. In June, the hotel chain became the first in its industry to offer secure online reservations on the Net. Its Web site gets about 7,000 visitors a week, with about three-quarters checking the availability of hotel rooms. The company won't disclose reservations revenue from the Web; it's too early in the game, says Les Ottolenghi, director of emerging technologies.

Smaller companies and so-called cyberpreneurs are moving a lot faster--and getting more dramatic results. Virtual Vineyards in Los Altos, Calif., sells tens of thousands of dollars worth of wine on the Web every month. The company expects those monthly sales to top $100,000 by December.

Hot Hot Hot, a Pasadena, Calif., specialty shop that deals in exotic hot sauce, sold some $60,000 worth of sauce over the Web in the past year. That' s nearly a quarter of its total annual business. Another retailer, the Tennis Warehouse in San Luis Obispo, Calif., has sold $10,000 worth of racquets, accessories, and apparel to Net surfers to date, boosting its overall business by 15%. "In terms of return on investment, it's incredibly successful," says Drew Munster, owner of Tennis Warehouse.

Leveling The Playing Field
For industries overrun by corporate chains, the Web may help smaller companies level the playing field. "As the retail industry moves to warehouse-type stores, it's harder for manufacturers to reach the consumer with the complete story," says Peter Granoff, VP, co-founder, and self-proclaimed "cork dork" of Virtual Vineyards. "Specialty retailers with expert staffs are becoming the exception to the rule."

But an information-rich Web site, Granoff adds, can help speciality retailers provide the same service as a fancy store in a big city--the kind that are losing more market share to the likes of Costco and Wal-Mart.

Still, Macmillan Computer Publishing in Indianapolis, one of the largest publishers of computer books, surveyed its Web site users and found that 65% would rather buy books in a bookstore than online. The trick, of course, is translating information like that into eventual sales. Macmillan's Web site, up since January, gets plenty of use by readers seeking information on book releases, authors, and store locations.

Jordan Gold, manager of online services for Macmillan, says that movement leads to increased sales. "We're driving traffic into our stores," Gold says. "It's a tremendous promotional tool. Whether we sell a lot of books online is almost irrelevant right now." Macmillan also is considering offering Internet promotions that will help the company better track sales triggered by its Web page. Two possibilities: online coupons and store discounts for Web users.

Windham Hill Records , a Palo Alto, Calif., producer of new age music, offers musicians' biographies, sound clips, album cover art, and other information on its Web site. One of every five people who visit the site take the information they've gathered there, travel to a record store, and buy a Windham Hill product. While the company allows Web visitors to order records online, Roy Gattinella, Windham Hill's VP of marketing, says, "For us to think [the Web] is going to be a fulfilling direct sales channel--it's not going to happen."

The indirect-marketing method is particularly relevant for big-ticket, business-to-business purchases such as industrial materials. General Electric Co.'s plastics unit in Pittsfield, Mass., was one of the first manufacturers to launch a Web site. Since the site opened in October 1994, others have followed. Such sites function essentially as online catalogs, providing reams of technical product data. In the case of GE Plastics, the products are pol ymers and resins used in products that range from hair dryers to automobiles.

GE Plastics is making the most of its Web effort. "We do pass along sales leads from the Internet to our sales qualification process, as if they had come in any other way," says Rick Pocock, GE Plastics' general manager of marketing communications. "But I don't think there's any way right now we could actually correlate them to any movement in sales."

Even one of the most successful pioneers of electronic selling, 800-Flowers in Westbury, N.Y., is less than overwhelmed by its results on the Web, which it has been using for just three months. The company sells more than $20 million worth of flowers annually--10% of its total business--on commercial online services such as America Online and Prodigy. But the Web is another story. "We're booking some orders, but not anywhere near what we do on the online services," says Chris McCann, VP of operations. "In the next two years, I don't see the Web as a big revenue producer. But it's a good way for us to develop brand attributes."

Will direct sales on the Web ever boom? Probably. Over the next six to 12 months, the launch of the Microsoft Network online service with full Internet access, combined with the momentum of the Net access debuted by Prodigy, CompuServe, and AOL in recent months, will bring millions of consumers onto the Web. Software that enables secure transactions from vendors such as Netscape, Open Market, and Spry, is available. Its use by Web merchants should grow, changing the perception that credit-card numbers are at risk on the Net.

Selling Ad Space
Many companies looking to make money from the Internet are turning to a centuries-old business model: advertising. Sites that include Wired magazine's HotWired and AOL's Global Network Navigator charge advertisers as much as $15,000 a month to post information about their companies, products, and services.

Th is year, companies will spend $10 million to advertise on the Web, according to a June report by Forrester Research Inc. in Cambridge, Mass. By the year 2000, Forrester predicts, that figure will hit $2.2 billion.

