Broadband will accelerate the collapse of the generalist portal business model and provide a weapon for content producers to capture consumer revenues, according to a new report by Forrester Research B.V. (Nasdaq: FORR).

“Portals mistakenly think they can dominate broadband but they already face erosion of value in the narrowband world as marketers divert their spend to alternate venues and tenured consumers bypass portals,” said Forrester Associate Analyst Hellen K. Omwando. “Content producers won’t need portals because they own the content and have access to entertainment gateways and the loyalty of huge multichannel audiences; as killer apps like VOD and PVRs mature, the main broadband entertainment gateways will develop outside the PC environment. Equally, platform owners will develop prime content for their own walled gardens and lock out low-margin distribution through Web-based portals.

“The broadband-induced power shift will damage any portal’s profit outlook, and portals will fail to make broadband pay even by 2005 because of high bandwidth costs and disappointing returns from key revenue sources like rich media ads. Overall, the high variable costs of offering broadband content and the operators’ reluctance to lower bandwidth costs will hit US invaders MSN, AOL, and Yahoo! hardest because they don’t own a delivery network.”

Forrester asserts that European consumers will pay for certain types of broadband content, and estimates that adult content, streaming audio/video, and online gaming will generate total revenues of €5 billion by 2005 — almost a hundred times as much as today. The bulk of this will end up with content producers and vertical entertainment sites. Adult content sites will grab 79% of total paid-for broadband content this year, a share that will drop to 17% in 2005 as streaming content takes off. But most portals tiptoe around adult content for fear of alienating their prime audience; by doing so, they will only capture €65 million, leaving €744 million to independent adult sites. Equally, streaming content will lack mass appeal until 2004 when bandwidth constrains will ease. Bundled services — Internet access plus content — won’t take off until 2004.

“Portals face a Catch-22 scenario; they must provide broadband content to stay attractive but operate it at a loss,” Omwando added. “To survive, Europe’s portals must adapt to one of four business models that blend narrowband and broadband use. Conglomerates like AOL Time Warner and Terra Lycos own both successful portals and rich content, and the power shift will not affect their overall financial performance. But to keep their position in the broadband world, they will enrich their content by buying small but premium content producers in local markets — running each service as a separate business, raising the bar on quality entertainment, providing ad-free online media consumption, and getting revenues from hybrid offerings.

“Portals lacking the money to own content will specialize and become dedicated marketing partners serving ads across channels including competitor sites. Using its client base and behavior tracking skills, a portal like Yahoo! could become such a beast. As a cushion to the cyclical nature of advertising, Forrester believes that Yahoo! Inc. will sell 50% of its stake in Yahoo! Europe to Vivendi Universal; with this acquisition, the French conglomerate will become the top Pan-European value-chain owner, benefiting from the portal’s marketing savvy. MSN, Wanadoo, and T-Online will use their strong technological backing to succeed as tools-based providers that offer P2P communication applications, seek expansion in the SME market, and make money from service fees. Finally, Europe’s small local portals will subsist by providing personalized, location-based services — a far cry from their generalist offerings of today.”

For the report “Portal’s Broadband Facelift,” Forrester spoke with 30 broadcasters and entertainment and news publishers across Europe about their broadband plans and future relationship with portals, in addition to speaking with 26 portals, technology vendors, and marketing service firms across Europe.