Major Web publishers and Internet service providers are discussing a new content distribution model that could change the way consumers pay for Internet access and information.
High-profile sites including ESPNET SportsZone, CNN, Hearst HomeArts and Sportsline USA, and major ISPs such as CompuServe, Prodigy, Sprint, AT&T Corp. and MCI Communications Corp. are engaged in a variety of discussions under which the ISPs would pay content sites to supply premium material for their services.
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DRAMATIC SHIFT IN PRICING
The end result could be a dramatic shift in Internet access pricing, where consumers pay not only by usage, but also by the information they want to receive and the activities they engage in.
"Much like the cable TV industry today, there will be 'must have' brands," said Kenneth Dotson, VP-marketing with Sportsline, which is negotiating premium packaging deals with major ISPs. "Such 'must have' brands can expect to receive some form of compensation from ISPs/online services in return for their discounted access to premium content."
Signs of an impending shift are rampant. America Online last week was the target of a class action lawsuit charging that its current $19.95 flat-rate pricing is causing traffic jams and leaving countless thousands of users unable to access the service. Bloomberg last month reported that AOL is considering tiered pricing for parts of its service.
CompuServe and Netcom Online Communication Services, meanwhile, have already vowed to stay out of the $19.95 morass, saying there's no revenue in that model.
WANTED: SUBSCRIPTION REVENUE
Enter the content providers, which are desperate for a workable subscription revenue stream. Most sites derive 100% of their revenue from advertising; analysts predict it will take three years before subscriptions will account for even 30% of revenues.
Early stabs at subscription plans have shown mixed results. Microsoft Corp. Web zine Slate on Jan. 11 cancelled plans to convert from a free to a paid site. Playboy has repeatedly delayed its planned rollout of a subscription area, though it attributes the problems to building a back end, not questions about subscriber demand.
MTV Online, meanwhile, took the presumptuous step of sending letters to ISPs across the country late last year, demanding that they pay up--or be shut out of the MTV site entirely.
A Viacom spokeswoman confirmed that MTV Online was in continued discussions with as many as a dozen national ISPs about "strategic partnerships." MTV doesn't plan to charge subscribers for content in the near future, she said.
NEW REVENUE STREAMS
Major media sites and ISPs say a modified version of MTV's revenue model is definitely in the works.
"We're in conversations with ISPs in a number of different angles, and certainly bundling [of premium content] is one of the things that's being discussed," said Rich LeFurgy, VP-marketing and advertising with Starwave Corp. "It's the next wave of revenue generation for the entire industry."
If this sounds like deja vu, you're right, to a degree. Major media companies like Time Inc. and ESPN built proprietary areas on the online services, only to cancel them or scale them back when their Web efforts picked up steam. This time, though, the content is all Web-based, and no content provider is willing to do an exclusive deal.
Some sites, including SportsZone and Sportsline, already offer premium areas for about $4.95 per month and are using that content as leverage in negotiating the ISP "carriage" deals. Other Web sites, such as CNN and Hearst HomeArts, don't yet have a premium product.
ISP PAYS CONTENT SITES
One of the most commonly discussed scenarios involves an ISP paying a content site a few cents per month, per subscriber, for the right to offer specialized content to its users. The ISP could offer the content as an added value in the basic service package or bundle it and charge a premium price.
"We do anticipate the introduction of parts of HomeArts as subscription-based this year. One of the things we'd like to do is approach ISPs about charging for that content," said Brian Sroub, VP-marketing at HomeArts.
An ISP also could become a reseller of premium content, taking a cut of the subscription price from each participating site. Sharing ad revenue based on subscribers sent to the site is another possibility.
Sprint is discussing tiered pricing and delivery of premium content with MTV and others, said spokesman Jeff Shafer.
"We're looking at tiered approaches, and certainly there's merit for them in both the ISP and the content provider," he said.
Despite the activity, some say tiered pricing won't work for online services, which don't have the same kind of monopoly access to the home that cable operators do.
"The cable industry found out in the early '80s that if you tier too much, people just turn off. They don't get it," said Martin Nisenholtz, president of The New York Times Electronic Media Co.
"The ISPs don't have any money to throw around," said Bill Doyle, analyst with Forrester Research. "The content providers think they might be able to skim some cream off the top, but there is no cream."
Contributing: Jane Hodges.
Copyright January 1997, Crain Communications Inc.