15 January, 1999
The growth in the concept of the portal site was one of the internet phenomena of the past year. In addition to the major search engines, a growing number of smaller special interest sites have been expanding their content and providing peripheral services in order to become portals. During 1999 we believe you will see increased customisation and personalisation of portal sites, and beyond, we see the portal extending outside the browser to provide information to a wider variety of client applications and devices. We believe that, in future, portals will not just be accessed through the web browser, but will also provide information to other desktop applications and to mobile phones, set-top boxes, and handheld devices.
The Importance of retaining customers
The earliest portal sites were search engines such as Yahoo, Excite, Infoseek etc. These sites quickly realised that, while they were being used as an integral part of the web experience for the growing mass of web users, this usage was only transitory. Once users found the destination they were looking for, they would move off the search site to their destination. It was around this time that a possible answer to the question of how to make revenues and profits on the web began to emerge. Initially, it was felt that you could charge for information. However, the web is a free-wheeling information culture, and the moment you start charging for information someone else will provide similar information for free. In fact, the only companies that can successfully charge for information are the few that have a lock on exclusive and desirable content, such as the Wall Street Journal. The second thought was to provide information for free, thus driving traffic and allowing sites to charge for advertising. Yet, it is becoming apparent that advertising revenue alone may be insufficient to fuel the sort of growth that investors expect.
Today's thinking pins future web revenues and profits on e-commerce. The web is becoming more than an information resource - it is becoming a platform, a medium by which people will manage their lives. Increasingly, the mass market consumer will buy clothes and holidays, shop for cars, mortgages and houses, and bank and pay bills - via the web. It will be the websites over which people transact that make money. This is the web revenue model - provide valuable independent information for free and profit from e-commerce transactions. In addition to on-site transaction revenue, it is likely that the advertising of transactional services (which aims, in most cases, to take users off-site) will increasingly incorporate revenue sharing on resulting purchases in order to offset the loss of potential buyers.
This raises the important question "on which websites will people transact?". People will transact on sites that they know, trust and visit regularly. Those that provide a wealth of useful information and make comparison shopping easy. Those that the user feels a part of, and that understand the individual user's needs and preferences. The search engines now see this opportunity. People already know, trust and visit them. Now, they must provide a wealth of useful information, get to know their customers, and make transacting easy. It isn't only the search engines that recognise this. Increasingly, sites containing special-interest content are getting to know their users better, providing additional services, and building a sense of community - thus becoming vertical (or special-interest) portals. Most portals and vertical portals are trying to become more 'sticky' - by providing content that encourages the user to stay on the site for longer instead of moving on. The longer a user stays on a site, and the more targeted the site's content, the more likely they are to make an e-commerce transaction.
This vision of an e-commerce based revenue model is confirmed if you look at the valuations of internet companies in the US. Typically, sites that gets a lot of visitors are valued at around $10-$20 per page impression per month. Those sites that get to know their users (by turning visitors into registered members) are valued at around $100-$200 per registered member. And those sites where registered members are known to make a high volume of e-commerce transactions (such as Amazon.com or E*Trade) are valued at several thousand dollars per member.
Web usage patterns
There are four principal types of web usage. A given user may switch between different modes of usage, but the following generally holds true:
Single speciality users have one area of primary interest - a 'passion centre' (such as football, finance, technology) around which their use of the internet revolves. These users have very specific needs that are often well served by vertical portals offering depth of content and a wide range of topical functionality.
Multiple speciality users use the internet to satisfy two or more 'passion centres'. There are very few sites on the internet that are designed specifically to serve two areas of interest (although certain combinations such as technology and finance, food and art, sport and parenting, could probably attract a fair number of users).
General interest users do not have a strong primary area of interest, and will use the web as a form of leisure and entertainment, for access to the online community, and for specific information as and when required.
Launch pad users are looking for guidance as to where to go on the web (this includes a high proportion of novice users). Many of these will use the portal as a search engine that is a pointer to their eventual destination.
'General interest users' and 'Launch pad' users are clearly prime targets for portal sites. As they become more customisable and personalisable, general portals will also be able to capture 'Multiple speciality users', who will prefer to have their needs served on a single site rather than switching between several. 'Single speciality users' will continue to prefer vertical portals due to the depth of content and functionality that they offer in specific subject areas.
From website to internet information centre
A portal site essentially aims to capture the attention of users seeking information on the internet. Now consider the channel through which users find this information:
Traditionally, internet companies (including portal sites) have concentrated on the internet side of this picture. The thinking has been that while the client side provides access, the internet side is where the services are delivered. However, in reality, the internet is not as platform independent as envisioned, and the client hardware and software used can have a deciding influence on how internet services are used. At the browser level, both Netscape and Internet Explorer guide users to preferred portal sites - for example Netscape Communicator leads you to Netcenter if you press the 'Search' or 'My Netscape' buttons, or if you enter keywords in the URL field.
At the desktop level, a variety of desktop applications and features are internet enabled. These include applications that feature scrolling tickers or desktop information such as Pointcast, Backweb, and Yahoo Ticker, as well as word processors, spreadsheets, and design programs. Increasingly, these applications will drive traffic towards internet portals. For example, AOL's instant messaging client now allows you to conduct searches - taking you directly from the desktop client to AOL's portal. Productivity applications such as calendars, project planners and other organisation tools particularly lend themselves to the internet environment. As every application becomes internet enabled, more and more of these will use information stored by portal sites and will drive traffic towards portals.
