Business Week article on failing internet strategies and competitive options going forward.
businessweek.com
MAY 25, 2000
With Yahoo!, AOL, and MSN grabbing the mass audiences, the other players have options -- but not too many good ones
To the victor go the spoils. Only a year ago, a dozen online companies were in a fierce battle to become the most highly trafficked sites on the Web and thus reap the lion's share of the Internet's burgeoning ad revenue and e-commerce dollars. And by late last year, analysts were already proclaiming the winners: "The portal race is over," declared a December, 1999, report from market researcher Forrester Research. "Yahoo! and AOL win."
That seemed a bit premature at the time. Sites such as About.com and iWon.com were still clawing their way up the traffic rankings, and investor enthusiasm was still driving up the share prices of Excite@Home and Ask Jeeves. But the April crash in Internet stocks proved that Cambridge (Mass.)-based Forrester was onto something. Dozens of high-profile Internet companies lost more than 75% of their market value in a matter of weeks -- a not-so-welcome reminder that traffic increases mean little if visitors aren't converted to customers who generate revenue.
Now, it's obvious that America Online and Yahoo! have a lock on both traffic and advertising dollars. According to PC Data's April numbers, Yahoo! comes out on top with 49.4 million unique users and an audience reach of 64.9% of the entire Web population, followed closely by AOL.com with 43.3 million unique users and a 56.8% reach (AOL's numbers don't include its proprietary service or its Netscape or CompuServe properties). Those two are also among the only portals to boast profits. For the quarter ended in March, America Online earned $438 million, or 17 cents a share, on $1.8 billion in revenues. Yahoo! posted $78 million in net income, or 13 cents a share, on $228 million in revenues. Also in the black is Lycos, which reported net income of $7.9 million, or 7 cents a share, for the quarter ended Apr. 30, on $78.6 million in revenues.
STICKING WITH IT. Microsoft's MSN portal consistently ranks No. 3, with 36.9 million unique visitors in April, but it's rarely considered an equal competitor, since much of its traffic arrives via the default start page for its leading Internet Explorer browser. Still, analysts may be underplaying Microsoft's influence, says Peter Cohan, a Marlborough (Mass.) management consultant and author of a new book called e-Profit. On May 24, Microsoft previewed a new version of its site that better integrates its properties such as HotMail, Slate, CarPoint, and Expedia. "Microsoft has a track record of not getting it right until the third or fourth time and improving it to the point where it gets pretty good, and that's what they're doing here," says Cohan.
After the Big Three comes a steep falloff to Lycos, which had 22.3 million unique visitors in April and a 29.3% reach. It ceded its indepedence on May 16, when it agreed to become the first U.S. portal to be acquired by a foreign company, Spanish Internet service provider Terra Networks, for $12.5 billion in stock. Excite, Disney's Go.com, and Alta Vista are now all but counted out by analysts, with traffic levels that have plateaued. Patrick Keane, a senior analyst at Forrester who looks primarily at advertising on the Net, says he's surprised how many portals have survived. But he adds that they may not much longer. "A lot of third-, fourth-, and fifth-tier portals are running on fumes," he says.
The problem is that while there's lots of traffic to go around, there aren't enough advertising dollars to support more than a couple of sites selling to a mass audience, analysts say. According to Forrester's research, AOL, Yahoo!, and MSN will attract 17% of all Internet traffic and 45% of all Web ad revenue in 2000, while other broad-based portals combined will claim only 4% of the traffic and 16% of the ad dollars. This gap is expected to widen: By 2004, Forrester says, the top three will claim 20% of the traffic and 40% of the ad dollars.
"NO-MAN'S LAND." At the same time, the share of total Web traffic claimed by all other broad-based portals combined will have declined to only 1%, and their ad-revenue share will drop to 3%, Forrester predicts. "Second- and third-tier portals are caught in no-man's land," says Chris Charron of Forrester. "Their volume isn't as big as AOL and Yahoo!, and their audiences are too broad to command top advertising dollars."
