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Why the Dot-Coms Cannot Live on Ads Alone

Tempted to invest in Web sites with one revenue stream: advertising? Short 'em, Cramer says.
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When I look at Web companies to invest in these days, the first thing I do is see if they are entirely advertiser-supported. If they are, I want to short every share of them. For the rest of the year I will do my best to make that bet, as these dot-coms are going to crumble. As advertisers get comfortable with the Web, they will gravitate to sites with proven, paid demographics. Those who can't extract either carriage fees from content providers or subscriptions from readers don't deserve a dollar of your money. They won't get a dollar of mine, and I suspect I will make tons of money betting against them.

We got into a spirited discussion about advertiser vs. subscriber models of business on the

Cavuto Business Report

on Friday night, and Neil postulated that those companies that were to rely simply on advertising would never make it because there would not be enough advertising to go around.

I found myself nodding in total agreement. It all seemed so obvious when he stated it that way. Indeed, if you ask me how to analyze a potential Web winner, quite simply, as I have said a gazillion times, it has to have more than one revenue stream. The reason why I like



so much is not because it has a lot of advertising. It has a decent amount. It is because people pay Yahoo! to run and index their content. That's where the big profit potential comes in.

Similarly, when

Marty Peretz

and I first came up with the idea of

, we knew from the get-go if we had to give it away for free, it ain't worth reading. Heck, if you can't charge, I think you should give up and go back to print!! People may not want to pay for commodity general-interest publications, but we have shown that they will pay willingly for real-time financial information, updated constantly, that they can't get elsewhere, because it makes them money. We weren't interested in working with people who didn't subscribe to our views on this subject; we still aren't.

I knew people would pay pocket change for good financial content over a public telephone line, because I pay $1,500 a month for not-so-hot stuff piped in via expensive dedicated lines from wire services. I would gladly pay $10 a month for something that makes me as much money or more as the wires. I get hundreds of emails a week from readers saying the same thing. (I send them to the board members who follow our progress closely, and they save every one!) If I wouldn't pay, it is because it didn't make me any money and it wasn't worth it. Not charging for your wares says the same thing: You don't believe you are worth it either.

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This paid-vs.-free discussion is important, because advertising simply isn't moving fast enough to the Web to make all of those sites out there work. Don't let dot-com managements or wild-eyed analysts buffalo you into thinking it is. I am on the frontlines of this battle and only those so-out-of-touch with the real world of what is selling would think otherwise. Someone else has to pay beyond the advertisers.

When I see an e-tailing site or a business publication site that is bent on making it up with eyeballs, I want to say to those fools, "The bank doesn't take eyeballs." The bank, by the way, doesn't like to be paid in registrations either, despite what some publishing concerns may think. Those who don't believe they can charge do so because they know they can't charge --

because their product is not special enough

. Don't ask me to invest in your stock if you can't get people to pay, somehow, for your wares. I don't want to go there.

It is no secret that the giant, protracted slide in

America Online's


stock occurred when it lost the battle to charge in the U.K. That decision lost billions in market cap for the company, as many people, including me, said, "Hey, maybe they don't believe themselves in the paid model. Maybe they are going to go free." It shook the conviction of many investors, including me. We are still trying to recover from it, some 70 points down later.

Of course, many organizations have tried to gravitate to a paid model once they start as free. They have all failed and failed miserably. They were lured into the siren song by mutual fund investors and a couple of analysts who believe that sheer eyeballs matter. This next quarter we will see how so much money was spent to get those eyeballs. Mark my words, those trying to make it this way will have a ton of advertising,

but they will not be able to charge anything for it

, because the advertisers don't believe in eyeballs, they believe in brands.

Check your portfolios. Do you have dot-coms with one stream of revenue: advertising? Ask what those advertisers are paying. You can have tons of ads and very little revenue. That's a recipe for disaster. Making it will kill your financial health.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online, and Yahoo!. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at