The Internet, unplugged, Marketing Computers, Februrary 1996.

The Internet, last year's wonder medium, is about to experience a very ugly and expensive shakeout. ISPs? content providers and advertisers alike will be casualties. Here's what you need to know to avoid getting caught in the cross fire.

Nineteen ninety-five may go down in history as the Net's golden year--or the binge before the hangover, depending on who you talk to. In 1995, the net attracted more users, more money and many, many more lines of news coverage than it did in 1994. In 1995, the Internet became the destination point for everyone who's anyone, not only in terms of cultural "mind share" but in real dollar terms as well. Corporations invested an estimated 1. I billion to build 40,000 new web sites last year--remarkable when one considers that Mosaic, the browser that popularized the web, was released only in the fall of 1993.

Can this pace of development continue? Or will parts of the web turn into ghost sites, abandoned pages frozen in time, marking the failed ambitions of the many prospectors who entered the net gold rush of 95? The catalyst that sent millions on-line in '95 was the web, luring users with a mixture of mystery and familiarity--the whole world only a mouse click away. This naive view of the net soon came up against reality; that's when many investors realized that in the universe of the Internet, there is no up or down. Traditional markers don't make much sense on this so-called frontier, nor do traditional business plans or expectations, a situation that leaves many corporations flustered and confused about how and whether to continue spending money on excellent web adventures.

Companies entering this new world did so with high expectations, and they came away burned-by the end of the year only 12 percent of corporations that built web sites could justify the expense, according to a study done by the Yankee Group, a Boston-based market-research firm. Word spread and the number of new commercial web sites started to slow for the first time in the fourth quarter of 1995; the rate of growth dropped by 63 percent.

1996 will be the year of reckoning for the Internet, the year where sound business practices and realism seep into cyberspace. The common theme can be encapsulated in one word: consolidation. The vast constellation of sites will focus towards a smaller selection, the metaphorical village giving way to the rise of cities.

The ISP Massacre.

After all is said and done, one of the most predictable revenue streams in cyberspace is when a subscriber pays a service provider for Internet service. Subscription fees are still the largest revenue generating business on the net, and probably will remain so for the rest of 1996.

However, as with any small pie, competition gets fierce when there are too many people over for dinner--and the Internet service provider (ISP) business is apparently saturated. With approximately 1,400 ISPS nationwide fighting for a meager $ 400 million in Internet access revenue, this business looks ripe for consolidation. While Internet service revenue is expected to increase to $ 750 million in 1996, according to the Yankee Group, they expect the number of ISPS to shrink to 700 or so. The first to go, according to Stephen Franco, an analyst with the Yankee Group, will be the smaller ISPs--those with 100 or fewer members. The only way smaller providers can survive, Franco says, "is by providing unique content, like Pipeline, which gives its users New York theater reviews and content geared for people who live in New York."

Pipeline is hardly that small, with approximately 40,000 members (thanks to a merger with PSI). The truly small operators may actually hold off longer than the medium sized operators, because they have something that has enormous value--service. Small operators can actually answer phone calls and respond to user needs. While this guarantees slower growth and lower profits, many providers simply don't care; they come from a breed of hobbyists and hackers who are in business for more than financial gain. Such companies don't fit easily into the laws of the marketplace. They also do not represent much of an opportunity for large competitors, since the revenue these ISPs control is still small in relation to the cost of wooing their entrenched members who, for all sorts of un-economical reasons (loyalty, community, an email address they are accustomed to), will not move based on commodity pricing alone.

Jack Rickard, the editor of Boardwatch magazine, a publication devoted to the BBS and small ISP business, writes in the December issue that "Customer service is the heart of the matter ... Large entities cannot deliver Internet connections to consumers until the technology is such that you can truly plug in a wire and it either works' or it 'doesn't work'....Until it is plug-and-play, it will be smaller Internet Service Providers that can offer dial-up Internet connectivity to consumers and small businesses." Rickard dismisses the short-term threat posed by MCI, AT&T and Sprint, which, along with the Baby Bells, are entering the ISP business for consumers. He points out that in December 1994 both MCI and AT&T announced plans for internet service, plans which 12 months later still haven't materialized.

