Side Effects

Affiliates promoting pharmaceuticals online can earn lifetime commissions and five-figure paychecks while helping consumers purchase the drugs they need for a fraction of what they would pay at the corner drugstore. But the price also can be unacceptably high.

It certainly was for Ryan Haight. Using a debit card his parents gave him to buy baseball cards, the 18-year-old honor student went online and purchased 100 tablets of hydrocodone, the generic version of the painkiller Vicodin. He died after mixing the pills with morphine and other drugs.

“What happened to my son shows that kids today can easily buy drugs online,” said Haight’s mother, Francine. “It’s just like buying candy in a candy store. I was worried about the street drugs like marijuana, cocaine, and the other drugs you hear about, not prescription drugs.”

The tragedy illustrated the enormous risks that cloud one of the fastest-growing and most controversial areas of affiliate marketing. While the vast majority of affiliates and merchants conduct business in a safe and ethical manner, the lack of clear regulations and potential for abuse have resulted in a chaotic marketplace of conflicting laws and even criminal conduct.

Online pharmacies offer rich rewards to affiliate marketers who accept the risks. It’s not uncommon for affiliates to make thousands of dollars a month in commissions, largely through pharmacies located outside the US. The US Food & Drug Administration (FDA) estimates American consumers received 5 million offshore drug shipments in 2003 alone. That was up from 1 million in 2001 and 2 million in 2002.

Industry on the Edge

The bigger the business gets, the more attention it attracts from consumers, affiliates, online drugstores, regulators, prosecutors and others with a stake in the industry. “The business is teetering to the point that it may be gone tomorrow or it may survive,” said Marc Lesnick, who organizes the Conference for Online Pharmaceuticals. “The odds are stacked against the affiliate.”

The FDA has no regulations that specifically address the online sale of pharmaceuticals, although there are many laws related to traditional drug sales that may apply in certain cases. The US Drug Enforcement Agency (DEA) does have regulations about online drug sales, but has difficulty enforcing them. Therefore, the responsibility for making sure programs are safe and legal often lies in the hands of each affiliate marketer and director. That’s a lot of responsibility, and potential liability, to be leaving in the hands of the very people who earn revenue by marketing the products.

The problems inherent with self-regulation hit home recently for Brian Johnson, an affiliate marketing manager for MyRxForLess.com. A recent news report aired by Dallas TV station WFAA alleged the Mexico-based pharmacy sold Zoloft that had nearly 20 times the acceptable level of certain heavy metals. When Revenue contacted Johnson, he said he didn’t have enough information to comment. “I’m just an affiliate running a business,” he said. “A lot of people can say a lot of things, but the jury is still out. Besides, what online pharmacy isn’t being investigated by the FDA? Until it’s illegal, I’ll keep doing it.” Indeed, as we went to press, no charges had been filed against either Johnson or the pharmacy.

Numerous other affiliate marketers who were contacted for this story declined to discuss their efforts. Their tendency to shy from publicity is in stark contrast to their colleagues in more traditional industries. Lesnick understands this reluctance to enter the debate in an industry where, essentially, there are no guarantees. “If I was an affiliate, my name would be Billy Joe Bob, and that’s all you get,” he said. “The bottom line is that affiliates may try their best to promote a reputable pharmacy, but they don’t know what these guys are doing.”

Lesnick notes it can be tough to avoid legal problems when they arise. “In pharmaceutical cases, the lawyer names every single person involved, from the hospital to the doctor to the insurance company to the pharmacy to the Web site. There are some affiliates I know who stay away because it is a legal nightmare.”

A New Wave Is Coming

Indeed, this industry has been placed under the microscope, and as proposed new laws and regulations threaten to restrict the market many affiliates have stayed away from this potential moneymaker altogether because of the uncertain future.

“We need regulations because we have seen a significant increase in bad operators, drugs being given without prescriptions, and offshore transportation of drugs, which is illegal,” said Drugstore.com CEO Peter Neupert. “The bottom line is people are looking for low-cost alternatives. They find those lower prices online, but it comes at the price of their safety.”

To promote safety between affiliates and pharmacies, the Internet Pharmacy Board (IPB), a nonprofit association, promotes safe tele-medicine practices in compliance with the national and state boards of pharmacy and medicine, federal agencies, the medical community and patients. “I suggest the IPB to any affiliates or pharmacies that are getting involved in this area of online marketing,” said Aaron Sallade, CIO and affiliate program director for Millennium Pharmaceuticals.

It’s easy to see that other changes are on the way. One is a new program from National Health Services and Millennium Pharmaceuticals that, in theory, will make the affiliate marketing of prescription drugs safer. The program follows a legal and ethical code and screens for drug abuse patterns. If abuse is suspected, those records will be sent to a doctor for review. “We are creating a health care network rather than a pill store,” Sallade said. “It’s a program that we feel will be fully supported by the FDA and DEA.”

Affiliate marketers can also be more selective in the drugs they promote. Millennium is among the companies that make a good profit without selling controlled drugs. Sallade said his top affiliate averages 300 orders a day. With an average commission of $30, that earns the affiliate $270,000 a month. The average affiliate earners complete five orders daily, for about $4,000 per month, he said.

Other companies have reported similar results. “We have paid out over $100,000 per month to our top performers and have numerous affiliates that earn five-figure commission checks each month,” Steve Yasher, affiliate director of Medical Web Services LLC, said in an email interview. About 90 percent of the company’s revenue comes from affiliates.

Commissions paid to affiliates depend on the program, and there are two popular types. One provides lifestyle drugs such as Viagra, Propecia or diet pills. The other provides maintenance medications such as blood pressure, birth control or antidepressant medications.

Lifestyle medication programs pay out an average of $40 to $50 per order. These programs often offer a hybrid payout model, which is a flat rate per each sale plus a percentage of the sale. Lifestyle programs are popular not only because of the higher payout, but also because they give affiliate marketers more control, allowing them to set their own price. Maintenance medication programs typically pay a commission of about 10 percent – comparable to many other areas of affiliate marketing.

From a business perspective, who wouldn’t be attracted to lifetime commissions? And getting into the business is not difficult. Some programs will provide you with a pre-made template to give you a jump-start. No degree or medical experience is required. Like other affiliate programs, you just need patience, Internet marketing knowledge, dedication and creativity.

“The biggest downfall of new affiliates is that they feel that they can quickly make good money with little effort or maintenance,” Yasher said. “Internet marketing and the online prescription industry are both evolving very rapidly, and if you do not stay on top of your marketing strategies, you can very quickly waste your money on ineffective campaigns in a very competitive marketplace.”

Under the Microscope

You may be asking yourself, if buying pharmaceuticals online is so risky, why do so many people do it? The answer is simple. It’s convenient, private and, most importantly, relatively inexpensive.

“As long as the astronomical costs of pharmaceuticals remain in [the US], we will always be the better alternative, providing the cheaper, authentic product, with fast reliable and professional service,” said Laura Hunt, affiliate director of US-based Impact Health Care.

