No Check, Please

Whether it is for spring to begin, for Godot or for a commission check, no one likes waiting.

The 30 to 90 days that affiliates – especially those outside the U.S. – must wait for commission checks to arrive can seem like a lifetime, and waiting in line at the bank to cash it is so 20th century.

While merchants might not be as anxious to see the money leave their accounts, replacing lost checks and answering calls about payments wastes time and money, and paper leaves an expensive trail. For recipients, being paid by check requires a trip to the bank and then waiting (there’s that word again) 24 hours or more for the check to clear.

Paper checks are also permanent – a discrepancy in the amount must be resolved by another check, or possibly returning the original draft. When merchants are issuing dozens or hundreds of checks per month, the cost of resolving disputed checks can pile up in a hurry. "Receiving a check is one of the more inconvenient payment methods," says Ron Hynes, vice president of product development of Prepaid for the Americas at MasterCard Worldwide.

Enter the electronic payment. No sitting by the window looking for a delivery person, currency exchange fees or checks that disappear into the ether. The other advantages of electronic payments – including faster processing, greater accuracy and lower transaction fees – all but guarantee that the paper check will soon become an endangered species in the online marketing space.

For the issuing party, there’s the printing (where errors occasionally happen), verifying and signing of the drafts and the stuffing of envelopes – all time-consuming tasks. Direct deposit to a recipient’s bank account is the most popular form of electronic payment, and it is increasingly being used for business-to-business transactions. B2B automated clearing house (ACH) payments grew by 10.9 percent between 2005 and 2006 to 2.3 billion transactions, according the Electronic Payments Association.

Alternative electronic payments that do not require a bank account for deposits are also on the rise, with services including PayPal and PaidByCash becoming commonly accepted methods of payment. In all, electronic payments represent more than 10 percent of online commerce transactions, and similar technology is being applied to B2B financial transactions. Adding to their attractiveness is their "green" quality, as eliminating paper checks saves trees, while fewer trips to the bank means less time behind the wheel.

Electronic payments have grown more rapidly in the consumer arena, but B2B is catching up, according to Edward Kountz, a senior analyst at JupiterResearch. "There’s more pent-up demand on the B2B side" of electronic payments, Kountz says. The lack of a unified payment standard has held back adoption, but more businesses are moving to paying electronically for the same reasons as companies accepting electronic payments – "to eliminate friction," he says.

Catching On With Networks

Performance networks are moving to electronic payments to eliminate the costs and administrative hassles of paying with paper. DoubleClick Performics began paying affiliates electronically through direct deposit in 2001, according to Ed Fleming, the company’s finance manager. DoubleClick Performics developed software that is integrated with its reporting and accounting system to streamline generating direct deposit payments. "It costs us about half the price of a stamp to process" a direct deposit payment, he says.

Currently DoubleClick Performics’ payments are split evenly between checks and electronic deposits, Fleming says. Affiliates that generate the most revenue are the most likely to participate in direct deposit. Fleming estimates that 90 percent of commission dollars are sent out electronically.

DoubleClick Performics regularly contacts affiliates to recruit more to accept being paid electronically, but some still prefer to be paid by check. Affiliates may decline to participate in direct deposit because they fear identity theft. "They don’t want to give out their banking information," Fleming says. DoubleClick Performics has had internal discussions about offering alternative electronic payment options, but there has been "no outcry or huge demand" from affiliates, according to Fleming.

Commission Junction currently offers direct deposit and is evaluating offering PayPal as an electronic payment option for affiliates, according to Dave Osman, the company’s vice president of Client Services. "There doesn’t seem to be a clear leader" in B2B electronic payments, he says. While electronic payments would save the company, "Our desire to eliminate [checks] is based on customer needs, not cost," Osman says.

LinkShare recently announced a new payment plan for publishers, which pays them weekly from the first dollar earned. By moving to a weekly payment schedule, LinkShare reduces publishers’ wait time to receive commissions and doubles the number of paydays. The new plan intends to help publishers improve their cash flow so they can invest resources in their growing businesses. LinkShare officials declined to comment for this article about its payment options.

PayPal, the eBay company that has popularized online funds transfers in the consumer realm, has developed software called MassPay for automating the processing of electronic B2B payments. MassPay can be integrated into payroll and reporting programs through a free application programming interface (API), according to Michael Oldenburg, Associate Manager of Corporate Communications for PayPal. T here are now 18 affiliate software applications that incorporate MassPay, including Affiliate Guerilla, AffiliateShop and MyAffiliateProgram.

Transaction fees for MassPay are up to 2 percent of the value of the transaction to a maximum of $1 per transaction and are paid by the issuing party, according to Oldenburg. Money can be transferred without cost from the online account to a PayPal debit card for off-line spending, he says.

Alternative Payment Options

As an alternative to direct deposit, networks are beginning to roll out debit cards that are linked to online accounts and accept electronic transfers. These cards, also known as "prepaid," "stored value," "reloadable," or "payroll" cards, do not require affiliates to provide bank account information – only a valid address is needed to initiate an account.

Prepaid cards have the same efficiencies as direct deposit without requiring a complex sign-up process, MasterCard’s Hynes says. Prepaid cards enable companies to eliminate commission checks altogether when used in combination with direct deposit, says Hynes, which works with banks and payment processing companies to distribute MasterCard-branded cards.

Payment companies Payoneer and Ecount as well as network Axill offer prepaid card services that have no start-up fees to the network, and the cards are free for the affiliates.

These cards offer the security of gift cards (if you lose the card there’s no access to a bank account) with the added benefit of third parties, such as networks being able to deposit funds electronically. Payoneer, of New York, offers MasterCard debit cards that can be used for shopping or to get cash through an ATM, according to Yuval Tal, CEO of Payoneer.

Although the cards are free to affiliates, there are fees of up to $2 for withdrawing funds through an ATM. Affiliates who are part-time workers and use commissions as discretionary income can find it advantageous to separate their earnings from their primary bank accounts.

Just as with direct deposit, the funds are available the same day of the funds transfers, Tal says. However, if a balance is kept on the card at the end of the month, Payoneer charges a fee. While paying a fee for someone to hold onto your deposit might seem counterintuitive, Tal says that the cost of tracking and administering held-over balances is more than any interest the company could make.

Electronic Payment Options

Merchants looking to accelerate their payment processing while eliminating the cost of paper and accounting hassles have several options for going electronic. Transaction fees vary to a maximum of a few dollars per transaction, but they are all superior to the cost of paper checks.

