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Sites Worth Paying for

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The early days of the Web were a great party, no? The CEOs all

seemed to be about high school age. And we know what happens when Mom and Dad

come home after a high school party. They say: "Somebody is going to pay

for this mess." In the aftermath of the Net shindig, Web sites as big as

portal Yahoo! and as small as online magazines hope that convincing people to

pay for information and services will be to their income statements what a mop

and some Mr Clean are to a suburban kitchen. But will Web users, weaned on the

philosophy that valuable information should be free, start opening their

wallets?

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The paid Web is still a work in the very early stages of

creation. And it’s not at all clear which mix of services will make people

part with their pennies. But common sense tells us a few things. One, to

convince people to pay for online services, they had better be something you can’t

easily get free somewhere else. And Web services that carry a price will have to

have obvious utility. They have to help you make or save money, or greatly

simplify something you already do.

By these standards, the early generation of paid Web services

is a mixed bag. A look at efforts from Yahoo and financial news site

TheStreet.com, as well as the established pay-to-view site ConsumerReport.org

gives some idea of what people can expect—and what it’ll take to succeed.

Consumer reports online

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This $3.95-a-month site (or $24 a year, discounted to $19.95 a year for

magazine subscribers) is a beacon of the paid Web. It’s even profitable.

Surely, one of the grand ironies of the Web’s spree of greed is that one of

the few content sites with a paid audience and profits belongs to a nonprofit.

Consumer Reports Online meets both of my success tests. This site is tailored to

help make decisions that can involve tens of thousands of dollars, and Consumer

Reports Online’s approach separates it from free competition on the Web and

elsewhere.

Someone’s Gotta Pay

With online

advertising on the ropes, Web sites hope to persuade consumers to pay for

more of their online information and services. Two factors give you a

starting point for assessing whether paid sites are likely to succeed.

First, does the site let you make vital decisions or perform important

tasks? Second, is the same thing available for free elsewhere? Here’s

how some pioneers stack up:
important

Enough to Pay For
Free

Elsewhere?
Yahoo! Yahoo is mostly free, but

limited services, such as-bill-paying and real-timestock quotes, cost

money or soon will But bill paying is free both on and off the Web Free

real-time stock quotes are common, too Yahoo’s long-term plans had

better be smarter than the early salvos

TheStreet.com TheStreet is trying to salvage its business by offering some information free, but requiring paid subscriptions for services such as RealMoney.com and TheStreetpros.com, which includes recommendations from the site’s top pundits. They’re worth paying for because these people are worth listening to. And advice this specific is rarely free even online.

Consumer Reports Consumer Reports Online is worth the $395 a month or $24 a year because it can steer you right on purchases ranging from 50 cents chocolates to

$50,000 cars. Other Websites do product reviews, but no one does them the better.

The annual fee gets you access to archives from Consumer

Reports magazine. And you get detailed reports on cars at $12 per model. I

tested Consumer Reports Online right before my 40th birthday last month. Like

any good new 40-year-old, I used it to shop for red convertibles. I pulled

reports on a Porsche Carrera (if you think I’d buy something this expensive,

let me show you my paycheck), a Mazda Miata (if you think I’m confident enough

to buy something this small, you should see my motor-vehicle records), and a

Saab 9-3 (still expensive, but closer to the mark). Then I compared what I got

from the archives to what’s available for free at car-enthusiast site

Edmunds.com.

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Each site gives you all the basics on options, gas mileage,

and such, but Consumer Reports Online’s 20-page-plus analyses teach you things

Edmunds doesn’t. Its breakdowns on safety and resale value are deeper and

easier to understand than Edmunds’. For example, Consumer Reports told me that

a Toyota Camry Solara convertible is likelier to hold its value than the Saab.

That info could save me many times the $12 the reports cost. People clearly will

pay for that.

TheStreet.com

I’ve always liked TheStreet, even though some of my

colleagues at BusinessWeek grind their teeth about it and gloat over its

vanquished stock. The site stubbed its toe trying to charge fees for its basic

version, but it doesn’t sell enough ads to live by ads alone. So TheStreet is

scrambling to find premium subscription services that add more value. And they’re

pretty good—for some people, some of the time.

