Writing is on the wall for Europe’s portals

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Alternative marketing avenues will erode broad-based portals’ dominance of online marketing.To spend in the right places, marketers must alter their online budgets dramatically as Europe’s web traffic matures.
A Forrester Report by Hellen K. Omwando, with Matthew M. Nordan and Luigi Zarro

Portal deals’ hidden disappointment
European firms spend most of their online marketing budgets on portals and intend to renew their most important portal deals. But their secondary portal deals are at risk as companies look to more efficient marketing channels and new platforms like interactive digital television (iDTV) .

Chinks appear in portals’ armor
Today, broad-based web portals like Yahoo!, Wanadoo, and T-Online make big bucks as online marketing channels. Forrester’s Internet AdWatch data shows that 39% of online advertising in the UK goes through the top three portals, and smaller players like Excite saw their ad revenues grow more than 500% in a year.
Will portals extend their reign in online marketing? To find out, Forrester interviewed 40 retailers, financial institutions, and brand advertisers in Europe that have relationships with portals.

In this report, we define portals as generalist sites that enable search across the web and offer basic content, communication, and commerce services – like Spray and AltaVista. In contrast, we classify specialist sites – like handbag.com, Après L’école, and Miaeconomia – as sites that focus on a particular content category, commerce vertical, or audience segment. So-called “vertical portals” or “vortals” like shopping guide ShopSmart and community site NordNet fall into the latter group.

Traffic leads when selecting portal partners
The average interviewee has seven portal deals spanning three European countries. When we asked our respondents what criteria they use to select portal partners, three out of four cited raw traffic as a top criterion, while 40% named affinity with a specific target audience.

• “We pick the No.1 portal in every market because of the traffic it generates. But we also go for the No.2 or 3 national portals because they’re more willing to strike exclusive deals.” (Financial firm)
• “Our focus lies with portals that try to address a hobby or interest of targeted groups and draw consumers with the right content. Any portal is interesting, but only within reason – I won’t dedicate much of my time to a portal on marshmallows.” (Dot Com retailer)

Guaranteed deals dominate
On average, respondents spend $425,000 annually on what they describe as their most important portal deal – one-tenth of comparable US spending. The largest amounts to $6 million annually. Although terms vary widely from CPM to revenue share, half structure this deal as a guarantee with no performance-based payment. Guaranteed deals are also the biggest, claiming 76% of spending across all interviewees.

• “Our main deal is guaranteed – if no one clicks through, too bad for us. The portal we cut this deal with is not a small-time player. Because of their power, they act like a newspaper and demand guaranteed payment.” (Catalog retailer)
• “The biggest deal we cut is 100% guaranteed, but we are happy with it because we have an exclusive arrangement. If you go to this portal and check on travel or cheap fares, we are the default page.” (Travel company)

Marketers claim satisfaction with portal deals
Fifty percent of respondents claim satisfaction with their most important deal, but a greater number – 70% – plan to renew it. Why the difference? Even some dissatisfied interviewees believe that they cannot afford to be absent on high-traffic portals. However, interviewees expressed widespread doubt about the future of their secondary portal deals.

• “The deal I am happiest with is our most important one. We are pleased with the content placement, the portal’s telco relationship, and the fact that they help us generate special deals. For example, they helped us sell merchandise for the Euro 2000 football games.” (Dot Com shopping mall)
• “I am dissatisfied with our smaller deals because of the active management they demand. Since they don’t offer adequate performance tracking, our own people have to do it, which becomes a management problem.” (Traditional retailer)

But portals lag behind in effectiveness…
Today, the average interviewee spends 30% of its marketing budget on portals – less than half of the spending on direct and offline marketing, but four times the spending on affiliate networks and specialist sites combined.
The surprise: portals come in second to last in sales generated per marketing euro spent.

• “Portals don’t perform. They want to be everything to everybody, so they flood users with content that keeps them from clicking through. There are too many pages before the motor section that carries our link.” (Auto dealer)
• “We no longer want to go for generalist portals because they insist on fixed contracts despite low conversion rates. We are now looking at affiliates that are more effective and provide us with the right audience. (Dot Com retailer)

…And marketers see portals’ role diminishing
With affiliates and direct marketing showing better performance, 43% of interviewees say that portals’ role will decrease in importance in their marketing plans.

