Searching for a pot of gold on the 'Net

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Profiting on the 'Net is still a long-term bet for online marketers

So you want to make money on the Internet ...

You've got company. Lots of it.

The Internet and its World Wide Web multimedia arm have been an acknowledged marketing medium for more than a year now, and companies that planted their flags there are increasingly looking for a return on investment. Or at the very least to recoup the cost of opening up shop in the first place.

But if there's a pot of gold at the end of the rainbow, it's looking like an awfully long rainbow.

"As the Web starts to mature in technology you're going to see more and more transactions," said John C. McCarthy, director of research at Forrester Research, Cambridge, Mass. "Once that happens, it's going to be clear people are making money.

"Today, it's a long trickle-down."

Just how long corporate America will wait for the money to trickle down--some say the better phrase in the near term is trickle in--is a question on the minds of many who have placed their bets on online marketing. For if this medium, which is billed as being so accountable, does not show accountability on the positive side, it will account itself right out of business.

"Has Ford sold a car by being on the Web?" wonders Ed Gotfredson, media director at technology agency Woolward & Partners, San Francisco. "That's the goal, isn't it?"

He and others pooh-pooh the notion that Ford's three-month-old site may involve other near-term interests, such as database collection, building an online image or offering customer service.

"Making money on the Web would be like saying, `Are you making money on your advertising?' " said Gary Nielsen, marketing programs and special events manager for Ford Automotive Operations. "It's way too early."

But it's not too soon to ask whether any money is being made on the Internet. Not at all.

The U.S. business world has spent an astounding amount of money building its home there. If each of the 27,000 companies in the business database of the Yahoo online search service shelled out a mere $5,000 to create its Web site (most spent far more), at minimum that's a $135 million market, and more realistically, a market verging on half a billion dollars.

(In case you're wondering why there are so many companies offering to help marketers get on the Web, there's your answer.)

The truth is, as fast-moving as the Internet is in adding new bells and whistles, unless a company markets an Internet product or service, it's going to be a long, slow haul to generate cash there. Sticking with it likely will be one of the biggest marketing challenges ever.

The casualties are already coming in. Vermont Teddy Bear Co., seller of high-end stuffed animals, opened and closed its Web site in a matter of months when sales didn't materialize and site upkeep became too time-consuming.

Utne Reader, which reprints articles from the alternative press, tried and failed to make a go of a Web site featuring all-new content. After three months and a loss of several hundred thousand dollars, Utne shelved those plans and laid off three employees in favor of a less expensive and less ambitious site.

There are plenty of people who will say--with some reason--that these companies didn't give the Web a chance, or didn't have a good business plan in the first place. But the fact is, success from marketing on the Web won't be measured in dollars and cents for several more years.

"Remember, in the great gold rush of 1849, the people who really made money ... were the companies that supplied the miners, not the miners themselves," said David Carlick, senior VP-general manager, Poppe Tyson, Mountain View, Calif.

Searching for profit

There's no lack of people out there who want to make money by telling companies how they can profit on the Web.

"Just for fun, I would stop and ask people, `How are you doing [on the Web]?"' said Stephen Kelly, whose job as a Beulah, Mich., commercial appraiser gives him a natural curiosity about such matters. "What I kept hearing over and over again is `No, we're not making money. This is a joke."'

Positive he could find someone making money, he launched "Kelly's Internet Profit Newsletter," a monthly tome whose inaugural issue came out this month.

Others are jumping on the profit bandwagon as well. New York consultancy Jupiter Communications Co. is hawking its latest report, "Revenue Strategies for the World Wide Web." CD Solutions, a unit of International Data Group, Framingham, Mass., offers a disc called "Using the Internet for Profit." There's even an Omaha, Neb., Web developer operating under the moniker Net Profit.

While these entities say they are seeing the beginning of profitability on the Web, they also say the full flowering of the medium is still far down the road.

"It's [got] tremendous profit potential," said Paul Earl, president of CD Solutions. "The actual sales, the revenue impact, that's coming ... but I don't think for a year or two."

That's not to say there isn't any money being made on the Internet. Leaving aside infrastructure builders like Netscape, Oracle and IBM, companies using the Internet as a sales tool are starting to see profits.

But so far, the money isn't anything to write home about.

The Great American Beer Club and Great World Wide Cigar Club, profiled in the Kelly newsletter, generate a combined profit of only $500 per month. List broker Visual Horizons takes in $3,000.

Even veteran direct marketer 1-800-Flowers found the Web tough going. A summer test proved far less successful than the company had hoped.

At least one company may have found the solution to retailing on the Web.

CD Now, marketer of music CDs and other merchandise, reports a respectable $20,000 to $40,000 per month in profit.

Analysts say the Web has the potential to be a vibrant sales channel. A recent report from consultancy Jupiter bullishly predicts Web shopping will be a $4.5 billion business by 2000, up from a mere $4 million today.

Profiting without making money

So where else will the money come from, and when? Right now there are a lot of guesses and few clear answers. And unlike selling products, where results are immediately measurable, charting profitability from such intangibles as database collection, customer service and image-building is extremely difficult.

"There are a lot of different ways to think about making money [on the Internet], and it doesn't have to be selling something," said Donna Hoffman, an associate professor at the Owen Graduate School of Management at Vanderbilt University and an expert in online commerce.

For Sun Microsystems, Web profits come from saving costs elsewhere.

"Our revenues are going up tremendously and our expenses are going down as a result of information dissemination on the Web," said Jerry Neece, who until being promoted to enterprise training program manager last month was senior product manager for Internet marketing for the $6 billion computer products company.

Two Web ventures alone are saving Sun more than $7 million per month, Mr. Neece said.

Many Web sites hope to generate cash by taking advertising. In recent months a whole new ad medium has sprung up in the buying and selling of "links," billboards on one site that link, when clicked on by a mouse, to another site.

Publishing sites may face the most difficulty making money, long-term. If marketers decide that buying links isn't worth the expenditure, and if consumers continue to turn up their noses at paying for content, media sites will collapse.

Early returns have been promising but inconclusive. Sites from ESPN, Conde Nast Publications and Time Inc. have all generated more than $1 million in ad commitments--big numbers for the medium but peanuts compared with what it costs to run a media site on the Web.

"Pathfinder will make money when we have a vital advertising and consumer revenue," said Bruce Judson, general manager of Time Inc. New Media. As to when that will be, he added, "My goal is to make it very soon."

What likely will not work on the Web is being there merely to be there.

Companies--especially major marketers--that went up because it was the trendy thing to do will undoubtably look back on the hundreds of thousands of dollars they spent and not know what they are getting for it.

"Earning profits in a nascent market is something you shouldn't be punched in the nose for not doing," said Robert Broadwater, managing director-interactive digital media at investment banker Veronis, Suhler & Associates, New York. But taking the attitude "It's OK not to make money" is deadly, he said, because experimentation can go only so far.

Ford says return on its Web investment will be measured not in terms of the number of cars sold but on how well the company alters consumer perception of its brand.

"How will the dealer know that sales came through the Internet?" Ford's Mr. Nielsen asked. "The answer to that is probably you'll never know."

That may not be so. Most experts believe the Internet and World Wide Web will indeed provide exactly that kind of information, and more, meaning those who will make money there will be the ones to best use it to their net gain.

Copyright November 1995 Crain Communications Inc.

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