Increasingly, internet capabilities are being provided by the operating system itself - for example, Apple's Sherlock component in Mac OS 8.5 allows you to conduct searches directly from the operating system, using a variety of portal partners to deliver aggregated results (thus bypassing the browser). Microsoft's Active Desktop bypasses the browser too.
The hardware companies themselves are new entrants in the battle for portal traffic. Recognising that the internet is a key driver for PC sales, manufacturers are increasingly working with partners along the access chain to make the internet a seamless experience. Many manufacturers are placing 'internet' and 'search' keys into their keyboards. Dell is developing its own portal in collaboration with Excite, and in December announced it is providing a co-branded version of AOL to its US customers. Compaq's CEO announced at Comdex '98 that his was no longer just a PC firm, but that it would be developing a series of home 'gadgets' closely integrated with the web. Beyond the PC, manufacturers of handheld devices, mobile phones, and set-top boxes will increasingly influence user choice of portal.
Some UK portal players
The UK portal market can be divided into two categories - UK divisions of US portal companies, and local UK portals.
Yahoo UK & Ireland, among localised US portals, has achieved the highest traffic figures to date (at 64 million page impressions per month). Many UK users were already using Yahoo before it came to the UK. Yahoo's US parent has been particularly innovative in moving beyond the search engine to incorporate a wide range of functionality including maps, door to door driving directions, a web based personal organiser, travel agent, TV listings, personals, classifieds etc. We believe that many of these features will be migrated to the UK over the next few years.
MSN UK should be regarded as the one of the leading UK portal because of the depth of its UK content and functionality, its presentation, and its personalisation capabilities. It is the only major UK portal to feature a customisable home page (as opposed to a separate customisable site such as 'My Yahoo').
Excite UK. Excite is focussing on the development of its e-commerce revenue through features such as one-click ordering, and through the intelligent use of customer profile information. We expect many of these features to be migrated to the UK during 1999. Excite UK has already succeeded in gaining sponsorship for its Money & Investing channel, and will likely look for more sponsorship deals during this year.
AOL UK does not consider its UK website AOL.co.uk to be a portal (unlike its parent AOL.com). The UK website acts simply to draw people in to the AOL brand and the full AOL service. However, if the proprietary AOL service can be considered a portal, then it is currently the most visited portal in the UK - achieving 111.3 million page impressions per month. It also has the key advantage of having established loyal user communities. Although features can be copied by others, established communities are very hard to move.
Dixons' Freeserve, among UK portal providers, is the most formidable competitor at present - having built its user base from zero to over 500,000 (overtaking AOL UK) in just nine weeks, through the provision of free internet access. Freeserve has executed extremely well, developing a simple installation process, a good portal site and a reliable network. It remains to be seen whether Freeserve's portal site will become a major competitor as e-commerce revenues begin to grow.
Virgin Net represents a big UK brand that has been fairly low profile on the internet to date. Nonetheless, the power of the Virgin brand, and the possibilities of combining services from the 238 Virgin Group companies onto the internet should not be underestimated.
What happens next ?
In the United States, we have seen the following transitions in the internet market:
We see two acquisition trends in the UK. Firstly, we expect the final stage of development shown in the diagram above to begin taking place in the UK very shortly. There are a number of well established consumer and media brand names in the United Kingdom, including the likes of Sainsbury, Marks and Spencer, Barclays, Virgin, BT, Top Shop, Burtons, BBC etc. These established brands will increasingly buy internet companies in order to establish their positions in the internet space. BT's investment of $10 million for 50% of Excite UK represents the first major example of such a development. Secondly, we believe that smaller UK internet companies that provide a technological infrastructure or have built an established customer base (particularly supporting e-commerce), will increasingly be bought up by larger internet players. These will include providers of services such as classified advertising, internet auctions, comparison shopping, travel guides etc.
Christmas 1998 was a major year for the e-commerce market in the United States. Year on year sales for online merchants grew around 230%, with revenues reaching $13 billion. AOL reported average e-commerce spend per US member of around $90 ! We believe that the UK will experience similar gains by Christmas 2000. Portals will gear up for e-commerce by transforming their focus from search engine to shopping engine, offering vendor-independent comparison shopping, single click ordering, product reviews, and online auctions.
We believe that 1999 will also see a continuing proliferation of portals - with many more special interest sites expanding their content and functionality to become vertical portals. We will see more customisation and personalisation of UK portal sites - eventually leading to componentisation, which will allow individuals and corporations to create their own internet and intranet portals featuring components from established portal players. For example, an intranet portal at Shell might consist of industry news from Newspages, search from Lycos, weather from the Met office, commodity prices from Reuters, customisable personal content from Netcenter, and links to a variety of internal corporate databases and workflow systems.
Finally, we believe that the portal providers will increasingly deliver personalised information based on the user's preferences to a variety of applications and devices. Imagine if an internet portal could store your bookmarks, contact addresses, custom dictionary, e-mail settings, one-click order settings etc - and could make these centralised preferences available to your desktop, your word processor, your mobile phone, your television set-top box and your PDA. By providing such services, the portal will move beyond a website into a personal internet information centre accessible from anywhere.
Head of Consulting
Please contact us for further information on Diurlacher's research, consulting, or corporate finance services
email@example.com 020 7459 3641 © Durlacher Research Ltd, 1999