• by Steve Smith , Staff Writer @popeyesm, October 20, 2003

Is advertising getting squeezed out by consumers' new willingness to pay for their fun? Veronis Suhler Stevenson caused some tremors last summer when it argued that U.S. eyeballs and eardrums are spending progressively less time with ad-supported media (57.8 percent) and more time with fee-based content, which they define as movies and video rentals, cable TV, and the Internet. As consumers get accustomed to paying more of the freight for their media experiences, so go the nightmare scenarios, advertisers have fewer places to pitch them.

Don't worry. It was only a nightmare. Why VSS included the Internet among its consumer-supported categories is anyone's guess, given Webizens' famous resistance to paying for online content. To be sure, in the post-bubble world where the "free ride" is supposedly over, onliners are expected to pay up to $2 billion for content in 2003, according to Jupiter Research. Some providers like Weatherbug, Salon.com, and Britannica.com promote their fee-based products specifically as ad-free environments. Nevertheless, in the foreseeable future, ad spending will continue to dwarf consumer fees, which have grown at a good but not barn-busting pace of 20 percent to 30 percent annually. "Paid content is probably inching up on 15 percent to 20 percent of the total size of the ad market," says Michael Zimbalist, executive director, Online Publishers Association. "The question really is going to be recognizing the point of equilibrium. We're still in a state where that is sorting itself out." More than equilibrium, important synergies between free and fee-based models are starting to emerge at some of the very sites that enjoy strong subscription growth. Fee-based programs are helping some providers like Weatherbug underwrite new technologies for the ad-supported services. The innovative new ad provider Ultramercial (www.ultra-mercial.com) is helping companies like Salon.com develop a model that trades premium content for consumers' eyeball time. At least one publisher that has spent years behind the subscription wall, WSJ.com, is demonstrating that paying customers may actually be the best audiences for advertisers. Far from mutually exclusive, fee and free may actually work better together on the Web than they do in other media.

User-Funded Advertising
While a hearty 120,000 meteorological nuts pay $19.95 for an enhanced and ad-free version of the famous WeatherBug desktop utility, "that's relatively negligible compared to our 25 million free subscribers," says SVP and general manager Andy Jedynak. The company's revenue jumped 113 percent in the first half of 2003, but less than 10 percent of it is coming from consumer fees, and the roster of advertisers grew from 120 to 167. But since paid subscribers obviously are the most devoted visitors to a site, and perhaps the most interested in the core topic, marketers might worry that an ad-free premium product actually makes a site's most receptive and responsive audience unavailable to advertisers. Jedynak disagrees. "I don't think that we are carving out the most loyal audience at all." With a fully registered user base, WeatherBug segments its free audience for advertisers just as effectively as it could the paying customers. "Almost all of our buys are targeted buys," he says.

More important, having a diversified revenue model actually helped fund more sophisticated ad approaches like WeatherBug's innovative "Select a Sponsor" program, where new users actually pick which ad client appears on their pop-up weather utility for the first week. It all started with a dare from an unwilling client. Jedynak recalls. "He said, 'I will buy from you if I pay only for the people who say they want to see my ad,' and we took that seriously." The product took five months and more than $100,000 to develop, but he thinks that having reliable subscriber revenue allowed the company the necessary time and resources. "It gave us the revenue stream to develop additional ad solutions," he notes.

The Fair Exchange
The subtlest but most important relationship between fee and free models may be that the steady acceptance of pay-to-play products on the Web also raises the perceived value of all online media and, thus, in turn, the companies that sponsor it. Getting users to appreciate the value and cost of the generally free smorgasbord of information that is the Web has been a tough sell in the medium's first decade. But having an ad-free, paid offering like WeatherBug Pro actually changes the way the non-paying users perceive the free product. "They see that there is true value, and that the sponsor is paying their way," says Jedynak. The proliferation and acceptance of paid content models may be helping all consumers understand that "free media" also requires some fair exchange of value with visitors, namely advertising.

Indeed, once users acknowledge the value of online media, they actually seem willing to give a sponsor even more of their undivided attention. To wit - the new hot thing among major media brands and some ad clients is the "sponsored day pass." First seen at Salon.com and invented by California-based Ultramercial, this model lets non-subscribers access the paid areas in exchange for viewing an extended multimedia ad for a single sponsor. "You can't click away from the ad," says Micheal O'Donnell, CEO and president, Salon. "That is our Pavlovian attitude - if you want the food, you have to watch the ad."

And apparently the puppies are staying and salivating. Ultramercials can run up to 30 seconds and include sequenced pages of creative. Nevertheless, according to the company's metrics, 93.5 percent of Salon visitors who initiate the day pass watch the entire ad and spend on average 52 seconds with it, often including interactions with the brand. The format has attracted top-tier clients such as Absolut, Mercedes-Benz, American Express, and even advocacy ads for the ACLU.

Viewer-Initiated Commercials
"It's a fundamental change in the publisher's business model," says Dana Jones, founder and president, Ultramercial, which invented the format. By clearly giving users valued content in exchange for their attention to a sponsor, "we make explicit what has been implicit for decades - the relationship among the three partners in media - viewer, publisher, and advertiser," says Jones. "This is a viewer-initiated commercial that the viewer chooses to watch as payment to gain access to premium content." In this thinking, putting a dollar value on the content makes it possible for advertisers to act more as visible patrons of the viewer's media experience, and so, demand and get more attention.