Companies selling ads on the Web say the business model is a natural extension of their other lines of business. For example, Web site Career Mosaic is run by Bernard Hodes Advertising Inc. in New York, which derives more than $200 million in annual income from upscale help-wanted ads, mostly in magazines and newspapers. The company sees online ads as a logical next step, says Bruce Moore, VP of systems and planning at Bernard Hodes. "We were building ads, and then sending the content out to the newspapers to publish the ads--along with 75% to 80% of the revenue to pay them to publish it," says Moore. "On the Internet, we are the publisher, and we get to keep all of the revenue."

Career Mosaic functions as an online classified-ads and job database. Internet users going to the site can view ads organized by type of work, and corporate profiles of businesses that want to hire applicants. Ads stay up for 30 days and include the lavish graphics and hyperlinked text files typical of the Web. The site lists about 3,000 jobs daily in areas ranging from programming and engineering to accounting, marketing, and sales.

Another service, DealerNet , also runs an online classified-ad service that is an extension of a previous business. DealerNet presents advertising for about 400 U.S. car dealerships. CEO Marty Rood founded the company that runs DealerNet, Dealer Internet Services Corp. in Lynnwood, Wash., two years ago as a spin-off of his family's Rood Nissan/Volvo auto dealership. Rood sold the company in June to Reynolds and Reynolds Co. in Dayton, Ohio, an $809 million provider of information services to auto companies.

Other companies started advertising on the Net after earlier experience in traditional publishing. Ho tWired is the online extension of Wired magazine. Time Warner Inc. posts most of its major magazines on its Pathfinder Web site . Playboy magazine is also up on the Net.

O'Reilly & Associates, publisher of computer manuals and guides to Unix and the Internet, launched Global Network Navigator (GNN) , an online magazine that offers a mix of computer information and general-interest, consumer-oriented content, in 1993. In June, O'Reilly & Associates sold GNN to America Online in Vienna, Va., for $11 million in cash and stock as part of AOL's strategy to broaden its offerings from the proprietary online service to the Internet. "Our customers were already on the Net," says Jenny Shore, director of interactive advertising sales for GNN.

Online magazines such as GNN and HotWired run icons for advertisers next to articles and features. Once users click on the icon, they're propelled to a Web sit e containing more information about the advertiser.

The philosophy behind the ads is the same used in advertisements everywhere: The seller creates an attractive product--say, a TV program, magazine, or Web site--that people want to receive, and the buyer pays to have its product or service put in the sightline of those people.

Pricing and Effectiveness
No standard rate structure has emerged for the Internet. DealerNet charges a flat $995 fee to put a car dealership on the Internet, plus $500 per month for maintenance. That's pretty cheap, as Net advertising goes. HotWired charges $15,000 a month for an ad, with discounts averaging 15% for advertisers who buy into Wired's print edition. GNN has an entire menu of offerings, starting at $44 a week and ranging as high as $11,000 a week for an ad that runs in its most popular feature, the "What's New" directory of new sites on the Internet. Netscape charges $15,000 to $30,000 a month to place ads on its home page, beside information about Ne tscape products and services and access to free, downloadable copies of the Netscape Navigator Web browser.

One sticking point for Web ads: There's no way to measure an ad's effectiveness. The most popular method of measuring Web usage--hits, or the number of file accesses a site experiences--is one that even Web experts concede is completely useless. But hits say nothing about how much interest users really have in a site. To illustrate, a single, well-written article that's pored over by its readers will generally be stored in a single file, which counts for a hit every time a reader clicks on it. "But if you have a silly ad that contains an introductory paragraph and 12 pictures of different kinds of pasta, that counts for 13 hits," says Moore of Bernard Hodes. "How can you measure which one of those had more impact?"

Market researchers are working to develop more realistic measurements of how much interest an ad on the Net generates. Nielsen Media Research in New York, for one, is collaborating w ith Yankelovich Partners and ASI Market Research on a new measure. I/Pro Corp., a market-research startup in San Francisco, is also developing a metric.

But for now, setting a fair price for an ad on the Net is something of a guessing game--or a gamble. Individual Inc., provider of the NewsPage service, tried selling ads at a fixed price for three months.

Now, the Burlington, Mass., company will begin auctioning ads for its online news service. "How do you price something that's online?" asks John Zahner, VP of business development at Individual. "Nobody knows the answer to that yet."

Charging For Content
Another way of making money on the Web is to charge users for content, most commonly with subscription fees. While a few pricing models are emerging, there are no clear success strategies yet.

Most content providers that charge for subscriptions also count on advertising revenue from their sites. In fact, many predict that it will be advertising that will drive the business. "C harging subscription fees will not generate significant revenue [on the Web]," says Josh Bernoff, a senior analyst at Forrester Research. While Forrester expects companies will spend $2.2 billion advertising on the Web by the year 2000, Web subscriptions that year will come to only $156 million, he says.