• “I think portal relevance will go down over time because people will be able to choose access to more specific information. The net-savvy will know where to get the information they need without going to a portal site.” (Auction house)
• “Affiliate sites are the way forward for us. We expect them to generate 90% of sales. Sure, traffic from portals is great, but if it yields small conversion rates then there’s no point in continuing with portal partnerships.” (Retailer)
• “Every portal thinks it’s the absolute gateway to e-commerce. They’re all wrong. First, traffic is so fragmented that I can take my pick. Second, the CPM is so exorbitant that other forms of marketing look more attractive. ” (Auction house)

These execs eye iDTV and WAP phones as marketing avenues – but with new partners. Only 5% plan to cut deals on these platforms with their current web portal partners.

• “iDTV will be important for us, but our efforts will require new partners. No web portal has the TV expertise that we need for interactive ads, and I don’t see what any of them can offer that I can’t get from an iDTV operator.” (Dot Com retailer)
• “Our marketing and customer service efforts on WAP don’t cost us a cent. We get distribution by running the services in partnership with the platform operator. In turn, we handle the technical component. We don’t need portals.” (Auction house)

CONCLUSIONS
Based on our interviews, we conclude that:
• Portals are key marketing avenues today. An overwhelming majority of interviewees are satisfied with their biggest portal deal and most plan to renew it.
• But marketers are looking elsewhere for future spending. Marketers express discontent with the other portal relationships they have and look for alternatives in affiliate networks and new distribution platforms.

ANALYSIS
Portals’ best days near an end
Across Europe, web traffic evolves in a progression that favors a few top portals and chokes off the rest. But even winning portals that survive will lose their relevance to marketers as specialist sites, marketing services providers, and new platforms compete for the same budget.

Europe’s portal landscape matures
Europe’s online population is exploding. By year-end, 19% of households will be online compared with 12% a year ago. New users flooding the net click to broad-based portals preset on their browsers or recommended by their friends – and in response, marketers open their wallets to portals’ burgeoning ad inventories. But what share of web traffic will portals continue to capture, and how many can any single market support?

The web traffic progression predicts a portal shakeout
Forrester’s global research shows that web traffic follows a predictable, three-phase progression as more consumers in a market go online. In emergence, traffic diffuses widely; in development, a few top portals emerge; and at maturity the traffic gap between the top portals and portal also-rans broadens.

Throughout the progression, the share of pages viewed varies among three groups of sites:
• Three top portals ascend.
Traffic at the biggest portal sites perpetuates itself. As existing users open web-based e-mail accounts, participate in chats, and check stock quotes, they view more pages at portals – and kick off a network effect that makes portals even more attractive to new users. By the end of the progression, these portals claim a steady double-digit share of traffic. In Europe, a mix of US invaders like Yahoo! and national telco-linked portals like Terra play this role.

• Second-tier portals languish.
The next 10 portals by traffic fight for top spots but suffer from undifferentiated offerings and lack first-mover advantages. By the development phase, their traffic share declines to the low single digits; at best, it remains at this low level. Internet access sites like World Online, smaller US players like AltaVista, and European startups like Ilse.nl make up this group.

• The top 100 sites capture seasoned net users.
These sites steadily add to their low-double-digit share of traffic throughout the progression as consumers become more familiar with the web, bypass portals, and go directly to sites that meet their interests. This varied group includes retailers like Amazon, auction sites like QXL, home-page communities like Tripod, and content sites like interactive investor international.

Countries fall at different points in the progression
Forrester’s analysis of web traffic data from NetValue shows that three key European markets are each in a different phase of the web traffic progression.

• The UK has reached maturity. As the entry point of most US firms, the UK forms Europe’s most mature online market, with 30% of households online and $2 billion in online retail trade by year-end. UK web traffic apes the US: the same top three portals – MSN, Yahoo!, and AOL – have solidified their positions, boosting traffic share from 12% in January to 14% in July. The next 10 portals, like Lycos, maintain a paltry 5% share combined; the top 100 sites take 18%.

