Commentary: Muscling in on portal deals

By Carrie A. Johnson, Senior Analyst

It's hard to tell the major shopping portals apart these days--they all attract the same kinds of customers. To get the most bang for the buck, retailers must focus on just one portal and redeploy dollars to Amazon or eBay and e-mail and affiliate programs.

To get an update on the state of portal shopping, we invited representatives from America Online, MSN and Yahoo to sit on a panel at this year's Forrester Retail Summit in New York. The audience learned that while they are generating plenty of sales for their retail partners, the big three shopping portals:

• Lack differentiation. When asked to spell out why retailers need portal partners, all panelists gave nearly identical answers. Christopher Marentis, senior vice president of AOL's interactive marketing department, pointed to "a cross-platform promotional experience" as the key to AOL's value, and the other panelists agreed. Only Mark Ugar, director of MSN Shopping, pointed to technology as another key distinction, saying, "We're a technology company, not a media company."

• Don't acknowledge Amazon.com and eBay as competitors. At least four audience members asked how big a threat Amazon and eBay pose to the portal stranglehold on retailer marketing dollars. How did the panelists answer? By avoiding the question altogether. Both Bill Rowley, director of business development for Yahoo Shopping, and MSN's Ugar simply answered, "Amazon is a retailer"--no one even mentioned eBay.

New competitive realities
Just over two years ago, the big three could command any deal they wanted--in 1999, AOL charged 1-800-FLOWERS $34 million for a four-year placement deal. But things are different now: There's been a shakeout in the portal market, and retailers aggressively pressure portals to make deals pay off. Furthermore, portal shopping sites are undifferentiated, and competitors like Amazon and eBay are breathing down their necks to steal their business. Here's how we see the shifting portal landscape:

• The big three look very similar. MSN and Yahoo spent the past few years trying to catch up to AOL. Guess what? It worked, and all three portals now look the same. Their audiences are about the same size, our Consumer Technographics data shows that the shoppers they attract look nearly identical, and like offline malls, their shopping areas have the same bunch of retailers selling the same bunch of stuff.

As differentiation becomes less about audience or traffic, it becomes more about brand, partner flexibility and key merchandising technologies. AOL's brand and ISP service continuously bring new shoppers into the fold, MSN makes account management and technology top priorities, and Yahoo puts some skin in the game by offering performance-based deals.

• Amazon is a portal. As a site that aggregates retailers and shoppers, we classify Amazon as a shopping portal. Because Amazon has a high concentration of online shoppers that make more money and spend

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• eBay is also a portal--without complicated partnerships. We classify eBay as a portal because, like Amazon, the site aggregates sellers and millions of attractive online shoppers. eBay launched fixed-price and auction storefronts for major retailers like Home Depot in mid-2001, services for which it charges a listing fee, a percentage of the sale and optional site placement fees. And retailers don't need a formal relationship with eBay to start selling; they just need one person in-house to run auctions, or they can outsource the work to an auction software management vendor like ChannelAdvisor or Andale.

Spend less
The big three portals don't want to admit it, but the power has shifted to retailers. When it's time to renew traffic-driving portal deals, retailers should do the following:

• Pick only one year-round partner. Until the big three establish more significant differentiation, retailers don't need more than one time-consuming and expensive relationship with a major portal. Keep the portal that delivers the most profitable customers and is easiest to work with. Eliminate the rest--but don't completely sever those relationships. To keep your remaining portal partner on its toes, test other portals' seasonal promotions or one-time events like Yahoo's recent three-day Biggest Sale in Internet History, which increased sales for some retailers by as much as 70 percent.

• Shift resources to performance-based digital marketing. With newly freed-up resources formerly devoted to portal deals, retailers should shift marketing dollars to optimizing performance-based marketing tools like e-mail and affiliate programs that can be wildly successful--or backfire without proper oversight. And revenue-sharing marketing deals with Amazon or eBay can provide access to new, higher-income shoppers and help liquidate goods at higher product recovery costs at the same time.

• Consider--and control--cross-channel deals. Portals now know that they can drive sales offline through special promotions, but when AOL comes knocking to pitch its new cross-channel program, which will take a piece of the offline sales it influences, retailers should rebuff its proposed business terms. Insist on an upfront flat fee to participate in cross-channel promotions instead of a pay-for-performance deal, since retailers--especially their store clerks--will end up doing all of the work to track those sales via coupon collections.

© 2002, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.