PERSPECTIVE By Heather Green	April 19, 1999

FEEDING FRENZY. To understand why the portal deals became so important and why that might be changing, you need to step back a couple of years. The portal marketing agreements were a simple result of basic supply and demand. The power of portals sites like Yahoo! and Excite is that they attract consumers through a wide variety of content -- from stock quotes to sports stats -- along with free services and chat. The portals were among the few Web sites that attracted huge gaggles of people.

In 1997, it made little sense to spend a lot of marketing money in the earthly world to promote online businesses. After all, the masses didn't yet show signs of buying in droves; any "dot.com" and "www" advertising would mean little to those unfamiliar with the Net. So wily E-merchants, led by Amazon.com, signed wide-ranging multi-year and multimillion-dollar agreements to market to the consumers who visited portals.

The portal deals became a feeding frenzy -- in more ways than one. Beyond using the deals to attract customers, E-merchants also aimed to lock out competitors from prime marketing space. CDnow and N2K followed just that strategy, bidding up spots against each other on portals. Portal connections also helped raise the profiles of startups with investors and venture capitalists. Michael Barach, the CEO of natural-health-products E-commerce site MotherNature, remembers joking just last fall with execs of other E-commerce sites about whether he should do a portal deal as a way to raise capital.

So the state of the young Net market dictated the need to do the deals. Still, it's worthwhile pointing out that Yahoo!, the biggest portal of them all and the first place merchants consider when doing marketing deals, didn't rely solely on the Web to promote awareness. It used traditional marketing tactics taken from the brick-and-mortar world, such as concert sponsorships, free Yahoo! branded postcards placed in restaurants, and billboards. A few companies, such as baby information service and products merchant BabyCenter and wedding service The Knot took a cue from that example. The two startups focused on broadening their marketing through wedding books and pregnancy pamphlets distributed in doctors' offices. But these companies' inventive marketing efforts were the exception, while the portal deals remained the rule.

GETTING PICKIER. Now a major change -- one that opens up the marketing possibilities -- is afoot: The Net is reaching critical mass. This past Christmas, all types of buyers bought into the convenience and the variety that online shopping offers. Amazon.com, alone, now boasts over 8 million registered buyers. Because there is now a wide swath of people online, it pays to market and advertise just about everywhere -- because people everywhere get what the Net is all about.

Net companies, such as eToys, MindSpring, and priceline.com, are paving the way for the wide-scale use of TV, radio, and print ads. At the same time, more people coming online means a bigger audience for sites aimed at specific demographics, such as ThirdAge, which targets the over-55 set. Because they're able to draw from a bigger audience, vertical sites are becoming better places to advertise than ever before. David Smith, president of new-media ad agency Mediasmith, whose clients include The Globe and CBS MarketWatch, argues that companies mistakenly headed to the portals without really checking out other marketing possibilities, like the vertical sites. 1-800-Flowers attests to the power of the verticals. It claims it can get a clickthrough rate as high as 20% on some vertical sites, vs. 1% to 2% on portals.

Simply put, online merchants are getting a wider variety of marketing options. It's not a surprising thing, but it is new to the Net. That means not only that merchants can spend their marketing dollars elsewhere but also that companies have the opportunity to be pickier about the deals they do with portals. And companies like health-products merchant eNutrition can set stricter contract obligations, such as requiring more ads if a certain marketing campaign doesn't bring in as many customers as expected. It also gives merchants more leverage at the bargaining table when deals come up for renewal.

Still, the changing landscape isn't all bad news for the portals. For one thing, a mass audience also pulls more merchants online to reach those consumers. That could give the portals a new wave of merchant partners. Even if those new partners prove savvier and more demanding in the deals they stick, they still provide volume. And through personalized services such as MyYahoo and other free offerings like E-mail, the portals have been collecting information during the past two years about users and their tastes. That kind of data provides a highly targeted and desirable audience for marketers, keeping portal real estate at a higher premium than most Web sites. Those wild cards could swing more power back to the portals in the future.

But for the next year at least, it looks like we'll see a lot more of the Net brands offline. So get ready for .com ad nauseam while you're watching Ally McBeal and E.R.

Heather Green covers the Internet and E-commerce for Business Week in New York.
Have a question or a comment? Let her know at heather_green@ebiz.businessweek.com.

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