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.

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.

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

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.

Been There Done That: Q & A with Shawn Collins

It’s very difficult to find anyone in affiliate marketing better known than Shawn Collins, who earned his first commissions more than seven years ago.

Wearing his newest hat, as president/CEO of Shawn Collins Consulting, he provides outsourced affiliate program management. But he is, perhaps, better known as a co-founder of Affiliate Summit, as the author of the top-selling book Successful Affiliate Marketing for Merchants and for launching the highly successful affiliate program for ClubMom, a membership shopping site.

As a result of his numerous roles, Collins has not only become ubiquitous, but has helped to shape the industry through its childhood. He’s emerged as an expert for spotting new trends. Indeed, Revenue Editor-in-Chief Tom Murphy discovered some surprises when he interviewed Collins about where affiliate marketing is headed.

TOM MURPHY: You’re very well known in the industry as a superaffiliate, a guru, an association leader, a leader of an industry summit and, most recently, as a program consultant. How do you really define yourself these days?

SHAWN COLLINS: I guess I’ve been on every angle of the industry, working as an affiliate and affiliate manager. I worked with First Directory Preferred years ago. I guess, overall, I’d probably characterize myself as a cheerleader of the industry as well as a shepherd trying to push it in a direction that I think will be helpful for the industry.

TM: Do you think there’s a chance of spreading yourself too thin?

SC: I don’t think so, but my wife thinks I spread myself too thin a long time ago.

TM: You recently published your AffStat survey, which had some very interesting statistics in it. I’d recommend it to anyone who wants to know what’s going on in affiliate marketing. I had heard, for example, from a number of sources, that only about 5 percent of affiliates make any real money and only about 2 percent fall into the superaffiliate category. But your AffStat report shows 20 percent of affiliates making more than $2,000 a month. Do you think that’s an accurate figure?

SC: Yes. I had a pretty good cross-section here who were participating in the survey, from the very small mom-and-pops to some of the really big players. And I know who contributed the answers, so I think it’s a very accurate depiction.

One of the things that skews the numbers when they talk about 5 percent or 2 percent is that, in the past, there was a very big emphasis on quantity over quality of affiliates. And people are very proud to claim they had 75,000 or 100,000 affiliates. But naturally, you’re not going to have 15 percent of those being too powerful. These days, you see a lot more of a boutique approach to it, where people have 1,000 or 5,000 affiliates, so it’s much more realistic to have a good 20 percent or more be superaffiliates.

TM: I’d like to hear your thoughts on a few of the issues facing affiliates, including PPC, predatory advertising, Froogle and things like that. But, first, do you think these things taken together are really just symptoms of an evolving industry?

SC: Yeah, I really think they’re inevitable. It’s a more sophisticated industry than it was back in the ’90s. I think they’re good things. They’re hurting some of the smaller affiliates, but they’re making things easier for the affiliate managers because they’re shrinking the number of affiliates they have to deal with.

TM: It sounds almost like a natural, evolutionary process where there’s a survival of the fittest. Do you think that’s what is taking place?

SC: Absolutely. Back in 2000, and earlier than that, you really didn’t see any superaffiliates out there. You had SchoolPop and some others, but there’s been a big emergence of these sites over the past couple of years – various sites that have a tremendous amount of traffic, with membership sites and things. They’ve really taken a big bite out of the industry. They account for a big portion of the activity that goes on.

TM: Predatory advertising seems to be perceived as public enemy No. 1 in the community. Do you see that as a problem that’s getting better or worse going forward?

SC: I think it’s been limited to a degree over the last year or so, but it’s still a very relevant issue and I think it will be around for a while. Certainly, some of the affiliate managers have taken a cue from the networks. I think the affiliate managers have to be more proactive in their approach to stopping it instead of just sort of waiting for something to happen.

It is sort of a double-edged sword because a lot of the affiliate managers on a moralistic level would like to get rid of predatory advertisers. But when they have pressure from their bosses on the bottom line, they end up having to take those (predatory) affiliates because they’re seeing higher numbers with them. It puts them between a rock and a hard place. They want to do the right thing, but they want to keep their job[s].

TM: There’s a similar thing with spam. Nobody likes it. It hurts the image of the community. It hurts the consumers. And, arguably, it hurts the merchants and manufacturers, who spend a lot of time building up brand names. Do you think that’s also a double-edged sword for the merchants?

SC: With the parasites, there are some good adware products. But I think with spam, there’s never a good spammer. I think that has really hurt the industry tremendously because it’s resulted in the CAN-SPAM Act and that changed the face of affiliate marketing in one fell swoop this year.

TM: You wrote about the CAN-SPAM Act recently in a brief and in your blog. Could you reiterate your key points?

SC: Basically, a lot of the CAN-SPAM [requirements] are logical things, like you have to have an unsubscribe option and take care of things that any permission mailer always takes care of. But one of the things that makes it very difficult for affiliate marketing is the need to have a suppression list. If I’m an affiliate and I usually feature four different merchants in my newsletters, I’m now going to have to crush my entire subscriber list against their list of unsubscribes who never want to hear from them again. That makes it awfully challenging, not only to get that technology and make it work, but it throws some hurdles in front of affiliates who run email promotions.

TM: Some affiliates are feeling deeply threatened by Froogle, Google’s spider-driven shopping service. What kind of impact do you see from that in the affiliate area?

SC: Just from the power of Google, I think it’s certainly going to have a greater and greater impact on the smaller affiliates. A lot of the merchants like it because it gives them more exposure, the same as Shopping.com or Yahoo’s comparison-shopping engine. I think it’s a very positive thing in terms of affiliate programs getting more exposure and more penetration, but it’s definitely one of the things leading to a smaller world of affiliates out there.

TM: From what you said, it sounds like the number of people making some real money is on the rise, but the overall number of affiliates is declining. Is that right?

SC: Yes. Through a sort of natural selection, I guess. Since people used to take all comers, you’d get tons of sites from Geocities, and the free sites on AOL, and different free hosting services. So a lot of affiliates would be made up of free services where they never even bothered to put a link up. I wouldn’t even characterize them as affiliates because they didn’t know how to put a link up.

TM: I saw you referred to a lot of affiliates as “dead affiliates” in your report, people who haven’t provided a click in the last month or so. What sort of proportion do you think that is of the total number of affiliates out there?