David Gross, senior policy adviser for AARP’s Public Policy Institute, said his group tells members to do their homework before attempting to buy prescription drugs, whether online or otherwise. “If someone is going to buy offshore, which we don’t recommend, they need to make sure they’re getting a pharmacy that is licensed, that is accredited,” Gross said.

“The bottom-line is people are looking for low-cost alternatives. They find those lower prices online, but it comes at the price of their safety,” said Neupert of Drugstore.com.

No Doctor in the House

Another risk lies in the fact that people who order prescription drugs online often are not required to consult a physician in person or, even worse, at all. The DEA has a problem with that. According to the agency’s guidelines regarding dispensing and purchasing controlled substances over the Internet, “It is illegal to receive a prescription for a controlled substance without the establishment of a legitimate doctor-patient relationship, and it is unlikely for such a relationship to be formed through Internet correspondence alone.”

Ryan Haight bought his drugs from Main Street Pharmacy, a Norman, Okla. company that exemplifies what authorities call “rogue” pharmacies. The only requirement to order his lethal dose of drugs was the completion of a medical history statement, which then is reviewed by a doctor who consults for the online pharmacy.

Daniel Guess, an assistant US attorney in Dallas, successfully prosecuted 33-year-old Clayton Fuchs, owner of Main Street Pharmacy, on six felony counts that carried penalties of up to 20 years in prison. “Online pharmacies that tell a patient they ‘don’t need a prescription’ should be a red flag to consumers,” Guess said.

“When you think of a drug dealer, you think of a person standing on a corner selling marijuana or cocaine,” the prosecutor said. “These guys online selling pill after pill after pill are really no different. But they are perceived differently. There are no differences between the online pharmacy and the typical cocaine or marijuana dealer.

“We’ll start looking at them that way.”

Rogue pharmacies make most of their money by pushing highly addictive medications like hydrocodone or dangerous diet drugs over the Internet. Trouble is, diagnosing or confirming a medical condition is complicated and cannot be accurately done without a physical exam.

“The biggest risk ordering prescription drugs from an online source is that since you aren’t seeing a doctor, you are essentially diagnosing yourself and just choosing what medication you need,”said Dr. Vince Iannelli, professor of pediatrics at the University of Texas Southwestern Medical School. “Figuring out a medical problem is much more complicated than that since many conditions have similar symptoms. And an evaluation is never complete without a physical exam, which isn’t possible when ordering prescriptions online. Simply filling out a generic form isn’t enough.”

Haight’s story proves that. And the publicity it has generated has inspired self-regulation in high places. Internet search engines Google, Yahoo and Microsoft have all barred advertising from unlicensed pharmacies. Others, like pay-per-click search engine Overture, have amended contracts and policies to address the issue of online pharmacies.

What can affiliates do to make sure they’re promoting safe and legal companies? “I would ask the affiliate program to provide me with the DEA registration for their pharmacy and doctors, and I would request a copy of their professional license,” Sallade said. “If an online pharmacy states that they are certified, the question to ask is, ‘Where did the certification come from and what were the requirements for that certification?'”

The bottom line is that, at least for now, caution is the order of the day. Says Yasher: “I would advise all affiliates to engage the services of legal counsel to review their business practice.”

LAURA SCHNEIDER is the marketing editor for About.com. Her articles on marketing have been published by more than 4,000 Web sites and magazines. She is also partnership development and marketing manager for Revenue Partners, where she has developed and managed online marketing ventures for a decade.

Snake Eyes

Five’ll get you 10 that online gambling is here to stay. Cyber casinos already take wagers from around the globe on everything from five-card stud to the first race at Belmont. Even the industry’s harshest critics concede online gambling revenue has soared tenfold in the past six years to about $4.2 billion.

With generous payout packages and surging demand, it’s no surprise that affiliate sites are jamming the search engines like blue-haired ladies at a Tom Jones concert. Affiliates are anxious to collect their piece of the action, with a few lucky superaffiliates raking in five figures a month.

But it’s an election year in the US, where online casinos are outlawed, and affiliates are feeling a chill wind from lawmakers and federal prosecutors who allege online gaming is linked to ID thefts, personal bankruptcy, money laundering and, you guessed it, even terrorism.

As Revenue went to press, the US Senate was preparing to debate a bill that would ban the use of credit cards, wire transfers or other financial instruments for online gambling. A similar bill sailed through the House of Representatives last year on a 319-104 vote, authorizing five-year prison terms and hefty fines for violators.

“From a family perspective, the home may be considered a castle, but it should never be a casino,” said Rep. James Leach, R-Iowa, who authored an earlier version of the anti-gambling legislation in the House.

The strong rhetoric, combined with aggressive tactics used by federal prosecutors, has frightened many affiliates so much that they are reluctant to discuss their activities on the record out of fear they may be targeted by the government. Other affiliates, however, have become vocal proponents for legalized online gaming in the United States.

“I think there’s a lot of posturing going on right now,” said Cynthia Carley, outspoken owner and manager of the 150- member Gaming Portal Webmasters Association at GPWA.com. “There are a lot of legal attempts to intimidate people, but they don’t have any legal grounds at the moment. And getting those legal grounds is going to be more difficult than they believe it will be.”

To be sure, there are several other challenges in this controversial sector:

  • Some affiliates complain they have trouble collecting commissions from offshore casinos, and they get little sympathy from US authorities.
  • Many longtime affiliates think the sector is simply too crowded, with hundreds of new affiliates joining the throng each day.
  • Longtime stigmas of gambling addictions and organized crime still haunt the industry despite legal gambling in most of the US and lotteries in 39 states.

But it’s the legal issue more than any other that has affiliates on the edge. Cynthia Fanshaw, the 27-year-old marketer featured in our cover story, told Revenue she abandoned the shifting legal sands of gaming five years ago for the relative stability of the adult entertainment industry. “I started having conversations with a few Internet industry attorneys, and nobody could give me a straight answer,” she recalled, saying she feared being declared guilty by association. “By promoting an online casino, you’re getting in bed with them. If you’re promoting them, and they’re not doing business correctly, you’re just as guilty as they are.”

Fanshaw was just one of many affiliates, program managers, casino operators and others who complained that authorities have failed to provide clear guidelines on what is legal and what is not. Revenue repeatedly pursued the question with the US Justice Department, but the clearest response we obtained was from department spokeswoman Casey Stavropoulos, who simply said affiliate marketing of online gaming remains “a gray area.”

Active Enforcement

That, however, hasn’t stopped the Justice Department from going after parties they feel are too far into the gray. In mid-2003, PayPal Inc. and its parent, eBay, agreed to pay $10 million to settle federal allegations it had “aided” in illegal offshore and online gambling by transmitting millions of dollars in funds derived from “criminal offenses.” Prosecutors said the offenses involved the processing of illegal gambling transactions in Missouri, coincidentally the home state of US Attorney General John Ashcroft.

“Offshore sports books and online casino gambling operations which do business in the United States generally do so in violation of federal criminal laws. Therefore, we will continue to investigate and pursue such activity,” said Raymond Gruender, the US Attorney whose office pursued PayPal.

