For the past six years, most companies operating online provided free content and services to generate traffic. That honeymoon is ending. It is too costly to provide free daily offerings indefinitely, especially as advertising rates fall and Internet traffic slows.
Businesses have spent billions of dollars developing the Internet, yet few have made a dime in return. If a company provides a valuable service, it must begin to charge for it. That's Business 101.
Time to pay up?
Two of the most successful online companies, AOL (NYSE: AOL) and eBay (Nasdaq: EBAY), charged for services from the beginning. Charging alone did not make them successful, however. TheStreet.com (Nasdaq: TSCM) charged from day one as well, but hasn't met sustainable success.
Soon Yahoo! (Nasdaq: YHOO) will charge for some content, too, including a premium personal finance offering. Seeing how the TheStreet.com has fared, the question is, how many of us will pay for Yahoo!'s service?
Probably not me, and I've used "Yahoo! Portfolios" to track investments since 1995. If Yahoo! began to charge for this, though, I'd bypass it. I already have my portfolio listed elsewhere, and I can get the news that Yahoo! offers through other means.
So, unless Yahoo! added great new offerings and convinced me of them (which will be its largest challenge -- to become a "marketer"), I almost certainly will not pay for its services. So, for what will I pay?
For what will you pay?
By asking yourself, "What will I pay for?" you can hope to answer what many people will pay for, and then you can apply that answer to your investment thinking as you evaluate online companies.
Personally, I will not pay for a "commodity" service that I can obtain elsewhere, such as news or portfolio tracking. I will pay for services that add value to my life that I can't obtain elsewhere. That's partly why AOL (I want worldwide connectivity) and eBay (I want the ability to sell anything) succeed at charging fees, while TheStreet.com struggles.
How powerful is an online company's potential for charging? It depends on how much value it is offering customers.
Think about this: Imagine eBay began charging sellers an additional $2 per month to sell. That's $24 per year to be an eBay seller. Would a majority of sellers pay? I believe so, because most sellers derive much more annual value than $24 from eBay, and they'd rather continue using eBay than use an auction site that is smaller by magnitudes.
Amazon.com (Nasdaq: AMZN) is a company that must add more revenue streams to its service to compensate for slow retail periods and low margins coupled with high debt. Amazon recently began advertising placement promotions. An author pays to have his book displayed prominently on the site after a customer's search. That's fine, but it's no home run.
So, what if Amazon adopted a Costco (Nasdaq: COST) business model and began charging customers a few dollars per month -- a subscription -- to use the site? Would you pay $24 a year for Amazon's convenience of one-click ordering, a promise of low prices, product recommendations (which I love and would pay for), reliable service, and wide product choice?
If you would pay Amazon $24 a year, you would probably use the site more often and buy more from it, too -- to "get your money's worth."
What else might offer value worth paying for? In my opinion, a great community of people with similar interests can be worth paying for, and the Motley Fool discussion boards naturally jump to my biased mind.
I would also likely pay for Google's search software because I find it invaluable. Finally, I'd pay for one comprehensive online news source if I had to, for convenience and to complement the The Washington Post that I have delivered. Other than that, however, not much online content makes me want to pay for it. What about you? I believe that online content companies have a tough row to hoe.
The psychology of paying
Once people have received something free of charge, they're less willing to pay for it unless it already provides them meaningful, easily-recognized value. First, though, potential customers must overcome a psychological hurdle that says, "But it was free before!" What's funny is that people are more likely to recognize value and appreciate a service when they pay for it. When something is given freely, it's easy to take it for granted -- and eventually feel entitled.
The Internet was born with free content. That was inevitable. However, providing content and services freely is rarely a sustainable business model. So, laggards will die, while the relatively few online companies that provide meaningful value to customers will begin to strengthen as they begin to charge. Capitalism means, as Dave Matthews sings, eventually you "pay for what you get."
Take our poll! For what will you pay?
You might appreciate this column more if you'd paid a little something for it, or so Jeff Fischer might argue. (Smile, wink.) He owns shares of AOL and eBay. The Fool is investors writing for investors.