Local-site costs grow as salaries increase

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In the Web business, it is taken for granted that most local-content sites are not yet profitable. But exactly how much money are content providers on the Web spending?

It costs about $3.1 million a year to maintain a high-profile content site, according to Forrester Research. Costs are skyrocketing. When Forrester looked at sites in December 1995, it cost a mere $893,000 on average to operate a site for a year. In a recent report, the researcher said the average cost to maintain a content site will reach $6.3 million a year by 2000. The Forrester study surveyed 38 content sites including TheStreet.com, Discovery Online, Wall Street Journal Interactive Edition and others.


Sales and marketing spending--which includes marketing programs and ad sales salaries--will jump from 28% to 40% of the site's total cost, the report found. Forrester estimates that by 2000 the average site will spend more than $1 million on marketing, ranging from online sponsorships to print ads and TV spots. Technology costs should hold steady at 20% of a site's costs through 2000.

Of course, there are also start-up costs. Jupiter Communications estimated that for high-end content sites, the initial cost runs between $500,000 and $1 million.

"Local content has been one of the most overrated phenomena on the Web. Everyone sees that $60 billion local ad market and loses their mind," said Evan Neufeld, director of online advertising at Jupiter.


Digital City, which recently added 12 new local sites to bring its total markets to 50, is already talking profitability. Paul DeBenedictis, president of Digital City, said the Los Angeles site is already making money and the Washington site is breaking even and is expected to show a profit by yearend. Digital City is owned by America Online and Tribune Co.

On the advertising side, Digital City uses its local salespeople to handle $1,000-to-$10,000 accounts, while parent AOL targets larger or national advertisers. The lowest-paying directory and Yellow Pages-type advertising is farmed out to third-party companies such as R.R. Donnelley & Sons Co.

Mr. DeBenedictis estimated about one-third of advertisers across the Digital City network are national, with the rest being regional and local.

The Forrester study also drew some conclusions about where the content market is headed: Few players will be able to afford to stay in; big media players will win because of large capital reserves; and third-party content contractors will flourish as sites look to cut one of their biggest expenses, employees.

Mr. Neufeld said: "At the end of the day, there's just not enough money for all of them. Which ones will cave first, nobody knows."

Copyright July 1998, Crain Communications Inc.

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