Not surprisingly, PayPal no longer services gambling transactions. Neither does Commission Junction nor BeFree, the two popular affiliate networks recently combined into a single division by ValueClick.

About the same time, the Department of Justice in Washington sent a warning letter to several media organizations regarding “Advertising for Internet Gambling and Offshore Sportsbooks Operations.” The letter was widely circulated, including on the Web site for Interactive Gaming News, where Revenue obtained a copy. It said, in part:

“The sheer volume of advertisements for offshore sports books and online casinos is troubling because it misleads the public in the United States into believing that such gambling is legal when in fact, it is not.”

The letter went on to reiterate that Internet gambling was illegal within the United States “whether or not such operations are based offshore.”

A few months later, the operator of a portal site was subpoenaed to testify before a federal grand jury investigating advertising for online gambling, according to published reports. Several media organizations, including radio giant Clear Channel Communications, also were subpoenaed in connection with the advertising probe.

Revenue asked Jan Diltz, the spokeswoman for Gruender’s office, for confirmation of the reports and clarification of the laws surrounding affiliate marketing, but received only a Kafkaesque series of responses. Diltz said she could not comment on any ongoing investigation until indictments were issued. Asked if that meant there was an ongoing investigation, Diltz said she could not comment. Nor would she comment generally on whether affiliate marketing of online gaming was legal or illegal. Asked how affiliates could know if they were in danger of violating the law prior to being indicted, Diltz said she could not comment.

Unclear on the Concept

Diltz said department regulations prevented her from saying anything else about the matter. Instead, she pointed to the press release that included Gruender’s comments months earlier at the conclusion of the PayPal case, but that said nothing about affiliate marketing. The lack of clear guidelines has left many casinos, program managers and affiliates feeling frustrated.

“With all the subpoenas that were sent out to radio stations, magazines and a lot of different merchants that took online gaming advertising, it’s been more of a threat than anything else,” said Daniel van Dijkman, global affiliate manager for VIPProfits.com, a network with about 3,500 active affiliates serving eight online casinos. About 70 percent of his affiliates operate in the US.

Without clarity on the legal limits, or even on whether the grand jury has completed its probe, Carley said her association’s members were equally divided over how to proceed. “We have people who are ready to jump out there to do battle, and we have people who do everything they can to fly under the radar,” she said. “They don’t want to be seen, they don’t want to be tracked, they don’t want to be known.”

Attorney Larry Walters, who has represented casinos in First Amendment cases, said the power of the US government to regulate advertising is not as extensive as its ability to regulate a service like gambling and therefore affiliates would be somewhat less constrained than the casinos themselves. Casino operators tend to see the enforcement campaign as a tactic to silence affiliates.

“I think a few people in the United States with dogmatic opinions are trying to frighten affiliates and advertisers out of conducting their business in a proper manner,” said David Caruthers, CEO of BetOnSports.com, which operates a 1.2-million-square-foot casino in Costa Rica. The company also has operations in the Dominican Republic, Antigua and South Wales, all of which Caruthers states are “licensed and legal and I would defend that position very, very, very robustly.”

Caruthers hinted the legal climate had worsened under the Bush administration. “I think we’ve seen in recent times … correspondence from the Department of Justice that is very ambiguous and very threatening, with really no substance or legal fallback for their accusations,” he said. “I see that as aggressive, dogmatic and unfair.”

Rep. Bob Goodlatte, R-Va., was among the most ardent supporters of the bill that cleared the House and the bill now pending in the Republican-controlled Senate. When the House bill passed, he hailed it as a step that would help to “close off opportunities for money launderers, terrorists and organized crime.”

“The director of the FBI has testified that Internet gambling remains a loophole in America’s fight against terrorism,” Goodlatte said at the time.

Part of Leach’s bill, HR 21, could be blended with the Senate version in conference committee if the measure progresses through the Senate. “Internet gambling increases consumer debt, makes bankruptcy more likely, money laundering an easy endeavor, and identity theft a likely burden,” Leach said.

Social Costs

Goodlatte also stated that Internet gambling has “contributed to a whole host of social ills.” To be sure, online gaming certainly makes it easier for gambling addicts to place wagers, said Marc Lefkowitz, director of training for the California Council on Problem Gambling. However, he said his group has no opinion on whether gambling is good or bad. Neither does Gamblers Anonymous, the leading counseling group for the 5.4 percent of American adults who are believed to have a gambling addiction.

Lefkowitz said the important thing is that land-based and online casinos adopt a number of responsible gambling practices. “We want them to be able to refer [problem gamblers] to us, to post a help-line number, and perhaps train employees in responsible gambling practices,” said Lefkowitz, who has led numerous training sessions at land-based casinos. “We’re starting to get a good response from some gambling Web sites who are interested in making sure they have the same thing.”

Caruthers, the CEO of BetOnSports.com, said the need to help problem gamblers was among the reasons that he favored regulation and control of the online gaming industry. “Any proper operator worth his salt would have procedures in place to protect the business from being exploited by underage people or people with gaming problems,” he said, pointing to information on his site that advises customers to wager responsibly and to seek help if they need it.

“We are very, very acutely aware and sensitive to running our business with the highest degree of probity,” Caruthers said. “And looking after your customer is No. 1 in this field.”

The Glut

For all the political sound and fury in the US, all sides agree that online gaming is growing faster than anyone expected. Goodlatte estimated online gaming revenues grew from $445 million in 1997 to $4.2 billion in 2003. And Carley, who runs seven gaming portals in addition to GPWA.com, notes there were only 300,000 listings for “video poker” in Google when she launched VideoPokerJunkie.com in December 2000. Today, she said, there are 4 million listings.

Carley warns there is a glut that makes the affiliate business very tough. She said her group has members who are self-supporting and others who’ve been doing it for years but don’t make $1,000 a month.

“I believe we’re in a glut and we have been for the past year,” she said. “I’ve seen people getting out of the business and casinos failing. It’s a tremendously competitive business.”

Adding to this is the risk that an unscrupulous offshore site might just decide not to pay an affiliate. “I have had situations with the larger companies where they refused to pay me,” said Allen Schneider, a former director of the Interactive Gaming Association who now runs the Internet marketing firm RUOnTheNet.com. Schneider claims that he had to fight one Israeli company for eight months to get the $5,000 in commissions. Affiliates recommended that newcomers seek sites that pay commissions based on a portion of what the client deposits at the site. Two other common models offer a share of the client’s losses, which may be small, or a modest bonus for bringing on new clients, a model called cost-per-acquisition or CPA. Carley offers another, simpler piece of advice: “Use common sense.”

All things considered – legal risks, competition, social ills – this might not be the right area for all affiliates. To succeed, affiliates need to find the right niche for themselves, whether that is gambling or, say, baby clothes. There is no right or wrong answer here. However, Marc Lesnick, conference organizer for the Casino Affiliate Convention, argues that throughout history, the people who took the biggest risks got the biggest rewards.