SC: For the larger programs that haven’t done any sort of maintenance to clean out people who’ve been inactive for a while, they probably fall into that 95-5 rule (where only 5 percent of affiliates are making money). But (for) people who’ve tried to communicate often with the inactive affiliates, and sweep them out if they haven’t been active, it’s a much different percentage. But I think 80 percent of the programs probably have the 95-5 rule going on.

TM: That’s a pretty high proportion. And it’s contrary to a lot of other things we’re seeing going on with big business today. Most businesses in the last two years or so since the recession have been trying hard to maximize their efficiencies. And it seems like the affiliate program may be one of those areas that’s been overlooked. At the same time, I see affiliate programs contributing a bigger proportion of top-line growth to corporations these days. What’s your advice to corporations in general?

SC: It makes all the sense in the world to shrink the number of affiliates to just those affiliates who are going to be performing and who show some promise. But affiliates who have emails that bounce back and haven’t shown an impression in six months, I don’t think it’s worth carrying them on the affiliate roles. One of the reasons you see this perpetuating is that it’s all performance-driven. So even though they may be taking up some bandwidth, they’re really not costing anything for the companies that are keeping them on. But it makes more sense to me to shrink the size of the affiliate program so you know who’s promoting you and how they’re doing it, and you have a relationship with them.

TM: How do you think pay per click is changing the world for affiliates?

SC: In the last couple of years, there were a whole lot of affiliates basically using PPC – not even having their own Web sites. It was quite a successful tactic. I did it myself for quite a while, just driving activity right to the merchant. But in the last six months, a lot of merchants have been clamping down and adding a lot of restrictions because they found they’ve been bidding against their own affiliates and paying more than they have to. They’ve been concerned that a lot of searches normally would have ended at their site anyway. When an affiliate buys the keywords for a trademarked name, it’s a waste of money for the merchants because it would have been organic traffic for them.

TM: Do you think that’s an issue that will go away on its own because merchants will put a stop to it?

SC: I think what a lot of them are doing is damming the ability to bid on trademark names. Then they’re selecting certain generic keywords and saying, if you want to be in our program you can only bid a certain amount for these terms. And if you don’t like it, you just can’t do any pay-per-click promotions with us. Eventually, it will just sort of fade out and the affiliates will still do it successfully because there are a ton of words you can use without having to infringe on their trademarks. So I think that will be a strong channel for affiliates for a long time to come.

TM: Another interesting statistic in the AffStat report – I’m combining a couple of categories here – says 40 percent of affiliates have negotiated higher payments from programs. Does that fit with your anecdotal experience? And does that present a headache for affiliate managers?

SC: I was actually surprised by that figure myself. I’ve found, in personal experience, even for some smaller sites of mine, if I approach affiliate managers and tell them what I think I can do for them, a lot of them are willing to negotiate and make a special deal for you. So I think it’s really possible for just about any affiliate to do that. A lot of them never ask because they don’t realize it’s a possibility. But I don’t think the average affiliate manager would mind being asked, because then they know it’s an engaged affiliate and they can get more activity out of them.

TM: As a consultant, would you recommend to affiliate managers that they keep the door open to negotiations with affiliates? Or is there a time constraint that may limit their activities and put a lot of pressure on them?

SC: It’s something you’d have to model for. You just can’t put out projections for a year expecting to pay the rate you advertise on your site – say, a 7 percent commission. If you do that, you’re going to end up blowing out your budget. Because if you say you’re going to pay a 7 percent commission for everybody and you give 10 percent to superaffiliates, you might spend twice as much as you expected on commissions. If you don’t model for that, you’re going to be in trouble.

TM: How do you see the future for networks versus in-house programs? Do you see a bigger share for networks, or a bigger share for in-house programs?

SC: The networks still have the bulk of the activity in the space. When I did the AffStat report at the end of 2002, I think the networks had about 80 percent of the market share. But I think we’ll see an expanding role for in-house programs such as My Affiliate Program and DirectTrak. They’re getting more and more of the network programs to switch over, and they’re very aggressively recruiting new clients. I think in the next couple of years, we’ll see more prevalence of that kind of program.

TM: What do you think that means to the affiliates out there?

SC: It makes things a little more challenging to them in some ways if they have to go to a lot of different places to log onto their stats. But, otherwise, it’s a good thing for affiliates because it’s a little cheaper to run in-house programs so, theoretically, the affiliate programs can pay more to the affiliates in commission.

TM: The merger between Commission Junction and ValueClick is now a done deal. Nobody is sure what will happen to CJ in the future. What do you think is the future for big networks? And do you think this merger and other trends in networking open more opportunities for niche networks?

SC: It’s exciting to see this happen. It sort of validates the way the industry is moving, that it definitely has a future. It’s sort of surprising to some people that it took this long for there to be some consolidation because there have been rumors about various companies getting together for years and years. But it definitely sets the stage for some niche players out there who can take care of certain types of clients, with certain levels of start-up fees, because right now the bigger networks are not really an available resource for some of the mom-and-pops who are out there. It leaves an open door for ShareASale and MyAffiliate programs to capitalize on anyone who’s not in the Fortune 500.

TM: There are always new technologies coming down the pike, and I think we can all agree that’s a good thing. There wouldn’t be affiliate programs now if there hadn’t been technologies in the past few years that make it possible. Some technologies, such as the Norton firewall product introduced recently, block banners and can make links unclickable. Are there ways the affiliate community can change things when a company introduces a product that creates obstacles to what they do to make their living?

SC: I think the individual affiliates are powerless. We really have to rely on the networks banding together and going to Norton or whoever might make a similar product. One of the prime targets of these products are the domains that are serving all the banners and the clickable URLs for affiliate programs. The products are going after the URLs for LinkShare and Commission Junction and other companies, so it’s certainly in their best interest to get their hands dirty and try to take care of this as soon as possible. (See ReveNews.)

TM: Do you know if they’re doing that?

SC: I don’t know. I know in the past that was going on. Then, the end-user was asked if they wanted to block ads, and now it’s a default that I’ve just heard about. I don’t know how active the networks are. I would imagine they’re out there trying to find some sort of resolution for it.

TM: What will be coming up at your summit this year?