• Germany enters development.
In Germany, only 21% of households will use the net from home by year-end. Although three portal leaders – T-Online, AOL, and Yahoo! – have emerged, they have a smaller lead over second-tier portals like web.de than the top three do in the UK. A key local trait: strong specialist sites like Spiegel and Bank 24 mean that all portals get a lower share of traffic overall.

• France is still emerging.
France has a budding online market: the percent of consumers online is one-third that of the UK and half that of Germany. In this green-field, traffic is more evenly dispersed in the three camps. In fact, the share of traffic going to the top threeportals – Wanadoo, Yahoo!, and AOL – consistently declined during the first half of this year while traffic at second-tier portals increased to 12%, twice the share in both Germany and the UK. This means France’s top portal spots are still up for grabs.

Ad revenues can’t save second-tier portals
If only a few top portals eventually dominate traffic, can second-tier portals get enough ad revenue to survive? To answer this question, we analyzed Forrester’s Internet AdWatch data in the UK and Germany to compare sites’ share of online ad spending to their share of traffic.

We found that:
• The top three get enough to thrive.
Today, the top three portals grab 39% of UK online ad spending – three times their share of traffic. Marketers that can afford these portals value them because of their reach, innovation, and potential for commerce tie-ins: Bertlesmann had no qualms about paying Terra $1.3 billion for advertising, services, and exclusive placement over five years.

• Second-tier portals get more ad spend per page view – but not enough.
These sites receive 22% of UK ad spend in absolute terms, yielding a ratio of ad share to traffic share almost twice as high as that of the top-tier portals. This group gets the cash because it’s cheaper and easier to cut exclusive deals with them compared with the top three – witness QXL’s decision to partner with Lycos for prominent placement across all Lycos’ sites. However, even ad revenue that outpaces traffic share isn’t enough to bring second-tier portals to profitability: they have the same fixed costs for technology, staffing, and marketing as the top three portals but garner only 17% as much revenue each in absolute terms.

• Specialist sites lead the top 100 – the rest lag behind.
The next 100 sites see twice as much ad share as traffic share with superstar specialist sites masking the laggards: in Germany, news site Focus doesn’t even make it to the top 50 in traffic but appears in the top 10 by ad revenue. Sites beyond the top 100, however, receive only one-twentieth as much ad share per traffic share.

Few broad-based portals will survive at the end of the progression
The web traffic progression shows that only a few broad-based portals can survive in a mature market. Financial hurdles will drive most portals out of business and force others to consolidate (see the July 1999 Forrester Report “Picking Europe’s Portal Winners”). Unlike US portals, winners benefit strongly from an ISP play that draws automatic traffic. Who has the ISP strength, financial capability, and partnerships to survive?

• The winners: two US invaders…
AOL’s ISP strength across both free and subscription offerings with multiple brands guarantees one top spot. Yahoo!’s household name and partnership network snag the other – the only winner not anchored by an ISP play. What about the rest? Although we expect MSN to sustain a high traffic share, its shallow, accidental page views from Hotmail and Internet Explorer users will be less valuable to marketers. The others, including Excite, AltaVista, and Infoseek, already lack the momentum to prevail long term.

• …and three national telco properties.
Only three of the dominant national portals backed by deep-pocketed telcos will triumph on a Pan-European level. First, Terra already dominates in Southern Europe and will use its recent acquisition of Lycos to reach consumers in Northern Europe through its home-page communities and MP3 search tools. Second, Wanadoo – already a popular ISP and portal outside France – will thrive because of the momentum it will gain from cross-promoting access and content from Pan-European sister portals like Voila. Finally, T-Online – Europe’s largest ISP – has the money to penetrate new markets through acquisition.

• Losers: all other portals.
As Dot Com venture capital funding dries up, marketers will tighten their belts and slash spending at second-tier portals. Plus, brick-and-mortar companies that move their advertising online will repeat the behavior of our interviewees and prefer top-tier portals because they guarantee the most visitors. The result: second-tier players will either court top tiers for acquisition like Freeserve did, refocus their business models on access like World Online did, consolidate with peers like Spray did, or simply fold.