The real driving force behind consolidation may not, in the end, involve consolidating the existing market of Internet subscribers, many of whom are technologically advanced and devoted users. Rather, consolidation may come in the form of expansion into new markets--to the second tier of users who are not members of what the Yankee Group calls "technologically advanced families" TAFs.

The TAF segment is about 16 percent of the population and the dominant demographic of current Internet users (about 11 percent of the US. population has access to the Internet either at home or through work). TAFs are people who are computer literate and technology enthusiasts. The big challenge, according to Greg Wester, a director with the Yankee Group, will be to attract non-TAFs as new users, "Expect many consumer ventures to struggle as developers experience the difference between TAFS and the rest of the market." Herein is a business opportunity. The traditional online service providers and ISPs focus their marketing energy on technological sophisticates, and may well be unable to provide support, or a good reason, for curious Americans who are not technophiles. This creates an incentive for those providers willing to approach innovative solutions, solutions that redefine why and how people decide to connect to the Internet.

New Alliances

1996 will see an emerging alliance between two kinds of companies, which will provide service to these new users. A content provider, along with a sponsor and a large ISP will together provide a branded product whose selling points are ease of use, low or no cost to the user, and control over what one sees at the access point, or on-ramp, to cyberspace.

Already, several companies are planning to provide just such a service. One is Juno, a division of D.E. Shaw, a New York-based investment bank; Juno's motto is "email was meant to be free." Charles Ardai, President of Juno, explains his business model this way, You cannot charge for email and succeed in the future," he says, "Imagine if television were just invented and HBO and Cinemax were the first channels. Some people would be willing to pay, but a lot wouldn't. We are creating the online equivalent of NBC by running advertising on the screen--we are giving consumers something back for their time online. This is a way to acquire the equivalent of shelf space in cyberspace."

Juno, currently in beta testing phase, plans to roll out its service nationwide in March. AT&T will provide hundreds of local POPS (points-of-presence) for Juno users to log in; in turn, Juno has customized its email client to permit 30-second ads to scroll along the top of the screen and launched a nationwide ad campaign, which already includes billboard advertising on the streets of New York.

The selling points for this service, according to Ardai, is that advertisers will reap the benefit of being able to target their advertising to specific demographics within the Juno user pool--a kind of direct mailing without the cost (direct mail runs about 55 cents per envelope). Ads will also contain active links to more information which the user can follow, potentially leading to a sale.

From the user's point of view, the payoff is free unlimited access to the one Internet service everyone agrees is essential: electronic mail. More ambitious marketers could do a special deal with Juno to fully brand the email software. For instance, Nike could hand out free branded versions with the purchase of a certain sneaker, collecting a user base of Nike wearers.

Juno is not the first company to commingle Internet service with another, higher order, purpose. Perhaps the most successful example of branding an Internet software package with a product was the release last October of a customized version of Netscape with the latest version of Intuit's Quicken accounting program for Windows. Intuit's strategy is a harbinger of how profoundly the definition of why people go online is set to change in 1996. "Intuit has focused on automating the financial activities performed at the desktop," Intuit co-founder and chairman Scott Cook explains, "Now we are automating the communication between our users and the financial world. From this point forward, our products will be connected--connecting our users to Intuit, to their banks and brokers, to financial information, and to each other." Quicken users get free access to the Intuit web site; for $ 1.95 an hour, they are free to explore the rest of the Internet.

This is a profound shift, away from justifying Internet access by its quirky entertainment or hobby value, toward justifying it as simply the means to an end: in this case, management of one's personal finances. This sort of selling point is bound to attract the next generation of users. By creating volume deals with this kind of Internet software and content provider, mainstream telcos stand a better chance of getting into the ISP business. They, unlike local providers, have the ability to establish nationwide points-of-presence. They also have the capacity to do upfront bulk buys with companies like Juno, guaranteeing a set number of Internet access hours.