SC: The plan for the whole agenda is to be very focused on networking. We’ll certainly have our share of speakers and panels. But for every conference I’ve gone to during the last decade, it seems like the feedback from the people is always that they wished there was more networking, and nobody seems to be catching on to that. Every time you go to a conference you see the same cast of characters up there on a panel and running some PowerPoint, and it seems like it’s boring everybody. But the organizers aren’t seeing that. So my partners, Missy Ward and Ryan Phelan, and I figured we’d create a conference for people who hate conferences. We’ll have an emphasis on the things people love: the formal and informal networking as well as the educational sessions. And so we’re sort of expanding beyond what the past affiliate marketing conferences have been to make it more of a performance-marketing conference for affiliates.We’re also bringing in the experts on email and search to all get together for a four-day event. I don’t know if you ever heard of speed-dating, where people date for 30 seconds and then move on. We’ve sort of adapted that goofy concept to speed-networking, where you sit opposite another person for 30 seconds and give them your card and have these mini-meetings. You get a lot more comfortable and have a lot more interaction on a level that you can’t really see. (Note: For more information about the upcoming summit, please visit AffiliateSummit.com.)

TOM MURPHY, editor in chief of Revenue, has been writing about business and technology for more than 25 years. He is also the author of Web Rules: How the Internet is Changing the Way Consumers Make Choices.

Bad Guerrillas

The biggest mistake of all is launching an affiliate marketing program without knowing perception from reality.

THE PERCEPTION is that you’ve been running your affiliate program earnestly and professionally. That’s why you have lots of affiliates. You don’t feel you’ve got to be very aggressive with your marketing because all the affiliates already know about you.

THE REALITY is that very few of your own affiliates know about your business. Even if you’ve been in the same business for five years, if you assume your affiliates know what you sell and why it’s terrific, you’re making a major misjudgment.

THE PERCEPTION is that you can’t treat your affiliates any better than you do right now. Each one of them is happy and delighted with the rewards of their service. You don’t have to improve your affiliate program.

THE REALITY is that your affiliate base represents a teeny tiny percentage of the potential market. Treat them like royalty but start to focus upon those affiliates who are proving to be above the rest. Zero-in on finding more just like them. Need I tell you that all affiliates aren’t created equal?

THE PERCEPTION is that all of your business is repeat business and that you’re doing everything right. Your focus is 100 percent on your existing affiliates.

THE REALITY is that if you’re not growing, you’re on the way to going out of business. No business can rely solely on its existing affiliates.

THE PERCEPTION is that you get a great deal of your business strictly by the energy and resourcefulness of your affiliates, so you don’t have to invest in real marketing.

THE REALITY is that when you invest in affiliate support materials in all shapes and forms, then provide them to your best affiliates, you’ll realize that those tools are some of the best marketing investments you’ll ever make – and you really don’t have to invest much money.

As a marketing phenomenon, Internet affiliate marketing is one of the new kids on the block. Whenever marketers flock to a new marketing medium, they seem to repeat the same mistakes.

A big mistake made with Internet affiliate programs is failing to consistently market the program and the products to the affiliates. These are not ordinary people. These are the extraordinary ones who made a conscious decision to participate in your program. Somehow, you conveyed a vision to them, and they saw themselves in that beautiful picture. You showed them how to be an important part of it. They paid rapt attention. They signed up to carry your banner forward into the fray.

And suddenly a monster of a mistake was made. Nothing happened.

You told your story once but once was not, is not, never is enough. Your affiliates have to see that vision again and again to incorporate it into their essence. Unless you consistently stay in touch with them – email, telephone, online chats, snail mail, regional meetings – they are not going to be the evangelists that the best of them can be with the proper care and feeding.

Of all the people who sign up for your program, only a very few will be true Rolls Royce affiliates. Your biggest job is to learn who they are, then treat them the way deities deserve to be treated. Forget the 80/20 rule. In Internet affiliate marketing, you need to remember instead the 95/5 rule. You’ll get 95 percent of your program profits through the efforts of only 5 percent of your affiliates.

It’s a mistake of the highest order to treat all your affiliates the same. Guerrillas are very adept at playing favorites. Your affiliate marketing program has a better chance of coming through for you if you understand what affiliate marketing really is and also exactly what it is not.

Guerrillas know that affiliate marketing is just a fancy phrase for helping people earn money by selling your offering, then treating those people exceptionally well.

It is more common sense and patience than anything else. But too many people make the boneheaded mistake of thinking that affiliate marketing is also a bunch of things it isn’t, such as:

  1. Affiliate marketing is not email. Some companies think they can get all the affiliate support they need with email. A microscopic number of those companies are right. Most businesses need a plethora of other marketing weapons in order for their email campaigns to succeed. If you are doing email only, you’re no guerrilla.
  2. Affiliate marketing is not telemarketing. For business-to-business marketing, few weapons succeed as well as telemarketing. And telemarketing response rates can be improved by augmenting it with advertising, yes, advertising, and email, even snail mail. But marketing is not just telemarketing.
  3. Affiliate marketing is not having a Web site. Sure, you’ve got to have a Web site to provide information, answer questions, reassure, take prospects to the next level and deepen the relationship between their lives and your company. But you must remember that a Web site only helps with the job. It does not do the job. Not hardly.
  4. Affiliate marketing is not producing brochures. Many companies rush to produce a brochure about the benefits they offer, then pat themselves on the back for the quality in the brochure. Is that brochure marketing? It is a very important part when mixed with 10 or 15 other very important parts – but all by itself? Forget it.
  5. Affiliate marketing is not show business. There’s no business like show business, and that includes marketing. Think of affiliate marketing as help-to-sell business, create-a-desire business, inspire-a-vision business, expand-a-company business, generate-motivation business. But don’t think of yourself as being in the entertainment business because affiliate marketing is not supposed to entertain your customers.
  6. Affiliate marketing is not an invitation to be clever. If you fall into the cleverness trap it’s because, unlike the guerrilla, you don’t realize that people remember the most clever part of the marketing even though it’s your enticing offer they should remember. Cleverness is a marketing vampire, sucking attention away from your primary offer.
  7. Affiliate marketing is not complicated. It becomes complicated for people who fail to grasp the pure simplicity of marketing, but affiliate marketing is user-friendly to guerrillas. They begin with a seven-sentence guerrilla affiliate marketing plan, create a marketing calendar and select from 100 weapons, over half of them free. Not too complicated. The full list appears online at www.GuerrillaMarketingAssociation.com.
  8. Affiliate marketing is not a miracle worker. More money has been wasted due to marketers expecting miracles than to any other misconception of marketing. Affiliate marketing can be the best investment you’ll ever make – if you do it right, and doing it right requires knowledge, commitment, patience and planning.

