Free Web: Its days are numbered?

The introduction of charges may fundamentally alter the course of the Web. This evolution could create a new kind of digital divide, giving rise to virtually gated and balkanized communities throughout cyberspace.

Paul Anderson became a big fan of Yahoo's free Internet phone calls not long after moving to Memphis, but he has learned to live without the service since the portal began charging for it.

It will be a different story for his 17-year-old daughter, however. Anderson has not yet mustered the courage to tell her that she won't be able to call her friends back home in Wisconsin without paying by the minute.

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"I expect there will be a potential backlash once the realization hits," the 41-year-old systems administrator said with a nervous laugh. "One of these days we'll have to deal with it."

So will millions of other people who have come to depend on online services and content as they realize the inevitable: The free ride on the Web is coming to an end.

Some denounce the Net's move toward subscriptions as the death of the first mass medium founded on democratic principles, a digital utopia where social, economic and geographic differences posed no barriers to the open flow of information. Others are more pragmatic, saying it was Pollyannish to have expected the Web's content and services to remain free forever--especially after the Internet bubble burst.

Either way, the introduction of charges may fundamentally alter the course of the medium. This evolution could create a new kind of digital divide linked to one's ability to pay for information and services, giving rise to virtually gated and balkanized communities throughout cyberspace.

"People have gotten used to free information. Schools, low-income people, job hunters--information will be dried up for them," said Jim Carrier, director of Tolerance.org, a Web site run by the Southern Poverty Law Center in Montgomery, Ala. "That's not to say the marketplace wouldn't work, but clearly the promise of the Internet is the democracy of ideas. That becomes less than ideal when some of your best information must require a credit card."

What people like Carrier fear is control of the Web by a handful of megacorporations capable of handling such diverse issues as security, privacy, speed, scale and copyrights in millions of transactions per second. Though countless companies from the New and Old Economies will prosper in this new landscape, many Internet veterans see two familiar names emerging as dominant players: AOL Time Warner and Microsoft.

Both are among the few media and high-tech companies powerful enough to take over large segments of a wholly commercialized Web, though each arrives at this juncture from vastly different origins: one from media and the other from technology.

AOL Time Warner derives its strength from America Online, the largest paid membership on the Internet, and from the massive wealth of content from Time Warner. Microsoft has unrivaled expertise in controlling the software consumers and businesses need to use services and buy products while navigating the Web.

"AOL Time Warner and Microsoft will probably take over some 70 to 80 percent of everything--Web access, Web usage, whatever," predicted Ken Lim, chief futurist of research organization Cybermedia Group and a former employee of Apple Computer and NASA. "An element people are touching on is that it's not the content that's important--it's the functionality." One popular conspiracy theory holds that sites are already preying on the addiction of their followers, hooking them on free services only to start charging when they seem indispensable.

Although that may be true in some cases, many large Web companies would rather keep their sites free--they just haven't figured out how to make money that way.

Through woeful miscalculation or a belief in their own hype, many leading dot-coms assumed that a limitless supply of advertising dollars attached to traffic would keep them profitable. Following that strategy, the major portals became locked in a multibillion-dollar war to acquire the highest numbers of visitors, often by buying other sites for little more than their traffic figures.

The result was a kind of gargantuan pyramid scheme that continually raised stock prices based on traffic counts, making money for investors until Wall Street realized those numbers weren't translating into meaningful revenue. As the Internet economy was squeezed last year, a wave of online publishers began to rethink the free philosophies that drove the Web's growth for so long.

"If you give away something for free, it's a bad thing. There's no profit, and you can't take clicks to Safeway," said Yobie Benjamin, distinguished fellow and general partner at Ernst & Young. "We knew that, yet we persevered in our stupidity."

Many companies are quietly making moves to rectify that situation. Bigstep.com will start charging this month for its Web-hosting services in three packages ranging from $9.95 to $34.95 per month, likely beginning a trend that will affect all small businesses online. Also this month, LookSmart will begin selling prominent placements on its Internet search directory, following a controversial path charted by Goto.com.

