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Has the great thinning begun?

Hot on the Web

This column originally ran in ComputorEdge on June 29, 2001

(Issue 1926, Computing in Your Palm)

It is, of course, pitched as a great new "improvement." But for those who have used Homestead's free web hosting service to build and keep their web pages on, it's hard to see how having to pay to keep your pages up is much of an improvement.

For those who've invested in Homestead, however, seeing the company actually generate real income has to come as an improvement.

For way too long, dot-com startups have gotten a free ride from their investors. Business plans have been long on predicting fabulous wealth down the road, while quite short on bringing any cash in the door right now.

An e-mail from Homestead founder and CEO Justin Kitch went out the second week of June to all registered members. In the e-mail, Kitch explained that the new subscription plan is going into effect in mid-July, but that existing members will have until the end of the summer to convert to a for-pay plan or downgrade their account to a bare-bones free plan – only three pages per account. Kitch's e-mail said no firm price had been set, but that $10 a month was a likely range.

Until now, Homestead's business plan has been based on having a portal built around content provided by the public. By providing free web hosting, the theory went, the company could attract tens or hundreds of thousands of people who want to build their own pages, in turn pulling in millions of viewers visiting those pages, and then it would make money by selling advertising to be placed on its customers' "free" pages.

The same theory is behind the business plans of, AngelFire and GeoCities, all of which provide free web hosting in exchange for the right to place advertising on those pages.

The problem with this entire approach is that the law of supply and demand continues to operate on the Web, and online advertising is massively tilted toward the oversupply side. Too much supply means little demand, which has driven the price of online banner ads into the cellar. (The fact that various studies have shown that online banner ads are less effective at influencing consumers than comparable TV or magazine/newspaper ads hasn't helped prevent the slide of banner ad rates, either.)

Now that we're three, four years into the great Internet explosion, investors are wanting to see some actual, concrete results, and the startups they invested in are scrambling to rewrite their business plans to generate immediate income.

The Homestead subscription plan is likely to be only the first change in the free webhosting industry. It's competitors are no less in need of an alternative plan in order to make enough money to pay the bills. is an example of a company that successfully made the switch from a advertising-based company to one with other methods of making money as well. When originally founded, had little going for it other than an easily remembered domain name. In its original incarnation, was less useful than the non-profit – you had links to various MP3 players and encoders, as well as links to MP3 search engines.

And yet investors flocked to When the original media hype over the then-new MP3 music encoding standard began to fade, so did's stock.

What saved, and brought in top dollar when it was sold last month to multinational media conglomerate Vivendi, was the company's realization that it needed more than a Web presence with banner ads – it needed a real business plan, and multiple ways to bring in money.

So structured itself as a new pipeline for delivering music to consumers. Rather than the typical retail distribution network, allowed musicians to use its portal to market themselves directly. By offering free samples of their music – say a song or two off a new CD that the public could download and keep – musicians (and those record companies savvy enough to not fear the new technology) could bypass the retail side of things altogether, not only saving themselves distributors' costs, but reaching entire new audiences. And got a cut on every sale.

But there's been very little of that kind of imagination shown by dot-com companies.

Instead, like Homestead – and most of the other free web-hosting portals – far too many Internet companies have business plans based on generating lots and lots of traffic and then selling advertising based on it.

Not many will survive based on that approach; the coming months should be interesting.