Lucrative Alternatives to Online Advertising

As chief executive of Gaia Online, an Internet hangout for some 6 million teens, Craig Sherman should be worried about how the worsening economy could slam Web advertising. Nope, not a bit. Unlike so many Web startups that until recently saw ads as an easy ticket to riches, Gaia gets most of its more than $1 million in monthly revenues from sales—in this case, virtual items: clothes, jewelry, and other accessories to dress up one's avatar, or online character. They run from a few pennies to $10 or so apiece. Gaia's gross profit margins on sales of virtual goods, which are up tenfold from two years ago, top 95%. After all, they're just endlessly reproducible bits and bytes.

Gaia is just one of dozens of Web companies increasingly mining revenue sources beyond ads. Virtual goods are now a more than $1 billion business worldwide. And subscriptions to sites, once thought to be a losing proposition on the wide-open Web, have become at least a $2 billion business, with millions of people willing to pay monthly or annual fees to companies such as United Online's Classmates.com and family research service Ancestry.com. Other companies are selling job listings, lists of prospective customers, and more.