Throughout 1998, Web portal stock prices were propelled to new highs, driven in part by expensive sponsorship deals the portal companies struck with smaller content and commerce companies.
The proposition behind these deals was fairly straightforward. Companies hoping to firmly establish themselves in their market would guarantee millions of dollars in advertising to the portals in exchange for preferential--and in some cases exclusive--access to the portals' very large population of customers. Many of these deals also allowed the portals to collect a percentage of transaction revenue once certain hurdles were reached, or share in advertising revenue.
The deals were seen as "company makers." Venture-backed start-ups and many established brick-and-mortar companies looking to get a toehold on the Internet scrambled to negotiate deals with the portals before their competitors beat them to it. Additionally, a preferred or exclusive arrangement with a major portal was seen as a virtual necessity by companies eager to go public.
The deals were clearly favorable for the portals, but only time would tell if they worked for the portals' content and commerce partners. Tick tock.
A year later, a growing chorus of rumblings from dissatisfied merchants leads us to believe that click-through rates and conversion rates from clicks are well below those necessary to justify the expensive deals.
The implications for portals are potentially serious--low renewal rates and declining value of their substantial inventory. Performance has been so weak in some cases that the guaranteed payments have been negotiated down before the contract expiration. Ironically, many Web companies looking for traffic are now finding that radio and even television can be better customer acquisition vehicles.
To be fair, there are numerous merchants who are happy with the performance of their portal deals. Satisfaction seems to vary by portal as well, with AOL and Yahoo getting the highest marks. The number of dissatisfied customers is large enough, however, to impact revenue growth if the portals cannot find a way to deliver better results.
Meanwhile, consumers, the other key constituency effected by these deals, may be lessening their dependence on sites that fail to offer them sufficient choice. The Internet, by removing barriers to entry that have insulated industries for years, is shifting the balance of power in favor of the buyer, and those looking to make a purchase decision or online transaction will favor those sites that provide objective and comprehensive data.
In favoring one or several merchants, portals run the risk of losing the most valuable customer to Web sites that offer the consumer objective information and choices.
Although we have highlighted the high-profile portal sponsorship deals, weakening advertising performance is affecting many companies. Web advertising today does not live up to the targeting promise of the Internet. The solution, we believe, lies in investing more heavily in sophisticated database tools and management, building richer customer profiles, and finding better ways to deliver the right message to the right consumer.