Value Proposition

With the many affiliate offerings out there, why would anyone want to align himself or herself under your banner? The answer is: your value proposition. You must structure your referral fees with a fair percentage to make it worth their while. It should be generous to make them sense that they are, indeed, earning a passive income.

And it must be simple to make their lives easy. You must offer them the tools of today’s technology: auto-responders, hyperlinks, team-building techniques, incentive programs, contests, sweepstakes, and training materials.

Affiliate marketing is an opportunity so new and unlike what your daddy did that it intimidates many business owners, who then steer clear of it. For guerrillas, affiliate marketing is a ticket to ride first class, avoiding the potholes, on the road toward financial well-being.

But even as you avoid the potholes, you’ll still see affiliate road kill littering the landscape. That’s because it’s so easy to make a mistake with a new concept such as Internet affiliate marketing. Our pioneers made their share as they settled our nation. Why should it be any different among pioneers in marketing? Mistakes are part of the deal, but if you know them ahead of time, perhaps you can sit out that hand.

As all affiliates are not equal, neither are all stupid affiliate marketing mistakes. Stupid mistakes in horrid abundance have been made by otherwise bright companies when testing the affiliate marketing waters. Because guerrillas can learn from these blunders, it’s worth your time to know the most notable:

  • Failure to attract attention during the announcement of a program dooms many brilliant affiliate efforts before they have a chance to shine. Opening lines, email subject lines and first impressions are the gates to your offer. Open them wide.
  • Not facing the reality of an affiliate marketing explosion relegates your attempt to the ordinary, which means the ignored. Guerrillas say things to rise above the din, to be noticed and desired in a sea of affiliate marketers. If you were the only game in town that would be a different story, but there are many games. Act and market accordingly.
  • Focusing your message on yourself instead of your affiliate will usually send your effort to oblivion. Affiliates do not think of themselves as affiliates. They think of themselves as people, husbands, wives, brothers, parents, sports fans, business owners, professionals, consultants. They care far more about themselves than they care about you. So talk to them about themselves ” and help them to see themselves as affiliates. Expect magic if you can do this.
  • Not knowing precisely who your market is will send your affiliates off in the wrong direction. Research into pinpointing that market will be some of the most valuable time you devote to your affiliate marketing campaign. Those hard-working affiliates of yours need all the help they can get. Guerrillas are helpers supreme.
  • Marketing to other than honest prospects wastes your affiliates’ time. If you make your offer to people who don’t really have a need for your offering, it will be an incredibly tough sale. As in all direct marketing – and make no mistake, affiliate marketing is direct marketing – the target market is the most important factor, followed by the offer and then by the way that offer is presented.
  • Initiating affiliate marketing programs without specific objectives gives you too hazy a target for bull’s-eyes. Begin by setting the goals you wish to attain, then the steps you’ll take to reach those goals – and the benchmarks you’ll use to measure your progress. Without benchmarks, you’ll be affiliate marketing in the dark.
  • Featuring the benefits of your product or service to your affiliates first is telling them what they don’t want to know yet. First, your job is to make them see how they can gain financially. Then, they’ll pay rapt attention to the vehicle that will convey them to that promised land. To a hungry man, the most important benefit is the promise of a good meal. To a business, it’s profits. To an affiliate, it’s financial independence.
  • Failing to test all that can be tested is a goof-off of the highest order. Test your commission structure, price points, benefits to stress, contact times and mailing lists to know the real winners. Test various marketing weapons with your affiliates so you can provide them with the most lethal. Guerrillas test everything they can, constantly subjecting the results to the litmus test of profits.

There. Now you can never say that you weren’t warned. You can never plead ignorance when you commit a monumental boo-boo. On the other hand, perhaps you can take a deep breath of relaxation knowing that others have made the really moronic errors for you and that there are no more to be made.

Guerrillas giggle at that idea. When it comes to Internet affiliate marketing, as new as it is, they operate according to a single mantra: “Don’t make the same mistake once.”

JAY CONRAD LEVINSON is the author of the Guerrilla Marketing series of books, the most popular marketing series in history with 14 million sold in 39 languages. He also publishes the Web site GuerrillaMarketingAssociation.com.

Wanted: Affiliate Manager

Here in the midst of the fearsome jobless recovery, one job remains hard to fill: affiliate manager.

And nobody seems surprised. After all, online affiliate marketing is still a relatively new field. While thousands of corporations have established affiliate programs, many still haven’t figured out the skills required to manage the programs well, much less what they’re worth.

Can you blame them? Anyone who has ever tried to explain affiliate marketing to a friend knows the very concept can be, well, a bit abstract. But now some very large companies are starting to notice there is real money flowing in from that strange little group of people in the affiliate marketing area. And the pressure is on to find someone who can lead them to greatness.

But what exactly goes into that job description? What skills are required? What experience is needed? And how much, exactly, should the affiliate manager earn? Is this a technical job or a marketing position? Or does it require an MBA?

We set out to answer those questions after we discovered salaries spread out, pretty evenly, from $40,000 to $250,000 – a range that reflects a great deal of confusion. (About one in eight AMs makes more than $120,000 annually.) With the help of many experts, we also learned there are some common elements to great affiliate managers. Revenue is proud to present the top 10 traits that the folks in HR absolutely must list when placing an ad that reads: “Help Wanted – Affiliate Manager.”

1. Great Communicator

Perhaps the No. 1 skill desired in an affiliate manager is the ability to communicate well through many media to many affiliates. Affiliates need to know about your products, prices, promotions and a whole lot more. “Tell your affiliates when you’re having a promotion, tell them what your hottest products are,” said Matt Ranta, affiliate manager for electronics retailer Vann’s. “Don’t make them go out and find it.” Monthly or weekly newsletters and regular emails are key to that communication.

Carolyn Tang, AM for CollectiblesToday.com, uses informal, usually weekly, text emails to communicate affiliate stats, merchandising ideas or details on the merchandising manager’s “hot product” picks. “Communication isn’t just the writing,” Tang said. “It’s the ability to communicate with affiliates on different levels, from casual to complete professional, like making sure checks get paid on time and problems are solved.”

