SAN MATEO (05/15/2000) - Like the alchemists of old, today's online media pioneers face the daunting task of transforming one element into another. This time, they seek to change content, not lead, into gold -- and the challenges of doing so are formidable.
Near term, an industrywide challenge is to overcome or outwait the public's lingering perception that the Web is a virtual free library. That mind-set makes it difficult for online media companies to sell either pay-per-view entertainment or subscription-based content.
In the interim, media companies must give their content away so they can build traffic and attract advertisers. But relying on advertising as a source of revenue raises ethical and privacy problems.
"We have profound respect for our relationship with those kids [who visit our site] and their family," says Stephen Gass, group president of online at Sesame Street Online. "Even if it leaves some ad money on the table, we're not going to cross that line when it comes to advertising or privacy related issues in our space."
Charlene Li, an analyst at Cambridge, Massachusetts-based Forrester Research, agrees that the quickest path to profitability is through advertising. However, she adds that no single revenue stream will be sufficient to cover the expenses of online media operations, so sites must expand their reach by distributing their content on partners' sites and in other mediums such as television and print.
Forming distribution alliances is a strategy that's easy enough for new online media companies to pursue because the companies have few, if any, existing channels or partners to protect. Established media companies, however, have to walk a fine line because the actions of the online group can negatively impact other divisions.
"How do you avoid channel conflicts? How do you put portions of the product online without impinging on the retail space?" asks Ken Goldstein, senior vice president and general manager at Disney Online. "You want to be careful not to compete with your own channels and [internal businesses], where each division has a bottom line and its own P&L. How do we do it? We talk, we stay coordinated."
Success strategies must also compensate for the Web's taxed-to-the-max infrastructure.
"Lack of bandwidth is just one of the extreme challenges to media companies trying to profit from delivering online content," says Barry Parr, director of consumer e-commerce research at IDC, in Mountain View, California. "The thin, comparatively costly pipes consumers must use to access the Net, plus home computers that are better suited for work rather than delivering compelling content, just make the situation worse."
Chuck Fletcher, vice preisdent of technology at Sesame Street Online, suggests two strategies the company employs while waiting for technology to catch up with consumer expectations.
"We have a trick to work around slow downloads. We give the user something to engage them, like a simpler game to play, while they wait for the bigger experience. And we make sure that everybody knows how long their request will take to fulfill," Fletcher says.
Profits on hold
Online media sites share the so-far dismal financial reality faced by other e-businesses. Both groups remain focused on covering their expenses while longingly eyeing far-distant profits. Meanwhile, they content themselves with establishing a trusted presence as they learn to exploit the Web instead of trying to dominate it.
"I would say that all of the major media brands have an opportunity to succeed in this new space," says Sesame Street's Gass. "While profit is of great importance, I think delivering a product with integrity and a clear vision to fill a need in the market and in children's lives makes it worthwhile."
Considering the technical and social hurdles that currently delay profitability for online media operations, what single element could justify the use of "content," "Internet," and "profit" in the same sentence?
"Making money online is all about increasing your reach, increasing the scale of your operation, and understanding your fixed and variable costs," Walt Disney & Co.'s Goldstein says. "As your reach grows, the amortization of your fixed costs flattens out. And the incremental costs of scaling up for new users pales in comparison."
In addition to increased advertising income, larger audiences bring a needed economy of scale that helps to reduce operating and infrastructure costs. Scale likewise leverages four of the Web's dominant benefits: universal distribution, personalization, immediate updates, and real-time communication. When integrated and backed by a competent management team, these formidable elements combine to imbue online media sites with capabilities traditional media cannot achieve.
"Succeeding in online media is like a football play. Everybody on the team has to execute the play," Goldstein cautions. "If everybody isn't where they need to be, then the play can't work."
Howard Millman (email@example.com) is a regular InfoWorld contributor who operates Data System Services Group, a vendor-independent data integration and systems consultancy in Croton, New York.
Hear from the players
Inspired by the challenge, awed by the possibilities, and bewitched by potential profits, online media entrepreneurs spend some part of each workday sorting through a mix of creative, ethical, and technical conflicts. These key e-business leaders share their insight into the people and the processes involved in making the business transformation.
Adrienne Schure: Editorial director, Discoveryschool.com, school.discovery.com"The key to making money on the Web is advertising."
Chuck Fletcher: Vice president of technology, Sesame Street Online, www.ctw.org"We've all got problems. I can't do a 3D Elmo because it's really hard to render fur."
Stephen Gass: Group president, online, Sesame Street Online"We've got this tremendous asset in representing online a brand that is probably second in worldwide recognition only to Coca-Cola. I'm hyperactive about [protecting] that asset 24-7."
Ken Goldstein: Vice president, Disney on Demand, disney.go.com"If you feel that you got all you want from the online experience, I didn't do a very good job because I oversatisfied you. My job is to give you a taste of the other media so that you will want more. The Internet is the single most efficient distribution channel in history. You tell me what you want online -- do you want to visit a theme park, listen to music, play a game -- we'll give it to you."
Peter Kay: Director of new media, Sports Illustrated for Kids, www.sikids.com"We have been given the authority to pioneer truly new media, not just repurpose stuff that kids will just ignore. I wonder how often, if ever, they think about who's behind the curtain."