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The best of the bunch, I think, is TheStreetPros.com, a

sister site where top pundits and money managers give unvarnished opinions and

investment advice. One example: Cramer’s mid-April column promoting Qwest Communications International. It’s tightly reasoned—and contrarian enough

that, if he’s right, people who listen to him will make much more than the

$400 a year TheStreetPros costs. TheStreetPros reminds me of the once-pioneering

Dow Jones services (where I once worked) that professional investors paid

thousands for. It was no mystery why: We found stuff on short-swing trading that

was interesting only to a small number of people—but tremendously valuable to

that select few.

This is the kind of stuff some people are likely to pay for.

In a market such as today’s, it’s too much to expect every one of

TheStreetPros’ tips to pan out. That’s not the test. The test is whether

TheStreetPros generates information and insight you can’t get elsewhere, at a

price that’s attractive. And TheStreetPros passes this test. Cramer may be a

little ubiquitous for some people (me, I love the guy), but he’s a real, live

professional trader who has made money for clients of hedge fund Cramer

Berkowitz. Most of his TheStreetPros buddies are traders, too. The staff at

TheStreet’s free service, and at competitor CBS.MarketWatch.com, are

journalists, many of whom are just a few years out of college. That’s why no

one pays to read them. The product isn’t the same.

Yahoo!

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It’s under more pressure than perhaps any other Web company

is to find a way to depend less on online ad revenue. Toward that end, Yahoo has

started to charge for premium services. Two early examples are its $4.95-a-month

online bill-paying service and its $9.95-a-month service for a package of

real-time stock quotes, including an alert service that tells you when stocks

hit a certain price or trade especially actively. For Yahoo’s sake, let’s

hope these offerings are a rough first draft with more to come. This early

effort isn’t going to cut it.

The basic problem is these services aren’t unique. Want

free real-time quotes? You can get them anywhere. Try Raging Bull. Want free

stock alerts? You’ll find them at www.stock-alert.com. On top of that, some of

the other sites offering quotes–such as online trading sites Datek and

E*Trade, for instance—also let you put your newfound information to work

immediately. That’s kind of the point. Yahoo can’t directly do that and can’t

subsidize the service by including its cost in your trading commissions.

The paid Web is likely to be a component of many businesses

but the linchpin of only a few. Don’t run out and buy dot-com stocks again

because the paid Web is coming: A look at TheStreet’s numbers will illustrate

why. TheStreet lost about $40 million last year. They’ll have to sell lots of

$400-a-year TheStreetPros memberships to fix their problem.

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There may be some surprises, though. Think cable TV: In 1975,

nobody knew how that would work out, either. Today, a mix of ads and fees

collected from system operators pays for cable programming, and services such as

Home Box Office cost extra. The Web is looking for a similar mix. And for those

sites that don’t find one...Paging Mr Soprano, Mr Tony Soprano.

By Timothy J Mullaney

in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

True grit

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But the very strengths of the Net are also its limitations. Just because

communication is ubiquitous doesn’t mean it’s everything. The last five

years have taught us that in industries such as retailing, manufacturing, and

transportation, physical factors overpower the virtual. E-tailing turns out to

be more about which company is best at moving boxes around rather than who has

glitziest web site or the biggest virtual store on earth. Linking supply chains

over the Net cuts costs and improves response times, but ultimately

manufacturers succeed or fail if they develop good products and figure out how

to produce them at low cost and high quality. Online airline reservation systems

can improve customer convenience and boost the revenue yield per passenger, but

they can’t do anything about long delays caused by runaway congestion, too few

loading gates, antiquated air traffic control systems, and mechanical

difficulties on airplanes.

Where the Internet May

be Revolutionary...

These information-intensive industries

are good candidates to be transformed by the Web:
FINANCIAL SERVICES



Most financial services can potentially be handled electronically. But so
far, banks can’t even figure out a good way of letting people pay bills

online.
ENTERTAINMENT



Much of entertainment can easily be digitized. But no one knows how to

make money yet, and the technology is lagging.
HEALTH CARE



The benefits of shifting health-care transactions to the Web could be

enormous. But so are the institutional barriers.
EDUCATION



E-learning could cut the costs of education, but only at the price of

making education more impersonal.
GOVERNMENT



Delivering information to citizens electronically has enormous appeal, but
requires massive investments.

Even in areas where the Internet can play a central role, the big changes are

not going to come overnight, as investors have found to their chagrin. Some of

the information-intensive industries where the Internet could have its biggest

effect are also the ones where institutional and regulatory barriers are the

highest and vested interests are the strongest. In health care and education,

for example, the possible benefits from widespread use of the web are enormous,

but it’s going to happen in baby steps, over time. What’s more, it’s a

difficult, painful, and slow process to restructure companies and markets.

