Ailing dot-coms: Forget the freebies!

Are Internet giveaways gone for good? Many companies are beginning to charge for services as they realize that the free stuff they've been giving away is to blame for their current sad financial state.

For a long time now, free has been the Internet's favorite price for offerings.

Free music. Free news. Free software. Free shipping. Free access. Free computers to get free e-mail. Even a free lunch -- certain food sites in headier times last year offered munchies gratis.

Today on the Web -- with apologies to Janis Joplin -- free is just another word for nothing left to lose. Many of the online companies that are in a sad state today can blame their woes on the cornucopia of free stuff and services they have been doling out to build market share.

Charging is now increasingly the way to go. Investors, in their latest shift regarding dot-coms, are focusing on "P-to-P," or path to profitability (some joke it stands for "prepare-to-pray"). They are eschewing any business that doesn't have multiple revenue streams or that relies too much on advertising fees.

Nick Donatiello of San Francisco-based Odyssey Research wonders if the giveaways are gone for good. "I think it's clear the big river called Free is not going to tolerate a dam all of a sudden, but companies are going to have to develop all sorts of small tributaries that will eventually be as powerful."

Major sites like Yahoo! (yhoo) and the Microsoft Network now talk about the importance of rolling out more premium services. The basic idea is simple: Give users a taste of a service and then "upsell" them, or persuade them to pay for better features. Such services could include souped-up stock portfolios, long-distance calling plans over the Web and highly specialized content.

These new fees are replacing the disappearing discount. Internet grocery delivery-service Webvan (wbvn) (whose stock has dropped below $1 a share on worries about its viability) is now charging users $4.95 on orders that fall below $75. Meanwhile, Amazon (amzn) has raised the amount of spending that customers must reach before offering free shipping. Most Web retail outfits are making similar moves, cutting back on generous promotions they made without a thought last year.

Freebies these days are often linked only with major purchases, such as a recent offer for a year of free access using MSN with the purchase of a Dell personal computer. Even the most prominent free-for-all companies are making big cuts. Last month, CMGI (cmgi) decided to close down a free-access service, 1stUp.com, which it bought last year amid loud declarations about the power of free. Executives blame weakening ad rates and high costs.

One survivor, Juno Online (jweb), saw its stock drop to around $2 a share from highs of nearly $30 early this year. The company said recently that it would try to restrict heavier usage by its free-service users by making it hard for them to stay continually connected and by shooting them more ads. Those who pay for Juno, of course, would be spared such agonies.

"It's hard to make 'free' work in the time frame that the market demands today," says Peter Mills, a top executive at CMGI. "At the end of the day, free is a concept that made sense, but not in the real order of things today -- and not soon enough and not big enough."

The most apparent sign of change, however, is the recent deal that Napster, the poster child for free online music, struck recently with Bertelsmann. In exchange for a big loan (note: not an investment) from the German media giant, Napster said it was working on a subscription system that would allow it to charge for its popular and controversial music-trading service.

Will users accustomed to not paying want to open their wallets? What is the economic value of some of these sites, anyway? And will those who charge actually sell more ads because advertisers like paying customers? Or will the expected user drop-off cause online ad rates to decline further?

It's not that everyone on the Web is so used to freebies. In the early days of the commercial Internet, nearly everything you wanted to do had some sort of an hourly fee. Today, the Internet's most important company, America Online, is still a paid service. But a variety of polls of online consumers are still fuzzy about how much and for what the users will pay for.

But it has been nice not paying for much of the Internet. Millions have been flocking to all sorts of free services. That attitude was jump-started as far back as 1996 when unlimited access swept the Web, wiping out the hourly fee structure that had provided stability to early start-ups such as AOL. The huge investments that followed allowed them to give away tons of quality material. Some sites continued to charge (such as The Wall Street Journal's WSJ.com), but many Internet experts roundly chided them for doing so. Many went back to free to keep up.

Online magazine Slate shifted to free after a charging stint. Its move made sense at the time, since almost everyone else was doing it and seeing gigantic growth in usage. When Slate was delivered unfettered, it also saw a huge spike in audience.

So the negative reaction to a new price tag was certainly swift when Napster announced its Bertelsmann deal. The move was greeted with shock by some that consider Napster the most potent symbol of the free Internet. The day the deal was announced, its online community forums howled with protests, which continue today. In a post last week on Napster's message boards on the issue of paying, BillyBob99 posted a typical comment:

"Napster = FREE/If Napster decides to not = free any longer then I will switch to another freebie/There are many out there. .../The Internet is a great place, you can get whatever you want on here. No matter what./Free Free Free."

Such a sentiment can only leave one wondering which battle cry for the Internet will ultimately win out: "Live free or die," or "Live free and die."