Direct Deposit It’s easy, universally understood and safe. However, it requires validating an affiliate’s bank account number. Finding international banks to participate can be costly and time-consuming.

PayPal Many affiliates already have existing accounts so they can be very comfortable in getting on board. Little to no information is required to recruit affiliates, and PayPal can pay out in 17 currencies.

Prepaid Debit Cards Ecount and Payoneer, along with many banks backed by Visa or Mastercard, offer cards linked to online accounts. With a minimal of software integration, publishers can issue payments from within their affiliate software. Affiliates can get cash through ATMs using a card with the network’s branding.

Affiliates who set up a Payoneer account can also direct funds from any network, even if Payoneer does not have a relationship with the network, according to Tal. Each Payoneer account includes a routing number that can be used for direct deposit, similar to a brick-and-mortar bank. Affiliates can also mail endorsed checks from Google, and Payoneer will deposit the funds into their debit account, Tal says.

Debit cards can be set up so that the networks pay most or all of the transaction fees. Tal says the per-transaction fee depends on the volume of funds that the network processes. Networks that use Payoneer include AmieStreet, ROI Rocket and JoeBucks. Gary McNelly, CEO of JoeBucks, a health and beauty affiliate network, chose Payoneer because the transaction fees are less expensive than implementing PayPal. Integrating Payoneer into his reporting system required just one hour of technical staff time, he says.

Ecount of Conshohocken, Pa., offers electronic payment systems that can be used by networks to compensate affiliates and for affiliates to offer rebates to consumers with minimal administrative costs. Jay Levin, senior vice president of consumer payments at Ecount, says companies can build loyalty by offering MasterCard debit cards with their branding. "Online marketers can be tough to get off-line branding," Levin says. Offering a branded card "will give them that viral feel." As an added benefit, affiliates that work with several networks are more likely to remember and positively view a network if the logo is on a debit card that they use for discretionary income.

Ecount requires a database or XML file from the network that can be submitted via FTP or email to generate electronic payments. The company creates a custom-branded website that cardholders access to check their account balances and payments.

Ecount’s debit cards can also be used as periodic rebates for signing up for a service, Levin says. Wireless phone carriers and cable companies have issued debit cards to new customers as an incentive for signing up. Part of the cost of a new phone or cable box is returned to the customer via monthly payments to a branded card, which builds consumer loyalty at a lower cost than issuing paper checks, according to Levin.

Axill, an international network located in Piscataway, N.J., has been aggressive in pursuing the expediency of electronic affiliate payouts. The company, which is a subsidiary of online marketer Northgate Technologies of India, offers same-day payouts to affiliates who sign up for the company’s Visa debit cards. However, same-day payouts are limited to affiliates that accrue a minimum of $25 in commissions. As with other debit cards, funds can be withdrawn at ATMs from the Axill-branded cards.

International Payment Options

Paying affiliates outside of the U.S. is often costly in transaction or currency exchange fees, and affiliates who are paid by check do not have immediate access to funds. Wire transfers can cost up to $50 each, and checks from U.S. banks can take up to a month to clear out of the country – if affiliates can find a local bank willing to cash them. Recipients living outside the U.S. may also be required to pay additional fees to exchange U.S. dollars for their local currency.

DoubleClick Performics’ Fleming says making payments to foreign banks "is by far the biggest issue" in using direct deposit. The fees (associated with foreign bank transfers) "are a drawback for using electronic payments" outside of the United States, he says.

PayPal’s MassPay enables publishers to issue payments in 17 currencies to 190 countries, with transaction fees of 30 cents each plus up to 2.9 percent of the balance, according to Oldenburg. A single batch of up to 250 payments can handle multiple currencies.

Since approximately 98 percent of his affiliates are outside of the U.S., JoeBucks’ McNelly says minimizing the cost and complexity of international payments was a must. Most of his new affiliates in India, Russia and Asia choose to be paid via a Payoneer account, and they like being notified by email of a funds transfer, he says. "We haven’t had many complaints [about using Payoneer], which is unusual, because [affiliates] complain about everything," he says.

Ecount can issue electronic payments to only U.S. and Canadian residents and will add three European markets in 2008.

Payment methods will continue to evolve with technology as merchants and online marketers look for ways to create efficiencies.

Key Cogs in the Affiliate Machine

In May 2008, JupiterResearch analyst Patti Freeman Evans published a study on affiliate marketing that indicates online marketers will spend $2.1 billion on affiliate marketing fees, with U.S. online affiliate marketing spending reaching $3.3 billion in 2012. That figure includes the aggregate cost of running an affiliate program: affiliate network fees and affiliate commissions. Evans estimates that the affiliate space is growing at 9 percent.

A report from Evans in December 2008 says a growing number of retailers will increase spending on holiday sales-driving tactics like promotions and online advertising. Twenty-seven percent of online retailers will increase spending on affiliate marketing (a 14 percent increase over the previous year) whereas 18 percent will increase spending on banner advertising.

Sitting smack-dab in the middle of that affiliate equation are the networks. The networks’ job as trusted third party means they are acting as an intermediary between advertisers and publishers. Serving multiple constituencies requires being a lot of things to a lot of parties. The networks are partners, matchmakers, facilitators, data keepers and more.

The major networks have many things in common and perform most of the same basic functions, including tracking technology, reporting tools, payment processing and payment aggregation.

The networks each use slightly different terminology to deal with e-tailers selling products and those that receive the commissions as part of the programs. Commission Junction, LinkShare and Google Affiliate Network all refer to them as advertisers and publishers, while ShareASale calls them merchants and affiliates. All of the terms are acceptable and interchangeable within the industry.

While each network also has its own specific terms and conditions that must be adhered to by advertisers and publishers, most of the networks have agreed to some basic rules about overriding affiliate commissions and what constitutes flagrant violations of the basic tenants of affiliate marketing.

However, each of the major networks has developed a slightly different flavor. Some are geared towards big e-tailers, others focus on lead generation and still others tend to work with major catalogers. The reasons why an advertiser or publisher chooses a specific network can depend on a variety of factors.

It’s like having a choice, between Pepsi, Coke, and RC Cola – and in some cases, Fresca.

For advertisers, the choice to work with one network over another can depend on a range of factors, including additional services offered, the technology platform used, the cost of setting up a program, the customer service and the quality of publishers in the network.