In the end, it turns out that the speed of Internet time has more to do with

the capital markets than with the pace of technology adoption. The enormous

amounts of venture capital available to startups drove companies to grow far

faster in a few short years than the underlying infrastructure or consumer

demand could support. In fact, the eventual benefits of the web should be

measured over a decade. "People had higher expectations for the next couple

of years than are likely to be realized," says Jeffrey Bezos, CEO of

Amazon.com. "And people have much lower expectations for the next couple of

years than are likely to be realized over the next 10 years." That may help

explain the current confusion about the future of the Internet.

Got Web?

That’s why Internet optimists are refusing to retreat. Analyst Mary Meeker

of Morgan Stanley Dean Witter is urging Net leaders such as Amazon, Yahoo, and

AOL Time Warner to band together in a ‘Got Milk?’-style marketing campaign

promoting the idea that the web is alive and well.

Such webfests, however, aren’t likely to change the minds of burned

investors or restore the once-buoyant expectations for the Net. For instance,

Merrill Lynch analyst Henry Blodget recently reduced his expectations for how

much retail sales will go online to only 5% to 10%, down from 10% to 15% he

envisioned just a few months ago. Even Bradford Koenig, head of the technology

banking practice at Goldman, Sachs, which underwrote many of the hottest Net

IPOs, has lost confidence in pure Internet companies: "The notion of an

Internet company is no longer viable."

...And Where the Impact May Be Incremental

Industries where information plays a relatively small role:
RETAILING



The glitzy web sites got all the attention. But dot-com success turned more on who had the best logistics..
MANUFACTURING



Web-enabled supply chains and intranets are important, but ultimately a manufacturer lives or dies on the quality of its goods.
TRAVEL



Online travel sites are popular, but the ultimate constraint on travel is the physical capacity of the air and road systems.
POWER



Online energy exchanges get the publicity, but power generation and transmission capabilities will have the bigger economic impact.

But that’s too pessimistic. In fact, part of the problem was that much of

the investment flowed into areas where the Internet is incremental rather than

revolutionary. Take retailing. The hyped consumer dot-coms were supposed to blow

away their brick-and-mortar counterparts. But it turns out that the importance

of information and communication in retailing–the Internet’s forte–is much

smaller than the role of logistics. How much smaller? According to a Softbank

spokeperson, it takes between $15 million and $25 million to build a

top-of-the-line web site. Yet it costs at least $150 million to build a

warehouse and distribution system for a consumer web operation.

All across retailing, the Internet is no longer seen as the 800-pound

gorilla. For example, a year ago, the prevailing wisdom was that old-fashioned

auto dealers were going to be passe. But so far, that hasn’t turned out to be

true. "There hasn’t been the massive shift to buying cars online that we

thought there would be 18 months ago," admits Mark Hogan, president of

e-GM, the auto maker’s online consumer unit.

And there’s growing evidence that shoppers on the Net are supersensitive to

price, according to Austan Goolsbee, an economist at the University of Chicago.

The implication is that any profits e-tailers might make could be short-lived as



competition drives prices down on the web.

Perhaps the biggest surprise is the comparatively limited impact that the Net

may have on manufacturing. To be sure, there is no doubt that e-business has

become an essential part of any manufacturer’s toolkit. The use of the Net can

reduce inventories, take costs out of the supply chain, and eliminate

unnecessary transactions. Collaboration can also speed up product development,

e-marketplaces can lower the cost of components and other supplies, and detailed

info on customers can help customize products to snag bigger orders or even help

determine which customers aren’t cost-effective. At Procter & Gamble, a

web-based information-sharing network makes it easier to collect and evaluate

new product ideas from the company’s far-flung workforce of 110,000 people.

Nevertheless, at the end of the day, manufacturers are still in the business

of making things, not simply moving bits and bytes around. Wheels have to be

bolted onto the car, circuit boards have to be installed in the router–and

that has to be done physically.

To know how this limits the impact of the Net in manufacturing, look at the

example of Cisco, the communications equipment giant, universally regarded as

the poster company for using the web. Some 68% of Cisco’s orders are placed

and fulfilled over the web and 70% of its service calls are resolved online.

Cisco is in the process of linking all of its contract manufacturers and key

suppliers into an advanced web supply-chain management system, dubbed eHub

speeding up the rate at which information about demand is distributed to

suppliers.