“It’s like the 1920s when you had prohibition,” he said. “The people who took the risk, the rum-runners, got rich. The affiliates are, if you want to say it, breaking the law by enabling gambling. But nevertheless, they’re getting some hefty rewards for it.”

TOM MURPHY is editor in chief of Revenue

Hot Profits

The marketing of adult entertainment is a lot like any other segment of the affiliate industry, except that it is nothing like any other. The business model and best practices are the same, with skills that easily translate to this sector. But the content makes this a world apart. X-rated sites commercialize one of the deepest human drives, one that’s idealized, demonized, desired and feared.

Sexual expression is one of the most contentious cultural issues. And pornography has been condemned in Western culture for most of recorded human history. Those who create, distribute and market it are well aware that they’re working on the fringe.

Why do they do it? Fun and money. To some people, it’s an exciting industry, enjoyed by millions of hard-working, productive and otherwise average adults who choose to view adult entertainment legally and safely from the privacy of their homes. It can be lucrative, too. According to “Online Adult Entertainment Report 2003,” a research report published by Reuters Business Insight, only 1.5 percent of Web sites contain adult-oriented content, but those sites reaped 66 percent of all online content revenues in 2001. The entire adult entertainment industry is estimated to be worth at least $2.5 billion, and perhaps four times that. Getting in on that while working with exciting content seems like a dream come true to some of us.

Different Strokes

Let’s start with how the X-rated sector of the affiliate marketing industry is different. Like it or not, most of the obvious differences are negatives.

First off, adult-oriented affiliates work with material that’s deemed offensive by many of their peers, as well as the general public, so they may find themselves stigmatized. Next, that same material tars them with the brush of the most egregious form of spam. Finally, they’re subject to more regulations than mainstream affiliates, so they’re also more likely to have legal troubles, even if they try to obey the law. The public face of the adult entertainment industry – the bionic babes and overbuilt guys – is quite different from the reality for those who toil behind the scenes. You couldn’t pick adult affiliates out of the crowd at a computer trade show. But the negative stereotype of the pornographer is a powerful cultural image, one that many avoid by trying to stay anonymous.

For example, the head of Booble, a guide to X-rated content that’s also a parody of popular search site Google, has carefully hidden all traces of his identity. He is known only as Bob. Bob says he heads an interactive advertising agency that works with a variety of traditional clients and started the site for fun. While he thinks his advertising clients would laugh at Booble, he isn’t about to bet his agency on it.

“My suspicion is that most of my clients would think it was pretty funny, but I certainly don’t want to test them,” Bob said. “Plus, I have an ex-wife and kids, and I have to respect my private life. That’s why I choose to remain anonymous.” Many affiliates are like Bob, maintaining a firewall that keeps the quotidian world of jobs, family and friends separate from this secret avocation. But they should realize that there’s always the risk of being exposed.

Even other affiliate marketers look down on those in the X-rated line of business. “Most of our clients see the pornographic sites as the scourge of the earth,” said Drew Jackman, business development manager for 10x Marketing, a company that manages pay-per-click campaigns and provides statistics on Web searches – except for the adult industry.

Another issue that every upright affiliate in the business must contend with is X-rated spam. Triple-X spammers have a special place in hell. Their dirty tricks, from innocent-sounding headers to spawning windows that can’t be closed, are a primer on how to give commercial email a bad name. “The tactics that a lot of the porn Web masters use is really unscrupulous. They use search engine spam, they create an inordinate number of popups, they make users frustrated. We try to stay away from them as much as possible,” said Haiko de Poel, CEO and administrator of ABestWeb.com, an affiliate marketing forum. He said that while those who promote the X-rated sites are affiliates, they’re not part of the mainstream – and not of interest to most merchants. In short, he said, “We see them as the scum of the earth.”

Affiliates use tactics to trick users into opening emails because they work. People who might never seek out an X-rated site can be tempted to click on an explicit picture to see more. Unfortunately, this quirk of human nature makes it nearly impossible to stop sneaky spammers. “Particularly in the adult marketplace, you know they’re doing [spam], but no one will own up that they’re doing it,” said Colin Daniels, CEO of Phoenix Group, merchant of a network of X-rated photo galleries. While his company mails a weekly newsletter only to those who have asked to receive it then confirmed the request in a process known as double opt-in, he acknowledged that over-eager affiliates are a big part of the problem. “It seems to be primarily affiliate-based. If you look at codes, buried beneath the HTML, there is affiliate code buried in there.”

While legitimate X-rated merchants like Daniels are as diligent as any others in warning affiliates against spamming, it’s impossible for them to police the thousands of anonymous affiliates that drop in and out of their programs. But spam-happy affiliates run the risk of having their email service shut off or getting blacklisted by ISPs.

Unfortunately, this is the company you’re keeping if you’re an adult entertainment affiliate. You may have a triple-opt-in list, but, unfortunately, in this hot-button segment, the public is a lot less willing to take the time to separate the ethical affiliates from the spammers.

Lawyer Trouble

Booble, the search-for-X site, got itself into legal trouble not for its sizzling content, but for the staid old rap of copyright infringement. Lawyers at search engine Google, a former iconoclastic upstart itself, sent Booble a cease-and-desist letter, claiming Booble is an encroachment on its world-class brand. Did Google pick on Booble because of its content? In their response to Google’s complaint, Booble’s attorneys argued the search company hadn’t objected to other Web sites with similar URLs and graphic design, such as the European search site Elgoog.

There’s a lot more for adult-oriented affiliates to worry about. Those who affiliate with the wrong site can find themselves linked to illegal material or practices, for example, providing X-rated content to minors.

Most X-rated sites use possession of a valid credit card number as the de facto proof of age, said Jake Ludens, spokesperson for affiliate network ARS. Merchants only provide censored content on their premium sites until someone registers – and they need a credit card to do that. “That’s the age verification,” he said. When it comes to members of the ARS network, he admitted that there’s no way to stop all juniors from getting inside the gate. In such cases, he said, the site is responsible. “Age verification is on the affiliate.”

ARS regularly polices its affiliates, checking the sites for illegal material. Because affiliates choose which merchants they want to represent, the attitude of the industry seems to be that it’s up to affiliates to perform equal due diligence on a site before signing up to promote it.

According to Dorn Checkley, director of the Pittsburgh Coalition Against Pornography, studies show that anywhere from 70 to 85 percent of teenagers have been exposed to explicit material on the Web, most of them by accident. Seeing this stuff at an to problems ranging from inappropriate behavior to sexual violence. Unfortunately, Checkley said, the requirement of a credit card to view paid sites does little to keep minors away from content that’s illegal to show them. “Sure, you need a credit card to download or to see more, but you don’t have to pay a dime to see the most explicit stuff out there,” Checkley said.

Sizzling Success

While the challenges for XXX affiliates are many, there are rewards for those who get it right. Here’s where the segment begins to look like the rest of the industry. To succeed, adult-oriented affiliates need to work hard, find a way to rise above the clutter of mediocre sites and provide value to their visitors.

