By:style='mso-tab-count:2'> Newt Barrett

“This was more than a love

affair; this was an orgy,”

Ann Winblad,

co-founder of Hummer Winblad Venture Partners

In the mid-1990s, conventional Internet wisdom held that

publishing online ought to be much cheaper than creating a print publication.

After all, there was no paper and postage involved. If you built a site, people

would come. And advertising would make it profitable. Or would it?

As Internet usage skyrocketed, it seemed increasingly

logical that content sites would thrive if they provided valuable content in an

online-friendly format. Every major media entity poured millions into online

ventures. From Time Warner to NBC to ESPN to Ziff-Davis to Disney to the Wall

Street Journal, they all wanted a piece of the action. But start ups like CNET,

TheStreet.com, Slate.com, and Sportsline.com quickly made headway against the

big boys.

Ann Windblad, co-founder of Hummer Windblad Venture

Partners, says, “I’m sure

that all the people who have been in the entertainment industry for a long time

found it fairly remarkable that we believed that, in four years, we could get

the amount of viewers, aggregate around the world, that cable had gotten in

ten.” But that’s exactly what happened. Worldwide Internet usage will exceed

400 million in 2000. In fact, the highest traffic sites get tens of millions of

visitors each month.

Because ‘content’ was assumed to be king, the virtual gold

rush was on. Venture capitalists got the message. By 1999, $1 billion per week

of VC money was pouring into Web start ups—many of them content-related.

While content euphoria reigned supreme, behind the scenes,

the cost of technology, marketing, and content production was eating up the

dollars that starry-eyed investors had poured into dozens and dozens of

internet launches. Too many sites were vying for the time users have to spend

online. A correction was inevitable.

In mid-April 2000, just such a correction occurred among

publicly traded Net companies. After a tough, but commonsensical article

appeared in Barron’s, investors woke up to the reality that hundreds of market

favorites might not have enough cash to last through 2001. Many of those were

expected to run out by year-end 2000. Market values plummeted, making it doubly

difficult for fledgling companies to get additional funding.

What

Went Wrong?

With a critical mass of users on the Internet, one might

justifiably assume that popular sites should be at least close to

profitability. As Jake Winebaum of eCompanies Venture Group emphasizes, “style='mso-fareast-font-family:"MS Mincho"'>There’s a huge audience, a growing

audience that’s using the Internet more and more, and it is a very powerful

advertising medium.”

That

said, there is an inevitable lag between user adoption of a new medium and

advertiser acceptance. This was true of cable where ads initially sold for a

tiny fraction of what they cost today. And, it’s true of the Internet, where

there is a surplus of national advertising availability that has depressed ad

rates. Moreover, many pundits are questioning whether advertising alone can

deliver adequate revenue to assure profitability.

Indeed, most content sites are hemorrhaging cash. Just a

month ago, APBNews.com, a well-funded crime/police news site declared Chapter

11 bankruptcy and laid off 200 employees. APBNews.com is in good company as

numerous other sites fail to prove that profits are imminent and suffer a

variety of grim fates.

Perhaps most surprising to most of us, is that a

two-year-old site managed to scale up to 200 employees without commensurate

revenues. But, within the Internet universe, bushel baskets of cash have

enabled some very expensive visions to be attempted. In hindsight, investors,

including VCs are asking, “What were we thinking?”

The lesson for the next several years, according to

Winblad, is that “This is not a get rich quick business. It was only

temporarily.” Anyone planning to survive with a new or existing business must

be prepared to stick it out for the long haul — that is 5-7 years before hoping

to go public.

Almost certainly, it’s going to get worse before it gets

better. It’s useful to compare today’s Internet era to the turn of the last century

— when more than a hundred automobile manufacturers struggled for market

dominance. Today, only a handful of automakers survive amid ongoing

consolidation worldwide. We’ll see a similar winnowing at a much quicker pace

on the Internet.

Survivors: Who Won’t Be Voted Off the Internet?

Compelling content, a devoted user

community, a sound revenue model, and financial staying power are critical to

survival for internet content providers. So who’s likely to be left standing by

2002?

We can expect

two broad categories to survive:

• tab-stops:list .5in left 4.5in 5.0in'>Online ventures from veteran media

  players such as NBC, AOL/Time Warner, the Wall Street Journal Interactive,

  ESPN, CNN who really understand and exploit the new media realities.

• tab-stops:list .5in left 4.5in 5.0in'>Upstarts who have already

  established themselves as must viewing by millions of online users, such

  as About.com, Slate.com, Hoover’s Online, and CNET.

"MS Mincho"">mso-bidi-font-size:10.0pt;font-family:"Times New Roman";mso-fareast-font-family:

"MS Mincho"'>In a July 2000 article in eCompany Now, “Will Online

Publishing Ever Fly?,” Josh McHugh notes, “mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>There are some sites

out there that are turning profits, and they're doing so because they've

realized something absolutely essential: On the Internet, it's not enough to be

good. You must also offer readers something nobody else has.

In other words, there is no room for

me-too sites with little that’s unique or valuable. He then quotes, CNET

founder, Halsey Minor on their core philosophy, “10.0pt'>We know our place," says Minor. "It's as an intermediary

between buyers and sellers. But from the beginning, we've also understood the

importance of journalistic integrity."

Interestingly,

Minor is describing the traditional role of business-to-business publishers,

such as Southwest Florida Business that aggregates business buyers so

that advertisers can reach them efficiently at BusinessNewsNow.com. The

online nuance is that users can go directly to the advertisers’ online sites

and can conduct ecommerce transactions immediately. There’s no need for a

letter, a fax or a phone call.

Multiple

revenue models seem to be critical for most sites’ survival — although some

dissenters at the conference believed that advertising would be enough.

Typically, the elements include: advertising, ecommerce, and/or subscription

revenue.

Already

profitable, CNET stands as an example of a site with both broad and deep

content, but who counts on ecommerce revenue for a major portion of its

revenue. And shortly before press time, they announced the acquisition of print

veteran Ziff-Davis’ online properties.

Another

poster child of profitability, Wall Street Journal Interactive,

generates significant revenue from its annual $59 subscription fee in addition

to advertising dollars.

Locally,

the Naples Daily News Online was an early online entrant and is quite

profitable today — it generates revenue from both ecommerce and advertising.

These

profitable sites are the exception in today’s online universe. Most sites are

still losing money — even such stalwarts as The New York Times and the Washington

Post.

The Bottom Line is The Bottom

Line

Therefore

expect rapid consolidation as hundreds of weaker players drop by the wayside.

Even as Internet usage skyrockets by 2002, you can expect user traffic and the

revenue that follows to be concentrated among fewer and fewer players.

It’s

going to be a bumpy ride.