Since affiliates come from many backgrounds – single parents with children at their feet, retirees, home-based entrepreneurs and companies sometimes larger than the merchants themselves -“we put marketing tips in the newsletter, from ‘How to increase conversion rates’ to ‘How to increase your average order size,'” Driscoll said.

“I am in contact today with 400 to 450 affiliates that I consider to be the top producers in the industry,” said Andy Rodriguez, an outsourced affiliate manager and owner, Andy Rodriguez Consulting in Miami, Fla. “Our conversations include ‘How’s your family, how’s your dog?’ It’s that information I can draw upon when I bring a new affiliate aboard.”

2. An Entrepreneur

In true entrepreneurial form, AMs must be self-motivated innovators who can create a custom blueprint for growing the merchant’s affiliate program, follow and forecast revenue, select affiliate tracking technology, understand contracts, manage data feeds, and represent the merchant’s brand and interests through the affiliates – often with little support from others within the company.

“The affiliate manager is basically CEO of this little slice of pie within the bigger program,” Driscoll said. “They basically get to run their own show, their own business, with their own sales force through the affiliates.”

Todd Daum, vice president of marketing for Overture, added, “Being able to recognize an opportunity, such as a high-potential affiliate or an opportunity for a new promotion, will go a long way in helping differentiate one affiliate manager from another.”

3. A Bit of a Nerd

Of course, it’s not enough just to be a hotshot entrepreneur. Great AMs should also be, well, a little geeky. They’ll need to understand html, search engines, coordination of search keywords and search URLs. They’ll need to provide quality control for the Web site, as far as researching availability of images, scanning images and uploading images.

It also pays to have hands-on experience with BeFree, Commission Junction, LinkShare and/or Performics management interfaces. And, of course, the AM should be a whiz at communications tools such as instant messaging, PDAs and online chats. Online forums are great learning tools for uncovering current tech issues, such as new parasites and new pop-up or anti-virus software. So managers may want to hang out in some.

Many AMs also are affiliates themselves, giving them the experience of working with technology from the affiliate’s point of view. “Have your own affiliate site, or set up a test account in Commission Junction [or other network interface],” Ranta said. “Go in and see what an affiliate has to go through to get a text link, a banner or individual product links. That way, [you] can walk new affiliates through the process.”

4. A Marketing Maven

Hear ye, hear ye: AMs must be able to sell affiliates on using their program, and sell internal Web designers on creating a site that makes sales once people discover it. “If you’ve got the qualifications [for being an AM], and it’s apples to apples, what breaks the tie is chemistry – someone who could really keep the affiliates motivated and pass on that enthusiasm for our products to them,” Driscoll said.

Marketing goes one step further: “You want to give your affiliates good sales tools – not just banners – that really work,” said Jim Gribble, an outsourced AM and managing director of LinkProfits.com and PartnerIndustry.com. That includes links coded to product tracking information, so affiliates don’t have to log onto a management interface and go through the rigmarole of downloading each individual product.

It also includes having real, personal relationships with at least your top 20 affiliate partners, Gribble said. “Then spend at least 25 percent of your time prospecting for partners. Even if the program is going well, [you should] always be looking for new partners.”

5. Resourceful

AMs face constantly moving challenges: forming alliances with key players who can move the merchant’s program forward and finding creative ways to reach decision makers on the sites they want to partner with. “Maybe pick up the phone, or use regular mail to get their attention,” Gribble said.

The AM also has to know how to adjust quickly to increasingly sophisticated affiliates. “There’s more and more (affiliates) who are really getting smart about their business,” said Michael Brucker, affiliate manager for Yahoo. “They are placing the search engine bids. They’re coming in and asking really targeted questions, and they’re challenging us: What’s our conversion? What are our proprietary keywords?”

6. Good with Numbers

It pays to keep track of sales numbers. “I monitor that on a daily basis,” said Jack Boulant, affiliate manager for InsureMe.com. “We have an amazing IT department, so we can really see the affiliates that are drivers for us.” How does Boulant reward his superaffiliates? “Increase their payouts,” he said. “A fair thing is to pay them 45 percent of what we make – so we’re both making a profit. Together we are growing this company.” AMs also must take care of financial reporting, figure commissions, cut the checks, and analyze what clickthroughs are legitimate and what could be fraudulent.

7. Graphically Inclined

An AM must come up with fresh banner ads and provide design input for Web sites in order to increase sales. “They must know how to work with a designer, or have Photoshop experience,” Ranta said, “and be able to do quite a bit yourself or communicate what’s needed to the design staff.” A 30-day version of Adobe Photoshop can be downloaded for free at Adobe.com. AMs will need to create special storefronts for seasonal events, size and process new images, research and load missing images, and coordinate photography of new products with the photo studio and designers.

8. Respectable

AMs must have a commitment to doing the right thing: being truthful, ethical, and quick to resolve problems. “Be true to your word,” Ranta said. “Your word is your bond.” For instance, Ranta recently made a mistake in a contest he was running and errantly told one of his affiliates that she was the winner. “I gave her the prize anyway, and told her in person that I had made a mistake,” Ranta said. “If you tell your affiliates you’re going to have a new data feed available, or you’re going to go in and do new creatives, you need to follow through in a timely fashion. Don’t say something just to get them off your back.”

Because affiliate managers are salaried plus commission, rumors abound that “doing the right thing” with affiliates is held back if that means AMs could lose money on their sales charts. “But it’s been proven that once they do the right thing, such as dropping parasitic relationships, the sales numbers just blow up,” de Poel said. “It doesn’t matter what your competition is doing; it doesn’t matter what search engine optimization guys are doing. It matters what you are doing for your channel, treating your affiliates appropriately and rewarding your affiliates for the business that they drive.”

Remember, said Tang, “We all make mistakes. The ability to say, ‘I’m sorry,’ and make up for it is where all the respect comes in.”

9. Contactable

By returning toll-free calls, emails, forum questions or instant messages within 24 hours, affiliates feel like telecommuters and part of a team. Even if the affiliates aren’t contacting you, it’s a good idea to be checking in with them: “I always check in with my affiliates, some more than others,” Boulant said. “I at least try to do it on a monthly basis; some of our top affiliates I talk to on a weekly basis, some more than that.” But what about those affiliates who don’t like to be bothered and are happy just being paid on time? “It’s all part of the relationship process: you have to learn what your affiliates want,” Boulant said. “What I do is I send new affiliates a welcome-mail, and then leave them a voicemail just to introduce myself so they know that there is someone here just to help them. If I get a response by email, I know they’re more responsive to communication that way. Some call, and I respond the same.”

