When Walt Disney Co. (DIS) announced on Jan. 29 that it would abandon its Internet portal Go.com, it put a seal of approval on a hypothesis that has spread through the Internet industry over the past few months: All portals are not created equal. AOL
, Yahoo! (YHOO), and MSN are the winners in the portal wars, having grabbed 70% to 80% of both the visitors and ad revenues on these something-for-everyone sites. All that's now left for second-tier portals, says Disney CEO Michael Eisner, is to pick up the scraps. And there are likely too few of those for the also-rans to prosper -- or even survive.
Indeed, Excite@Home, NBCi (NBCI), and AltaVista have been scrambling to avoid financial ruin, and some analysts think that iWon.com, though its audience is large, may not have real staying power. Each has a plan: Excite intends to focus on broadband customers, AltaVista is diversifying into search software, and iWon wants to increase page views by building visitor loyalty.
SEE THE WRITING. But the betting on the Street is that only the big three -- plus Terra Lycos (LCOS), which analysts say has $3 billion in cash reserves -- will survive the shakeout. Among the remainder, "All are trying to find a new angle," says Deutsche Bank Alex Brown analyst Andrea Williams Rice. "But I think the writing has been on the wall for some time."
Indeed. As early as April, 2000, Jupiter/Media Metrix published a report entitled "Portal Evolution," which warned that all but the top three players would have to revise their strategies and focus on specific vertical markets if they wished to survive. The really bad news: Go.com followed this advice. Last October, Disney relaunched its portal as a travel and leisure site, a move aimed at leveraging Disney's expertise and real-world investments in family entertainment.
So why are Go.com and others going down? It isn't that the second-tiers have weaker technology or that their sites are any less compelling. It's just that AOL, Yahoo, and MSN got bigger and healthier first. As market pioneers, they established strong brands (well, Microsoft (MSFT) already had one, plus plenty of money), grabbed the most eyeballs -- and cut lucrative deals with both online and offline brands for top billing on their sites.
PAYING THE PRICE. Thanks to its huge audience, AOL earns millions selling "anchor-tenant" positions on its editorial pages to clients such as CBSMarketwatch and Salon.com. Yahoo has similar deals with a wide variety of partners. In the spirit of "If you can't beat 'em, join 'em," even Go.com cut a distribution deal to deliver ABCNews.com headlines to Yahoo. But companies that arrived late to the game -- or couldn't keep up as the others grew -- ended up losing "a lot of money," Rice says.
Losing money -- once tolerated as a sign of investing wisely to support growth -- is now anathema to investors, and the second-tiers are paying the price. On Jan. 23, Excite@Home, which provides broadband access in addition to its consumer portal business, slashed its staff by 250, or 8%. The majority of those laid off were content producers. Two days later, the company announced a net loss of $115.8 million for 2000, sending its stock reeling 23%.
In December, AltaVista withdrew its filing for an initial public offering, the second time it had done so. Then, in mid-January, the company eliminated 200 jobs, or 25% of its workforce. The cuts were the third set of layoffs since last May. NBCi has also had a rough ride. On Jan. 18, it eliminated 150 jobs, or 30% of its staff. Its stock, which saw a 52-week high of $100, is now languishing around $4 per share.
OTHERWISE PERISH. The also-rans are trying desperately to regroup. Michele Turner, senior vice-president of the Excite Products Div., says the portal will focus on attracting broadband customers for its access business. iWon.com is trying out new incentive programs to increase already-strong customer loyalty and "more sophisticated" targeted ads. AltaVista is hoping its search-engine-software business will help it survive the downturn in Internet advertising. "We believe we can lead in our segment in the market," says AltaVista President Greg Memo. All second-tier players must find a niche or perish, he says. (NBCi was not available for comment by publication time.)
Barring a few miracles, most of the second-tiers won't survive, predicts Aram Sinnreich, an analyst with Jupiter/Media Metrix, who wrote the firm's portal report. He thinks Excite@Home will fail because it's trying to be everything to everyone. The company is chasing broadband and dial-up users and catching no one in particular. As for NBCi, Sinnreich says it was a "text-book misjudgment" on behalf of the parent company -- a "shameless attempt to spin off an Internet company late in the game." iWon.com's business model -- which is based on giving away money to visitors -- is a dubious proposition over the long haul, analysts say. And Sinnreich argues that AltaVista is damaged beyond repair.
The second-tier players say the markets are to blame, in part. Just as the portals began to develop new strategies, investors turned cautious, putting intense pressure on the portals to show them the money. "By and large, the people in the portal business did what the capital markets were asking them to do," says Jonas Steinman, co-CEO of iWon.com. "The markets decided they wanted one thing, then they wanted another."
"LOSING TRACTION." Beyond that, though, it's a rare industry anymore that supports more than two or three major players. And by definition, the second-tiers don't meet that test. "They are losing traction," says Charlene Li, research director at Forrester Research in Boston. "You don't hear of people signing big portal deals with anyone but [AOL, Yahoo, and MSN]."
The bottom line: It may take a few months, but, like Go.com, many of the second-tier portals will also find themselves going, going, gone. By Jane Black and Olga Kharif in New York