The principle here is much the same as offline, says Jonathan Levin, CEO and founder eMeta, which provides the software for paid areas at NYTimes.com, FT.com, and Hoovers.com. In the real world of print, free publications generally command lower ad fees, while paid and controlled circulation books enjoy the better ad rates. "You need to value your content," he says. "If you don't, no one else will." Oddly enough in Salon's case, the fact that users have the day pass alternative to buying a full subscription to the premium site seems to have helped rather than hindered expansion of the paid base. Salon was relatively stagnant at about 45,000 paying customers when the program started nine months ago, but now has ballooned to nearly 75,000. "For a publication, this is like defying gravity," says Jones.

And because the audience is essentially captive during the spot, the advertiser knows precisely how many people truly sat through their ad, a metric virtually no other medium can promise a client. Ultramercial says it started receiving calls from publishers and ad clients on the day the format first appeared on Salon. It has already pushed Virgin Mobile ads at eMode and IGN.com, and is working in stealth mode with a number of "major media conglomerates" to deploy the day pass at some of the Web's most visible content properties later this year.

A Better Class of Eyeball
While day passing represents a cutting-edge approach that makes the relationship between sponsorship and "free media" clearer to consumers than it is in any other medium, much of the online world continues to suffer a regressive either/or formula to its content business models. Publishers and consumers seem to expect that fee-based content areas should be ad-free, even though magazines and newspapers have been advertising to their paid subscribers for over a century. In part, the unique dynamics of the Web force this Manichean view upon publishers, because their traffic and ad reach plummet so radically when they begin to charge for access. "The experience we have seen on the Web is that, once you put down the walled gate, up to 95 percent of your audience goes away," says O'Donnell. "People flee when they have no choice but to pay."

Because of this inevitable user flight at the first glimpse of a sub wall, most publishers have to make a hard choice and do a tough cost/benefit analysis when they move to a paid model. With low-urgency content that is more nice-to-have than must-have, publishers can expect to convert as little as 2 percent of their uniques to paying customers, and virtually gut their advertising reach, says Levin. "There is a trade-off that doesn't exist in print," he says. Accordingly, many publishers start by walling off only a fraction of their content in order to maintain enough raw reach to sell to ad clients.

But keeping ads out of paid areas is not necessarily a long-range plan for content providers, says Zimbalist. "Early on, people were saying 'free with ads' or 'pay with no ads,' and I always believed that was a very shortsighted way to market. The either/or model wouldn't be in the best interest of the publishers."

In fact, if advertisers and publishers can change their thinking a bit about online audiences, metrics, and ad effectiveness, they might see that paid subscribers constitute the most receptive and reliable audiences for marketers. One of the oldest and most successful of fee-based publishers, Dow Jones, offers a glimpse of hybrid models to come. Along with FT.com, Janes.com, and SoftwareCEO.com, it is among the only paid sites to place advertising on both sides of the sub wall, at free sites like CareerJournal.com, StartupJournal.com, and OpinionJournal.com, and into the 671,000 paid members at WSJ.com. Dow Jones sells ads across the free/fee network, and doesn't specify WSJ.com as a discrete placement, yet the more highly targeted ad buys generally are going into this area, where the company has much more detailed demo profiles and behavioral data.

"By having the subscription model from the beginning, it's allowed us to command a higher CPM because clearly, people want to know what we know about our user," says Randy Kilgore, VP advertising. Open rates for "run of network" ads go for a CPM of $35.Kilgore's "special sauce" of demographic targeting costs $95 to do tricks like aiming for senior level managers of companies with 100,000 employees, and much of this audience is behind the sub wall. As a result, "we believe we generate a similar amount of advertising revenue as sites that have far greater apparent reach," says Todd Larsen, president, consumer electronics publishing, Dow Jones. The company has also turned around the denser sets of behavioral data that a subscriber base allows into a very hot "Interest-Based Targeting" product. By knowing a user's reading habits, Kilgore and company can sell an auto maker all of the WSJ.com members who recently used the car loan calculator and are therefore, clearly in-market. "We've got a bunch of folks already committed," he says. "It seems to be the topic of every sales call."

A paid model pays off for advertisers in a number of other more subtle ways than sheer targeting. Acknowledging that users are paying their way, WSJ.com is more discriminating in the size, number, and placement of its ads, says Larsen. "But that has turned into a real sales benefit. [Clients] want to be in an environment that is less cluttered."

And a number of others in the industry are arguing now that paying customers simply make better audiences for advertisers. "Subscribers have high loyalty to a content brand," says Zimbalist. An OPA study earlier this year found that familiar ad metrics such as aided brand awareness, message association, and brand favorability ran higher among sites with faithful audiences. "It suggests that content loyalty translates into advertiser effectiveness."

No doubt, publishers will have ample opportunity to prove this case with agencies and clients. According to Levin, eMeta's pipeline of companies that are moving at least some of their material to a subscription model is larger than ever. Nevertheless, in the end, few publishers believe that a subscription business will successfully supplant ad models. O'Donnell expects that the 50 percent of Salon revenue now coming from ads will eventually grow again, and Larsen believes WSJ.com's ad revenues will become much more important to the mix in coming years. Nevertheless, advertisers certainly will be buying into more hybrid networks of fee and free audiences in the near future, which could challenge longstanding conventions about online reach and frequency.

Where the subscription model succeeds, advertisers may also be dealing with a new balance of power. Publishers with a reliable, alternative revenue stream tend to be less desperate and less pliant with clients. In the post-bubble years when many sites were only one lost ad sale away from shutting down, they came to the table with fear in their eyes and a willingness to try just about anything. A healthy subscriber income can change everything, however. "In a candid moment, other site managers and even ad directors would say they have done things they wouldn't have wanted to do," says Kilgore. "We're able to say no."

No. It's been a good three or four years since a media buyer heard that response from a website.