The biggest obstacle to selling subscriptions over the Net, explains Bernoff: Consumers are used to getting cyberspace information for free, thanks to the dozens of news and information Web sites now available without charge.

Nonetheless, a few bold daily newspapers have started charging for content. The San Jose Mercury News began charging fees in April that range from about $1 to $5 a month for its Mercury Center news site. USA Today charges $13 a month for services, including Internet access using proprietary software. Neither the Mercury Center nor USA Today would release subscriber numbers, although the Mercury Center says its online customers number in the thousands.

There's even more activity among business publications. Some are rushing into the paid-subscription field, and a few are even making a profit. "Businesses are used to paying for information that will give them competitive advantages," says Forrester's Bernoff. He points to Individual's NewsPage as an example of an information service businesses might pay for.

NewsPage, which launched as a free service in April, began charging
for subscriptions on July 17. Its prices are tiered, starting at $3 a month for basic service and $7 a month for premium. NewsPage also charges à la carte prices of 10 cents to $10 a story from higher-priced sources such as specialty newsletters. The company has signed up thousands of paid subscribers, says VP Zahner.

But even with NewsPage's subscriber base, advertising is driving its business. Since April, the service has generated about $250,000 in ad re venue, with the site's dozen or so charter sponsors paying $15,000 a quarter for a banner linked to their Web sites on one news category page and four subtopic pages.

Publisher Meredith Corp. plans to launch an online version of its Successful Farming magazine on Oct. 1 and sell subscriptions for $40 a month. The Des Moines, Iowa, company is banking on the agricultural community's need for up-to-date, accurate information such as commodity prices and weather forecasts. It has priced the Web version of Successful Farming based on competitive agricultural data services, such as satellite feeds Farm Data and DTM, which charge $25 to $70 a month. "If we price it high to begin with, we'll probably get the early adopters who are willing to pay and are frustrated by surfing [the Internet] on their own,'' says Jim Cornick, publisher of Successful Farming . Besides, Cornick points out, farmers don't have a lot of time to sit in front of their PCs.

Charging For Services
Yet another emerging model involves charging for some type of service, such as searching databases or providing space, links, and other services to clients on a Web site.

One of the most successful service providers on the Web is Industry.Net , an online marketplace for manufacturing and industry. Industry.Net, which started as a dial-up service in Pittsburgh, went on the Web last October, offering businesses a place to shop for goods. It charges manufacturers and suppliers $3,000 to $8,000 a year to maintain an electronic storefront on its site. In this way, Industry.Net has generated about $20 million this year in Web business and expects to bill another $8 million by year's end.

Industry.Net does not conduct online transactions, although businesses are able to place orders via electronic mail. In July, it launched an online catalog service that allows customers to shop for specific products across manufacturer sites. Industry.Ne t plans to allow online purchase ordering, says Don Jones, Industry.Net's president. The company charges $8,000 to $500,000 to participate in the catalog service. In the month since the program began, the company has billed $2 million.

In the emerging Internet search business, InfoSeek Corp. in Santa Clara, Calif., charges users subscription and transaction fees for its database search service--and by selling space to advertisers. Since its launch in February, InfoSeek has generated about $1.4 million in advertising and subscription revenue, although the company declined to break out the figures by revenue stream.

InfoSeek offers three pricing options: the occasional user plan, which has no monthly fee and costs 20 cents per search; the light-user plan, which costs $2 a month, including 10 free searches, plus 15 cents for each additional search; and the standard plan, which costs $10 a month, including 100 free searches, plus 10 cents for each additional transac tion. "In the print business, you never made money on subscriptions," says Bill Peck, director of interactive advertising for InfoSeek. "On the Internet, people are looking at the subscription side and saying, 'I can generate profits from subscriptions.' The mentality has shifted."

Even so, InfoSeek is generating more revenue from advertising, for which it charges $7,500 and up. Its adrate card is based on "guaranteed impressions," or the number of times an advertiser's logo is guaranteed to be seen by viewers. This is different from basing a rate on hits, Peck explains, because sponsors' banners are placed at the top of pages rather than at the bottom.

Electronic Newsstand Inc. in Washington, which sells magazine subscriptions online, is another business that has generated revenue by offering services to both consumers and businesses. The company launched a Web site in April, and now has several different revenue models.

Electronic Newsstand's primary business is linking the home pages of publishers to its site, for which it charges about $1,000 a month. In addition, it offers several advertising programs, including a "pod" plan, for $5,000 a year, that let publishers sell space on their home pages for up to 10 advertisers. Electronic Newsstand keeps $5 to $10 of each subscription sold through its service.

Since launching its Web site in April, Electronic Newsstand has generated about $250,000 in revenue. Says Jeffrey Dearth, founder and CEO of Electronic Newsstand: "We hope it pushes us over into real nice margins."

Other businesses on the Net share that hope.