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Portal favor hits fever pitch
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October 5, 1998: 4:26 p.m. ET
Traditional media's investments in gateways necessary, but perhaps ill-placed
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SAN FRANCISCO (The Red Herring) - Wall Street's long infatuation with portal sites -- the so-called gateways to the Net -- hasn't made much economic sense.
Yahoo's ever-soaring market cap is upward of $8 billion, yet it will bring in just $150 million in revenues this year, according to estimates by Forrester Research. America Online's valuation has hit $25 billion, yet the company is still hundreds of millions of dollars in the red.
Financial investors aren't the only ones buying into the hype: corporate strategic investors, including traditional media, also want a piece of the portal business. In mid-June, Walt Disney took a 43 percent stake in Infoseek (the least visited of the top nine portals, according to RelevantKnowledge, a Web research firm) in exchange for $70 million in cash and Disney's ownership of Starwave, a media firm that provides interactive programming to ABCnews.com and ESPN SportsZone.
The Disney deal followed on the heels of NBC's announcement that it was acquiring CNet's floundering online directory service, Snap, for $65 million in cash and $100 million's worth of free promotions.
Mainstream media's bets misplaced?
Portals, the theory goes, can use traditional media to appeal to the broader market of consumers who are going online. And vice versa: traditional media don't want to lose out on a new medium. But NBC and Disney may have bet on companies -- and a theory -- that aren't worth all the fuss.
First, look at the numbers. Although portals are currently attracting 60 percent of Internet advertising revenues, which Jupiter Communications estimates will total $2 billion this year, a shakeout is imminent.
Forrester predicts that by 2002, the portals' share of ad revenues will be sliced in half as more money goes to content sites. While overall spending by advertisers will rise to $8 billion, by Forrester's estimates the portal pie will be worth about $2.5 billion at that point--enough, really, for only three or four portals to share, assuming they evolve into broad-based consumer sites as expected.
Two of those four will likely be Yahoo and America Online, given the strong position each has to date. That idea doesn't leave much room for competition, and it doesn't make Disney's and NBC's recent choices seem particularly promising.
Can portals possibly become the major media plays that the buzz surrounding them suggests? Even with the lion's share of Internet ad revenues, portals attract just 15 percent of all traffic, according to Forrester estimates -- and a lot of those visitors are using the sites only for their search and directory services. Yahoo and AOL have been successful in their efforts to branch out and become programming and service providers, but they may be the exception.
Meanwhile, suggests Forrester analyst Chris Charron, traditional media companies run the risk of diluting the Internet-specific strength of their partners' brands with their own brands.
The upside to portal investment
But Jupiter analyst Mark Mooradian thinks Disney and NBC were smart to bet on the future of portal companies. "It's all about positioning," he says. "You go where the traffic is. Navigating the Web is still difficult right now, and this is the resource people are using."
Indeed, Mr. Mooradian and Mr. Charron insist that traditional media can't afford not to put more money into portals. "Many media companies have already either stayed too long on the sidelines or bungled their online efforts," says Mr. Charron. "Portals give them the perfect opportunity to play catch-up. These sites bring programming expertise to the table, while big media companies bring off-line promotions, advertising relationships, attractive content, and deep pockets."
Despite the uncertainties that lie ahead for portals, traditional media no longer want to be left out of the online race. And although they may not be placing their bets in exactly the right spots, their willingness to gamble is a step in the right direction. 
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