How prime is portal real estate?

At first glance, the arrangement seems to make perfect sense: Online merchants seeking wide exposure pay premium prices to lease space on portal sites boasting the highest traffic.

But what happens when the rent goes through the roof and everyone keeps paying anyway, knowing that a steady stream of rival tenants is right behind them?

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That's the question facing virtually all businesses selling their products through electronic commerce today. And no easy answers are emerging, even though the payoff of this expensive real-estate practice is decidedly unclear.

"It's still very much an open question whether they are getting a return on their investment," said James Vogtle, research director for the Boston Consulting Group.

In fact, according to a study last month by research firm Jupiter Communications, more than two-thirds of e-commerce merchants surveyed failed to generate more than 30 percent of their sales from these portal deals. Fewer than 5 percent of executives polled at the time were "highly likely to renew" their portal agreements. And primary portals are expected to see only a minor rise in online buying in the next three years, from an 18 percent increase in 1999 to a 20 percent gain in 2002.

Still, in the hyperspeed of Internet business, many companies believe they can't afford to take the risk without such portal partners as America Online, Yahoo, Lycos, Excite, and MSN.com, which millions of Netizens visit daily for email, news, stock quotes, search services, and even their own home pages. Merchants regularly shell out millions of speculative dollars for a single deal, stressing the importance of getting in early and firmly on the ground floor.

n: A site that aggregates an array of content and offers a range of services to be the home page for as many users as possible, thereby attracting more ad dollars.

"Retailers tell us they have five or six major portal relationships. One guy is doing a bounty, another is revenue sharing. They all are assessing which is the best form for generating leads and sales," said Kate Delhagen, an analyst with Forrester Research. "We are 12 to 24 months away from knowing the results of these varied models."

Until then, the floodgates of cash are wide open. Ameritrade pays $25 million for two years with AOL; CDnow pays Lycos $18.5 million for three years; and Preview Travel pays Excite $15 million for five years. In one of the largest deals to date, First USA in February announced a $500 million agreement with AOL to be the exclusive credit card product marketer.

"These customer acquisition costs are very high," Shop.org executive director Robert L. Smith said.

No kidding. A November study by Shop.org and the Boston Consulting Group found that retailers with a Web site spend 65 percent of their revenues on advertising and marketing, online and off--producing an average cost of $26 to generate a single customer order.

Compare such acquisition costs to brick-and-mortar retailers with no Web site, which spend an average of 4 percent of their total revenues for marketing and advertising, which comes to about a $2 cost to generate an order. Catalog retailers spend about 6 percent of their revenues on marketing and advertising, about $3 per order.

Yet many public Net companies dismiss such numbers as irrelevant at this nascent stage in the Web's development as a commercial vehicle. They say online merchants are not subject to the same rules as traditional retailers.

"The stock market is willing to be very forgiving and to let [online companies] spend far more money on marketing than their businesses can support," said David Simons, managing director of Digital Video Investments.

That support appears limited indeed, at least so far. The Shop.org study found that only 2 percent of visitors to a merchant's site resulted in a purchase.

Entrepreneurs are banking on repeat business to raise that percentage exponentially. After customers become familiar with a merchant's service, the thinking goes, they can bookmark that site in their browser and bypass the original portal page altogether, eventually reducing the need for these megadeals.