The adult affiliate marketplace has gone through changes in the last few years, according to Phoenix Group’s Daniels. Like the rest of the affiliate industry, it moved from pay-per-click to revenue sharing, typically on a 50/50 basis. The business moved to today’s flat pay-out model, where affiliates receive set payments for referrals that convert to paid memberships. Pay-outs zoomed from $25 or $30 to $50 and up, as merchants competed for affiliates’ referrals. Life was good.

But the big payouts and privileged access to X-rated content flooded the market with low-end affiliate sites. “All the affiliates had little sites with a few pictures and advertisements all over them. There was this huge influx of free [material],” Daniels said. The problem was, merchants want their affiliates to entice visitors just enough so that they’ll click through to the premium site and spend some money there. Too often, he said, after they spend a half hour looking around the affiliate sites, they’ve had enough.

Daniels said that to be successful today, X-rated affiliates should concentrate on building one or two quality sites. “Unless you have some exclusive content, it looks like everything else,” he said. Phoenix Group’s most successful affiliates write reviews and guides. “This is the type of pre-selling that’s almost critical at this point,” he said.

Booble is a prime example of combining useful reviews with unique style. Although it masquerades as a Web search site, in fact, it’s an extremely well-indexed body of original reviews created by a team of volunteers and freelance writers. All the links that show up in searches lead to sites with which Booble is affiliated – about 150 at press time; Bob said that represents about half of all available programs.

Affiliates who show they can produce traffic that converts can often forge special relationships with merchants, Phoenix Group’s Daniels said. They can negotiate for exclusive content to use on their sites, a tactic that further differentiates affiliate sites.

Scratching a Niche

Creating a niche can work as well in the adult industry as in the mainstream world. Sssh.com is a woman-oriented erotica site operated by the Phoenix Group that’s extended the market by catering to the sensibilities of female affiliates. Its program, SpiceCash, uses the same technology as the hard-core merchants, but with a softer front end.

“We made a page specifically for women, so when they sign up they don’t see the hardcore or stronger Web sites. So women feel okay about it,” said editor Angie Dapery. Because of this, Sssh.com gets a different sort of traffic, devoted not only to erotic writing and artsy photography but also things like astrology or psychics.

Many affiliates operate a mix of explicit and mainstream sites. ARS widened its purview from erotica in order to accommodate its multitasking affiliates. Founded in 1996 as the Adult Revenue Service, its acronym now stands for Affiliate Revenue Service. Last year, it relaunched its private network as a full-fledged affiliate network, and began seeking mainstream marketers and retailers to take advantage of its network of some 5,000 affiliates generating a reported 70 million unique visits a month. “We’ve noticed that a lot of our merchants had to turn to other affiliate networks in order to promote mainstream products,” said ARS vice president of customer relations and marketing John Valigorsky. “We figured, why make them go anywhere else? Let’s incorporate the companies that they’re also promoting in their mainstream sites [into our network].”

Just as in the wider world of affiliate marketing, there are a glamorous few affiliates promoting adult entertainment who have hit it big, flashing the cars, the clothes and the rings. Most are hard-working aficionados who haven’t quit their day jobs.

Said Booble’s Bob, “We’d like this little adventure to pay for itself. If we weren’t having to pay lawyers, we might make a little bit. But not enough to pay for a whole other employee.” But hey, it’s not all about the money. XXX affiliates get the thrill of being insiders in an industry that still pushes all kinds of buttons.

SUSAN KUCHINSKAS has covered online marketing and e-commercesince their beginnings for Revenue, Business 2.0, and othermedia. She also has published erotic fiction.

Win Or Lose

In a lot of ways, Cynthia Fanshaw is just another star in the affiliate marketing universe. With a specialty in search engine marketing, she works hard to drive traffic to her company’s site and then to convert visitors to customers. She’s anxious to learn new tricks that give her an edge over competitors, and glad to share a few tips with newbies.

But there’s one thing that sets her apart from most of her colleagues. Fanshaw promotes adult entertainment, a completely legal yet unmistakably controversial product that has simultaneously emerged as one of the most popular and most vilified areas on the Web. And she makes no apologies.

“My friends and family don’t mind,” Fanshaw said. “They just don’t want me to be involved in being in the content, which I really have no desire to be. I’m actually doing pretty well for myself, and as long as I’m happy, they’re happy.”

Along with online gambling and prescription drugs, adult entertainment is a subject that is sure to spark furious debate whenever it is discussed among lawmakers, affiliate marketers, prosecutors or parents. Each category, in its own way, offers benefits to the consumers who support it. And each draws bitter ire from its detractors.

What can’t be debated is the soaring popularity of the three industries. Nielsen//NetRatings showed 115.6 million Americans visited adult, gambling or drug sites during January – nearly double the number that watched the Super Bowl. They’re also ubiquitous, thought not always in a good way. Worldwide, more than 13 billion spam email messages are sent each day, comprising about half of all email traffic. According to London-based email security company Clearswift, two-thirds of that spam pitches drugs, adult entertainment or gambling.

The rewards for affiliates are generous. Revenue spoke with numerous program managers who said they often pay monthly commissions well into the tens of thousands of dollars in each category.

“As an affiliate myself, I can tell you my motivation for joining such programs is money,” said Graeme Eastman, owner of Australia’s AffiliateGuide.com, a network that promotes gaming and adult entertainment affiliate programs along with more mundane pursuits such as autos and computers. “There is really no other reason to join an affiliate program.”

Or is there? Many of the affiliates we interviewed spoke of the thrill of working in areas considered by some to be on the fringe of polite society. And many pharmaceutical vendors earnestly discussed the need to provide low-cost drugs in the American market, the only major Western power that doesn’t cap the cost of medications. In all three cases, it was clear that something in addition to money was motivating affiliates.

Yet shifting laws and long-standing taboos have left these industries in a social twilight zone where most affiliates are afraid to publicly acknowledge how they make their living. Revenue contacted dozens of affiliates in these areas, and most declined to be interviewed, citing fear of harassment by authorities or simply fear of what their neighbors might say. Although we observed virtually no evidence of criminality, we found a nearly universal desire among these affiliates to operate in obscurity.

It isn’t hard to understand why. Each area carries a special burden for those in the trade:

Gambling: Affiliates promote offshore companies that cannot legally operate in the US, at least not yet. Affiliates are stuck in a legal gray area somewhere between free speech and abetting a crime, and nobody – not even federal prosecutors – could say exactly where the line is.

Drugs: While most online drug stores operate with high ethical standards, the unrelenting river of spam pushing narcotics and male potency pills taints the public’s perception. Plus, some offshore pharmacies have been caught shipping drugs that fall short of US standards.

Adult Entertainment: Tens of millions of Americans view it, but few will admit they do. And the all-too-frequent nightmare of child pornography leaves the industry with an ugly scar that darkens against a backdrop of X-rated spam. Controversial maybe. But affiliates have the US Constitution on their side. “Commercial speech, such as advertising, is entitled to First Amendment protections under well-established constitutional law,” said Larry Walters, an attorney for the Internet Freedom Association who represents clients in the adult entertainment and gambling industries.

