Are online providers having their cake and eating it?

There have been two significant developments during the past fortnight.

There have been two significant developments during the past fortnight.

First, the Thursday before Good Friday Yahoo!’s share price went up by more than $17 (10.50) to $121.5. Rivals Excite and Lycos are also buoyant and have been for two months. Why? Because a lot of people seem to be confident that, for search engine/ directories at least, advertising is a profitable model for the future.

Second, AOL, the second largest online provider in the UK, has announced a deal to make Associated Newspapers’ This Is London Website an “anchor tenant”. A similar deal has been agreed bet-ween Associated and MSN.

The surprise is that Associated is paying for this privilege. Why would it agree to this at a time when investors are finally coming round to the view that advertising will generate profit on the Internet? After all, a couple of years ago AOL was happy to pay for content – to Mirror Group for instance. Now it seems to be bullish enough to demand, and achieve, the opposite.

At first sight this seems like a reversal of everything we understand about media. In cable, for instance, content providers (the channels) are paid by the cable companies – or at least get to keep ad revenues. The same is true of radio, where syndication companies are paid by radio stations for programming – unless it’s sponsored.

On the other hand maybe this is a model that the press would understand – after all, publishers are used to paying retailers for distribution, through a share of the cover price.

Viewed in these terms, AOL becomes the WH Smith of the online world. The trouble is that boundaries are being blurred, because AOL is also competing with Associated for ad spend, something print retailers generally don’t do.

In fact, there appears to be a bit of cake retention and consumption happening here. AOL is now generating money from subscribers, advertisers and content providers.

So why would This Is London do this? Over 2.3 million page impressions a month, three months after launch is a handsome achievement. It’s also a good site.

The answer lies in brand building. Associated knows it can get close to “owning” London on the Web. To do so, it needs to achieve volume quickly to block rivals and establish a reputation as a destination site. That may mean cutting some uneconomic deals.

Advertising online would be another way of generating impressions, and no doubt Associated is doing this.

Is it a new trend? I doubt it. AOL is obviously big enough to get away with charging – but few others can or will.

The speed of change in the Net is remarkable – and the impact of the collision between TV and the Web will be felt everywhere. In the interim, it will be some time before we see the economics of content provision and Web publishing finally settle down.

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