Seeking payoff on the Web

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As rival internet networks America Online, MSN and Yahoo! wrestle with strategies to grow non-advertising revenues, they all appear to agree on one thing: the need to lure consumers to pay for premium services.

Beyond boosting average monthly revenue per consumer, network content providers hope once they build valuable subscriber bases for paid services, advertisers won't be far behind.

But will consumers pony up for add-ons?

A recent study conducted by comScore Networks and the Online Publishers Association found consumers racked up $675 million in spending for paid content in 2001, up 92% from 2000. Spending was mainly for news-site subscriptions, personals, financial services and sports.

The research found consumers were most willing to pay for content considered "of superior quality and/or that meets more emotional or passionate needs such as personals/dating, sports and weight loss," according to Dan Hess, VP-comScore. Mr. Hess believes paid content spending in 2002 is tracking toward $1 billion.

If that's true, Internet networks like Yahoo! are on the right track. Yahoo!, which offers more than 20 premium services, racked up a little more than 1 million paying customers, about half of whom subscribed to mail and personal services, according to the company's second-quarter earnings report. Yahoo! offers mail service ranging from $9.99 to $49.99 per year. Yahoo!'s recently launched Games on Demand service, offered via its partnership with SBC Communications for broadband Internet service, allows consumers to rent a title for a three-day period for $4.95 or pay $9.95 for three games for 30 days, $12.95 for five games for 30 days, or $14.95 for 10 games for 30 days.

`logical evolution'

"Our strategy is to provide the best combination of free and fee-based services, it's a logical evolution of the Yahoo! brand," said John Costello, Yahoo!'s chief marketing officer.

AOL Time Warner's AOL said it will offer exclusive game downloads and a pay-to-play service by first quarter 2003. AOL could potentially convert its Sessions @ AOL and First Listen offerings on AOL Music to a paid content product on AOL High-Speed.

Games and extra mail storage are among the pay services Microsoft Corp.'s MSN offers. For entrepreneurs, MSN offers an array of business services on bCentral, its business hub, such as e-mail marketing for $29.95 per month and e-commerce services for $24.95 per month.

But Yahoo!, which built its brand on "free" content, is facing an uphill climb. Yahoo!'s replacement revenues are still not making up for the lost revenues, according to Paul Kim, senior media analyst at Kaufman Bros. "The value proposition for the pay services doesn't compare to the free stuff ... the value proposition [just] isn't there, the exclusivity isn't there," Mr. Kim said, adding that competition among providers marketing pay services will only intensify. Yahoo! is "trying to monetize little bits and pieces and experiment here and there but I don't think anyone has a clue about how to monetize this user base. It's a big conundrum right now."

Yahoo! executives say the company's deep understanding of its consumer base, some 200 million unique visitors per month, enable it to market the kinds of services people are willing to pay for. Yahoo! conducts extensive research into consumer-usage patterns to come up with new services, followed by rigorous pre- and in-market testing.

"It's a smart strategy for them because not only are they creating a revenue stream, but they're also using the data that they collect from subscribers to understand their audience and how to better target them," said Sarah Fay, president- Carat Interactive, whose clients include Adidas, Kia Motors and RadioShack.

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