Ad Dollars Flow to Vortals

Web traffic is fracturing into two broad-based camps, a few broad-based portals and thousands of vertical sites, and the result is a new battle for online marketing dollars, according to a report by Forrester Research.

In its report “The Parting of the Portal Seas,” Forrester predicts that 57 percent of all online ad spending will flow to vertical sites and affiliate networks by 2004 as more retailers seek greater returns from their investments.

“There is a sea change underway in spending for online marketing,” said Charlene Li, senior analyst in Media & Entertainment Research at Forrester. “Companies love the visibility that AOL and Yahoo deliver, but they need a much higher customer acquisition rate than these broad-based portals can offer. To realize some return from their Internet ad spending, retailers are demanding pay-for-performance deals that only vertical portals and affiliates can deliver. This is where the ad dollars will go over the next five years.”

Traffic continues to surge for AOL, Yahoo and MSN, thanks in part to communications, consolidation, and competitive fervor. These sites capture 15 percent of Internet traffic and 45 percent of all Internet advertising. Other broad-based portals, such as AltaVista, Excite, Go.com, Lycos, and Snap are showing modest gains at best.

Although broad-based portals drive high volumes of traffic, retailers have found that vertical and affiliate sites are more efficient at delivering qualified leads and customers, according to Forrester. And while portal deals are generally less expensive than traditional offline means of acquiring customers, portals are more expensive than other online methods. As a result, retailers plan to spend more with vertical sites and on affiliate marketing, both of which provide lower acquisition costs.

In contrast to the broad-based portals, which seek to serve anyone and everyone with a portfolio of basic content, communication, and commerce services, vertical portals are more than just a content or transaction site. Instead, they focus on a particular content category, commerce opportunity, or audience segment and provide a broad set of services tailored to the target opportunity.

The contextual advertising opportunities offered by vertical portals (a.k.a. “vortals”) will seriously erode ad spending at midtier portals like Excite and Lycos, according to Forrester’s report. These broad-based portals will see their ad share decline from 5 percent in 1999 to less than 1 percent in 2004. Meanwhile, the leading vertical sites will see their share of ad spending increase to 24 percent, up from 20 percent in 1999. The rest of the Web, which had only an 11 percent share of total Internet ad dollars in 1999, will steadily gain revenue share as retailers embrace affiliate programs, advertising networks, and other forms of syndicated selling. By 2004, these niche sites will get 25 percent of online advertising dollars.

“To survive, midtier sites like Lycos, Excite, and AltaVista must follow Go.com’s lead and get vertical,” said Li. “It almost doesn’t matter whether they focus on entertainment, demographic, segments, or commerce, as long as they focus on something.”

Disney’s Go Network is a consolidation of the company’s Web properties, which includes vertical sports sites such as ESPN.com and entertainment sites such as ABC.com and Disney.com.

For its report, Forrester interviewed 50 retailers that have distribution deals with major sites as well as executives from the leading broad-based and vertical portals. The top three factors that retailers use in choosing a portal partner are return on investment (62 percent), audience demographics (58 percent), and raw traffic level (48 percent).

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