A long, long time ago -- the spring of 1999 -- it seemed as if the Internet had sprinkled financial pixie dust upon the publishing industry. Publications that had only been around for a couple of years, like TheStreet.com and CBSMarket Watch.com, were entering the stock market with smashing success. The market transformed mere Webzines into "Internet content companies" worth as much as a billion dollars. Individual reporters and editors, some barely thirty years old, were said to be worth millions on paper. Old school content providers like newspapers and television networks reshuffled their corporate structures so they, too, could get a slice of fat Net valuations.
But what the stock market gives to Web journalists it can just as easily take away. Today, a year later, most Web content companies -- from iVillage to Drkoop.com to TheStreet.com -- are in the market's subbasement (along with many other Web companies, particularly retailers). As of early June, TheStreet.com was selling at about $7 a share, nearly one-tenth of its first day closing price and less than half of its initial offering price. Salon.com, the San Francisco-based Web magazine that went public in June 1999, rose to $15, but was selling at $2.13 a share a year later.
Public financing of these companies has not been a complete disaster. After all, the primary goal of a public offering is not to enrich shareholders; it's to gain vital financing to help a company grow. Regardless of what Wall Street currently thinks of TheStreet.com as an investment, the publication has tens of millions of dollars in the bank and boasts that it can stay alive for several years just on its cash reserves; private capital was unlikely to stick around for that long. There's also an argument to be made that selling stock to the general public is an effective way of getting one's name out to potential readers and subscribers -- financing with advertising side effects.
Still, the severe downdraft in "content" stocks represents more than just Wall Street's fickle demands. Investors are expressing disillusion not merely with individual companies, but with the very idea of Internet content as a stand-alone business. And it's not just public companies that are being punished: the line of content companies waiting to become public has gotten much shorter. While venture capitalists are not quite refusing to invest in content companies, they have become quite finicky about where they choose to invest. Kurt Andersen, co-chair of Inside.com, famously said that raising money for his all-star Web project was as easy "as getting laid in 1969," but for most content players these days, it's more like 1869.
Why is the market rejecting Internet content companies? It almost goes without saying that none of them makes any money; few show any prospects of making money any time soon. The problem is not, as some early Net publishers feared, that there's not enough advertising to support Web-based publishing. The Internet Advertising Bureau claims that $4.6 billion was spent on Net advertising in 1999. That's close to what is spent in outdoor advertising. Moreover, the growth of Net ad dollars has been spectacular, more than doubling every year. Boosters claim that Net advertising has grown faster in the medium's first five years than even the advertising tornado called television did.
The problem, however, is that the Web -- unlike magazines, newspapers, television, or radio -- has an essentially limitless capacity to handle and eventually dilute advertising. A Web master can create two, three, or more Web pages in about the same amount of time it takes to create one, at no greater cost.
Theoretically, then, the "supply" of Web pages is expanding to infinity. Midyear 2000, there were an estimated 800 million Web pages in existence, and there's no reason why that number couldn't double in a few short years. And yes, the number of readers is growing rapidly, but it's still always a finite number. Elementary economics suggest that advertisers over time will therefore pay less and less to reach about the same number of Web readers. That's the kind of math that saddens publishers -- and those who would invest in them.
To date, Web publishers have not had strong backup plans. Many have chosen to ally, editorially and financially, with established media conglomerates: TheStreet.com took substantial investments from The New York Times Company and Rupert Murdoch's News Corp; the pioneering music site SonicNet sold itself to Viacom; MarketWatch.com from the start was branded with the CBS logo. For some, like MSNBC.com, the affiliation has led to the kind of massive traffic that makes financial viability seem possible. For others, though, such alliances raise worrisome questions about editorial independence, and appear to be more trouble than they are worth (witness, for example, the dustup between Fox News Network and TheStreet.com, after a Street commentator touted Street stock on Fox, and Fox complained).
Of course, there's always the backup plan that print media have enjoyed for centuries -- charge people for content. The theory behind most American newspapers and magazines has always been: if it's worth reading, it's worth paying for. Much to the surprise of some media observers, cable television has also successfully grafted that model onto a medium that had grown rapidly in the '50s and '60s largely because it was free.
Alas, the Internet has whipsawed just about everyone who's tried to reproduce cable's example. Not counting some pornography sites, the only significant Web publisher that has successfully coaxed readers to part with their money is The Wall Street Journal. Its main site, wsj.com, now charges $59 a year ($29 for those who subscribe to the print edition). Despite that toll, more than 400,000 readers worldwide have signed up for the Interactive Journal.
Current thinking in the Internet industry is that very few publications are capable of duplicating the Journal's pay-for-content success. The Journal, after all, is a century-plus old institution with a worldwide reputation as a must-read business publication. Partly for that reason, a good chunk of its online readers put the subscription on their office expense accounts.
Newer, Web-only publications have learned at their peril just how valuable those old-world credentials are. Slate, the Microsoft-owned Web magazine edited by Michael Kinsley, experimented with various paid models until February 1999, when it finally went free (its audience has ballooned as a result). TheStreet.com was able to gain just over 100,000 paying subscribers before finally admitting at the end of 1999 that it could not grow fast enough using a paid subscription model.
In light of those reversals, it's especially intriguing that the team at Inside.com has embraced a paid Web model. Inside.com's parent company, Powerful Media, is the New York-based Web company run by Kurt Andersen, former Spy and New York magazine editor, and Michael Hirschorn, former editor of Spin. Their lead product, Inside.com, launched this spring with part of the site available for free and deeper sections requiring paid subscription. Inside.com is aimed at a media-immersed audience looking for original reporting and analysis on the media, entertainment, publishing, and Internet businesses. Its all-star roster of journalists has been recruited from The Wall Street Journal, Spin, Fortune, Brill's Content, and similar prominent publications.
Inside's business model relies on the notion of producing, essentially, a high-quality online trade publication (though they disdain the term trade, preferring "b2b" instead). The company is betting that the executives who shell out hundreds of dollars for Variety, Billboard, and Publishers Weekly (again, expense accounts pick up the tab) are willing to add a pricey Webzine to their reading list if its provides timely, high-quality information. (A sneak preview sampler: TV: "Miffed Over FCC Decision, Fox Says It Will Sue"; Music: "If Napster Cuts a Deal, Then What?"; Books: "What They Want You To Read This Summer"). At the prices it is charging ($19.95 a month, $199 a year), Inside.com would only need to get subscribers in the tens of thousands to make a go of it.
It's far too early to gauge the success of Inside.com, but certainly the company's business plan did not scare off the private investors who put some $28 million into the project prior to launch. If Inside.com survives, it may pioneer a workable paid model for the Web: aim for a very tightly defined niche, and emphasize high-quality journalism.