Each network has its share of loyal advertisers – large and small. Although there is some amount of churn, where merchants switch their programs from one network to another, that process can be complicated, disruptive and time consuming, so it’s not all that common (like customers switching mobile phone carriers). Some advertisers run programs on multiple networks, but in most of those cases one of the networks seems to act as the primary one. LinkShare is the only major network that requires merchants to sign an exclusivity contract and work only with them.

Most affiliates tend to maximize their earning potential and work with several, if not all, of the major networks. Some affiliates work with just one or two based on preference about payments, advertisers in the network and commission rates.

One of the biggest jobs of the networks is to facilitate relationships between advertisers and affiliates. All of the Big Four networks do that in some form through annual face-to-face gatherings, and most have facilities within their respective platforms to allow contact between those two parties. Commission Junction is the only big network that does not provide merchants with the names and contact information of their affiliates. While merchants can use a variety of techniques to get around that and also have contact with publishers, they are not given direct access through the CJ platform.

Some of the other differences – and the most hotly debated – often surround the issue of network compliance.The major networks have teams of various sizes that work to ensure advertisers and publishers are not in violation of their respective terms and conditions. However, those levels of policing infractions and ejection from the network varies widely. In addition, each network seems to have its own ideas about what activities are acceptable within the network. ShareASale stands alone as the only network that forbids merchants from offering any type of downloadable applications or software. That stance means affinity and loyalty merchants are not allowed within ShareASale. It also means that the company has greater control over ensuring that its affiliates are being fairly credited for commissions.

Increased competition from ad networks and vertical networks are forcing the major networks to step it up with their offerings, which is likely to result in increased innovation and better service for advertisers and publishers. That should be a boon for the entire industry.

Crossing the Line

The roles played by each of the key parties in the affiliate marketing space are very clearly defined. Just like a well-oiled machine, each component has its job to do, each ensuring that the industry as a whole functions, if not in harmony, at least in synergy.

Affiliates should drive value added traffic and consumers to a merchant’s site.

Networks are considered to be the middlemen that track affiliates’ traffic and merchant sales.

Merchants convert that traffic and consumers into sales.

Affiliate managers are there to oil and facilitate the whole process.

Each group enters into relationships with the other parties with the presumption clear boundaries will be maintained. For the most part it works, and each group wants to keep it that way. Affiliates don’t want to see affiliate managers doing their job and merchants don’t want to see networks becoming merchants.

The only potential for crossover is the job of the affiliate manager, as they can exist with the merchant’s organization or within networks or as outsourced program managers. An affiliate manager could certainly boost their personal revenue rather nicely if they started playing all sides of the business,but at the same time they are likely to destroy trust with their affiliate partners.

Trust is the key issue in all of these roles. This complex ecosystem functions because it is based on trust. Trust is not something that people should take lightly or for granted.The presumption of trust exists within each party’s responsibilities, but still, each group needs to earn and continue to foster that trust.

One of the most complex and debated roles in the industry is that of the affiliate network. They are considered to be a trusted third party that is meant to remain neutral and ensure everyone is working in a fair field of play. That’s not an easy task given that there are widely differing opinions on various sides of what constitutes fair play.

Both LinkShare and Commission Junction have previously bought affiliates, and while this has caused concern, it didn’t raise any real alarm bells at the time. And those moves have since faded from the limelight. But let’s face it – many of the larger CPA networks are affiliates that turned into networks,and most still operate as affiliates.

The PepperJam Network has progressed through the affiliate business from merchant,to affiliate, to affiliate managers to affiliate network – presenting them with a serious challenge in how they separate and manage their industry role. The mixed reviews and acceptance PepperJam has received from the affiliate community shows it’s not an easy path to travel. It’s a very difficult journey to take while keeping all constituencies happy. And the larger a company becomes the harder it is to ensure boundaries inside the company are enforced and trust is kept in place.

So it is perplexing when a “Trusted Third Party” network such as LinkShare recently began allowing OneCause, an affiliate, to operate in violation of its’ own terms and conditions, overwriting affiliate codes without a consumer action and targeting direct-to-site traffic from organic search results.

What makes this even more upsetting to the delicate balance of affiliate marketing trust is that OneCause is owned by Rakuten, LinkShare’s parent company.

The industry has long argued whether BHOs (Browser Help Objects) should be part of the affiliate channel and how they should interact with the consumer. That debate continues to rage on. But the real question here is, why is LinkShare (or any network) now operating as an affiliate?

Extensive tests by members of the affiliate community showed that, not only is the LinkShare-owned BHO failing to follow LinkShare’s own Terms and Conditions, but it is also going beyond other BHOs, such as the ones from affiliate eBates, and overwriting affiliate tracking that is meant to be protected by the industry standard afsrc=1 code. This means LinkShare is being credited for commissions that should have gone to its own affiliates. It is wrong on all levels.

LinkShare wrote in its blog that the issues were immediately addressed, but continued testing shows the same results as prior to the fix.

LinkShare isn’t the first to do this, but as the company likes to state, it is a market leader. So, why is one of the three largest U.S. affiliate networks seemingly going out of its way to cannibalize its own affiliate base? In fact, CJ and Google Affiliate Network all cleared OneCause.

Economic conditions are tough in the U.S. market, but it’s hard to believe that business is so bad that networks can’t find other ways to increase revenue rather than undermining affiliates and slicing up their affiliates’ revenue. This is ultimately bad business for the long run because it undermines the basic rules of trust between a network and affiliates.

Merchants need to ask themselves if they want to be working hand-in-hand with networks that are cannibalizing their valuable affiliate sales channels and undermining core affiliate partners. And affiliates must consider if they want to be promoting merchants that allow their traffic to be cannibalized for someone else’s profit. The affiliate business exists because of synergy and trust between all parties. Cannibals have no place in that equation.

Chris Sanderson is the owner of AMWSO.com, an Outsourced Affiliate Management Firm, with an international team of dedicated affiliate managers supporting clients programs on a global basis.

Commission Junction: Putting the Pieces in Place

Kerri Pollard took over the helm of Commission Junction as general manager over a year ago. Pollard’s rise through the ranks – starting at BeFree back in the day and then at CJ as director of publisher services – gives her a wide variety of network experience to draw upon. Since Pollard took over, CJ has undergone some changes.

Lisa Picarille: You’ve been running Commission Junction for over a year now. What’s changed at CJ?

