The race for portal dominance is over. While traffic continues to surge at AOL, Yahoo!, and MSN, the other broad-based portals — AltaVista, Excite, GO.com, Lycos, and Snap.com — are showing modest gains at best. With traffic fracturing into two camps — a few broad-based portals and thousands of vertical sites — a new battle for online marketing dollars is unfolding. A recent Report from Forrester Research, Inc. (Nasdaq: FORR) predicts that 57% of all online ad spending will flow to vertical sites and affiliate networks by 2004 as more retailers seek greater returns from their investments.

“There is a sea change underway in spending for online marketing,” said Charlene Li, senior analyst in Media & Entertainment Research at Forrester. “Companies love the visibility that AOL and Yahoo! deliver, but they need a much higher customer acquisition rate than these broad-based portals can offer. To realize some return from their Internet ad spending, retailers are demanding pay-for-performance deals that only vertical portals and affiliates can deliver. This is where the ad dollars will go over the next five years.”

Communications, consolidation, and competitive fervor have enabled AOL, Yahoo!, and scrappy MSN to capture 15% of Internet traffic and 45% of all Internet advertising. Although these sites drive high volumes of traffic, retailers have found that vertical and affiliate sites are more efficient at delivering qualified leads and customers. And while portal deals are generally less expensive than traditional offline means of acquiring customers, portals are more expensive than other online methods. As a result, retailers plan to spend more with vertical sites and on affiliate marketing, both of which provide lower acquisition costs.

In contrast to broad-based portals, which seek to serve anyone and everyone with a portfolio of basic content, communication, and commerce services, vertical portals are more than just a content or transaction site. Instead, they focus on a particular content category, commerce opportunity, or audience segment and provide a broad set of services tailored to the target opportunity. Vertical sites like CBS Sportsline, CNNfn, Garden.com, and CNET are regularly among the top 100 Internet sites.

The contextual advertising opportunities offered by vertical portals will seriously erode ad spending at midtier portals like Excite and Lycos. These broad-based portals will see their ad share decline from 5% in 1999 to less than 1% in 2004. Meanwhile, the leading vertical portals will see their share of ad spending increase to 24%, up from 20% in 1999. And the rest of the Web, which had only a 11% share of total Internet ad dollars in 1999, will steadily gain revenue share as retailers embrace affiliate programs, advertising networks, and other forms of syndicated selling. By 2004, these niche sites will get 25% of online advertising dollars.

“To survive, midtier sites like Lycos, Excite, and AltaVista must follow GO.com’s lead and get vertical,” added Li. “It almost doesn’t matter whether they focus on entertainment, demographic segments, or commerce, as long as they focus on something.”

In the Report “The Parting Of The Portal Seas,” Forrester interviewed 50 retailers that have distribution deals with major sites as well as executives from the leading broad-based and vertical portals. The top three factors that retailers use in choosing a portal partner are return on investment (62%), audience demographics (58%), and raw traffic level (48%).