Portals: Engines of the New DM

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Conventional wisdom says the Internet will profoundly change direct marketing, with e-mail supplanting paper mail and printed catalogs giving way to e-merchant sites.

More important for the long term, however, will be how DM evolves to exploit the economics of the Internet rather than how the Internet can mimic solutions that evolved to suit the economics of printing and postage.

E-mail lists and Web-based catalogs are the first, tentative steps toward a new DM for the Internet era, but they aren't a good indication of its ultimate direction. For a clearer view of DM's future, look to an industry that has never been encumbered by "physical world" economics: Internet portals.

In the early Web days of the mid-1990s, portals, then called search engines, operated under a media business model: provide relevant content to targeted groups of consumers and sell ad space to advertisers interested in reaching that audience.

The key content was links to other sites, generated by search terms provided by the consumer or organized into hierarchical directories. Consumers used the links to get to destination sites containing the content they were really looking for, hence the name "portal."

Through their role as the nexus of millions of search queries, early portals came to know exactly what consumers were looking for on the Web. Capitalizing on this insight, they strove to increase the length of portal visits by importing the most-requested content, including news, weather, sports, stock quotes and horoscopes, into the portal itself.

Ultimately, portals realized that consumers wanted more from the Web than content. Next came community features (chat, talk back, discussions) and user applications such as e-mail and personal scheduling.

Portals now provide so much of what consumers come to them looking for that the name "portal" is now a misnomer; they have become destination sites unto themselves.

Who Wants to be a Portal?

Since assembling a critical mass of targeted users is a prerequisite for the success of so many Internet company business models, it's not surprising that consumer Internet ventures strive to be the portal for their demographics. Every Internet business-to-business play wants to be the portal for its vertical markets.

Providing audience-specific content, community and user applications is the way to get there. The final portal element, commerce, is increasingly what makes providing the other three worthwhile.

For a few mega-portals, the media-centered business model may persist. The huge audiences they generate translate to high ad and sponsorship rates. The rest of the portals, lacking that huge traffic, recognize that the media company model of ads and sponsorships is unlikely to be sufficient to sustain a business in the long term. As a result, they're incorporating another, familiar business model: DM.

Affiliate programs were portals' first, primitive step toward DM. Such programs, run mostly by e-merchants, allow portals to earn sales commissions by offering items from the e-merchant's catalog (think Amazon or CDnow), ideally at moments of greatest context - the juncture in a portal visitor's experience at which he or she is most likely to be receptive to that offer.

Taking advantage of moments of context in the portal experience has been the value proposition portals have made to marketers with banner ads, and especially beyond-the-banner advertising.

Unlike the traditional DM approach of recapturing a consumer who has expressed an interest in the past, the moment of context in the portal experience is more akin to the Yellow Pages, in which the consumer is receptive to a targeted offer, because he or she is likely to be looking for a specific product or service.

Unfortunately for marketers, portals' shift toward DM and away from a pure media business model means that increasingly the best moments of context will not be for sale to marketers. Rather, portals will be merchandising them themselves, in order to capture more of their value.

Affiliate programs are relatively easy for portal operators because the e-merchant is responsible for most of the heavy lifting: shopping cart, credit card clearing, fulfillment and customer service. This ease of affiliate program deals has a cost: E-merchants, through the addition of content, community and user applications relevant to their customers, have become portals themselves.

The affiliate problem is leading portals with sufficient scale to take the next step toward DM -- bringing more of the consumer purchase experience inhouse or contracting with third parties that will private label them to the portal's brand. Not coincidentally, as portals own more of the critical consumer buying experience, they also keep more margin for themselves.

The evolution of portals into engines for DM is still in its infancy. It is clear, however, that the new DM of portals is at least as much about creating real-time context for a multitude of tailored offers as it is about the traditional DM of lists and monolithic offers. Portals, especially e-merchant portals, continue to take pages from the DMers' playbook, increasingly keeping their best moments of context for themselves.

To what extent will the two businesses ultimately converge? The more that they do, the more that traditional DMers should consider taking a few pages from the portals' playbook.

Martin O'Donnell is co-founder and vice president of business development for OpenSpace.com, Seattle, a leading provider of Internet portal infrastructure, uniting content, community, desktop services and shopping.

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