Critics bash publishers' rosy Web profit projections

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Magazine publishers' rosy forecasts for reaping profits from online sites were dismissed by several critics as being overly optimistic.

A new Ernst & Young study, previewed at the Magazines & New Media Conference in New York last week, found the 47 Magazine Publishers of America member companies surveyed oversee 175 online sites that have gobbled up an estimated $77 million in expenditures. The sites are projected to bring in only about $47 million in ad and subscription revenue this year.

But respondents also predicted that online revenues would average about $4 million per company next year and would rise to an average $5.5 million per company in 1998.

The results sparked a lively debate among new-media experts on the opening panel of the two-day session.

"I'd say probably about 95% of [publishers expecting to hit profitability] are going to be very disappointed in 1998," said William Bass, senior analyst, media & technology strategies at Forrester Research. "We think it will be more like the year 2000. In '98, there's just not going to be enough advertising revenue."

Mr. Bass last week issued a scathing report on Time Inc.'s Pathfinder, estimating the Web site is losing $8 million annually, a figure Time Inc. denies.

Still, success will not come easily.

"This is going to be a hard slog," Mr. Bass said. "Sites that say they are profitable--I don't buy it. We think most sites are covering maybe 20% of their costs."

Martin Nisenholtz, president of The New York Times Electronic Media Co., predicted a long climb to profitability.

"Some very large and successful players could be profitable [in two years] if they grab the lion's share of advertising," he said. "But I think you'll be able to count them on one hand."

Revenue resources and pricing models remain the single biggest obstacle, said James Guthrie, MPA exec VP-marketing development.

"We could have subtitled this conference, `Alive and well with growing pains,' " said Mr. Guthrie.

Currently, he said, 53% of the online revenue recorded by publishers is coming from advertising, and only about 5% of the revenue is subscription-based.

Regarding advertising models, the Ernst & Young study found wide variances. Close to half--48% of respondents--are using a cost-per-thousand formula similar to the standard print model. But a sizable number--30%--are using a "value added to print" model and only 11% are using a "click-through" model.

Far down the scale was a method that charges advertisers on a "cost per lead" basis--4%--while only 2% of publishers charged marketers on a cost per sale basis.

Venture capitalist Jerry Colonna, managing partner with Flatiron Partners, urged publishers to think about blending several business models.

"The downward pressure on CPMs will be continuous and relentless," he warned. "The trend toward a mixture of business models is absolutely accelerating."

Copyright November 1996, Crain Communications Inc.

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