About.com, another search engine and a subsidiary of magazine publisher Primedia, plans to charge for some of its email newsletters--a form of online communication that free-Net proponents have long argued is key to ensuring the open flow of information, bypassing copyright laws if necessary. In Primedia's case, newsletters targeted at specific industries ranging from Cable World to Soybean Digest could soon be available only for a fee.

The trend toward subscriptions may even rescue that much-maligned species known as the dot-com start-up.

In the next few weeks, a company called Talaris plans to offer a fee-based Web service using Sun Microsystems' Java technology. Similar to long-term plans by Microsoft, the Talaris service would act as a kind of virtual assistant that handles multiple tasks such as scheduling a business trip complete with airline, hotel, restaurant and rental car reservations--updating them all automatically in the event of a last-minute delay.

"Lots of companies went too far down the road in giving things away for free and found that they couldn't charge later," said Kevin Werbach, an industry analyst with EDventure Holdings and a former Federal Communications Commission attorney. "Anyone who thought the Web would somehow change the laws of economics was deluding themselves."

Publications that have already begun subscription fees include Encyclopaedia Britannica and magazine Salon.com, which now charges for premium sections and sells readers an ad-free edition. Hollywood trade publication Variety.com started charging for articles it previously used as bait for online subscriptions.

Far more controversial is a plan by eBay to begin charging subscription fees of $4.99 to $15.99 a month for popular auction software that helps sellers present offerings and manage sales. The move has been met with particular acrimony because eBay's unique one-to-one business relationships have fostered its reputation as the first true Internet marketplace, grown organically by an egalitarian online community.

Companies are also experimenting with various ways to present these new bills to customers, including "micropayment" charges ranging from 10 cents to $10 per click applied piecemeal for specific content. ESPN SportsZone and Playboy Enterprises are separately trying another plan that would let visitors use digital money to pay for day passes instead of monthly subscriptions.

This may be just the beginning. In the future, executives and analysts say, a variety of free and subscription models will coexist. Some compare the emerging medium to television as it evolved when cable was introduced, eventually leading viewers to pay for some channels while watching others for free.

"You'll see these blends where those that value their time rather than their money will pay for an ad-free publication," said Jonathan Zittrain, executive director of the Berkman Center for Internet and Society at Harvard Law School. "All these models can make your brain hurt really quickly, but this is the sort of thing that people who have MBAs and such will put a lot of work into."

Some newspapers are reconsidering online subscriptions, raising the specter of what some in the publishing business call the "90 percent order of magnitude." That equation is based on the experience of The Wall Street Journal's online edition, which purportedly lost 90 percent of its readers when it began charging a monthly fee.

After the initial traffic shock, The Wall Street Journal Interactive went on to become one of the few subscription sites considered a business success. Since then, other sites have weighed whether they, too, could survive if only 10 percent of the people using their services were willing to pay for them. Those that do decide to charge usually offer at least some content and services for free as an enticement.

"It's an old, old model that venture capitalists used to use," said Clay Shirky, a partner at VC firm the Accelerated Group and a veteran Internet analyst. "Let them onto the front porch for free, then charge them for coming into the house."

This tactic, like so many other standard online practices, was pioneered by the pornography industry. The adult business may further provide a blueprint for profitability for the mainstream entertainment industry, which hopes to cash in on movies and music once high-speed connections pervade the Internet.

Public demand for broadband would create opportunities to charge consumers in a variety of ways for services. In addition to imposing fees for viewing or hearing copyrighted material, companies could charge for premium software, fast network connections and other technologies needed to experience multimedia entertainment online.