Said Rodriguez: “You have to be able to go home at night, and think that you have people working until 2:30 or 3 in the morning for you, placing links and banners on their pages to sell your products. Be accessible to them, even at that time.”

10. A Team Member

The best AMs can work with cross-functional teams including customer service, sales, technology and administration. “Excellent affiliate managers should have the ability to work closely and effectively with account managers,” said Daum at Overture. “Taking the time to develop those relationships is imperative.”

AMs must also treat affiliates well, be good relationship builders, and know how to reward but not “manage” their affiliate sales team. “The long and the short of it is maintaining and building a relationship with an affiliate,” Boulant said. “Good or bad, it should be ‘Tell me and I’ll take care of it.'”

It boils down to this, said Rodriguez: “Be sure that the merchant and the AMs are on the same page. Treat your affiliates as partners, they are your salespeople. Be sure you have open communications to build a level of trust, so that when everything is going great, everyone is on the same page, but when you have a problem, you can go to them and say, ‘Everything is going to be fixed’. It’s no different than a marriage, [except] the goal here is for everybody to make money.”

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.

The Spam Jam

What a mess. Jim Gordon is hell-bent on collecting some of the $600,000 or so he thinks Commonwealth Marketing Group owes him for sending more than 1,500 emails advertising credit cards. He says the emails had inadequate subject lines and the transmission paths – the list of computers that passed along the email – had been doctored.

Gordon, who runs an online health and nutrition business in Richland, Wash., said his email address was harvested, and now the spewing of spam is unstoppable. “I get roughly 1,500 emails every single day of my life,” he said. “Last summer, I got fed up and sent out a bunch of demand letters. Commonwealth was one.” This tactic, attempting to collect a charge from spammers for each email they send, then suing if they don’t pay up, is advocated by anti-spam activists. Activists encourage pissed-off consumers to strike back and try to hit the spammers where it hurts – in the pocketbook.

On Dec. 15, Gordon sued Robert Kane, the CEO of Commonwealth, in his home state. At that time, Washington had tough anti-spam laws that let individuals bring private suits against alleged spammers. We can relate, right? Who among us doesn’t have to wade through lines and lines of email subject headers cleverly disguised to look like they’re from a friend, or, perhaps worse, that stridently proclaim their icky content?

But wait. Robert Kane had a different story to tell. He said Commonwealth works with one Internet marketing company that maintains a network of affiliates. Some of those affiliates may have email marketing lists that they use to market Commonwealth’s credit cards. “We rely on the affiliate to provide opt-in information, and in other cases when [someone has complained], they’ve been able to provide the exact time and date when the person opted-in.”

Kane said Gordon is out to get him, that he’s making a business out of threatening to sue legitimate marketers, hoping to get a payoff. Indeed, Gordon does have suits against two other companies in the works. “I’m seeing an increase over the course of the last year where individuals will go out and sign up for a barrage of offers,” Kane said. “Then they file these actions saying, ‘You’ve been spamming me, and I’m entitled to X number of dollars, but I’ll settle for this.'” According to Kane, Gordon’s demand letter said he’d settle for $10,000. Kane refused, because he verified that Gordon had opted-in.

Where does that leave Gordon’s suit? Like we said, it’s a mess. The hearings go on. Gordon is trying a variety of legal maneuvers, such as complaining of harassment or unfair business practices instead of spamming, while Kane parries by dishing dirt on Gordon’s family. The only sure thing is that both are expending oodles of resources that could be better used trying to end world hunger. Let’s be glad we don’t have to decide who’s right.

But everyone has to be concerned about spam. It could kill the affiliate marketing industry. Incessant emails touting reputable products can tarnish the merchant’s reputation and turn consumers off to the brand in every channel. Merchants also run the risk of being legally liable for their affiliates’ illegal emailing practices. Irate consumers like Jim Gordon and trigger-happy state attorneys general show a tendency to press charges and let the courts sort it out. In February, the nations’ first criminal spam trial began, with a North Carolina man facing four felony counts of sending unsolicited bulk email.

Legal issues aside, spam is bad for business. The gush of stupid and offensive emails creates delete-happy customers. A recent study from the Nielsen Norman Group, a company that consults on making technology more usable, showed that, while the public is getting better at differentiating between opt-in newsletters and unsolicited messages, they’re feeling increasingly stressed dealing with their inboxes, and now have even less tolerance for newsletters they feel waste their time.

While few email marketers would admit to spamming, it’s clear that affiliates are a huge part of the problem. According to Brightmail, a provider of anti-spam services for corporations, products pushed by spammers are closely related to holidays. For example, last Valentine’s Day, 15 million messages hyped flowers, chocolate, dating services and sex toys – all categories that rely on affiliate marketers.

If you dare, open the next 10 pieces of spam you get and click on the links. Except for the ones advising you to “use this patch immediately” and infect your computer with a virus, they’ll be either affiliates linking back to a retailer, or affiliates linking to other affiliates in the Internet’s big Ponzi scheme.

When affiliate marketing consultant Shawn Collins polled affiliate managers in January 2004, 23 percent said they planned to forbid affiliates from sending email. At the same time, 60 percent of them hadn’t taken any steps to educate their affiliates about the issue, and 35 percent of them hadn’t even read the entire law.

That’s scary. Any marketer who uses email needs a crash course in spam.

Living Under the Law

The CAN-SPAM Act of 2003 whisked through the US Congress at the end of ’03, focusing the nation’s attention on legal retribution for spammers. Die-hard privacy advocates say it’s not enough. Marketers say they still can’t be sure they’re inside the law.

“Some of the spam problem is classic spammers, but the majority of it is not from people who are actually attempting to do anything fraudulent,” said Margaret Olson, chief technology officer for Constant Contact, a company that provides email-marketing services for small and mid-sized businesses. Unwitting spammers are merely naïve, she said. While the best practices for email marketing and rules to follow may seem clear to large corporations, affiliates are often new to the game, and many are part-time marketers. “If you have another whole job to do,” Olson said, “you probably haven’t been following the law that carefully.”

