Is the long-awaited retrenchment of the Internet portal market finally under way? Recent moves in the industry appear to signal that second-tier portals are backing off from competition with the three giants - America Online, Yahoo and Microsoft's MSN - to concentrate on niche markets.

Last week AltaVista announced a strategic initiative that would pay other websites to pass on their visitors. As part of the scheme, AltaVista intends to build a network of about 10,000 affiliate sites in its aim to be,in the words of its chief executive, "world class in a few areas".

Last month, Disney disclosed that its Go.com portal would cease to be an all-embracing Web destination and would instead focus on its entertainment content. These developments are further evidence of the pressure on the so-called second-tier portals - Go, AltaVista, Lycos, ExciteHome and Snap - to differentiate themselves. It also comes at a time when advertisers are increasingly scrutinising Internet industry data in an attempt to maximise their expenditure.

This, in turn, underlines a trend towards the biggest Internet sites taking a growing slice of advertising revenues.

"It is a hugely significant moment for the portal market," Ms says Charlene Li, an analyst with Forrester Research. "Disney is signalling its withdrawal from the broad-based portal market and concentrating instead on what it does best - entertainment. It's a smart move."

The portal model emerged about two years ago as a means for the Internet search engine groups to move more quickly to profitability. With millions of Web users entering the Internet through their sites, the search engines realised that if they could hold on to this traffic for as long as possible, they would be able to increase rates to advertisers as well as to realise e-commerce revenues.

A spending spree followed, which continues to this day, with the portal groups seeking to acquire sites and companies that would widen the wealth of services they offered to visitors.

Financial services, news services, community sites and e-commerce opportunities became key battlegrounds.

Unfortunately, this has all but cancelled out any differentiation between the portals, with the result that the bigger sites have continued to pull away from their smaller rivals. But it is not all plain sailing for the big three, with their strategy of continuing to offer as wide a range of services as possible.

Indeed, Forrester forecasts that 57 per cent of all online advertising spending will move to sites focused on one segment of the market - so-call edvertical portals - and affiliate networks by 2004, more than double the current figures. Vertical sites offer a more targeted audience for advertisers and retailers and hence a more efficient way of acquiring customers.

Such is the dominance of the big three portals, however, that they can probably weather some erosion. Analysts estimate that AOL, Yahoo and MSN attract 15 per cent of Internet traffic and some 45 per cent of advertising.

By contrast, the second-tier portals have just 5 per cent of advertising and Forrester forecasts this will decline to 1 per cent by 2004.

What next for the likes of Lycos and AltaVista? "They are all re-evaluating their strategies, trying to focus on what their strengths are," says Danny Rimer, a partner in the Barksdale Group, a prominent Silicon Valley venture capital firm.

Ms Li predicts that the smaller portals have a choice: consolidate in an attempt to match the size of the big portals, or acquire assets that will make them an attractive destination.

"They still have great stock value, so it would make sense for them to buy something that would enable people to know what they stand for," she says.

AltaVista and Lycos share the same significant shareholder in CMGI, the Internet investment group, and an alliance between the two has long been mooted by market observers.

Since the announcement of the AOL-Time Warner merger, speculation has intensified that an alliance with a media company might be the answer to the portal strategic conundrum, and it remains Wall Street's favoured endgame.

"There has never been such a polarisation in the portal market," says Mr Rimer. "The pressure on second-tier portals to differentiate themselves is immense. They are all casting around for either new partners or a different direction."