This was on teh front page of today's New York times.  At some point,
someone must pay for all of these services that the Internet brings
us.  The question is who.

kelly 


The New York Times 
   
May 1, 2001

Free Rides Now Passé on Information Highway

By SAUL HANSELL

   T here never was such a thing as a free lunch over the Internet. But
   for a while a determined freeloader could find a Web site that would
   pick up the tab for all sorts of other goods and services, from
   computer keyboards to photo developing, in return for little more than
   looking at a few ads.
   
   No more.
   
   You can't get free online service at freeInternet.com any more. Nor
   can you get a free computer from free-pc.com or make a phone call at
   callfreeway.com.
   
   Some services are still free, but with limits. Kmart's Bluelight.com
   offers free Internet service but for only 12 hours a month. At other
   sites, the watchword has changed from free to fee. What had been free
   picture developing at Snapfish.com now costs $1.99 a roll. Voicemail
   from uReach is at least $2.99 a month.
   
   And the only thing free at Freemerchant.com, which once gave Internet
   stores to small business, is a 30-day trial of its $25 a month
   service. "We did what we needed to do to cover our costs and stay in
   business," said Jennifer Rogers, a senior vice president of Network
   Commerce, the Seattle company that bought Freemerchant.com last year.
   At first, she said, advertisers were paying $50 to $75 for every
   thousand users who saw their ads. Those rates are now down to $3 to
   $5. "At those rates, there's no way we can recoup our investment as an
   advertising-driven business," she said.
   
   It is also becoming harder to get free shipping when buying from an
   online store. Outpost.com, which built its business in part on free
   shipping, now charges at least $3, and second- day air on a television
   can run $60. And Kozmo.com imposed a fee for delivering videos and
   snacks in recent months, but that was not enough to keep the company
   from failing a few weeks ago.
   
   Even Yahoo, the big, previously free Web portal, has started imposing
   fees for many aspects of its service and promises many more.
   Auctioning off your used skateboard is $1.50. Storing your e-mail
   costs $20 a year. Receiving live stock quotes $10 a month. And so on.
   
   Most sites offering news and information are still free, but a few
   have started to impose fees and more are considering doing the same.
   
   Salon.com, which happily gave away its coverage of the Clinton White
   House, is charging $30 a year for its flagship column on the current
   administration, called "Bushed." That fee also buys a weekly celebrity
   gossip column, an erotic art gallery and regular reports on the
   "Chains of Love" reality TV show. Paying customers can also turn off
   the ads. (Salon's voluminous "Survivor" coverage remains free.)
   
   David Talbot, Salon's chairman, says he thinks 2 percent of the site's
   3 million users will sign up for the new service. Half of them, he
   guesses, will want the special articles and half will just want to
   support the site.
   
   "A lot of our audience pays $300 a year to join National Public Radio
   and they don't have to pay anything," he said. As early as next year,
   Mr. Talbot said, Salon hopes to impose a fee of $75 to $150 a year to
   read any of its site with ads.
   
   Why not just impose the full fee now? "That's jumping off a cliff with
   no net," Mr. Talbot said. Sites that have imposed fees, like Yahoo
   Auctions, have experienced declines in volume of as much as 90
   percent. And the biggest subscription content site, The Wall Street
   Journal Online, has 574,000 subscribers at $29 to $59 a year,
   one-tenth the monthly audience of the largest free financial news
   sites.
   
   Besides, advertising is down, not dead. Mr. Talbot says he thinks
   Salon will take in $2.50 per free user a year from ads, perhaps more
   if the company's moves to increase the size and intrusiveness of its
   advertising catch on.
   
   "The ad market goes up and down, but we are very committed to the free
   model," said Mark R. Goldston, the chief executive of NetZero, the
   largest free Internet service provider, which superimposes advertising
   on the screen as its users surf.
   
   "Free is one of the greatest catchment mechanisms anyone has heard of
   for attracting users," he said. The failures of many of his
   competitors, he argued, simply means that only the largest and most
   efficient free providers will survive.
   
   Even so, NetZero has introduced an ad-free paid Internet service and
   has limited free customers to 40 hours a month.
   
   "We had five 500-pound fat guys showing up at the smorgasbord and
   stuffing themselves all day," Mr. Goldston said. He said 12 percent of
   NetZero's users accounted for 53 percent of its network costs. Cutting
   back their use, or getting them to find another service provider
   altogether, will save the company $20 million to $40 million a year.
   