Still, problems like these have caused some mainstream companies to shy away. Such large affiliate networks as ValueClick’s Commission Junction won’t carry adult or gaming programs, partly because credit card charge-backs are more common in these industries. Insiders say the rate is higher because customers are caught by spouses or parents when credit card statements show up. Rather than owning up, cardholders tell the credit card company that someone else was responsible. “With CJ, you can see why they stay away from online gaming sites,” said Allan Schneider, former director of the Interactive Gaming Association. “You don’t have disputes with the other industries. [In other industries,] if a guy bought $10,000 in products, I get my commission.”

Even payment processor PayPal backed out of servicing adult transactions in May 2003 and gambling transactions in October 2002. “It’s still unclear how online gambling is going to be regulated, and based on that we felt that we had a legal risk,” said Amanda Pires, spokesperson for PayPal. “We saw higher rates of charge-backs in the adult businesses specifically – and that means a higher operational cost (for us). With adult sites there was a risk and it was just best to exit the business.”

Even Yahoo, which launched a gay and lesbian portal in April 2003 and runs its own dating site, won’t allow adult sites to use its hosting service. “We’re so brand-conscious that we can’t be on a site that contains adult content,” said Michael Brucker, affiliate marketing manager for Yahoo. To be sure, Yahoo flirted with adding adult content in mid-2001, but email campaigns and threats of boycotts persuaded the company to back away from the adult entertainment industry.

Trash or Treasure?

But one man’s trash is another man’s treasure, and some companies have rushed to fill the void. Take dating service FriendFinder.com. Soon after its 1996 launch, “we found people were pushing the envelope (with risque content and photos) on the site,” said CEO and founder Andrew Conru. “Rather than pushing away the industry, we decided to embrace them. We rolled out AdultFriendfinder as a kind of relief valve for the more erotic content.”

Now AdultFriendFinder has more than 8 million members, making it the Internet’s largest adult personal site. While other personal sites downplay their adult content, FriendFinder promotes it just like it does BigChurch.com. “We’re one of the few companies that looked at their marketing and said we’re going to make this a legitimate offering rather than the stereotype of the dark and seedy underworld,” Conru said.

Many niche and mainstream affiliate networks also list adult entertainment, gambling and prescription drug affiliate programs. “As a major directory owner, I thought it was important to list programs from as wide a range of categories as possible,” said Eastman, the owner of AffiliateGuide.com.

From here, the similarities among adult, drug and gambling sites end. Each has its own standards, demographics, pluses and minuses that are explained in detail in the other stories in this issue of Revenue. Here’s a sneak preview of what every affiliate should know.

Gambling

“The Internet is a very good learning environment,” said Schneider, who is now business development director of the affiliate marketing firm RUOnTheNet.com. “Most people won’t go to a gambling table, because of the fears they have. Here you can go online, bet $50, and not be embarrassed or humiliated at the tables.” A study released by Peak Entertainment in 2003 showed online gamblers are 38 percent female and 62 percent male. They’re most likely between 30 to 59 years old and well-educated, with degrees ranging from bachelor’s to doctorate’s. They’re heads of household and solidly middle class, with household incomes around $60,000 per year. Men are more likely to play blackjack; women are more likely to play slots.

Since the US Communications Act of 1934 doesn’t allow broadcast of gambling activities, and the Internet arguably falls in this category, foreign sites have stepped up to fill the huge US demand. There are now two types of merchants: 1) corporations – such as Canada’s Criptologic.com, which was one of the first out of the gate – working within the regulatory systems for their respective countries, and 2) offshore companies, largely unregulated.

“Internet users assume it’s legal if they find it on the Net,” said Schneider. This leaves affiliates open to the possibility that they are “aiding and abetting” the entry of illegal content into US home computers. Odds are the charge would be overshadowed by free speech protections, but that’s a bet many affiliates won’t take because of the widespread uncertainty over what’s legal and what’s not.

In any case, “it’s a good cash-grab for the publishers [affiliates], because these people have a boatload of money,” said Schneider, who still pulls down commissions from his past efforts as a gaming affiliate. To best grab that money, affiliates we interviewed suggested signing up with programs that pay a percentage of client deposits (typically 25 to 50 percent of the money gamblers put up to potentially lose) rather than a pay-per-account structure (a straight fee per sign-up, typically $50 to $150) or a proportion of client losses.

“You’re playing a numbers game,” said Schneider, who still pulls in commissions from his past efforts as a gaming affiliate. “You may as well just play like a casino, and go for the jackpot.”

Even land-based casinos are feeling the online hit. “Six of the last seven years we’ve seen declining sport pool/wagering, and that coincided with Internet sports wagering,” said Frank Streshley, a senior analyst with the Nevada State Gaming Control Board. Meanwhile, “in the last four months, poker revenue has spiked up 35 percent. From talking to properties, they’ve felt what has increased the play is Internet poker sites. (Gamblers are) playing on the Internet, watching TV and coming in to play it in person.”

With this growing demand, affiliates are scrambling to address online gambling’s hot buttons. First, the US doesn’t yet allow US-based sites so affiliates do assume a bit of risk from the “aiding and abetting” angle. However, few if any prosecutions have been initiated against affiliates involved only with promoting online gambling operations; the Justice Department declined to comment on that question.

Second, there is the fear of fueling addictions. The Wall Street Journal recently told the story of Kansas City Mayor Betty Burch who supported bringing a riverboat casino to town only to have her sister lose her home to gambling debt.

Third is the issue of non-payment. “I have dealt with some of the larger (off-shore) programs out there and still I had to fight tooth and nail in order to get paid,” Schneider said. “You have no recourse if you get burned.”

Prescription Drugs

Because there are no price caps on prescription drugs in the US, there is a surging demand for drugs shipped from other countries. A September 2003 Harris Interactive poll found 7 percent of its US respondents already purchase drugs from other countries, and 48 percent said they’ll do it down the road.

Who’s buying? Twelve percent of online households now buy some prescriptions on the Internet, reports Forrester Research. They’re older, more affluent and almost 50 percent more likely to be retired than offline-only purchasers. A Families USA study found that prices for the 50 medications most used by seniors are rising at three times the inflation rate. That’s why 44 percent of Medicare members who buy prescriptions buy some online.

Meanwhile, drugstore affiliates are making substantial incomes, often more than $2,000 per month. “Those are the private entrepreneurs in the United States; they’re all American,” said David Mackay, executive director of the Canadian International Pharmacy Association.

While the spammers get most of the attention, most of the online drug market is mundane in nature. Even WheatenRescue.org, a Houston-based dog rescue group, used an affiliate link to Drugstore.com to help finance its efforts. The money didn’t pour in, but “we got a little bit from it,” said Director Gwen Arthur.

The American Medical Association classifies online questionnaires as generally substandard medical care, and the US Food and Drug Administration agrees. That’s why some online pharmacies are now requiring visits to local doctors. Still, a PharmacyChecker.com evaluation found 33 percent of online pharmacies don’t require an original prescription. The report also noted that half of foreign online pharmacies don’t have a verified license to dispense drugs.