But the sun will set on portals
By 2002, 12 out of 17 European countries accounting for 75% of online households will reach maturity in the web traffic progression. Portals that survive the shakeout will enjoy momentary victory – but their unchallenged dominance of online marketing spend will soon erode. Although portals will remain a key piece of the marketing mix, marketers will increasingly divert budgets to three alternative avenues: specialist sites; marketing services providers; and new distribution platforms.

Specialist sites deliver a higher quality audience
Broad-based portals deliver a high volume of untargeted traffic – the online equivalent of posters on city streets, not direct mail. As European firms diversify their online marketing strategies, they will divert budgets from portals to specialist sites that offer:

• Targeted audiences.
Marketers will find that specialist sites’ targeted traffic delivers better demographics and higher click-through rates than broad-based portals. Entertainment companies like peoplesound and Sony advertise on Sky’s entertainment sites because they know they will reach the right eyeballs – young, affluent, entertainment-motivated consumers that match demographic targets.

• Repeat exposure.
NetValue traffic data shows that consumers view far more pages per visit at specialist sites than broad-based portals – specialist sites like wallstreet: online delivered 110 page views per visitor in June compared with MSN.de with six. By engaging consumers more deeply, specialist sites create opportunities for repeated exposure of in-context messages that portals lack.

• Commerce tie-ins.
While visitors to portals are just passing through, consumers at specialist sites like iBazar and price-comparison sites like Preisauskunft.de are either already actively considering purchases or they fully intend to buy. Winterthur Insurance uses contextual marketing with sites like Spanish auto dealer Trader Coches.net, cutting exclusive deals to place ads for auto insurance as consumers calculate the cost of their dream cars.

Marketing services providers give greater return on investment
Specialist sites won’t be the only alternative that saps marketing budgets from portals. As marketers strive to attract and retain specific target groups of consumers across multiple sites on a Pan-European level, they will increasingly entrust budgets to:

• Ad networks
Our interviewees give portals failing grades when it comes to tracking and performance. Ad networks like DoubleClick and Admaster fill the gap through active tracking and analysis of campaigns. And ad networks will prove even more valuable as specialist sites pull more traffic, forcing marketers to pursue placement across many sites to reach dispersed audiences. In the US, portals already lose business to ad networks – The Internet Advertising Bureau reports that ad networks claimed 12% of online ad spend in 1999, up from 4% in 1997.

• E-mail service bureaus
Forrester’s Technographics 2000 Europe Benchmark Study of 23,000 households shows that e-mail is the top reason Europeans go online at home. Delivering marketing messages via e-mail pays off because it offers a cost per sale as low as $2.50 and covers the entire purchase cycle from acquisition to retention (see the January 2000 Forrester Report “The E-mail Marketing Dialogue”). As marketers discover e-mail’s compelling economics, they will increasingly shift marketing spend to e-mail service bureaus like advancis.com.

• Affiliate networks
The challenge of specialist sites is reaching them – an amateur home page on Tripod.nl is perfect for game publisher Ubi Soft to place a microsite, but no marketing team can manage relationships with thousands of such sites. Affiliate networks like Be Free and ukaffiliates.com unlock these opportunities for marketers by linking traffic to relevant sites within the network: Commission Junction’s network of 1,100 merchants can place sales at 3,000 content sites for a setup fee of $784 and 20% revenue share – and see a 3.5% click-through rate on average, twice the typical banner ad performance.

New distribution platforms will be portals’ achilles heel
Portals succeed at capturing traffic on PCs, where Europe’s consumers spend nearly all their online time today compared with other interactive platforms. But by 2005, Forrester forecasts that this share will shrink to 64% as more consumers spend time on their mobile phones and iDTVs.
Portals won’t profit from this growth because:
• iDTV shuts out today’s portals
Platform operators like CanalSatellite and TPS already position themselves as iDTV portals and build walled-garden services where they control all access to content through their set-top boxes. They will use their first-mover position to lock up the best content providers wherever they operate – keeping competitors at a permanent disadvantage even when walled gardens open up. Furthermore, marketers will go directly to broadcast networks for iDTV’s most valuable capability – interactive video – or enlist creative agencies like M&C Saatchi that work directly with broadcasters.