Kerri Pollard: It seems like a cliche, but the first order of business was to get the right people in place. Our emphasis is customer focus on the advertiser, publisher and agency side of the business. We didn’t spend a lot of time on agencies in the past. Making sure we had the right people gave us greater focus. Everyone is now aligned and focused. On the agency side, we have a support team and the resources on the sales end. I’m happy to say that coming off CJU we’ve gotten positive feedback about the increased support and partnership. Also, both the advertiser and publisher sides made alignments in the marketing and products teams. There is ownership and accountability within their teams. That is reflected in the product groups. I grew up on the publisher side of the business at BeFree and we have added more support on that side of the business. Mike Ouellette, a former BeFree-er from back in the day, has also joined us as director of publisher developments.

LP: What has resulted from the personnel changes?

KP: Those changes give us a couple of different things. In this business, it’s all about bringing in new advertisers to the CJ Marketplace and retaining them. Organizationally, we are focused on retention and acquisition. We are really trying to re-emphasize customer outreach.

LP: And the biggest changes?

KP: They’ve been on the technology side and the marketing and product sides. We are becoming better at product marketing. We hadn’t been marketing ourselves. We are also able to focus on Web Services. We launched that two years ago, but there are more opportunities for third party developers and to get traction with developers.

LP: Have the changes allowed you to attract more developers, advertisers or publishers?

KP: We tend to err a little more on the conservative side. But we continue to bring in new clients in each quarter when you look at the year-over-year numbers. It’s all about how we track it and we are also very conservative about sharing that data.

LP: Has the fact that Performics is now part of Google impacted your ability to bring in new clients?

KP: No. It’s been no different thus far. That could change. But it hasn’t impacted the sales process of anything with our existing clients. As far as we are concerned, it hasn’t changed from when they were Performics.

LP: Now, the inevitable question about the impact of the economy on your business?

KP: Because our business is tied to the online process we have been looking at the forecasting process. A lot of people are in the dark about what the holidays will bring. Analysts are all over the place with predictions – anywhere from 12 to 13 percent growth, but we’ve also seen numbers as low as just 3 percent growth for online sales. On the positive side, we are seeing that companies are definitely redirecting money from other channels into affiliate marketing because it is cost effective. Even if a company or retailer has laid off workers, they can’t shut down that channel. But they need our help on the services side of the business – especially if they don’t understand that when they pay out more to publishers, that’s a good thing. That it’s tied to increased sales. But it all comes back to the consumer. More and more consumers are coming online and shopping, and the adoption rate will continue to increase. Will that fact offset what is happening with the economy? Not sure. And we definitely won’t know for sure until a couple of weeks into 2009. We are doing what we can, but things like Citi Bank filing for bankruptcy and more consolidations at financial institutions are beyond our control and they do have an impact.

LP: What’s the impact been on affiliate marketing overall?

KP: I do know affiliate marketing is the safest business. It’s measurable and cost-effective. But businesses are also in hunker-down mode. But I think we can grow the affiliate marketing pie. We are helping our existing clients with greater education, so they can really understand performance marketing. We are also looking to areas like BtoB. People tend to take a shot and need the support for publishers. That business can be tracked and we are looking into what role we could play. We are also looking at doing more tracking retail outlets and VARs (value-added resellers). We are having conversations about how, as a business and technology platform, we can track other things within an organization.

LP: And you have the technology to do that?

KP: We have a lot of technology initiatives. We were the first to launch Web Services domestically. We are revitalizing that initiative, making it more of a community and a mashup. We want third party developers and others to make widgets. We are also working closely with some of the other ValueClick properties to leverage their technology – Media Convergence and MediaPlex. We want to move beyond the methodology. ValueClick is already doing behavioral and contextual targeting. The biggest challenge is the amount of heavy lifting involved.

LP: Are you leveraging other technologies as well?

KP: We want to make it easier for existing clients to do business with us. Publishers get excited when it comes to optimization. Big publishers have made a significant investment. We need to make things easier for the great diversity of publishers. We are looking at creating more push network features for new publishers. So, we are looking at the core fundamentals. This is a relationship-based business. There are social networks out there and communities. We also want to have more automation on the reporting side. We are open to leveraging other developers. We don’t have to build everything ourselves. We just launched a pay-per-call beta test with CallWave. It has a branded CJ look and feel.

LP: There have been issues around network compliance and those that continue to override affiliate commissions.

KP: Network quality is important to us and we are very diligent about it -maybe more than anyone else. We’ve put an increased focus on it. Jeff Randall is handling our network quality and developing that even more. Adware and spyware have been difficult and more egregious, but when it comes to adware, there are customers that are still supporting it. We will still continue to watch it and stay one step ahead. In addition, trademark bidding is a big piece to monitor. The focus for us is staying on top of it. To do that, we are adding more regulations and policies.

LP: A while back, you were expanding into countries outside the U.S. Is that something CJ will continue?

KP: ValueClick has a big global presence. CJ launched in Spain this summer. We also have offices in the U.K., France, Germany and Sweden. We are looking to continue expanding in 2009 and looking at different ideas. We are also seeing more client interest in the Asia-Pacific.

LP: What are some of the specific goals for CJ in 2009?

KP: There are economic factors in play, but we’re focusing more on what we can control. In general, we are seeing greater focus on profitability and margins for our customers. We think that by educating our clients and being focused on technology we can grow distribution beyond the scope.

LP: Are you seeing larger affiliates get bigger and the gap between the largest and smallest affiliates get wider?

KP: Large publishers – especially couponers – are having their best year ever. But double digital growth year-over-year is going to be more difficult. It’s getting more difficult to be successful in this business. The small guys are trying to compete, but it is survival of the fittest and there is a huge increase in competition. The changes to search engine policies this fall hit hard for a lot of people. Search engines determined that content was ranked higher based on what was compelling to consumers. That hit the smaller guys hardest.

LP: Do you feel pressure from the CPA networks?

KP: No. Not really. It’s just arbitrage to an extent. They have not made an investment. It’s not a relationship. I see them as here today, gone tomorrow. They are ankle-biters. I think when you think about networks it really comes down to the Big Four.

LP: What are the other major challenges for CJ over the next 12 months?

KP: It’s been an interesting year. I’m excited about all the things that we’ve been able to do. It’s like we’ve been cleaning up the stable and the horses are ready to hit the racetrack. We are making sure that we stay focused on the customers and the products and services they need the most.

Network Supporters

Many merchants and affiliates develop very close relationships with their account representative at the networks. These network reps often take on many roles including problem solvers, helpers, mentors, sounding boards, cheerleaders, and sometimes they end up being cherished friends.

Many of these representatives are juggling multiple client relationships as well as their daily interaction with colleagues and peers. The account reps are usually big supporters of their clients and while the relationship between the network and its merchants is a partnership in many ways, it’s best not to forget that the account reps ultimately work for the network. And the goal of the networks is to make money.