   Of course, perhaps the biggest giveaway on the Net, the music on
   Napster, is also slowly coming to an end but for legal reasons. And if
   the record companies do not kill it entirely, as most seem to want to,
   Napster, too, hopes to be reincarnated with a monthly subscription
   fee.
   
   While Napster was started more as a hobby than as a business with no
   visible means of support, many of the giveaway sites were intended
   from the start to be viable as advertising vehicles. If television
   situation comedies can sell soap, why can't fax cover sheets?
   Free-PC.com, perhaps the most audacious effort to use the concept,
   decided that it could cover the cost of a computer by selling
   advertising on one-third of the screen. Similarly, for every two
   minutes of calling on Mytalk.com from General Magic, a user had to
   listen to a 15-second advertisement. Both closed last year after it
   was clear that the ad revenue was not going to be enough.
   
   In other cases, sites gave away something basic, hoping users would
   pay for a better version.
   
   "We were banking on the piggyback approach," said David Stubenvoll,
   chief executive of Freeworks, a site meant to automate paperwork for
   things like time sheets and expense accounts at small businesses.
   Rather than spending the money to advertise a paid service, it assumed
   it could attract hordes of clients by offering a basic service free,
   and then pushing them into additional paid services.
   
   "If a small percentage of people would upgrade to paid services, they
   would generate real money," he said.
   
   But the piggyback plan did not help the piggy bank. The company needed
   2 percent of its users to upgrade, but only half a percent did. It
   closed earlier this year.
   
   Some of these businesses might have succeeded, their founders argue,
   had they been given more time to work things out, and some were flawed
   from the start. But in the last few years, venture capitalists were
   competing with each other to give tens of millions of dollars to any
   business that could attract lots of user "eyeballs." And there is
   hardly a better way to attract customers than to give away something.
   
   The investors and entrepreneurs assumed that with a vast audience,
   there must be a way to make money selling ads, services or something.
   Many cynically thought they could just sell the company to someone
   else who would figure out the finer points of the business model.
   
   After all, the creators of some of the first unprofitable but rapidly
   growing services made millions. Microsoft bought Hotmail, a free
   e-mail service, for about $400 million. America Online paid a similar
   amount for the free ICQ chat service. And Yahoo bought Geocities,
   which gave away Web home pages, for $4 billion.
   
   "When we started, we didn't know what the right business model was,
   but other people were offering all sorts of things, free e-mail, free
   calendars, so we offered free storage," said Tim Craycroft, the
   founder and chief executive of i-drive, a site that let users store
   files to keep backup copies or to share them with friends.
   
   One idea the company was banking on was giving away some storage space
   then charging for more. But it became caught in a sort of bidding war
   with nearly a dozen competitors. "Each new company that just raised
   $20 million was giving away more space free," he said.
   
   That war is over. I-drive and most of its competitors that are still
   in business have decided their only hope is to sell software to
   corporations that let employees or customers have Internet storage. In
   the next few months it will tell its nine million customers they will
   have to find another place to keep their files.
   
   Users are hardly enthusiastic about the changes, and unfortunately for
   companies, the nature of the Web makes it easy for people to take
   their business elsewhere quickly.
   
   John Ridley, in Chelsea, Mich., says he is loath to pay the $20-a-year
   fee just imposed by PhotoPoint, a formerly free site on which 1.5
   million people share pictures. The site is "way too heavy on banner
   ads." But moving his photo album does not really bother him.
   
   "I realized at the beginning that these `free' services wouldn't last
   more than a couple of years, if that," he said. "I use them as
   disposable services, and I fully expect a great deal of churn as new
   ones pop up and then go out of business."
   
   Ed Bernstein, chief executive of PhotoPoint, said he had no choice.
   "The entire industry will have to move to a paid model or go away," he
   said.
   
   When the company raised $11 million from the likes of Intel, it
   predicted that half its revenue would come from advertising. It now
   calculates that it will be lucky if ads represent 10 percent of
   revenue. (Selling prints and gifts has been its other major revenue
   sources.)
   
   Its costs, meanwhile, have been higher than anticipated. Sure, it
   costs only a few pennies a year to store a picture. But with 35
   million pictures taking up 10 terabytes of disk space, those pennies
   add up. So imposing a $20 annual fee not only brings in cash, it
   sharply cuts the company's costs as the vast majority of its customers
   leave.
   
   "It's a terrible thing to say that if I lose 80 percent of my
   customers it's a good thing," he said, "but they weren't customers
   really, they were visitors."


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