Olsen said legitimate affiliate marketers can shoot themselves in the foot with simple mistakes, such as failing to drop names from the list if they haven’t been contacted in the past year, or buying someone else’s list and assuming it’s okay to email everyone on that list.

This federal law supersedes state anti-spam laws where they’re contradictory -but states still have the right to sue spammers in federal court. And, although individuals will no longer have the right to sue spammers under state anti-spam laws, there’s a backlash movement teaching them how to bring suit under a variety of other laws, including harassment.

Ben Livingston, president of ISP Innovative Access, actually wrote a primer on using the courts to get back at spammers; it’s posted online. He’s won cases against spammers, junk faxers and telemarketers -although, he said, collecting is another story. “I know that people will fight back,” he said. “I don’t know how many, or if it will make a difference, but with all these litigious individuals, it could.”

Guys like Livingston are bad news for bad guys. If you’re reading this, you’re one of the good guys. But it can be all too easy to stray.

CAN-SPAM and You

Compared to some very stringent and punitive state laws, the CAN-SPAM Act is relatively marketer-friendly. In fact, it doesn’t prohibit unsolicited email ads at all, as long as marketers follow some guidelines.

The law focuses on three things: ensuring that consumers can recognize commercial email, see who it’s coming from and make it stop. To that end, affiliate marketers should use their business names in the FROM header and create a SUBJECT line that gives the recipient a solid clue as to the content. Within the email itself, the affiliate must provide a working email address where the consumer can ask to be removed from the list and a physical address for the sender.

These measures are no more than good marketing, said Anne Mitchell, president of the Institute for Spam and Internet Public Policy, a consultancy that advises marketers and public institutions. “Ethical marketers are already doing more than CAN-SPAM requires anyway. The reality is, no legitimate marketer who’s trying to do the right thing needs to worry,” said Mitchell, who is also author of “CAN-SPAM and You: Emailing Within the Law“.

One other aspect of the law may become worrisome in 2005, when the Federal Trade Commission, the government agency responsible for administering CAN-SPAM, is required to report to Congress on a plan to require subject-line labeling of all commercial email in the subject header. Some email advertisers already have begun starting their subject lines with ADV, one of the labels under consideration. (The FTC will devise a separate label for sexually oriented ads; that’s expected to kick in some time during 2004.)

Such prefixes make it easier for consumers to keep commercial email from ever appearing in the inbox. However, they would eliminate the ability of marketers to use email to prospect for new customers. Meanwhile, it’s unclear whether real spammers, who usually hide their identities, would comply with the rule.

The law does hold merchants responsible for affiliates’ spam, if it can be proved that they knew or should have known about it and did nothing to stop it, said Mitchell. Merchants who haven’t controlled their affiliates are responsible for polluting the affiliate model, she said.

“People were littering spam under affiliate programs with complete immunity because, while the company had a statement on the Web site that they wouldn’t tolerate it, nudge nudge, [sending spam was] just what they wanted people to do.” In those cases, the way the law gets at the affiliate spammers is through the principle company. Now, companies can’t just shift the blame to their affiliates. “If you have any control over the channel, you should exercise it,” Mitchell said.

One more worry: While the federal law supersedes state laws against spam where they conflict, said Mitchell, “it’s also absolutely true there are all kinds of other laws people can use. Marketers shouldn’t get complacent.”

It isn’t hard to imagine other prefixes that might follow. But how US authorities would stop offshore spammers is unfathomable.

SUSAN KUCHINSKAS has covered online marketing and e-commerce since their beginnings for Revenue, Business 2.0, and other media. She says she has already received her lifetime dose of spam.

Next Year Is Here

Right around now, the sun is shining, the days are getting longer, the garden is looking so great. And the dreaded tax deadline is behind you. The last thing you want to be thinking about is next year’s taxes.

Sorry, but you really shouldn’t let taxes off your mind. Especially now, while you have a chance to do everything right in the year ahead instead of making the same mistakes you made last year.

Oh, sure, you’re going to follow the advice of the great affiliate managers in your key programs, and you’ll have money pouring in. Sounds like success, doesn’t it? Well, my friend, quite often the consequence of success is failure when you don’t take care of your tax issues while you’re raking in the revenue.

Here are some tips that you can start using now to help you minimize your taxes in the year ahead.

Meals and Travel Separate these two costs as they occur in the coming year. All of your business travel is deductible. Your “meals” deduction gets cut in half on the Schedule C. Keeping track generates a bigger travel deduction than guessing. The costs of affiliate marketing cruises are considered travel, and you needn’t separate the cost of the meals. However, there are special rules for cruises. You may deduct up to $2,000 each year for attending cruise ship conventions that are directly related to your business.

To do this, the ship must be registered in the United States and must visit only ports in the US or one of its possessions. At least 51 percent of your waking time must be spent at the seminar and you need to include two supporting statements with your return, plus a statement by the cruise organizer with the schedule of business activities.

Bring the Kids Normally, the additional costs of having your family along on a business trip are not deductible. But as an affiliate marketer operating a home business, you’re in a special position. You certainly could have your spouse and children working with you, or for you. They may be an integral part of your marketing and networking presence on that cruise or trip. If you want to deduct their expenses, they must really be working like any other staff person would. And you must document what their duties are and what they did.

Hire the Kids If you hire your family, but fail to put them on your payroll, you will raise a BIG red flag in front of the tax authorities. There’s a lot of hype about this out there. And there are several multilevel marketing companies whose entire business is devoted to convincing you to deduct your home office and the costs of hiring your children. Frankly, most of that is a scam.

However, don’t let that discourage you from really hiring your children. Why should your teens go out to a burger joint and earn minimum wage, when you could use their services, train them to grow in your business, and be able to build a better relationship with them? If you’re going to hire your kids – do it right. Put them on payroll, have them use time cards, and have them document or summarize their work each day. Not only will this protect your deduction, it will help your teen learn to focus, get organized and communicate.

Putting children 18 or under on your payroll, you must file payroll tax returns. But you don’t have to pay Social Security or unemployment taxes. And you’ll get the deduction for all their wages and any benefits or expense reimbursements. Your children will have to pay taxes on very little of the money. After all, they get their own $4,750 standard deduction, tax-free.