The Achilles heel that could cripple this concept is the essential question of service and ease-of-use. By shifting service requirements to the content provider, such as Intuit, the telco can counteract its greatest weakness--it's inability to deal with the vast gray area that is Internet service, a service which, unlike its existing telephone business, doesn't simply work or not, b.ut rather involves the laborious service support hand-holding that software companies are accustomed to.

The Data Imperative

While branding Internet software is a dramatically different way of increasing Internet usage and access, what about the content already out on the net. The double edged sword of adding new users, especially non-technophiles, is that while it improves the bottom line for those providing service, it dilutes the mindshare of small content providers. New users, less technologically sophisticated than the old, may not have the same geek-hipster patience for surfing and browsing web sites. The new net user may well seek order in the chaos, turing to entrenched familiar names for information and amusement. Sites like Time Warner's Pathfinder, HotWired, ESPN and The Wall Street Journal should lead a consolidation of web-based content and talent.

These sites, however, refuse to come clean about the effectiveness of their advertising-based business. As users consolidate and advertisers become more sophisticated, the ability of content providers to manipulate and obfuscate is sure to diminish. 1996 should see the arrival of the first truly professional web-tracking and advertising auditing, along with proper polling. This is sure to put downward pressure on the current ad rates for sites like HotWired. Advertisers use a cost-per-thousand (CPM) to compare the relative cost of running an ad. A 30-second ad on NBC nightly news runs about $ 5.50 per thousand. A full page in Cosmopolitan has a $ 35 CPM. HotWired weighs in with a $ 150 CPM. Explaining why on Earth an advertiser should spend precious ad dollars on web ads at this rate requires detailed impartial auditing, with clear standards for what a "hit" really means.

While everyone trying to make money online agrees that proper auditing is essential, Internet users may not cooperate. The ethos of the net remains strongly opposed to any sort of extensive demographic and usage monitoring. So 1996 may see the beginning of a division between new and old net users. Old users who refuse to participate in any market or demographic research will pay higher fees to access the net. Using the HBO versus NBC metaphor, there will be net users paying $ 35 a month for access who vehemently refuse to cooperate with advertisers, just like HBO subscribers. People who want to surf for free will trade fragments of their personal information in return for access. Unfortunately, the entire question of how to make money online may become secondary to a larger problem: uncertainty over the limits of electronic speech.

Net Censorship

Just when effective business models appeared, Congress decided to throw a huge spanner in the works: criminalizing the distribution of "indecent" material, a vague standard far broader than the original idea, which was to restrict "obscene" material. Proposed legislation would make online communication deemed "indecent" (including private email) punishable by up to two years in prison and a 100,000 fine. If sponsored content, teamed with advertisers and ISPS is a formula for 1996, then the uncertainty over the "rules of the road" in cyberspace will suppress this strategy.

Advertisers, recognizing that good content attracts viewers, face the disturbing prospect of possibly sponsoring something that leads to a nasty and very public lawsuit over indecency. Material that would be protected in this magazine, or any other print publication, may become unacceptable on the net, posing a big problem to youth-oriented sites (curse words, sexually suggestive stories, pretty much all rock'n roll journalism, would probably be considered "indecent") --a demographic with strong commercial appeal. While the absurdity of this legislation appears funny, it can only serve to dampen the flow of investment into net businesses.

Professor Donna Hoffman, who teaches online marketing at Vanderbilt University's business school, used to talk extensively about the appropriate strategies for companies to follow online. Her associate David Novak consisted with Nielsen when they conducted an extensive poll on Internet use, a poll which was widely discredited after Hoffman came forward to reveal that Nielsen misinterpreted the data. (Nielsen claimed America Online had 10 million users, when it actually has 4 million; they claimed 24 million Americans were online, and that 2.5 million Americans had bought products through an online service, figures which Hoffman feels strongly overstate actual net use.