Counterfeit drugs will continue as long as copycats can be made. A recent investigation by Dallas TV station WFAA found these copycat drugs, sold under the brand name of the drug they mimic, were 78.6 percent and 92 percent less potent.

Online pharmacies must follow the regulations of and be licensed in their country of origin. Search engines such as Google, Overture, Yahoo and Microsoft’s MSN have recently started policing the market themselves, screening for and dropping advertising from unlicensed pharmacies. Still, half of foreign online pharmacies don’t have a verified pharmacy license to dispense drugs, reports PharmacyChecker.com.

“States are looking at taking action against the search engines and sites that allow (illegal) operations, but there are no guidelines for affiliates that advertise them,” said Carmen Catizone, executive director of the National Association of Boards of Pharmacy. “And I don’t see any legislation coming down the pike to regulate that advertising.”

Drugstore affiliates should pick their partners carefully. Check the drugstore’s home page for licensing information (usually at the bottom). Work with sites that have previous-prescription policies. Work only with sites headquartered in developed nations with strict drug regulations. To be sure, there’s still the risk of partnering with a fly-by-night operation more interested in profits than in providing safe or real products.

Adult Entertainment

Seventy million people worldwide visit at least one adult Web site each week. In the US alone, 36.3 million checked out adult sites in January 2004, reports Nielsen//NetRatings. As many as 10 million plunked down $20 to $40 for monthly subscriptions. Most are men, but there’s a growing number of women. For this new generation, adult content is no longer looked at as risque; it’s looked at as a choice. “Frankly, the youth of America is laughing at us old fuddy duddies,” Walters said. “I talk to some of these young Webmasters who aren’t shy about their bodies, their sexuality or fetishes. This new generation is driving a sexual revolution, to be sure.”

Still, a societal bias persists. “Oftentimes journalists will have a headline that says, ‘Pornographer Gets Busted.’ But they neglected to say in the headline that it was a child pornographer, someone who was doing something illegal,” said Jay Kopita, vice president of YNotMasters.com. “There are plenty of people that are doing it legally, but they lump us all together. We’re up against a distorted public impression.”

Flying Crocodile, a hosting firm, estimates 9,000 US affiliates already participating in this space. Matt Mickelson, affiliate manager for XXXPressToys.com, AdultToyChest.com and NaughtyCards.com, breaks those into two categories: “One is affiliates with some kind of large membership, whether from a dating site, a gaming site or a porn site, and we’re a component within that membership section,” he said. “The other is the average guy who’s been in the search engine trenches for the past five, six, seven years, (who) has optimized html pages to feed the search engines, and is going after keywords and basically directing, or shuffling, traffic.”

There is some money to be made in this industry, but most affiliates won’t get rich. “The majority of the people in this industry in the US make $15,000 or $20,000 per year,” said Kopita, who polled adult Webmasters on the subject in 2002. “More than half the people who are involved in the adult Internet in one way, shape or form need to have another job to make a livable income outside of it. On the same token, I know several people in this industry who are more than likely self-made millionaires, and they’re still in their 20s.”

This industry also has its challenges. First, it’s become so large that existing sites dominate search engines and online marketing, leaving little room for affiliates to squeeze in. “Going back six, seven years, you were able to make money as an affiliate in the adult sites,” said Schneider. “However, they’ve reached such a saturation point where you can’t make anything unless you’re in the top one or two tiers.”

Then there’s an uncertain legal climate. Even though the industry has a certain amount of free speech protection, it’s still beefing up its defenses. That means warning labels, age verification, and records that affirm that the model is 18 or older for all photos on the site. Even banners downloaded from an affiliate program are subject to age verification laws. Since affiliates must get the records from their merchants, it’s imperative to work with sites that have them all.

The adult industry does offer a fast track to technical skill. It was the first to launch widespread affiliate programs, and has remained on the cutting edge for streaming video, pay-per-view content, coercive click conversions and community publishing. “There are still new innovations coming out all the time,” said Kopita, who also heads the CyberNet Expo, a San Diego-based adult Webmaster convention. “Something that takes a week or two in the rest of the world, takes a day here.”

The secret to success in this industry still lies in the most fundamental small business tool: a good business plan.

More than Money

In the end, it may be the potential risks as much as the money in these industries that make them so desirable for some affiliates. “They’re willing to take the risk that some public company is not willing to take,” Walters said. “The reason that people can be successful, and that the small guy can make big bucks, is because these industries are tumultuous.”

JENNIFER MEACHAM, managing editor of Revenue, has been writing about business and technology for more than a decade. She was named the Region X Journalist of the Year by the US Small Business Administration in 2002.

Less Is More

Ask any guru in the affiliate universe what ValueClick’s acquisition of Commission Junction means, and you’ll get more answers (and more pitches) than you can imagine.

Is it consolidation? “Yes and maybe.” Does it matter? “Perhaps, but let me tell you why it won’t matter to my business.” Is it changing the nature of the affiliate industry? “No, but it reflects the changes.”

It’s all true. And here’s why. This merger is part of an evolution in affiliate programs, from the Fortune 1000-level represented by this deal to the small-business end. The reason behind the merger is simple. There are not only too many cooks, there are too many kitchens. The merger put two cooks – CJ and ValueClick’s BeFree – in the same kitchen under the CJ brand.

When More Was Good

In 1998, the first affiliate marketing conference, Beyond the Banner, featured teenage shadow-boxing between well-financed BeFree, LinkShare and upstart CJ. It was an industry founded in families and friends, from the brothers Sam and Tom Gerace at BeFree, to the LinkShare brother-sister team of Steve and Heidi Messer, to the sudden appearance of Lex Sisney, Per Pettersen and Todd Crawford bonding around an idea called Commission Junction.

In the those days, it was all about more. More affiliates. More free traffic. More sales at little cost. The promise was a good pitch, but the results didn’t match the promise for many Fortune 1000s, although many small businesses find it a cost-effective channel even today.

Those early days and definitions are still what many people equate with affiliate programs. But now instead of families, we see ValueClick acquiring companies. The opportunity for traditional affiliate companies to thrive is still in place. But it’s less of a cottage industry and more in the mainstream of performance marketing.

Now Less Is More

The affiliate industry is splitting in two. Fortune 1000 companies want to work with fewer vendors and build more integrated services, calling it performance marketing. For the rest of us, it’s about small business.

“As you look at the makeup of the client bases of CJ and BeFree, there are some distinct differences,” said Jeff Pullen, general manager of the new CJ unit. “BeFree focused on high-end retail merchants and has continued to be very strong in that market area. CJ has a fair number of clients, very strong in financial services, Web services, ISP market, and very strong in retails as well. If you look at the cross-section of our client base today, it is very comprehensive, which goes to the basic strategy of ValueClick: deliver full service digital marketing solutions.”

Executing that strategy requires an understanding of how affiliate marketing is maturing into performance marketing. “Over time you’ll continue to see services and technology to facilitate that growth and maturation,” Pullen said.