And that’s where potential conflicts begin to arise. As a network you want to have efficiencies and leverage strengths. If one representative has experience dealing with the specific challenges and issues of a particular vertical segment (whether it’s those selling online mortgages, insurance, shoes or flowers) then having a single person deal with all those clients might be the most effective way to maximize your resources.

However, from a merchant’s point of view this might create a conflict of interest. If you are a merchant selling flowers online, you don’t want the same person handling your account having access to all your proprietary information and also managing the accounts of your competitors.

“I think it could be a benefit and liability for the merchant,” says Shawn Collins, co-founder of Affiliate Summit. “If all goes well and you have a rep with good insight, that’s great. But if you have someone that you suspect has a reason to help someone else over you, that’s not a good feeling.”

Collins says those uneasy feelings could easily be amplified since each of the networks offer different levels of service.

“I would probably have some concerns if the same rep was working on the same verticals – especially if the network was managing the account,” he says. “If you’ve got one company paying $1,000 a month to the network and another paying $10,000 and they are in the same vertical, I’d be worried that the one paying more was getting much better attention. I’d also be worried about shared intelligence even if it was innocent or inadvertent.”

ShareASale.com President and CEO Brian Littleton says his network is very aware of the situation and asks “each client who their competitors are, in their minds, so that we get a comprehensive list as well.” He says in “any area where a ShareASale representative is in front of sensitive data, we take as many steps as we can to make sure that it is not shared directly or indirectly with a competing merchant,” Littleton says.

LinkShare President Steve Denton says that his company helps quiet merchants’ fears by giving them direct access to their affiliates. That’s not the case with some other networks – most notably Commission Junction.

“It’s your channel; you should have that information,” Denton says, who admits that tact could be a liability if a merchant decides to leave. However, he says he thinks the upside of building a partnership outweighs that.

Denton says that for LinkShare it’s all about the service level the merchant has bought into. LinkShare offers two levels of service: one where the merchant purchases tools to help them run their own program; another whereby LinkShare runs your program for you.

“If you bought tools from us and I’m not running your program, then you can be put in a vertical category,” Denton says. “I don’t see a conflict there because it’s just a tool set and the playing field is level. But if I’m running your program – recruiting affiliates, extending private offers, etc. – then you can’t have the same reps working on accounts in the same vertical. I would not have direct competitors in the same portfolio. They may roll up to the same VP. We have Dell and Apple, Wal-Mart and Target, Macy’s and Bloomingdale’s. But the same reps don’t work on those accounts.”

Gary Marcoccia, marketing director at affiliate network AvantLink, says that in the company’s top two categories – Outdoor Gear/Recreation and Special Occasions – AvantLink has seen “that the more merchants from those respective categories that come in, the better all programs seem to do. This is because each program brings quality affiliates, adding even more specialized affiliates per category to draw from and attract.”

But what if a merchant is working with a CPA or ad network? Generally the merchants that do business with ad networks are looking to get leads and conversions. They are not paying them to deal with branding guidelines.

“In essence you bought shelf space in a store, you can’t expect much more. You didn’t buy an exclusive network. The attention goes to the guy that pays the most and has the best-selling product. Welcome to the world of distributed commerce,” Denton says.

Merchant Vann’s works with two different networks and according to Matt Ranta, affiliate manager at Vann’s, “Fiscally, it can be in a network’s short-term best interests to promote one competitor over another based on the analysis of commission and conversation rates,” he says. “But, ideally, if competing merchants both were working with a single network, they should be offered equal services and opportunities from separate representatives so as to assuage as much as possible a potential conflict of interest. Unfortunately, is seems that this is not always the case with some networks.”

A Taxing Experience

Some companies worry about conflicts when competitors simply join the same network. For TaxBrain, the problems started last November when Intuit and H&R Block also joined Commission Junction after leaving LinkShare. For four years leading up to the point, TaxBrain had enjoyed being the only tax preparation program with a big affiliate presence at CJ. Even though its rivals had much larger overall brand recognition with consumers, TaxBrain had more success using affiliates.

TaxBrain got wind of a competitor joining CJ when TaxBrain’s No. 1 affiliate called the company to say H&R Block’s account team at CJ was recruiting him. TaxBrain’s affiliate manager and vice president of business development, Todd Taylor, says he approached CJ about actively recruiting his top affiliates for the H&R Block program and was told these folks signed up as publishers looking to work with specific types of merchants, and the H&R Block profile was the same as TaxBrain’s.

Affiliate Colin McDougall says this kind of poaching is the norm. “This happens all the time. I will usually accept the rival offer; however, I will promote both companies on my site by offering reviews and pointing out the differences between the two companies for my visitors to make the best decision possible,” he says. “In most cases, each merchant has their own unique selling proposition and promoting rival companies benefits the merchant, consumer and the affiliate. The merchants get more traffic. The consumer gets to see a third-party perspective. The affiliate makes more money by having more brands to promote.”

That might be true, but Taylor says it’s still a hard pill to swallow when you’ve been at the network much longer. Taylor, who had suspected something was afoot when H&R Block showed up at CJU in September, was also miffed that the newcomer Intuit got high-profile treatment at the network. CJ recently put Intuit as a featured advertiser on its home page. TaxBrain has never been featured in that position.

“I felt like that was a slap in the face,” Taylor says, adding that TaxBrain has gone through four entire account teams in the last year at CJ, due to personnel changes and reshuffling at the Santa Barbara-based network.

This has all caused Taylor to be very cautious about communicating his affiliate strategy to CJ. He’s also worked hard to find out the names and other contact information for his top affiliates (CJ doesn’t actually share that information with its advertisers). He claims that now he only calls his top affiliates on the phone and deals with them personally. The rest of the affiliate program related to messaging and such is outsourced to a team at Partner Centric.

The impact has been felt on TaxBrain’s program. Taylor claims it has seen the conversion rate come down compared with last year, while the commissions paid out have gone up. He attributes some of that falling conversion rate to a variety of factors, including the state of the economy and that there is evidence that many people are holding off on filing their taxes. He directly cited the increased affiliate program competition for the rise in commission rates, saying that his company has had to pay out more to be competitive. He also claims that H&R Block recently began mimicking TaxBrain’s successful hybrid affiliate program that pays for both leads and sales.

