Broadband providers looking for sweeter deals?

New portal war is heating up as broadband providers begin making noise about more favorable deals with large Internet brands.
Written by Marguerite Reardon, Contributor
A new kind of Internet portal war is brewing as broadband providers begin flexing their muscles to renegotiate more-favorable deals with large Internet brands such as Yahoo and Google.

Last week rumors were flying that AT&T was unhappy with its existing broadband portal deal with Yahoo. And this week, The Wall Street Journal reported Comcast wants a bigger slice of the revenue pie in its deal with Internet search giant Google.

AT&T and Yahoo have downplayed the rumors, saying they are actually expanding their relationship. Meanwhile Comcast and Google remain mum on their deal, but insiders say that Comcast is re-evaluating the Google partnership as part of a broader deal it's considering to add advertising to its Web site.

Whether AT&T eventually splits from Yahoo, Comcast ditches Google or neither of those possibilities comes to pass, one thing is clear: broadband penetration has changed the game, and new Internet power brokers are emerging, making it necessary for players to renegotiate deals made only a few years ago.

"ISPs have always faced a challenge when it comes to attracting customers to their portals," said Joe Laszlo, an analyst with Jupiter Research. "But they are bringing more to the table today in terms of subscribers and their own content, so I think naturally there is some rebalancing going on. But I don't think it's a traumatic thing; just an evolution in the relationship with the Internet companies."

As more advertising dollars move online, broadband companies see a big opportunity. For the last couple of years online advertising has grown about 30 percent year over year, according to the advertising and marketing research firm eMarketer. The increase in spending comes as more advertisers shift away from placing ads in traditional media and spend more to advertise online.

But most of the advertising spending is concentrated among the top four Internet portals--Google, Yahoo, MSN and AOL--according to eMarketer. Google alone captured about 25 percent of the overall online advertising dollars spent in 2006. In 2007, eMarketer projects, two-thirds of the $19.5 billion expected to be spent online will go to those four big Internet companies.

"As more traditional advertisers shift their budgets toward online, they're more likely to spend that money on traditional online companies, such as Yahoo and MSN," said David Hallerman, senior analyst at eMarketer.

Still, the opportunity to make money from advertising is there, and broadband providers want a piece of the action. Comcast started experimenting with advertising on its portal about nine months ago, and the company is looking to expand its efforts. It already has a request for proposal circulating among Internet companies to find a suitable partner to help attract more advertising dollars.

What's in a portal?
Since cable operators and telephone companies first started selling high-speed Internet services, they wanted to offer more than just dumb pipes delivering access to the Internet. They wanted to provide a reason, beyond simple speeds and feeds, to keep customers loyal to their services. Developing a Web portal or home page for direct interaction, where they could showcase other services to existing customers, became an important element of their strategies.

"(ISPs) are bringing more to the table today in terms of subscribers and their own content, so I think naturally there is some rebalancing going on."
--Joe Laszlo
Jupiter Research analyst

Some companies, such as Comcast, built their own portals and partnered with big Internet companies like Google only for certain features, like search. Others, such as AT&T and Verizon Communications, partnered with existing giants to offer co-branded services that included premium content that users couldn't get on regular Web portal sites. AT&T, then SBC Communications, struck an exclusive deal with Yahoo. Verizon took a multipartner approach, signing contracts with AOL, MSN and Yahoo. Its co-branded AOL site will launch later this year.

At the time most of these deals were struck, companies like MSN and Yahoo had more clout with consumers when it came to the Internet than did phone companies or cable operators. As a result, some deals likely favored Internet players more than broadband providers.

That appears to be the case with AT&T and Yahoo, which struck their deal back in 2001. According to news reports, AT&T actually pays Yahoo to allow its subscribers to access Yahoo's content. Some estimates are that Yahoo makes as much as $250 million annually from the AT&T deal.

Meanwhile, Google has been paying some of its partners, such as Dell and News Corp., to use its search engine. Google has promised to pay $900 million in advertising revenue to News Corp. for putting its search engine on MySpace. Comcast is also getting paid to use Google's search engine, although some say Comcast wants a bigger cut of the advertising revenue.

But the Internet is changing, and broadband providers have more reasons today to demand better partnership terms than they did earlier. For one, broadband penetration is now more than 50 percent in the U.S. And with all the consolidation that has happened in the cable and phone industries over the past few years, more subscribers are customers of fewer providers.

For example, at the end of 2002 Comcast had 3.6 million high-speed Internet subscribers. By the end of 2006, it reported a total of 11.5 million subscribers. With its acquisition of BellSouth, AT&T has become the largest broadband provider, with more than 12 million high-speed Internet subscribers.

What's more, consumers are starting to buy bundled packages of services from a single broadband provider. Not only does this encourage loyalty, but an integrated portal makes more sense for subscribers who want to access all their services from a single launch pad. Today, Comcast customers subscribing to high-speed Internet, digital voice service and cable TV, can access their e-mail, telephone voicemail and TV guide from the Comcast.net portal. The company's upcoming wireless phone service will also be integrated into the portal.

The phone companies are planning similar integrations. While Verizon has co-branded portals, it's also developing its own portal, called Verizon Surround, which is focused on content affiliated with the company's high-speed Fios service. Like the cable companies, Verizon offers a triple-play package of voice, video and data services that runs over the Fios all-fiber network.

Later this year, Verizon will offer subscribers the ability to program their digital video recorders from the Verizon Surround portal. Comcast also plans to offer that capability later this year through Comcast.net.

The content connection
Another key reason why the balance of power may tilt slightly toward broadband providers is the existing relationship that they have with big media companies for video distribution. The cable companies, especially, have long-established relationships with huge media companies, since they've been the primary source of distribution for more than 30 years. Comcast already offers a larger catalog of video-on-demand titles, some of which can be accessed from its Web site.

Verizon is also starting to bulk up its own portal with video content from deals it has struck for its TV service, which will eventually allow Verizon subscribers to view and access content from any kind of device, said Bill Heilig, vice president of consumer broadband product management at Verizon.

Meanwhile, Google is embroiled in what could be a multibillion-dollar lawsuit with Viacom, one of the largest media companies in the world. Google, however, has also successfully negotiated licensing deals with many entertainment companies, including Warner Music Group, CBS, and most recently, the BBC.

Experts say that large Internet companies do still wield a lot of power, especially since usage on their branded Web sites far outpaces that of any phone company or cable provider. According to Nielsen/NetRatings, Yahoo and Google each had more than 107 million and 105 million unique visitors, respectively, to their Web sites in February. Meanwhile, Comcast.net and all other Comcast-branded sites had only 14 million unique visitors. AT&T and Verizon Communications Web sites saw only about 13 million unique viewers each.

As a result, broadband providers, recognize that Internet companies are important partners. Because the Internet brand is very familiar to subscribers, it often helps keep customers loyal. Verizon's Heilig said he was surprised to see how much its co-branded sites reduced customer churn.

"People like the brand-name portals," he said. "I will be the first to admit that Verizon's start page isn't MSN, Yahoo or AOL."

But he added that as the market evolves, these deals will inevitably be revisited.

"I'm sure we will do a gut check in a year or two," he said. "Right now, the retention benefits are very material. But at some point the game may change, and we have the flexibility to change our plans."

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