• The mobile Internet adds cost without revenue
Early mobile Internet adopters will indeed look for the web portals they already use on their mobile phones. But, for two reasons, mobile pages viewed won’t drive revenues. First, few ads will be served – 80% of marketers interviewed for this report have no plans to invest in mobile ads by 2005. Second, mobile retail revenues will amount to only ¤5 billion in 2005, yielding meager sales commissions (see the August 2000 Forrester Report “Driving Retail With Devices”). In addition, late-adopting single-device users who don’t already use the web – one-third of UK mobile Internet users in 2005 – will overwhelmingly tap their operators’default portals (see the May 2000 Forrester Report “Mobile’s Split Personality”).

How to spend web marketing budgets
The web traffic progression dictates how marketers should slice their online budget to reach Europe’s web users – and how to exploit shifting opportunities. Firms should assess their target markets’maturity to allocate spending today.

Marketers should:
• Cover their portal bets in emergence.
Marketers in countries like France and Spain should allocate 85% of web spending to portals, the best way to reach consumers in this early phase. They shouldn’t favor the top three over the next 10 – today’s also-ran could be tomorrow’s leader. Instead, pursue portals that offer effective performance reporting and have a solid multidevice strategy. Split the remaining 15% evenly among three nascent marketing venues – specialist sites, affiliate networks, and e-mail bureaus.

• Introduce ad networks in development.
In countries like Germany and Belgium, marketers should drop portal spending to 50% – portals still attract new users but engage net addicts less frequently. Marketers should split this amount evenly among the top three and the next 10. They should also allocate 15% to direct relationships with specialist sites, 15% to affiliate networks, and 10% to e-mail bureaus, focusing on cheap, retention e-mail to outsourced lists. The remaining 10% should go to ad networks that can target narrow consumer groups across borders and proliferating niche sites. A caveat for well-known brands like eBay and Interflora actively sought by consumers: drop portal spend by an additional 10%, diverting it to specialist sites and ad networks.

• Spend only on the top three portals in maturity
Marketers in the Nordics, the Netherlands, and the UK should reduce portal spending to 20% – confining it to the top three unless one of the next 10 has more than 80% reach for a specific target segment. To reach experienced web surfers wherever they roam, marketers should boost spending on specialist sites to 30%, e-mail to 15%, and affiliate networks to 15%. They should spend the remaining 20% on an ad network like 24/7 Media.

• Treat portals with the right best practices in all stages
Regardless of the phase in the web traffic progression, firms need a four-part checklist to ensure that portal deals pay off:

1) negotiate short-term deals aiming for at least 60% of pay dependent on performance, with a two-week testing phase, a clear out-clause, and renewal and make-goods terms;

2) designate a dedicated account manager at the portal to meet regularly and deliver agreed-upon performance reports;

3) track key operating metrics like customers acquired and audit them through third-party services like Engage AdKnowledge; and

4) ensure that the portal commits to comarketing like joint promotion and PR (see the December 1999 Forrester Report “The Parting Of The Portal Seas”) .

Action
Portal winners should go for integrated portfolios
Portal leaders like Wanadoo can’t stop the flow of traffic to specialist sites as web traffic matures – but they can benefit from the shift by buying specialist properties and selling ads and sponsorships across a portfolio of sites. To keep Yahoo! Finance customers from straying to strong financial sites like moneyextra, Yahoo! should beef up its efforts by buying interactive investor. T-online should buy a stake in cash-starved QXL to gain guaranteed placement and cross-promote its portal in 10 European countries where T-Online is weak.

Second-tier portals should go specialist
The web traffic progression shows that weak broad-based portals like AltaVista and Fireball will never rival Yahoo! or Voila. Their best bet is to seek alternative revenue streams or dress up for acquisition by a winner with a weak spot. Those with money, like Excite, should buy stakes in retailers like Swedish fashion shop Snowdrops to secure eCommerce commissions. Cash-strapped players like Freenet must morph into attractive acquisition targets by attracting specific groups like seniors, who are underserved online but hold great wealth (see the September 2000 Forrester Report “The UK’s Golden-Age Opportunity”).