After getting over the initial shock of H&R Block coming to CJ just in time for tax season, Tax Brain felt like it was dealt another blow when Intuit, which joined CJ in early January after running an independent program, had its lawyers begin sending a handful of cease and desist letters to TaxBrain. Most centered on advertising that TaxBrain was doing (some here in Revenue magazine) to recruit affiliates and promote its affiliate program.

“They are lawyering us to death to keep us from gaining market share,” Taylor says. “It’s cheaper for us to comply then spend the money on legal fees.”

Boon for Affiliates

While all of this competition can be a headache for merchants, it’s great news for affiliates. The more people affiliates have bidding for their attention the more they are in the driver’s seat in terms of getting better offers and higher commission rates.

Affiliates that want to create comparison sites in a particular category can also maximize their chances of getting commissions for sales or leads. “This is great one-stop shopping having all the players in one spot – search engines love that stuff,” Taylor acknowledges.

But some affiliates claim there is some loyalty involved. “I have been approached by rival merchants seeking to compete with a strong performer on our site. However, in these cases, loyalty plays a strong role,” says Mike Allen, president and chief executive shopper of Shopping-Bargains.com.

“It’s wise to ‘dance with the one who brung ya’ and I’m not willing to dismantle a strong relationship for a quick dance with a newcomer. Over the long term, though, since we have a diverse base of shoppers, I’m willing to build a complementary relationship with additional and even competitive merchants. Expand, yes. Replace, not likely.”

Allen adds there is also a lot of research that goes into joining a new program. “Once we have evaluated a program and determined we are interested in running it, we then look at the finer details of their program to determine how much we will promote it. This is especially important when there is a lot of competition in a particular vertical. Some of the finer details that impact placement and promotion on our site include the merchant’s conversion rate, their coupon policy, the availability of their affiliate manager, their policy regarding parasites and opportunities for additional earnings through bonuses, higher tiers, private offers or sometimes even slotting fees.”

McDougall says, “As an affiliate, having multiple merchants to choose from helps grow my business. More merchants to promote provides me with more brands to review for my site visitors, offering greater value to them. Plus more merchants in a vertical creates more competition amongst the advertisers to get prominence on my site, which of course leads to higher commissions. If there are too few merchants in a vertical, an affiliate doesn’t have much leverage for higher commissions.”

Out of Commission

How to Limit Commission Theft

  1. Find a trusted network and merchants. Ask other affiliates about their experiences with network partners, and if you are not being protected, take your business elsewhere. Likewise, if a merchant partner advertises via adware that is known to facilitate commission theft, you may be better off without them.
  2. Study your reports yourself for anomalies such as drops in conversion rates. Look at your server logs as well as network analytics to identify inconsistencies between the ratio of customers who appear to purchase and your commissions. If you are driving traffic but people suddenly aren’t buying, it may be a problem of theft.
  3. Test the software yourself. Even though isolating a computer and infecting it with suspicious software is a hassle, what you learn will be invaluable. Watching the activity when visitors come to you or your merchants’ websites will enable you to understand the scope of the problem.
  4. Educate yourself through affiliate marketing forums and the legal landscape. Affiliates and software experts are the best source of information available. While there is some misinformation, being well-versed in the issues is your best defense. Several court cases are pending that could decide the legality of overwriting commissions.
  5. Tell customers not to download software that you suspect is assisting commission theft. If the evidence convinces you that some free applications are harming your business, advise your current and potential customers not to use it.

We all operate to a great degree on trust. Whether you are an affiliate, advertiser, network or merchant, being able to succeed in business largely relies on others adhering to their written or implied agreements. We assume that most people will be honest and not interfere with our transactions.

“The overwhelming issue [in affiliate relationships] is about trust,” says Joseph Matheny, chief technical officer of advertising network AdValiant. But unfortunately that trust continues to be violated by some who capture commissions rightly due to others or take credit from a merchant that is not earned.

“There are those who haven’t bought into the rules of affiliate marketing,” Larry Adams, product manager for Performics, says. Subversive software, the anonymity of hiding behind affiliate IDs and sneaky scripting on websites make it easy to steal commissions and avoid detection. The potential to redirect commissions without fear of prosecution “provides a strong financial incentive not to follow the rules,” according to Adams, who says, “this is not a problem that is ever going to go away because there is economic opportunity.”

While there are reporting and auditing tools that can flag some of the most blatant attempts at padding commissions, dishonest affiliates can marginally enhance their earnings from their partners with little fear of detection or repercussions. Scott Jangro, president of marketing services company MechMedia, estimates that loss of commissions due to theft is “in the single digits” and “part of doing business that you should expect.”

Not-So-Grand Larceny

Commission theft generally falls into two categories: when tracking mechanisms meant to follow visitors from an affiliate or advertiser to a merchant are ignored or overwritten, or when someone claims a commission from a merchant for a transaction that they did not initiate. Unethical affiliates can stealthily overwrite competitors’ cookies during visits to their sites, or they can “advertise” with companies that disrupt the buying process by launching pop-up windows that falsely create commissions by erasing the true referring ID.

Like its brother nemesis click fraud, commission stealing has existed since before the Web was dynamic and will likely always plague online marketing. In 2002, networks Commission Junction, Be Free (which was subsequently acquired by CJ) and Performics agreed to address the problem by creating a code of conduct for affiliates to follow. LinkShare developed it’s own formal code of conduct.

CJ and Performics agreed that affiliates should insert a text identifier known as “afsrc=1” in their query strings to identify themselves to merchants and publishers. Affiliates and software developers should look for that string and back off from attempts to claim their own fees.

Performics’ Adams says employing afsrc=1 “will protect against software used by a lot of marketers who play by the rules,” and distribute applications that respond accordingly when they detect the code. The affiliate code of conduct has been revised twice since its inception, and Adams still advises new affiliates to implement the afsrc=1 code.

Implementing the afsrc=1 code “protects from a narrow class of programs” such as consumer rebate software like Upromise or eBates that follow the rules, according to attorney and adware/spyware expert Ben Edelman. But many adware companies do not conduct themselves along these guidelines, according to Edelman. Affiliates rely on the networks and each other for policing with “some affiliates paying bounties to those who turn in others,” he says.

The afsrc=1 parameter and affiliate code of conduct is not enforced consistently and “gave too much wiggle room to the networks,” according to Kellie Stevens, president of Affiliate Fair Play. Stevens, whose company provides affiliate consulting services, says “afsrc=1 is now a moot point,” because it is not uniformly implemented and is ignored by adware applications. “Many affiliates have no idea [about afsrc=1] and don’t know they are supposed to be using it,” according to Stevens.

