Less than a year ago, the nation's largest Web portals were able to set virtually whatever terms they wanted with advertisers desperate to tap into the most heavily trafficked sites on the Internet.
Now, even market leader Yahoo, which recently blew away Wall Street earnings estimates, has been showing far more flexibility as the portals recognize that companies purchasing ads may no longer be able to afford the high rents in today's more frugal dot-com environment.
In this new dynamic, advertisers are looking for more than exposure: They want to see faster returns on investments in ways that simple banner ads could never deliver. As a result, these companies are arranging new types of "hybrid" deals with portals that include revenue sharing, access to consumer information, and other modes for tapping into the sites' coveted resources.
Web sites "had so much demand in the past that maybe they weren't motivated to sit down and collaborate," said one agent from a major advertising firm who requested anonymity. "Today, Web sites are being forced to work harder for their money."
The relationship, of course, isn't a one-way street. The advertisers still need high-volume sites such as portals to increase their traffic. But portals are falling under increasing pressure to demonstrate the effectiveness of their sites in creating business.
Both buyers and sellers of advertising say they have been forced to change the way they do business since investors began to pull away from dot-com companies earlier this year. The withdrawal has meant less money for advertising and more demands on portals to show that banners on their sites are worth spending scant resources on them. Last week, Wall Street analysts downgraded online ad network DoubleClick because of fears of a third-quarter slowdown.
"Those reckless deals with no real thinking or rationale behind (them), those deals are disappearing," said Rishad Tobacowala, president of online advertising agency Starcom IP. "The easy money is over."
In demanding more accountability from portals, some companies are agreeing to pay only for specific performance levels. No longer willing to spend millions of dollars just to carpet-bomb visitors with banners, advertisers instead are offering portals a percentage of an online purchase or are agreeing to payments only when their promotions receive a predetermined number of clicks.
For example, when Net2Phone began cutting portal deals about a year ago, direct payment for banner advertising was the only option.
Under its current deals, however, the Net phone software company is required to make only partial up-front payments for banners. In return, it embeds links for its phone service throughout the portal. The portal then gets a cut for each Net phone call made on the site, which may be better for both Net2Phone and the portal.
"Usually you get a major discount on an ad buy," Net2Phone spokeswoman Sarah Hofstetter said about the new deals.
Portals "know they get money on the back end with revenue sharing," she added.
A vice president for NextCard, which has one of the largest budgets for Web advertising, agreed that the mentality among ad sales representatives from major sites has slowly shifted. But he said the change has not come easily.
"Companies selling advertising are getting more comfortable with hybrid models and pay-for-performance models," said Dan Springer, vice president of marketing for the online credit card company. "They've resisted it because they'd rather do it on a basis where they are guaranteed revenue."
Challenges to come
Analysts say top portals, including Yahoo, are not immune to this trend, despite posting strong earnings and revenue growth in the second quarter.
Jordan Rohan, an equity analyst at Wit SoundView, said the effects of declining advertising will not crest until the third quarter, which is traditionally the slowest for revenue because of the summer season.
"The key take-away, in our view, is that the third quarter will likely be a challenging one for online advertising networks and could be challenging for the largest players such as (America Online) and Yahoo as well," Rohan wrote in an analyst note earlier this week.
Not all portals agree with that characterization. Although they acknowledge that they are seeing new types of deals, the leading portals say their prime real estate remains a required buy, especially because so many companies must do whatever they can to survive the Internet shakeout.
AOL, for instance, is willing to negotiate different kinds of ad deals but still wields enormous clout with 23 million paying members--or potential online retail customers, depending on how they're viewed.
Moreover, if recent advertising projections are any guide, major portals don't have to worry about giving away the store anytime soon. Despite the consolidation among Internet companies, 55 percent of all online ad impressions show up on Web portals, according to a recent study conducted by AdRelevance, an online advertising research company owned by Media Metrix. Adding categories with such labels as "community" and "search sites" brings that total to 80 percent.
In addition, the largest sites are taking an even bigger slice of the pie. In the fourth quarter of 1999, the top 10 Web publishers received 70 percent of all Internet ads, according to the Internet Advertising Bureau. According to Forrester Research, more money flows to sites such as AOL, Yahoo and Microsoft's MSN--the portal leaders--leaving others such as Lycos, Excite@Home, AltaVista and Go.com in a second tier.
"Sites are lucky to sell a quarter of their inventory month to month," said Patrick Keane, an analyst at Jupiter Communications. "When you have that reality, rates are really low and a buyer can come to a publisher and say, 'Hey, this is what I want.'"
Opting for co-branding
In some instances, portals and other Web sites will offer their technology or services to produce co-branded offerings. Yahoo, for example, has been touting its "fusion marketing" strategy targeting offline companies to get them to advertise as part of an interactive marketing campaign.
"They're becoming more flexible," said an agent from a major advertising firm in reference to Yahoo. "They have been trying to work better with agencies."
In March, Yahoo and Pepsico unveiled a deal to develop a promotional Web site dubbed PepsiStuff.com. Participants in the promotion, scheduled to launch in August, can collect points under bottle caps of Pepsi's line of drinks. People can then redeem the points for merchandise on the PepsiStuff.com site.
"Because of the nature of our platform and because of the unique attributes of Web, it allows the marketer to reach any targeted audience," said Murray Gaylord, director of fusion marketing at Yahoo.
That's good news, considering that advertisers are looking for more specific groups of people who might buy their products.
"In the beginning, the first pass was how do we create banners, how do we contact consumers?" said one media buyer for a major consumer products company. "Now it is about how do we find the consumer in the right mindset...In doing that, we've shifted our thought more into integration with sites."
Such changes underscore a growing skepticism over how best to reach customers, even as online advertising continues to boom. Net advertising is expected to reach $11.5 billion in 2003, up from $4.6 billion last year, according to market researcher Jupiter Communications.
"Portal deals can be effective, but they're not effective just by sticking a bunch of banners on the front page," said a media buyer at a consumer product company. "I think a billboard in New York City is much more effective than sticking a banner in front of a portal."