Toll Booths at the Portals' Gates

To break their ad dependence, these sites are setting up services that people will be willing to pay for -- they hope

On Apr. 23, Web portal Terra Lycos followed its destination brethren with the launch of its own subscription-based phone service, called Lycos 411, that connects users with live Web-surfing operators. The Barcelona-based company's move is the latest in a race among portals to identify substantial revenue sources that aren't dependent on the volatile -- and as yet unproven -- online advertising market.

It's becoming a crowded field. Competitors such as Yahoo! and America Online already offer phone-based Web services. Yahoo! announced at the beginning of April that it, too, would start charging for its formerly free, six-month-old service starting May 1.

Now comes the real question: Will charging for certain parts of a site, especially those that feature content easily found elsewhere, help the bottom line of these flailing companies? The answer is crucial to their survival.


  For now, most analysts don't expect much of a bump. "I would be surprised to see [these subscription services] make a dramatic difference in the short-term," says Horacio Rozanski, a vice-president at consultancy Booz-Allen & Hamilton. He predicts that the road to recovery "will be a very long, tough time for independent portals," pointing to decisions by NBC and Disney to bring their Net operations back in-house as evidence.

But there may be a silver lining. Such premium services could help keep these portals alive until advertisers warm up again to online advertising -- and are willing to pay according to what's valuable to them. And there, the portals have a big advantage. About 60% of all Net sessions include at least one portal stop, Rozanski writes in a recent paper, "The Great Portal Payoff." These are by far the most-trafficked sites, he says, and they have evolved into destinations rather than mere pit stops on the way to somewhere else.

For example, users access a mere 6% of all sites via search engines, and they spend three times more time on full-service portals than other sites, says Rozanski. The Web has become "a collection of friendly local pubs, with an occasional dive into a new saloon," he writes. "For most consumers, the coziest hangout has become their neighborhood portal."

As such, it makes sense for portals to charge according to the ways they actually capture audiences. "What we're seeing is an experimentation phase," Rozanski says. Indeed, as portals work to convert consumers from free to paid services, they're also trying out new pricing strategies for advertising and testing ideas such as sponsorships and co-branded ventures.


  Witness the spate of recent initiatives by Yahoo!, dependent on ads for 90% of its revenues. Yahoo!'s 800 number, which provides automated news headlines, sports scores, stock quotes, weather reports, and messages from individual e-mail accounts, isn't its only subscription service. It has already begun offering online bill-paying (see BW Online, 4/20/01, "Would You Pay to Pay Bills at Yahoo!?"). The portal is also planning to offer fee-based music downloads from Sony and Universal artists, as well as access to real-time financial news, stock quotes, and ratings analysis.

"We applaud any directional move away from the sole reliance on advertising," says Wit Soundview analyst Lisa Haas, "but these sites are going to have to offer something beyond what users can find for free."

Exactly, says Lycos 411 Senior Product Manager Nick Werthessen. He says its 50 live operators will differentiate Terra Lycos' service from that of its competitors. "Callers aren't limited by the type of information they can access," Werthessen says, "and the technology tracks all the questions and the source of their answers so that efficiency increases with every call." Following a free one-month trial, subscribers can choose among three packages: $30 a month for unlimited access, $5 a month for three calls, or $1.95 per call.

But obstacles to success remain. For one, the unlimited-access monthly charge is higher than those of most Net service providers. Also, mobile users are most likely to seek real-time information, such as flight updates or financial account status, that can be found via free 800 calls or sources more reliable than the Web (which tends to update info according to specific time intervals). Calling an airline or bank accomplishes the same goal for a fraction of the price and possibly greater peace of mind.


  Still, for companies that glean an overwhelming majority of their revenues from advertising (70% for Terra Lycos), there's really no choice but to figure out alternative ways of earning income. Ad rates are down some 30% since the beginning of the year and aren't expected to rebound strongly anytime soon. That caused Yahoo! to miss first-quarter earnings estimates by some $300 million and has led to a major management shuffle, including the appointment of a new CEO from outside the company.

For sites that decide to charge for previously free services, the risk is a dramatic plunge in traffic. Fact is, consumers have expressed little willingness to pay for much of any service on the Net except access to it. News sites based on subscription revenues, such as The Wall Street Journal's and, have not escaped the recent spate of layoffs and cost-cutting measures of many dot-coms, and in some cases, now offer more content for free.

But even if subscription services such as Lycos 411 are just shots in the dark, at least they signal that the hunt is on. "We know our users want to have access to data away from their PCs," Werthessen says. He notes that financial site and dating service -- which have offered free and subscription content for at least four years -- are two of the most popular destinations in the Terra Lycos network.

After the recent tech meltdown, the future is still touch-and-go for portals. Now they must begin to test just how indispensable they are to consumers in an environment where advertisers have decided -- for now at least -- that they can get along without the portals.

By Stefani Eads in New York

Edited by Douglas Harbrecht

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