The fiasco highlights how amateurish the tracking of Internet use remains. However, Hoffman is so concerned about the indecency issue that she feels discussing good online strategies is futile at this moment, since they may well be obliterated in the near future. "I have trouble talking about these marketing questions right now. The Internet is in so much trouble," she says. "If we do not get people in Congress to see that this is a communications medium, and not a broadcast medium, then 1996 will be the year we all fight to maintain this revolution--the net is the most important invention since the printing press." She chides corporations for not standing up and lobbying Congress. "A much larger organized force has to come in and say the commercial value of this medium is being threatened," Hoffman argues.

The Limits to Growth

Some cynics might argue that scaring people away from the net is a good thing, welcome relief for an overburdened system. The infrastructure that makes the Internet possible is strained to the breaking point. Overwhelmed by traffic, the Internet may not be capable of handling increased demand in 1996. The plight of Internet bandwidth is largely ignored, or dismissed by people who assume that, just as Intel makes faster chips every 18 months, Cisco can make faster hubs.

Unfortunately, that's not the case. "Mac-East has a problem with congestion," Mark Kosters tells me. "It goes down often, once every couple of hours." That's a stunning fact. MAE-East, for those who care, is one of the hearts of the net, a central hub near Washington D.C. where billions of bits converge, get re-routed, and then dash off to their destination. Kosters works for Network Solutions in Virginia, the company responsible for issuing Internet domain names, acting as principal investigator of InterNIC--the closest thing the Internet has to a governing body. From Koster's vantage point in the center of things (as much as the net has anything close to a center), the net is waging a neck-and-neck race between bandwidth and demand.

Every few months demand creeps ahead of capacity, by which time engineers have scrambled to develop mix of hardware and software patches to ease the bottleneck. The only certainty is that the patch will be strained to the breaking point yet again after a few months.

Culprits, according to Kosters, include the web, a platform that serves data inefficiently. Instead of serving an entire web page n one burst, web servers feed information piecemeal to the client--a little text, a little image, and so on, until all the elements are downloaded. This dramatically increases the number of transactions back and forth and, with the unprecedented growth of the web, it is the main source of stress on the whole Internet system.

Kosters doesn't see this situation changing anytime soon. Worse yet, Kosters explains, "the number of people who have a clue are stretched really thinly." There are simply not enough skilled network administrators to keep up with growth.

The bottom line for everyday users means unexplained errors, usually the message "host busy, try again later," which is misleading.

The truth is, your data packets just vanished, destroyed by a brown-out somewhere on the net.

A Problem of Definition

Nineteen ninety-six will be the year the real world challenges the up-is-down world of the net, a network free from law, where flat fees get you everything, and anyone with a computer, a modem and a good idea is able to take on the mighty--be it Time-Warner or ESPN. 1995 brought legions of new users and reams of new investment to the net, further undermining the net's original character as a network of hobbyists, hackers and computer scientists. The new users coming online do not come from the same culture; they don't share the technical skills of the old users, nor do they have the same vision of the net. While old users turned to the net as a means to communicate and collaborate, the new user sees the net as a kind of digital stop-and-shop, a place to be entertained, an extension of the 500-channel universe.

As corporations devise new ways to attract the next generation of users, the image of the net as a broadcast medium will increase, challenging the older premise that the net is a communications medium. The two have always stood in tense balance, and now momentum is shifting toward the broadcast metaphor.

The ratio of authors to readers--of people who create information versus those who consume it--will only widen in 1996. But every action has a reaction. In this new environment, the net may well begin to fragment, moving from one global network to a series of interconnected global networks, each with different access fees, and different rules of the road. Those who wish to keep the net like it used to be will be willing to pay higher access fees to support the network themselves.

In that sense, the net in 1996 will come to resemble the real world--divided. No one should, however, assume the outcome is certain--that order and stability can come into this world, or that business plans will make any sense soon. The only certainty about the net is that it plays by its own rules, rules that turn college students into multi-millionaires and computer programmers into counter-culture heroes.

by David S. Bennahum