Electronic commerce: Fighting it out at the door to the Net

Whoever controls your jumping-off point into cyberspace will earn big profits from advertising.

It is said that the most valuable real estate in the world is that on the PC desktop - the screen that flashes up when the computer is turned on. Control of this space is at the heart of the conflict between Microsoft and the US Department of Justice. For it is not just the integration of browsers and operating systems that has stirred the wrath of Joel Klein, the US government's "trustbuster", but deals that place the icons for services on the desktop, too. Herein lies the beginnings of another fight, the battle-lines of which are only just being drawn up.

For at least the next five years, the most lucrative Web sites on the Internet will be those that people first go to before launching out into cyberspace. These so-called "portals" will be a kind of virtual contender to the desktop. And as if in a latter-day gold rush, the big names in information technology are trying to second-guess competitors, erect gateways in the right place, and establish the number one portal online.

The gold in this case is advertising revenue. In Western Europe alone, the interactive advertising spend will grow from $50m last year to $4.3bn in 2002, according to Datamonitor. Nearly half of this will come the way of Internet and online service companies (the larger share going to interactive digital television), and the biggest gainers in that set will be what Datamonitor calls the platform providers - the owners of portals.

Microsoft last week upped its stake with enhancements to its new Start portal site (http://msn.co.uk). Although this site is already the default for Microsoft's Internet Explorer browser, the company is working hard to make the site attractive as a permanent point of departure, once the novice becomes a more savvy. The portal provides features including the Internet search engine Inktomi, already endorsed by competitors including Sun and Yahoo, and a free e-mail facility. But most of the noise at the announcement was about the links to what Microsoft regards as the best of the Web, from Scoot to the Ministry of Sound, though it is clear that brand association is what Microsoft is after as much as anything else. Being able to provide a compelling bundle of content is one of the Web's most powerful features.

Yahoo! (http:///www.yahoo.com), with its personalised My Yahoo service, has already established sophisticated advertising models. Ralph Averbuch, producer for Yahoo UK & Ireland, acknowledges that developing these, in conjunction with being a portal, is the key to its future success. As a hierarchical site (where users self-select according to interest the areas to which they go) advertisers are offered highly targeted placement of banner ads, with rates that reflect this.

But this hierarchy is worth more to Yahoo!. For example, there is a market for Web addresses on the Internet. Yahoo!, recognising that users want to buy Web addresses, might develop an alliance with a business that sells them. This would add to what users can gain from the site, but part of the arrangement would also be providing the Web address retailers with advantageous advertising sites, to drive an audience to them.

However, a familiar question looms: are we on the slippery slope down which Bill Gates is accused of sliding: the creation of a "walled garden" which privileges certain companies by locking others out? Averbuch is adamant in his defence. "We absolutely have an open door policy, offering opportunities at any level for users to go to other Web sites. This is an ethos instilled in the heart of Yahoo!. There might be commercial temptation, but it would create consumer resistance and alienate the very people on whom our business depends."

AOL is another important builder of portals. Industry gossip suggests a purchase of Mirabilis, and it indicates another route to establishing portal presence: by acquisition. Mirabilis has a real time messaging system, similar to Internet Relay Chat, called ICQ. In little over a year, ICQ has gained 10 million users, making it the fourth most popular Web site after Yahoo!, Netscape and Microsoft.

Buying ICQ would be a significant addition to AOL's present customer base of 14 million worldwide subscribers. Rumour is that it is prepared to pay $300m for Mirabilis, indicative of the investments these companies are prepared to make for portal advantage.

A fourth and rather different move into the portal space was signalled last week with the purchase by Motorola of 26 per cent of Teledesic, the company planning to offer broadband Internet access by 2003 via a network of 288 satellites. If this service takes off, Teledesic will control how people access the Internet via mobiles - a kind of hardware portal. A similar grip on another part of the market is likely to be developed by BSkyB, ready for when the television becomes an important point of access to the Internet.

Amidst all this activity, we haven't mentioned names such as Excite and Gateway, to say nothing of Internet strangers such as Boeing and Sony. So what sense can be made it?

"It is a fad, like push technology was a year or so ago. But it will be longer-lasting than that," says William Reeve, head of Internet practice at Fletcher Research. He believes that there will be a shake-out in the next couple of years. There will be opportunities for second-and third- tier players, in the shape of portals which become dominant for special interests on the Web, such as personal finance or sport. But probably only the very privileged can win the big prize - that is, Microsoft, Yahoo! and AOL. Where do you want to go today?