So what's a third- or fourth- or fifth-tier portal to do? The conventional wisdom is that they should forget about attracting a mass audience and target niches. In an April report, Web researcher Jupiter Communications recommends that general-purpose portals narrow their audience by focusing on an affinity group, such as Latino users, or a single subject, such as sports. Analysts think vertical sites emphasizing women (iVillage), investors (CBS MarketWatch), sports fans (SportsLine.com), or gardeners (Garden.com), to name a few, could be survivors.
The goal of narrowing down is to attract more specific audiences and thus be able to charge more for ads. A niche site may never have the reach of a Yahoo! or AOL, but it can cut expenses and still make money because it can sell advertisers access to its audience for a higher price. About.com, a portal made up of more than 700 niche sites, says it can charge as much as $60 per thousand viewings of a targeted ad. Broad-based portals command less than $10 per thousand on average currently, analysts say.
VERTICAL APPEAL. Lower-tier portals also should emphasize e-commerce more and make it an increasing part of their revenue stream, say the purveyors of unsolicited advice. "Traditional portals need to become more focused on either a particular content category or audience segment in order to lower costs, increase revenues, and differentiate themselves," Charron says. "They need to get more entrenched in e-commerce, and appealing to a vertical audience definitely helps them better target such opportunities." According to Forrester, 68% of revenues for content sites comes from advertising, while 16% comes from commerce. By the end of 2002, it expects this to change to 47% from advertising and 36% from commerce.
Other sites may be able to stand out and attract advertisers by emphasizing particular functions normally associated with larger portals. For example, Google.com focuses only on search, and Yack.com specializes in chat and live Web events. In fact, Amazon.com, which wants to be the primary shopping destination on the Web, could be considered an e-commerce portal. The retail giant already commands the multimillion-dollar positioning fees of top portals such as AOL and Yahoo!.
The theory that portals should narrow their audience may be off the mark, some dissenters argue. While second- and third-tier portals may not have a viable business model now, they're still valuable properties, says Cohan, who thinks that by joining up with deeper pockets they can stick around. "It's not clear yet what they'll be," he says, but with all the time and money spent on developing the brand and building an audience, "this is not something you just want to chuck." While such sites can't survive on advertising alone, they can build on e-commerce streams, maybe add a subscription fee, and possibly another revenue stream no one has thought of yet, he says.
NOT GIVING UP. Indeed, sites such as Lycos, Alta Vista, and Excite don't concede that they've lost the race to be the Web's gateways. "There's no indication that these sites are giving up the broad-based portal race," Charron says. "They're still trying to follow Yahoo! and AOL by classifying themselves as networks, not portals." And indeed, some wild cards could still shift the landscape considerably.
For one, lots more people are coming online. According to Cahners-Instat Group, 14 million people will purchase Net access by yearend, meaning 60% of U.S. households should be online by the end of 2000.
Wireless could shift the balance of power, too. In the short run, AOL and Yahoo! may have little to worry about, but some analysts predict that these sites could soon have a problem increasing their share of Net traffic as more content providers expand their presence via wireless devices. "Both brands have traction, but their hegemony will be challenged as [wireless] access providers develop or acquire their own portals and form partnerships," says Nicole Schmidt, an analyst with institutional research firm Josephthal & Co. "People are buying cell phones regardless of whether Yahoo! is there, and unattached portals are dead to the extent they don't have [a wireless] infrastructure partner."
SHIFTING LANDSCAPE. Both AOL and Yahoo! say they've already inked deals with several telecom companies to distribute their content and services. Still, Schmidt says the real battle will be fought outside the U.S., where even a content stalwart such as Yahoo! could end up paying hefty marketing fees to stay on a wireless access provider's short list. "Neither [AOL or Yahoo!] is so entrenched abroad that they're a shoo-in for success," says Schmidt.
Yahoo!, AOL, and MSN will also have to keep ahead in new technologies that could shift the competitive landscape yet again. Yahoo! is emphasizing voice communications on its site, while AOL is set to launch AOL TV. So far, AOL seems to have an edge with an upcoming launch of wireless devices, while some observers think Yahoo! has the lead in expanding internationally.
AOL and Yahoo! may have won the portal wars for now. But in a business that defines Net speed, they'll have to maintain a frenetic pace if they want to stay on top. |