Adware from companies such as Zango (formerly known as 180solutions) and DirectRevenue enable their advertisers, who are affiliates or merchants, to insert pop-up windows that can interrupt the buying process and cancel commissions from other affiliates and/or create commissions for themselves. These applications, which consumers download in order to receive free software, music or videos, have led to several lawsuits (some of which were dismissed) claiming unfair business practices. Zango recently settled a case with the FTC over charges of deceptive practices with consumers and paid a $3 million fine, but did not admit guilt.

Dave Methvin, software expert and chief technology officer of PCPitstop.com, began studying how Zango’s software works because customers who had their PCs scanned at his website were emailing him about problems browsing the Web. “It became a crusade because so many of our users had infected computers,” he says.

Methvin installed the Zango software and watched as his visit to a Verizon website was interrupted by a pop-up window that created a commission for an affiliate whose site he had never visited. “When I started the transaction, Verizon wouldn’t have owed anyone a commission,” he says.

“Clearly there are unfair things going on,” says Methvin, who likened Zango’s enabling of partners to interfere with affiliate relationships to someone who provides a criminal with a gun and bullets but doesn’t want to be held accountable when it is used in a crime.

Zango’s software looks for keywords contained on a website or for specific URLs, and when found, launches a Web page or pages from affiliate websites in pop-up windows that have been observed to generate as well as overwrite commissions.

Zango director of public relations Steve Stratz says his company’s software does not itself overwrite cookies or otherwise subvert affiliate commissions. However, Stratz confirmed that Zango’s terms and conditions with its advertisers does not prevent them from altering cookies or creating pop-up windows that interfere with transactions, and he has no intention of asking them not to. Stratz says Zango sells to its advertisers all of the URLs and keywords that are used by its clients to open up pop-ups, including pages that open up only when someone visits a merchant’s shopping cart. Zango’s software will load pop-ups when a trademarked product names appears on a page.

“For us to regulate the world of cookies and the various and sundry ways that they are used goes beyond the scope of our mission as a company,” says Stratz. He says if companies want to protect their home pages or trademarks from pop-ups, they can always outbid their competitors. “We don’t apologize for the aggressive nature of our ad network,” Stratz says, adding that 200,000 people willingly download Zango software each day.

(For more on Zango, see the Affiliate’s Corner column on page 94.)

Network Protection

Technology does not exist that can prevent cookies or affiliate links from being ignored or to proactively defend against commission theft, according to attorney Edelman. It is impossible to prevent cookies from being overwritten, although consumers can protect their computers by installing applications that detect adware or spyware.

Since there is no panacea for protecting commissions, affiliates should employ the strategies for limiting loss, which foremost requires carefully selecting and working with your network partner.

The primary responsibility for monitoring commission theft lays with the networks, according to Steve Sauve, chief technical officer of network MaxBounty. “The merchant is paying a network for a service, and it is our responsibility to do quality control,” he says.

Sauve says that on average his company terminates two to three affiliates per month for commission stealing. In his experience defrauding merchants is a bigger problem than affiliates stealing from one another. “You need to actively monitor the network and watch to see where the traffic comes from,” he says. If an affiliate’s commission is out of alignment with the historical conversion rates, Sauve says the network should investigate.

Performics’ Adams says networks need to be proactive to make certain that affiliates aren’t participating with adware software vendors. “One of the most transparent things is anomalous performance. If they’ve been in a network for a while without showing results, then jump up to the top 20,” then something is likely amiss, he says. Performics tracks daily and trailing averages, and has a network performance group to monitor how affiliates drive traffic. “Looking at geography [of the initiating IP address] is also a good clue [for identifying bogus commissions], as illicit activity is often offshore,” according to Adams.

If affiliate reports show an unwarranted boost in performance, or if another affiliate has suspicions, Performics undertakes a remediation process to determine if the affiliate should be bounced from the network.

Affiliate Fair Play’s Stevens says if an affiliate isn’t getting enough support from the network in battling lost commissions, then it is time to shop around. However, larger affiliates “have to participate with the big networks because they need big brands to draw the traffic.” She says that networks need to be more candid in instructing new affiliates about the occurrence of commission theft and more closely monitor the commission-reporting process.

Merchants should aid affiliates by terminating relationships with those who are known to steal commissions, according to Stevens, but they are constrained by a lack of information. She says that if a dishonest affiliate is part of a large network, it may be hard to identify that specific affiliate, and so the merchant would be forced to terminate the entire network; a difficult decision if the network overall is performing well. Merchants sometimes make side deals with known cheats because of the revenue they generate, Stevens says.

Networks such as ShareASale are drawing affiliates by being selective about the companies that they choose to do business with and promoting their “clean” affiliate relationships, according to Stevens.

Selectivity

According to AdValiant’s Matheny, networks could eliminate 50 percent of the lost commissions by caring for their affiliates properly. His company is developing MediaTrust, a custom link-generation technology that would make it more difficult for software to circumvent the referral process.

Matheny, who has a background in Internet security, says that the system is similar to a public and private key system used in encryption software where each side (in this case the affiliate and the network) holds part of the information necessary to complete a transaction. The software, which is due in the first quarter of 2007, would make it more difficult for an application to fake a referral transaction.

The best method for understanding if, or how, commissions are being stolen is for an affiliate to set up a test computer and install any suspicious software, according to Performics’ Adams. He recommends you visit your site and your merchants’ sites with the “infected” computer and watch for deceptive behaviors.

Since the networks have offered little details about commission theft, affiliates should search forums and message boards for links to investigations of adware by software experts. “There is not a lot of centralized factual information,” advises Edelman, who says affiliate forums are the best places to start.

Affiliate Fair Play’s Stevens says that lack of a concerted voice among those in the industry is hindering the fight against commission stealing. More sharing of information between networks would deter affiliates from bad behaviors because they wouldn’t find it so easy to hop from partner to partner, she says.

AdValiant’s Matheny says he recently spoke with a competitor about starting a consortium for sharing information and establishing industry standards. Presenting a unified front amongst competitors would have a psychological effect, according to Matheny, if commission thieves believe that “we won’t let you get away with it.”

Affiliates who take undeserved commissions “should be flagged,” by those in the industry, Matheny says. MaxBounty’s Sauve says his company would volunteer data about affiliates to a group effort, “but there would be a danger of false positives.”

Sharing too much information would reveal how commission thieves are tracked and bad affiliates could use the knowledge to avoid detection, according to Performics’ Adams. His company prefers handling issues with clients privately to establishing a blacklist of affiliates who have cheated. “We wouldn’t want to throw them under the bus.”