If you pay your children, but don’t put them on your payroll, it will cost you. Your children will have to file tax returns with their own Schedule C. All the income you pay them will be subject to self-employment taxes – 15.3 percent. So even if they don’t have enough income to pay income taxes, those self-employment taxes get you every time.

Hire Your Spouse Hiring your husband or wife lets you use an IRC Section 105 medical reimbursement plan. Putting your spouse on payroll lets you provide family medical coverage as part of the compensation. You may deduct all your medical insurance premiums, as well as family medical expenses right out of your business.

Why bother with this when there’s a full deduction for self-employed health insurance on the front page of the tax return? Two reasons. First, you cut your income taxes and self-employment taxes on those medical premiums. Second, that front-page deduction is only for the premiums. The Section 105 plan also lets you deduct medical co-pays, dental expenses and all other types of out-of-pocket costs.

When it comes to hiring any family members, remember, IRS is watching for that kind of thing. Don’t do it unless they really work for the business. Don’t just talk the talk. Walk the walk.

Avoiding Errors

Hopefully, you have already filed your tax return for the past year. But if you haven’t, pay close attention. If you have, then stow the following information away for next year, because the following three common errors can delay refunds or credits to your account.

Wrong Names Be sure that all the names shown on your tax return match each person’s name as it reads on their Social Security cards.

Wrong Social Security Numbers Look for switched digits or mixed-up numbers.

Affiliate Income as Wages The income belongs on Schedule C – the business profit and loss schedule. Your profits will be subject to self-employment tax – 15.3 percent, which funds your Social Security account.

On the Record

Keeping track of all this throughout the year is much easier than you think. Even if you don’t have an accounting system, at least get an accordion file or two, labeled by category, and drop in your receipts as you get them. Simply add your receipts up at the end of the year and you’ll be all set.

EVA ROSENBERG, MBA, is publisher of TaxMama.com and an enrolled agent, licensed to represent taxpayers before the IRS. She has a quarter-century experience dealing with tax issues faced by small and Internet businesses.

Setting the Data Table

The last issue of Revenue gave an overview of databases and how they can be used. Let’s delve a little deeper into how you, as manager of an affiliate program, can use a database to improve your service and provide customized information for all of your affiliates.

When creating a database, the first step is to understand what information you want to record, and the important relationships among the data. Similar information is grouped into a table in the database. An affiliate will have a variety of contact information such as an email address, a postal address and perhaps even a separate payment address. All of this information could be placed into a single table. Let’s call this table affiliate_contact.

You may want to record certain accounting information about an affiliate, such as the date a sale was made, what item was sold, how much the affiliate earned and the total dollar amount generate by the sale. This information could be placed into the affiliate_contact table we already created, but we will place it instead into a new table called affiliate_sales. I’ll explain why later.

In database design, you want to create tables that group similar information and then link these tables together based on their relationships. This is where the term “relational” comes from when describing a database. Relational databases, such as Oracle, DB2, SQL Server and MySQL, provide very rich tools for extracting information based on these relationships.

Planning and mapping the information you have into tables is just the first, but perhaps most important, step in developing your database. You could change a database’s design once it is running, but if you have a lot of data, or a lot of code using the database, changes can be difficult and time consuming. So, it is worthwhile to take some time and care in planning your tables. In 10 years, my company, Epage, has gone through a few database redesigns, but there are some tables that have not changed structure since the first design.

Creating basic relationships between tables can be quite easy. Usually, it’s accomplished by having a common item such as a table column in related tables. If your affiliates all have a unique identifier, such as their contact email address, this can be used to link tables together. The affiliate_contact table and the affiliate_sales tables would both have an “email” column with the affiliate’s email address. If you want to retrieve information from both tables, like the affiliate’s first name and last sales date, you could query both tables using the same lookup key (the affiliate’s email address).

There are other ways to generate relationships among tables. We like to generate a unique number or string of characters to identify one of our users. This unique identifier is only used internally to form table relationships, and may never be seen by the user. This way, if a user needs to change their email address, it would only need to be changed in one table. In our example above, both tables, and perhaps many more, would need to be updated.

There are many reasons to break your information into multiple tables. Tables with many columns (email, address, phone, etc.) can be very difficult to manage. Database servers are designed to efficiently deliver results to your queries. But, they can get bogged down when you have a lot of columns that you might want to select from. For example, when you insert a new row, such as adding a new affiliate to the affiliate_contact table, the database must re-optimize the way it retrieves data from that table. The more columns that are in a table, the more work the database must perform.

Efficiency is another reason for multiple tables. Some tables may have only one row (entry) for each affiliate, such as the affiliate_contact table. Other tables, like the affiliate_sales table, may have many rows, one for each sale. If these two tables were combined, there would be a lot of wasted space for repeating the contact information for each sale.

Consider what unique information you want to record for each affiliate when planning your tables. You may want to know certain business information. For example, you may want to know whether the affiliate prefers to be paid by check or electronically. Or you may want to review the payment terms for certain affiliates, such as the percent of the purchase price they earn. A database can record these unique terms for each affiliate, allowing you to personalize how your program works. You might want to offer better terms to a desired affiliate or during a promotional period. When a sale is made, the percentage earned by the affiliate would be read from the database, and the result would be stored into the affiliate_sales table.

If you send multiple mailings to your affiliates, some might not want to receive all of the messages. You could store which type of messages they don’t want in the affiliate_contact table. Or, you might want to contact your top-performing affiliates. Each month you could query the affiliate_sales table to find those top performers.

Once you have the information recorded, how you use it is limited only by your imagination. You could send a special message on the anniversary of an affiliate’s signup. You could determine which affiliates had a big drop-off in month-to-month sales – perhaps they are having a problem you can solve. You could determine characteristics of your best affiliates – perhaps it’s their location – and target more like them.

Another good piece of information to record is how new affiliates found out about your program. If you use a tracking code in your advertising, you can record the code in the affiliate_contact table. Then you could determine not only how many affiliates were generated with a specific code, but how much revenue that advertising generated. One last idea to consider: If your users can refer new affiliates to you, then you could record who referred each affiliate. Offer an incentive to these users, such as a percentage of sales generated by the affiliate, and you have the potential for a huge force generating new affiliates for you, with almost no work on your part.

EDWARD ARENBERG, vice president and CTO of Epage, created one of the first fully dynamic Web sites. He manages and develops for EP.com, Epage.com and AdConnect.com.