All portals must focus on one business model
Many of Europe’s portals currently juggle a mix of incoherent business models including content aggregation, free Internet access, services to businesses, and pseudo-telco services. These potpourri sites will fail – each business changes so fast that one-stop shops can maintain weak offerings at best. Instead, portals must focus on unique areas of strength and jettison vanity ventures. For example, Italian Kataweb should focus on building communities around the 80 sites it runs by drawing together consumers with similar interests, and Yahoo! should spin off its eMarketplace-like B2B venture as a separate line of business.

Content startups should cut short-term deals with many portals
In the long term, startup content sites like Sapenda.com will live codependent lives with portals like ilse.nl. Facing grim economics, most will eventually be forced to sell out. These players should determine their own destiny now by signing a raft of six-month deals with portals of all stripes to determine fit with vision, strategy, and management – to know whom to court down the road.

WHAT IT ALL MEANS

Excite’s number is up
Today, Excite is the portal world’s biggest overachiever, rivaling Yahoo! and MSN in ad spend with less than one-fifth as much traffic. But as marketers wise up, even the hungriest ad sales force will not be able to sustain Excite as a broad-based portal. We believe Excite will see the writing on the wall and specialize by focusing on entertainment at its broadband and narrowband portals – cutting deals with game companies like Sega to power broadband services and retailers like fashionmall.com to provide 3-D experiences for upmarket shopping.

Online marketing watchdog associations will emerge
Today, powerful portals like AOL have the strength to leave marketers in the dark about pricing and refuse performance-based deals. This won’t last: we believe that big retailers like Carrefour and financial firms like Sweden’s SEB will create a marketing watchdog association that goes beyond what associations like FAST Europe and auditors like Germany’s IVW provide. This group will share anonymous ad purchase data, aggregate performance statistics, and expose portals that don’t perform. The benefit – better information to negotiate preferred deals – will outweigh fears about sharing contract details.

Portal consolidation will spur ec regulatory action
The European Commission’s misgiving about the AOL/Time Warner merger heralds more inquiries to come for Europe’s few portal winners. Telco-linked players like T-Online will have to give up some breadth to avoid punitive regulatory measures – for example, by agreeing to end any exclusive joint-marketing deals with telco parent Deutsche Telekom.

ISPs will offer ad-free surfing… at a price
As more marketers vie for attention, they will try every method to reach the consumer anytime, anywhere. Facing a bombardment of advertising, consumers will regard marketing messages as intrusive and shun banner ads and opt-in e-mails. To mitigate the problem, subscription-based ISPs with multidevice portfolios like Tele Danmark and Telefónica will offer consumers ad-free surfing that blocks marketing messages according to profile. The catch? Non-intrusive surfing will come at a stiff premium above vanilla Internet access.

RELATED MATERIAL
Marketers interviewed
For the Interviews section of this report, we spoke with 40 marketing executives at European firms that have at least one portal deal: 19 retailers, five financial institutions, eight brand advertisers, and eight content, community, and/or auction sites.

Other companies interviewed
Aladdino
www.aladdino.com
AltaVista
www.altavista.com
America Online (AOL)
www.aol.com
CanalSatellite
www.canalsatellite.fr
Chello broadband
www.chello.nl
Commission Junction
www.cj.com
DoubleClick
www.doubleclick.com
[email protected]
www.home.com
Freeler
www.freeler.nl
Freenet.de
www.freenet.de
Freeserve
www.freeserve.co.uk
Ilse media
www.ilse.nl
Interactive investor international
www.iii.co.uk
Jubii
www.jubii.dk
Kamera Interactive
www.kamera.com
Kataweb
www.Kataweb.it
Microsoft
www.microsoft.com
MSN
www.msn.com
ONdigital
www.ondigital.co.uk
OnVista
www.onvista. de
Pixelpark
www.pixelpark.de
Quality Channel
www.quality-channel. de
Saatchi &Saatchi
www.saatchi.com
Scandinavia Online
www.sol.no
Spray
www.spray.se
T-Mobil
www.tmobil.de
T-Online
www.tonline. de
The Financial Times
www.ft.com
Tiscali
www.tiscali.it
TPS
www.tps.fr
Virgilio
www.virgilio. it
Wanadoo
www.wanadoo.fr
Wapamente
www.wapamente.com
WEB.DE
www.web.de
World Online
www.worldonline.nl
Yahoo!
www.yahoo.com
Zed
www.zed.com

Forrester Research

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