Such businesses go beyond charging the consumer, potentially creating new middleman industries that could do everything from providing complicated micropayment systems to licensing and aggregating professional sports events. RealNetworks has already struck deals with the National Basketball Association and Major League Baseball, possibly positioning itself to provide on-demand Webcasts similar to cable TV's pay-per-view boxing matches or TiVo's recording of personally programmed events.

"If you look at this history of any media, there's always been a blend of ad-supported and consumer-supported revenue," said Mark Hall, vice president of programming and marketing for multimedia company RealNetworks. "The larger point is you see people moving in that direction, and that is something that's always going to happen."

Until then, companies can build lucrative businesses by charging for services that have nothing to do with content, such as instant messaging, Internet telephony and high-capacity e-mail. Some companies even charge to remove features from services, rather than add them. Juno Online Services' free Net access, for example, carries prominent ads that can't be removed. People who use the free service often grow irritated with the ads and eventually pay for a premium service to avoid them.

"Marginal costs will be the true determiner of whether something's free," said Jordan Rohan, an equity analyst at Wit SoundView. "People give away things that don't cost them a lot."

Others agree that companies are looking to provide services compelling enough for consumers to buy, suggesting that the demise of the free Web goes beyond finding replacements for ad revenue.

If any single company has mostly avoided free content and services, it's AOL. The company resisted criticism that it was holding onto an obsolete, closed environment that limited its traffic at a time when Web portals were scoring exponential gains.

Some believe that the key reason for AOL's success has been a hybrid culture that straddles the Old and New Economies. One product of that old-world sensibility was steady revenue from paying subscribers--a distinction that would serve the company well through the vagaries of advertising slumps and stock market crashes.

"AOL owned the access numbers. Five years ago, you didn't go onto the Internet--you went onto AOL," said Joshua Sinel, chief executive of BlueBarn Interactive, which builds community sites. "They controlled your behavior."

On the other end of the spectrum was Yahoo, whose very name could not be more different from the image conjured by AOL. Yahoo was the quintessential dot-com, the emblem of a new generation of Web companies banking on the hope that its enormous traffic would carry it to victory.

More than any other company's plight, the reversal of Yahoo's fortunes in the last year has been universally cited as hard evidence that the free Web must change.

"We've always been about evolving the model," said Henry Sohn, vice president and general manager of network services at Yahoo. "The shakeout helps us assess which products can be offered and supported by advertising."

This year, the portal giant began charging for many services, including real-time financial information and online phone calls. But, unlike AOL, the portal may run into problems if its move toward paid services results in a backlash that drives traffic from the site.

"There were situations where Newsweek would pay someone to give it away for free while they're selling it to someone else," said Steven Brill, chief executive of Brill Media Holdings, which publishes Brill's Content magazine. "You've got to be an idiot to do that."

The empire is ready to strike again
At this stage in the development of online subscriptions, the technology used to make payments is arguably as important to businesses as the content and services people are buying. The resulting opportunities appear tailor-made for a company devoted to dominating the architecture people must use to get wherever they want to go: Microsoft.

Having exploited the strategy of free giveaways from its earliest steps online during the browser wars with Netscape Communications, Microsoft is preparing to cash in on its investments. Specifically, its new .Net initiative--a plan to turn its software from a PC-based product into a network-based subscription service--promises to have significant consequences for the free Web.

"The power will move closer and closer to where the buying decision is made," Guernsey Research analyst Chris LeTocq said.

Among other things, Microsoft is altering its commitment to free, standalone software downloads for some of its products, including its Windows Media Player. The latest full-function version of Windows Media Player 8 will come only as a bundled feature of the company's new Windows XP operating system.

In addition, Microsoft is developing "personal context services" under a project dubbed HailStorm, which builds on its instant messaging technology and Passport authentication system. Basically, the company is betting that consumers and businesses will pay extra to gain access to features like phone lists and calendars and to share the information with others on devices including PCs, cell phones and personal digital assistants.

