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Let the portal games begin

The value of a portal to a large media company is fairly obvious--both from a financial perspective and a tactical perspective. What's interesting is that the value of an Internet presence is no longer in question.

Portal mania has been on a tear, with NBC's investment in Snap and CNET, and Disney's investment in Infoseek. In fact, since the NBC investment announcement on June 6, the H&Q Internet Index has appreciated by 13 percent, while the Dow has been down 2.5 percent, the S&P and the H&Q Tech Index have been down 1 percent, and the Nasdaq has been flat.

Portal euphoria was expected, but it had been unclear when the first global media company would step up to the plate. The value of a portal to a large media company is fairly obvious--both from a financial perspective and a tactical perspective. What's interesting is that the value of an Internet presence is no longer in question, it's more of a build vs. buy decision.

A couple of columns ago I wrote that the horizontal portals of today would not necessarily be the dominant portals of tomorrow. I argued that today's vertical Web sites would be significant portals tomorrow, because, unlike horizontal portals, vertical portals--which include corporate Web sites, regional Web sites, and thematic Web sites--provide much more targeted information. I continue to believe this, and that certain software application vendors and business-to-business online services are moving the market toward vertical portals.

An example is Netscape. Perhaps the most significant news out of the company recently is its plan to marry its NetCenter operations with its software products. In other words, Netscape plans to provide more than just a portal, and more than an application solution for corporate customers--it plans to provide both.

While Netscape's execution of this model remains to be seen, its plan is to significantly raise the bar for what it takes to be an Internet software provider. By bundling NetCenter distribution tie-ins to a software buy, Netscape is transforming the role of Internet software companies. The vendor now has to provide access as well as software solutions to customers--either the real estate sale is being subsidized by the software sale, or vice versa.

So what are Internet software companies going to do? Importantly, many already have weathered significant change. In recent months, they've had to adapt their business models to a transformed corporate customer buying-pattern--one that has changed the nature of sales from a one-time, steep license fee model to a subscription-based/services model. The services model has been adopted by many software vendors, some of whom already have successfully positioned themselves ahead of their competition. The adoption of such a model is not an easy route to take, however, and in many cases, switching to it is not enough.

Companies like Netscape, Macromedia, and Real Networks may raise the bar even further. Internet software companies will have to provide a distribution channel or some other means of capturing the attention of additional customers. I suspect that they will have to either become portals, partner with portals, or buy real estate on portals in order to compete effectively.

It remains difficult to predict who the portals of tomorrow will be. Will they be the existing portals that are more geared toward consumer purchases? Will they be corporate Web sites? Or, will a new type of portal emerge, one that is geared more toward business-to-business traffic and services? Interestingly, no public company seems to provide these services as of yet.

I would have expected the ISPs, telcos, or RBOCs (Regional Bell Operating Companies) to own the portal space by now, but it still looks like fresh territory--the game is just beginning. Keep your eye on companies, like VerticalNet, that focus on business- or industry-specific verticals; small business aggregators like LinkExchange; or Yahoo's recent acquisition, Viaweb. They may have extremely interesting opportunities going forward.

Danny Rimer is an equity analyst at Hambrecht & Quist covering CNET and Netscape. He writes regularly about the Internet in Marketwise.