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Net merchants not cashing in on portal deals

Even though portals attract huge consumer audiences online, multimillion-dollar placement deals do not generate significant revenue for most Net stores, a new study says.

Tech Industry
Deals with some of the largest portals on the Web have left many online merchants disappointed and rethinking their contracts.

Even though portals such as Yahoo, Lycos, MSN.com, the Go Network, and Excite attract some of the largest consumer audiences on the Internet, a new study by market research firm Jupiter Communications found that multimillion-dollar placement deals do not generate significant revenue for most Net merchants.

Placement on portals has not been a total loss--among online merchant executives involved in portal placement deals, 92 percent said portals help drive online sales. However, more than 60 percent said the deals contributed to less than one-third of their sites' overall sales. As a result, a mere 5 percent said they were "highly likely" to renew their contracts.

In recent years, portals have taken steps to diversify their revenue streams beyond banner advertisements by inking multiyear, multimillion-dollar deals with e-commerce merchants. The sites have leveraged their massive audiences to charge companies large sums for "anchor tenancy" or status as an exclusive seller of a given product. The portals also have said such deals offer merchants critical brand awareness--which is highly desirable to relatively new online brands that are competing with brick-and-mortar powerhouses, such as CDnow vs. Tower Records.

However, as the study today showed, the promises of turning eyeballs into dollars may be more far-fetched than many expected.

Though the study maintains portal distribution deals are still important for sales and branding, it emphasized that these deals are not the Holy Grail for online retailers.

"The overall theme is that portals may have been positioned as the absolute slam dunk for commerce sites, and that's certainly not the case," said Jupiter analyst Mark Johnson.

Johnson added that many online retailers have found their sales being driven by other means, such as offline media promotion, the use of affiliate programs, and distribution through vertical market sites.

"Commerce players need to realize that they need to have diversified strategies," he said. "The majority are expecting revenue to be driven [on portals], and revenue is being driven, but it's only 30 percent of total site revenue," Johnson said.

Other analysts agree with Jupiter's results. Kate Delhagen, an analyst at Forrester Research, said that while portals offer an important traffic boost, a merchant needs a more targeted way to develop relationships with users.

"Driving traffic to a Web site is a fairly easy task, but converting lookers into buyers is much more difficult," she said.

She added that many merchants have found more effective techniques to tap shoppers besides the portal placement deal. For example, a cheaper alternative is through email, because it serves as a direct, targeted way to offer products to Netizens.

But the relatively lackluster performance from portals will not mean an end to the high-profile deals, according to Delhagen. Instead, online marketers will spend their money on a number of techniques, and not depend as much on portals. Still, the heyday of easy money for portals may be over.

"It means they're going have to work harder for their money," Delhagen said.

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