Analysts said it remains unclear whether these types of services will be attractive enough for consumers to open their wallets. But even if HailStorm fails to take off, the project could pave the way for Microsoft technology to become the standard payment mechanism on the Net.

As its name suggests, Passport would allow people to use the same name and password to enter participating Web sites and would provide a "wallet service" aimed at speeding online purchases. The system would also let people consolidate the many small charges likely to be accumulated for various content clicks, software downloads and connection links that could become a household nightmare if each were billed separately.

As EDventure Chairman Esther Dyson said, "People don't like being nickeled-and-dimed."

If history is any guide, Microsoft could be expected to offer incentives for content partners to sign up with Passport, which could then provide discounts and promotional items for consumers who use the service. The company has long experimented with these kinds of arrangements in the Web browser and operating system businesses.

As far back as 1996, Microsoft secured deals that provided free access to such subscription sites as The Wall Street Journal Interactive and ESPN SportsZone for consumers using the Internet Explorer browser. These kinds of arrangements have sometimes drawn the attention of federal authorities who have grappled with the concept of antitrust regulation while trying to allow companies to build viable businesses online.

That Microsoft would go to such lengths speaks to the importance of owning valuable content or securing exclusive rights to link to it. In fact, the very definition of ownership may need to change in the future online experience.

Some pundits predict we will move toward an online world where consumers own nothing and rent everything. Books, music and videos will not be owned, but rented. Much like the agriculture business, where farmers never own the seeds they use for next year's harvest, companies will farm out the rights to use information or services for finite periods of time.

All this raises serious questions about the application of copyright laws to online content. "Fair use" law, for instance, gives someone such as a teacher the right to photocopy chapters of a book for a class. But on the Internet, copying whole works and distributing them widely becomes much simpler.

In an increasingly money-conscious Web, new locks could be placed on copyrighted material, causing independent sites relying on these works to go out of business and giving rise to lawsuits over fair use. As a result, the costs of access to such works will increasingly be passed on to consumers.

"Authors will be interested in seeing how far copyright law will take them in protecting their economic investment on the Web," said Dan Appleman, co-chair of the intellectual property litigation practice at Heller Ehrman White & McAuliffe.

Placing a price tag on previously free material could mar the Web philosophically, however. From its inception in 1989, the Internet was thought of as rich soil for fostering the exchange of ideas and information. Newsletters, bulletin boards, newsgroups, and independent and academic communities have thrived on this idea, culling information from news sources around the Web to republish material for thousands of readers.

Copyrighted or not, most of the basic information that viewers found for free yesterday will be freely available tomorrow. For this reason, many industry experts doubt that Yahoo and other portals will be able to charge for some content because it is so widely available through other online sources.

"You'll discover an awful lot of information will continue to be free. Publishers will make some part of information for free. That won't disappear entirely," said Vint Cerf, widely known as the father of the Internet in his co-authorship of Internet protocols.

Illustrating this point, Cerf recalled a recent dinner party where someone asked the source of Nevada's power. In a matter of minutes, a Google search registered a site with the answer.

"In this random dinner conservation not only did we get the answer, but we found one of the most complete histories of Hoover Dam," said Cerf, who is senior vice president of Internet architecture and technology for WorldCom and chairman of the board for the Internet Corporation for Assigned Names and Numbers. "The academic community works that way because they trade information, and that tradition will still be represented on the Web."

As with most things in the real world, however, such ivory-tower aspirations are often subordinated by the harsh demands of corporate America.

Like Paul Anderson's family, Jeff Pulver was caught off guard a few weeks ago when Yahoo sent him an e-mail saying it would begin charging for the free Internet phone calls he was making through the portal's instant messenger. But his reaction reflected a cynicism that touches many Web veterans who have witnessed the increasing commercialization of the medium.

"I'm not surprised at that," said Pulver, a pioneer in Internet phone technology and co-founder of the Voice on the Net Coalition. "What surprises me is that it took so long."

Evan Hansen contributed to this report.

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