With the war between established and upcoming proprietary online services growing more fierce by the day, and the World Wide Web's rapid rise, providers of information and entertainment services should be making out like bandits.
But in reality, many of the magazines, newspapers and TV networks that rushed to develop online extensions are still making do with standard agreements that reward them with meager royalties (usually 10% to 15%) based on online usage fees and a small bounty for drawing new subscribers to a service.
Now, though, early one- and two-year exclusive agreements are expiring, new services are proffering more lucrative contracts and content providers are starting to flex their newfound muscles.
That's leading to increased tension in the negotiations between information providers and commercial services, which count on third-party content relationships to distinguish themselves from the crowd.
How it will all play out is unclear. Some commercial services recognize they've lost control in the bargaining process, while others insist content is no longer the key to success as distinctions between proprietary services and the Web dissolve. Content providers, meanwhile, are growing restless in the search to develop new revenue streams.
"The issue of who's going to package the content for the consumer is very much up for grabs," said Bill Day, director of content and community for Prodigy. "Content providers and service providers are feeling each other out to see who wants to partner and who wants to go their own way. Online services can't claim to have the leverage they did in the past."
Michael Kolowich, president of AT&T Interchange Online Network, scheduled to launch in June, has a more harsh prediction.
"The real hard discussions are the ones being made on the renewal of those contracts" with commercial services, he said. "There is going to be a backlash from publishers who are slowly losing control of their online services."
Signs of that backlash are already showing. InfoWorld Editor in Chief Stewart Alsop fired a public salvo in his column in the magazine's May 1 issue, saying InfoWorld was pulling out of Apple Computer's eWorld and steering clear of other online services because the financial deals are stacked against content providers.
"We find that dealing with online services requires a lot of effort in return for which we get a small amount of money, barely enough to cover the cost of providing the service," he wrote.
Mr. Alsop told Advertising Age the amount eWorld paid his publication-$4,500 a month-wasn't enough to cover what it would cost the publication to produce a quality interactive version.
"We're not in the business of giving away" InfoWorld's product, he said.
As soon as its one-year exclusive deal to provide sports content to Prodigy expired at the end of March, ESPN announced it was partnering with Starwave Corp. to develop a sports-oriented Web site.
ESPN is still providing content to, and negotiating with, Prodigy-which is said to have paid the sports network a $1 million advance for its original deal-but may bolt. Just last week, ESPN announced it will provide content to the Microsoft Network, and its Web site is accessible through America Online's sports area.
The New York Times' deal with America Online comes up for renewal on June 1 and there are rumors the newspaper will not renew. In one possibly telling move, the Times Co.'s Information Services Group turned over responsibility for the AOL site to the paper itself, giving the Times more control over its destiny. But insiders said talks are continuing and one Times executive called the rumors "ridiculous."
U.S. News & World Report is working on a new contract with CompuServe, and "revenues and the kinds of services offered are obviously big topics," said Kathy Bushkin, the magazine's director of editorial administration.
"The whole world has changed dramatically from two years ago. The whole notion of being exclusive has passed," she said.
Time Warner, which has sites on the Web and each of the leading commercial services, won't talk about its deals. But one insider predicts "it is going to be a tough discussion" when AOL's contract with flagship Time expires.
"Generally, it is going to be a lot tougher for the online services to get content from the publishers," the insider said.
The Web on the surface seems an appealing place to be because it makes a site accessible to users worldwide whether they're accessing the Internet through a commercial online service or local provider. Content companies also keep all of the money they generate there. But navigating the Web to find valuable content remains a tricky process and there are not yet secure mechanisms to charge users.
"If content companies are going to the Web today to make more money, they're in for a rude surprise," said Ted Leonsis, president of AOL Services Co. "They can keep everything of nothing."
CBS has a site on Prodigy and on the World Wide Web and George Schweitzer, exec VP-marketing and communications, thinks that's the best model for now. The network is developing a link from Prodigy to the Web site.
"I think you're seeing everything moving to the Web. It's the free range, the frontier where everyone is staking their territory," Mr. Schweitzer said, adding, "It does not preclude relationships with online services. They all realize where life is going, too."
Microsoft and AT&T are looking to combine the best properties of the Web and proprietary services in their business models for outside content providers. On both companies' online services, content providers will retain the majority of revenues generated by their areas.
Microsoft Network, slated for rollout with the company's introduction of Windows 95 in August, last week announced its first wave of content providers. The list includes American Greetings, Cooking Light, C-SPAN, Hollywood Online, Home Shopping Network, The New York Times Co. Sports/Leisure Division, QVC, Starwave's Outside Online and ESPNet SportsZone, U.S. News & World Report, Women's Wire and Ziff-Davis Interactive.
George Meng, lead product manager for Microsoft Network, likens the service to a shopping mall. As in a mall, Microsoft wants to rent space to multiple vendors in a product category, a departure from some services' practice of offering category exclusivity.
"The financial incentives [content providers] have been presented so far haven't been compelling," Mr. Meng said, adding that Microsoft will give back at lest 70% of revenues.
Current leaders in the online field are split over the impact Microsoft's and AT&T's plans will have on their own business models.
"I think you'll see online services focusing on certain segments of certain areas," said Prodigy's Mr. Day. "Certainly in those areas we'll be looking to structure different kinds of deals that are stronger, with more revenue-sharing, more of a partnership than a client relationship.
"In other areas where we have less focus, we will downplay" the need for new agreements, he added.
AOL's Mr. Leonsis admits the current business model isn't best for content providers, but said it is a proven formula that is best for consumers since it allows AOL to keep its pricing "simple and predictable." AOL does not let content providers charge subscribers a premium to access their areas.
AOL will still pay bigger royalties for exclusive deals and is looking to generate more revenue-sharing opportunities, but the service won't dramatically restructure standard agreements.
Mr. Leonsis, who admits to being nervous about content deals, went so far as to shatter a popular new-media cliche.
"Content is not king," he said. "Content isn't what's driving this business. There's too much content. Community and context right now are king."
Rick Spence, online services analyst at Dataquest, San Jose, Calif., disagrees.
"We still believe that content is king," Mr. Spence said. "Consumers will typically go where the content is. They're not concerned about the domain."
But he said it's much more difficult to promote a site on the Web than on a commercial service, noting, "Unless you have something extremely compelling, people have to stumble on your [Web] site."
Gary Arlen, president of Arlen Communications, Bethesda, Md., offered a more practical reason for content providers to pick the Web over commercial services. "They're not making money off their online magazines; they're not making money on the Web," he said. "But it costs less" to go on the Web.
Contributing to this report: Debra Aho Williamson, Keith J. Kelly, Bradley Johnson and Joe Mandese.