According to Cisco’s own calculations, its payoff from its use of the

Internet amounts to $1.4 billion per year, or 7% of sales. If the rest of

manufacturing could even do half as well as Cisco in using the Net, that would

cut an impressive $150 billion from annual manufacturing costs. And yet it is

not the radical reduction in costs that would signal a revolution.

Slow as molasses

While supply chains linked over the Net are more responsive than their

predecessors, they have their limits, too. "The flexibility now being

demanded by customers exceeds the physics of what the supply chain can actually

deliver," says Kevin Burns, chief materials officer for contract

manufacturer Solectron, whose big customers include Cisco and IBM. Now that

companies have switched to web-based models, he notes, they expect to be able to

ramp up or halt production of a product within weeks. But it still takes at

least three months to get a specially designed chip made in a Taiwanese foundry

and around 40 weeks to order an LCD screen.

Obstacles don’t disappear, but it’s easier to see the far-reaching

potential of the Net in industries that are primarily about moving information

rather than goods. Take financial services. In many ways, financial products are

ideally suited to the Internet, since they deal only with information. A recent

Goldman Sachs survey reported that 63% of financial companies had sold their

products through an e-marketplace or a web site, the highest of any industry.

The Internet is already well on its way to transforming financial services.

Online brokers such as E*Trade Group have completely changed how the retail

brokerage business worked. And Net services are now offered by nearly every US

bank and credit union. Bank of America says it’s signing up 130,000 online

customers a month, giving it more than 3 million Net customers. Citigroup has

2.2 million, Wells Fargo, more than 2.5 million.

But as in the case of entertainment, technological and institutional barriers

are slowing down the eventual gains. Consider online bill-paying, widely

anticipated to be the "sticky app" that drives traffic. The benefits

of paying bills on the Net, for both consumers and businesses, could be

enormous. But the technology has proven exceptionally complicated, and it has

hit a wall trying to penetrate the banking industry. Among the problems: Banks

and billers have been unable to agree on how bills should actually appear

online. Still, Bank of America plans to launch a big ad campaign later this year

to promote its bill-paying service.

And then there’s health care. Despite the tangible nature of many medical

services, health care has a very large information component that makes it a

natural for Internet applications. Just shifting claims- processing to the web

could save $20 billion a year, according to the Brookings economists. At a

leading provider of prescription drug care in the US, it costs a matter of cents

to handle a prescription order on the Internet, as opposed to more than $1

through other methods.

Broadband’s promise

But there are enormous institutional barriers. For one, privacy

considerations may slow down the full shift of health-care records to the web.

Moreover, health-insurance companies, doctors, and hospitals are unwilling to

give up control of patient records and insurance payments to a third party. This

reluctance helped frustrate WebMD and Healtheon, which expected to lead a

restructuring of health care by moving many claims, payment, and related

processing services to the Net. WebMD’s efforts to provide real-time payment

capabilities were shunned by insurers and HMOs, who prefer the current

cumbersome process that lets them hold onto the money longer.

There’s also the technology factor. In the long run, realizing the promise

of the Net will depend on the widespread introduction of advanced technologies

such as broadband to the home and high-speed wireless. With broadband

connections over telephone or cable-television lines, consumers will be able to

watch TV-quality video clips of the NCAA basketball tournament or download

crystal-clear music files faster than ever before. What’s more, they’re more

likely to use the Net because they’ll always be connected and won’t have to

spend minutes dialing into the Net each time they want to visit a site.

The problem is that getting the new technologies in place may take longer

than expected. Financially stressed telecom companies are slowing down the roll

out of broadband. The failure of small telecom providers means that subscriber

growth may slow down in second- or third-tier markets. And the prices for

high-speed Internet access may rise.

In the end, the Internet seems likely to revolutionize mainly

communications-intensive industries. If that seems too



limited, remember that almost every breakthrough technology over the last 200
years affected some areas of the economy more than others. The automobile

transformed personal transportation and patterns of housing while little

affecting manufacturing. Electricity radically altered manufacturing practices

and any industry that was power-intensive, while not having an enormous effect

on health care. The Net deserves to be put in such august company.

Michael J Mandel and Robert D Hof with inputs from Linda Himelstein in

Silicon Valley, Dean Foust in Atlanta, Joann Muller in Detroit, and bureau

reports–BusinessWeek

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