Portal wars are over -- guess who won?

Hey Lycos and the GO Network, put down your weapons and surrender. The portal wars are over, and you lost.

So says a new study from Forrester Research. Lycos and Disney's GO Network aren't the only prominent losers, according to the Forrester report. AltaVista and Excite also need to pull down their flags.

The winners: America Online, Yahoo! and, perhaps surprisingly, the Microsoft Network.

"The portal race is over," said Forrester analyst Charlene Li, author of the report. "If these other portals are to survive, they really have to focus their direction."

Li said that if such portals as Lycos and AltaVista want to remain attractive to advertisers and content partners, they must develop niche audiences and immediately "go vertical."

She said AltaVista should exploit its reputation as a superior search service and focus on academic and business content, Excite should focus on entertainment, and Lycos should target on young consumers.

It's a recommendation that Lycos, at least, disdains.

"We are not going to limit ourselves to a particular demographic, because our objective is to be one of those top three destinations on the Internet," said Ron Sege, executive vice president of Lycos.

Lycos was briefly among those sites at one point this year, according to Internet measurement service Media Metrix, numbers from March of 1999, but has since slipped.

But Sege is quick to point out a majority of US consumers are not yet on the Internet, so declaring a winner in this race is premature.

"It's like saying in 1930, when there was just General Motors and Ford, that the auto wars were over," he said.

Perhaps surprisingly, an MSN official agrees with him.

"I wouldn't declare the portal wars over," said B.J. Riseland, product manager for MSN. "The reality is, this thing is still moving."

According to the latest data from Media Metrix, AOL has a strong lead among Internet portals, with more than 53 million unique users each month.

Yahoo! follows in second place with a little more than 40 million unique visits. MSN.com, Microsoft's portal site, has seen its traffic increase threefold in the past year to come in third with 37.7 million visits.

Lycos, GO and Excite@Home finished fourth, fifth and sixth, respectively, but with significant drops in traffic.

But portal success isn't just about the number of people visiting the site these days -- it's also about a portal's ability to draw in profitable distribution deals with online retailers and content partners.

According to the retailers polled by Forrester, a typical deal with the major portals runs for 20 months, with a total value of about $4.5m (£3m). However, that price can go much higher.

AOL in particular has scored some big deals. Online job site Monster.com recently agreed to pay the online giant $100m over the next four years in return for being AOL's exclusive job search service.

In October, AOL signed a deal with Stamps.com worth $56m for three years in return for the right to be its exclusive provider of postage. Also in October, Travelocity.com said it will process all travel reservations booked through AOL. The deal is worth $200m over five years, with a portion of those millions guaranteed, and the rest based on the performance of AOL's referrals.

During the past few months, Yahoo!, which is not generally as forthcoming as AOL with the financial terms of its deals, has signed partnership agreements with the Weddingchannel.com, Network Solutions, and Law.com, among others.

But all the portals may be due for a wake-up call. "These (distribution) deals are really hard to justify for advertising return on investment," said Patrick Keane, an analyst at Jupiter Communications.

Retailers and content partners seem to agree. Only 57 percent of retailers now say portal deals are worth the exorbitant prices, according to Forrester. Still, 69 percent say they will renew their contracts for non-financial reasons, such as blocking out the competition or for public relations.

"Sometimes these deals are done just for public relations purposes to generate venture funding," noted Li.

But it's not always the portal's fault if deals don't meet expectations, according to AOL. "We're going to be able to send them a lot of traffic," said Ann Brackbill, an AOL spokeswoman. "Ultimately, they have to have the quality of service to handle that."

Analysts expect more caveats in future distribution deals -- such as pay-for-performance clauses and better tracking of consumer data -- as retailers become more savvy about how they spend their marketing dollars.

Changes to come Over the next four years, Forrester predicts the "Big Three" of AOL, Yahoo! and MSN will see their share of total Internet advertising fall from 45 to 40 percent.

Niche sites and vertical portals such as Garden.com, Amazon.com and eBay will have 57 percent of advertising dollars by 2004.

Both Li and Keane recommend companies closely examine the type of audience they are attempting to reach before they spend millions on a portal deal. Companies with well-known offline brands, for instance, probably won't benefit greatly from portal deals.

In fact, Li thinks only retailers striving to become big, fast, with advertising budgets of $5m or more, should attempt to ink a deal with the Big Three.

Her research shows that for both small sites and particularly large ones, other forms of advertising, such as e-mail and affiliate networks, can be cheaper and more cost-effective in the long run.

"The problem is, they've been doing this (signing deals) at the exclusion of other distribution deals," explained Li. "They're recognising the value of these other distribution vehicles. People used to think portals are the place to go, but it doesn't have to be that way."