John Ardis, ValueClick’s vice president for corporate strategy, said the lines are blurring between search and affiliate and between media and affiliate marketing. “We tend to think of four main marketing channels: Web, email, search and affiliates,” he said. “These are not distinct channels. Seasoned Fortune 1000s are looking for a solution to simplify their lives, a one-stop place for performance marketing initiatives.”

The First Signs of Change

The affiliate industry is divided between the Fortune 1000 approach and that of small business. The top echelon includes:

  • Commission Junction – Value Click’s beefed-up 800-pound-performance marketing gorilla, with five times the revenue of the competition;
  • LinkShare’s continuing focus on just affiliate programs; and
  • Performics’ agency-performance marketing mix of search engines and agency services, with an emphasis on affiliate programs.

“The CJ/BeFree merger is a long-overdue move toward consolidation driven primarily by two things: elementary, profit-driven economic factors and the need for the affiliate marketing industry to expand beyond its limitations,” said Jeff Molander, president of the marketing firm Molander & Associates. “Simply stated, the market is only so big … featuring a finite number of marketers [and] advertisers, and can support a limited number of service providers.”

Molander believes affiliate marketing was “merely a stepping stone” for Value- Click along the path to becoming a Web-focused marketing and advertising services vendor to large agencies and small retailers. And, like most changes in an industry, the first post-merger steps for ValueClick have been small. Pullen was appointed general manager of the two groups. BFast Express was closed in favor of CJ’s platform for smaller players. Accounting, sales and administrative functions are being brought within ValueClick. Technology integration remains a much more complicated challenge that will take some time, perhaps years, to resolve.

Merchants seem to favor the merger, as long as the technology change is taken slowly, which is ValueClick’s approach. David Morse, affiliate manager for Network Solutions and a long-time client of BeFree, sees it as raising the bar for all vendors. “Being able to combine two of the strongest affiliate tracking programs has obvious synergies that will provide merchants access to a larger population of affiliates and provides affiliates with more diverse product sets to sell,” he said.

When the smoke clears in a few years, there will likely be a single affiliate entity in ValueClick dominating the high end of the affiliate industry, powered by a stable financial backing and a well-rounded set of performance marketing services for clients of all sizes.

“CJ and BeFree can put out a package in the mid-tier and high-end of the market in the short term,” said Steve Messer, CEO of LinkShare. “It’s a good thing for them, but two separate entities is not a long-term viable entity, which is their challenge.” Messer said he doesn’t consider the combined company a threat. “We never really competed against CJ anyway, they are more mid-market than we were,” he said.

The Small Business Market

The opportunity for the small business networks – the cottage affiliate industry, the ones who can still identify with those sub-Fortune 1000s – is immense. The smaller players may gain more clients as the bigger players associate with bigger companies and small businesses choose the contact and familiarity companies like Kowabunga, ShareASale and DirectTrack can offer.

Of course, if those smaller players find success, they could become attractive merger targets for a bigger network seeking to emulate ValueClick’s approach. And so consolidation could happen in this space, too. After all, the smaller affiliate networks can’t be sustained forever by the small business market.

While small retailers may not generate the sales a LinkShare or ValueClick needs, they do generate a steady revenue for these smaller networks, with monthly fees that resemble the sales of a software vendor. Added up, it creates a healthy business for this group.

Even so, mergers of these smaller networks are somewhat less likely. For one thing, they don’t have enough revenue to attract bigger partners. For another, they don’t have enough cash to attract the owner of a smaller one. While the revenue may not be as scaleable as it is for the bigger players, it does provide a solid business that will continue to thrive.

But does the industry really need so many similar companies? Keith Kochberg of iMarketing believes the smaller networks are so dependent on email that they should already be closely examining their potential for the future.

“In time, publishers will have a major impact on which of these networks are worth keeping,” he said. “The networks that remain should carve out niches and focus on servicing their advertisers and publishers. I bet they could have a nice profitable run that way, but should not think of going public.”

DirectTrack CEO Jason Wolfe also sees potential for the “personal, smaller scale” players. “I don’t see a massive swap meet, or network, where one party controls it in the offline world for resellers. Why would it work in the online world? It won’t long term,” he said.

Wolfe believes there is potential for what he called a “small-scale with a vertical approach,” something that is the core strength of affiliate markets. Yet the verticals are not so much in specific categories, as in sizes of business. The needs of Fortune 1000s are very different, and more complex, than the needs of most small businesses.

The Affiliates

Merger, schmerger. So what does it all mean to the affiliates? Will there be a major effect?

“For the majority of affiliates, this will be the end,” predicted Kowabunga CEO Todd Farmer. “They’ll realize that when they join a network and start promoting merchants, they are actually ‘trying out.’ They can stay where they are on the JV team, and can only move up to the varsity team when they’ve proven that they can play the game.”

However, most of the industry feels the impact on affiliates will be minimal. For the most part, the biggest impact will be that they’ll have to change the links on their sites. Affiliates are an adaptable bunch, but there will be a continuing separation between the needs of super affiliates – those players like eBates that generate high-volume sales – and the small affiliates.

To be sure, affiliates for the Fortune 1000 will be subject to more rules and more scrutiny, but this hardly means the end of small affiliates or networks. In fact Farmer’s company, Kowabunga, is often mentioned as a possible acquisition target precisely because of its cozy relationship with the smaller companies. If a high-end company acquired it and added a strong technology solution, the combined company would be able to serve several levels of affiliate marketing. But is that enough? And do the bigger players really need the small business end of the market, which thrives more on monthly fees than overall sales?

It seems the affiliate industry has separated into two separate worlds – that of big business and small business. Both are strong markets, but it is rare for a company to play both ends of the game, which is the challenge for ValueClick.

Is LinkShare smarter just focusing on affiliate programs, while BeFree/CJ and Performics become agencies with an affiliate emphasis? Only time will tell.

After the Merger

Are the old ways of affiliate marketing gone? Yes and no. For the Fortune 1000, the appeal of affiliate programs has always been too small. But with this merger, there is now an entity with the revenue, financial stability, public exposure, technical savvy and integrated opportunities to truly be called performance marketing.

Yet that very growth may intimidate the smaller market which will flock to the more friendly, cost-effective solutions. The roots of the affiliate industry are in that group. While they may not go public, and there will be fewer of them soon, the smaller players who survive will find it a bright future.

Like the early pioneers of affiliate programs, these smaller companies are more like families than agency monoliths. Being small can be as good as being large, depending on your goals. For ValueClick, LinkShare and Performics, the goals are loftier.

But for Kowabunga, ShareASale and DirectTrack (plus the absolute multitude of other smaller companies in the battle), the goal is just revenue and generating a good business. While there are other players in this industry, there will be fewer in the small business end and the high end.

This merger is the first sign of a long overdue consolidation, one that can only lead to a more effective affiliate industry powered by tradition and evolving to meet the demands of the biggest companies, and the smallest.

DECLAN DUNN was one of the earliest Internet marketers and is the author of two e-books, Winning the Affiliate Game, and The Complete Insider’s Guide to Associate & Affiliate Programs. He is CEO of DemandLab.com, a training program focused on Internet marketing.