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Not the First Such Challenge: Radio Struggled Too

The Internet companies do not face this challenge without historical precedent. Radio in its early days provides an illuminating case study. It took years for a viable business model to develop in the radio industry, well after the public had fallen in love with the new medium. The model that finally emerged was not immediately obvious. Radio began as a way for one person to communicate with another. Radio Corporation of America (RCA), founded in 1919, charged a fee to sender or recipient and prospered by undercutting the price of telegrams.

This changed when radio broadcasting became popular in 1922. Radio was truly the first WWW, as the early RCA logos sported the buzzwords "World-Wide Wireless."15 The transition to broadcasting shifted the viable business model in uncertain ways. Everyone knew the new medium was wildly popular, but no one knew how to make real money at it. At first, RCA made money selling radios. To encourage sales, RCA and other radio manufacturers, universities, and churches sponsored radio stations to provide content. But this was quickly seen to be unsuccessful.

Some suggested a tax on listeners. The British charged radio owners a fee to finance the BBC. One obvious solution was paid advertising, but in the early days these were tough to sell and quite controversial. Just as in many locales there still are no ads before the trailers at big-screen movie theaters, ads did not show up on radio until national networks were created. In the 1920s, ads were seen as an intrusion at best and unethical at worst.

While ads did work for radio and TV, it is unlikely that they will be the answer for Internet companies. Radio and TV are mass-market media, with pre-arranged, set programming. The Internet, instead, offers customized content. The business model must reflect that. Amazon.com is betting that if it gets big enough fast enough, it will be able to charge enough to make money. We will see.

Subscriptions and fees may be part of the answer. Satellite radio stations are charging low monthly fees. Many dot-coms are looking for new revenue streams. A natural one for some would be to offer their valuable software technology to other noncompeting companies for a price. Some are already moving in this direction. Yahoo! is building private-label corporate portals—intranets for a company's employees—for internal use and setting up conferences over the Net. The fees for this will not be chicken feed. Yahoo! is hoping to earn roughly $200 million for this service in 2001, accounting for a fifth of expected revenues that year. Yahoo! had little choice but to diversify given that online advertising fell sharply with the economic slowdown.

Others are following a similar strategy. eBay is hosting storefronts for small and medium-sized merchants, similar to Amazon.com's zShops. Amazon.com has taken this a step further, however, with its agreement with Toys "R" Us, which pays to sell its products through Amazon.com's software and warehouses. Amazon.com is planning to do similar deals with other retailers whose products are too limited or seasonal to warrant their own stand-alone site. Quite a few smaller e-tailers—from Ask Jeeves to Respond.com—are also selling private-label versions of their sites to big companies in an effort to move away from excessive dependency on consumer shopping revenues.

The B2B space offers other possibilities similar to eBay's fee-for-service system. Commerce One, a leading B2B company, gets most of its revenue from selling and servicing its software. It plans, however, to charge for each transaction on its electronic marketplaces.

Certainly the enhanced service, selection, customization, and convenience of the Net is here to stay and worth paying for. Customers will become increasingly used to all that the Net has to offer and will refuse to go back to the long lines and low inventories of bricks-only shopping, even as the traditional retailing experience improves in response. But shoppers will have to be willing to pay for this in some way. The Net participants will figure it out, but it will take time, and the shakeout in 2000–2001 was very much to be expected. The 1922 radio euphoria was followed by a meltdown. Of the forty-eight stations that were first in their states, twenty-seven went out of business by 1924. It took this kind of churning for the new business model to emerge.

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