JOHN GARTNER is a Portland, OR-based freelance writer who contributes to Wired News, Inc., MarketingShift, and is the Editor of Matter-mag.com.

Stumped About Stopping Spyware

Tuan Le is mad. And when he’s upset, he speaks quietly, deliberately and very thoughtfully. He’s hardly a hothead. But nothing gets him more riled up, if you can call it that, than knowing he’s losing a large percentage of revenue from his two affiliate Web sites to other affiliates that are acting in unethical and unfair ways.

Le, who’s been an affiliate for the last few years and owns wholesaler.com and findcheapauctions.com, has spent a lot of time researching spyware and adware and has many times considered taking legal action against the companies that use spyware or somehow interfere with his affiliate commissions. But he’s been reluctant to make waves.

“I think there is a percentage of what is supposed to be coming my way that is being diverted,” he says. “I want to do something about it, but I’m not sure what I can do.”

And Le isn’t alone in this. Whether you call it spyware, adware, parasiteware or any of the many other names used to describe the software that positions itself between Web publishers and their merchant partners, the pernicious applications are causing thousands of affiliates to lose a lot of money.

According to an industry watcher who asked not to be named, affiliates are losing up to 40 percent of their annual revenue to illegitimate affiliates (often called bad actors) that entice end users to download free software in exchange for being served advertising.

Le estimates that figure could be as high as 50 percent.

“It’s the most horrible thing on earth. It’s intrusive, evasive and it’s just a very nasty thing to do; and it’s fast becoming one of the hottest ways to generate traffic on the Net,” says Jason McClain, president and CEO of PrimeQ Solutions, an Internet marketer and lead generator.

Once loaded onto the user’s desktop, these free applications often replace ads, redirect links and disable existing browser cookies. That means the ads that users see are not those paid for by affiliates – a consumer is often clicking on another affiliate’s advertisement to make an online purchase or going to a competitor’s site to buy goods. For affiliates that means a loss of commissions and traffic, which ends up hurting their revenue stream.

This issue has been a huge one for affiliates for more than the last four years, according to Kellie Stevens, president and founder of the affiliate marketing resource Web site AffiliateFairPlay.com.

“Affiliates feel the most pain – their cookies are being written over, the merchants are then paying out commissions that are not warranted. The merchants feel the second level of pain,” says Gary Stein, a senior analyst for online advertising and marketing at JupiterResearch.

At the crux of the issue is, who owns the desktop, the browser or the application?

Those companies that derive the bulk of their revenue from selling advertising on free downloadable applications take the position that the user owns the desktop and that consumers have a right to decide for themselves what is displayed on their own computer screens, not publishers.

Thomas Storm, vice president for online services at VentureDirect Worldwide, a performance-based marketing firm, claims the desktop doesn’t belong to a publisher, and if a user agrees to receive an ad, that is their choice. He acknowledges, however, that user agreement licenses for the free software are often so complex that few people actually read them. Or, if they do, few know exactly what they are agreeing to. Still, Storm believes it is the responsibility of users to make sure they understand what they’ve read before they agree.

“If there are three or four steps in the download process and users don’t read through all of them, then that’s their fault,” he says. “You can’t get away with claiming ignorance in a court of law. That won’t fly.”

A Big Problem

Although most market researchers who follow this space do not have specific numbers on the size of the spyware market or how much revenue is generated by the traffic, they agree the market is huge. Anecdotal evidence puts the spyware market at nearly $500 million, and some oft-quoted figures claim that nearly 90 percent of personal computers are infected with spyware or adware.

“It’s very hard to get a sense of how big it is, but it is big, and the perceived impact is significant,” says Stein, who notes that a quarter of the advertisers Jupiter surveyed are “philosophically opposed” to adware. Furthermore, 7 percent said their respective companies issued mandates prohibiting them from buying adware.

In October, EarthLink, along with anti-spyware and system utility software maker Webroot Software, published their SpyAudit Report, which scanned more than 1.1 million PCs for the period of July through September and found an average of 25 spyware-related applications running on each system. That is a slight decrease from the instances of adware and adware cookies, as well as a decrease in the number of system monitors and Trojan horse applications, on Internet surfers’ systems for the period of January through March 2004, when the average was 26.5 percent.

This downturn was attributed to the increased awareness of spyware and adware infections and the increasing number of software tools available to fight the threat. Antivirus vendors, including Symantec and McAfee, have been adding some level of spyware and adware detection and removal tools to their software.

Defining The Problem

It’s hard to fight something that is not defined. One of the biggest issues is one of the most basic – defining what is and isn’t spyware. Spyware is a catchall term typically used to describe computer programs that are designed to stealthily install themselves on people’s computers – often when the users attempt to download seemingly legitimate programs. The most benign spyware programs – also called adware – simply serve up a barrage of pop-up messages, while the most intrusive ones can track online movements, steal passwords and hijack sensitive data.

The fact that different groups use different terminology to describe these malicious programs (see sidebar) has made it difficult for various entities – especially the government – to curb the problem, according to Steve Messer, CEO of network service provider LinkShare. “Everyone’s definition is different. There is not a definitive answer,” Messer says. “Managing this problem will depend on how the community comes together.”

There are a handful of companies that are most often named as perpetrators of these types of acts, including Claria (formerly Gator), WhenU and 180solutions. All say they are not spyware and are legitimate advertising networks (see page 44).

Still, many are upset at the practices employed by these and other firms.

“California and Utah have given Gator and WhenU a clean bill of health, spyware-wise. Now these two guys are legitimate in those states,” says Haiko de Poel, president of ABestWeb. “But parasite- wise they are dirtier than hell.”

Claria, 180solutions and WhenU have all been named in suits that involve improper use of trademarks or unfair trade practices related to advertisements and targeting. Gator’s activities have prompted more than a dozen legal challenges from companies including the New York Times, The Washington Post, Extended Stay, Hertz, Lending Tree, Overstock.com, Quicken Loans, Six Continents Hotels, TigerDirect, UPS and Wells Fargo, among others.

One merchant, who asked not to be named, says he had to drop 180solutions. “I made a lot of money with them working with us on an affiliate basis, but my sense in talking with other retailers is that they were avoiding them like the plague.”

Who Is Responsible?

So whose responsibility is it to try to stop spyware: the government, affiliate networks, the affiliates themselves, end users, anti-spyware vendors? Most think the answer is all these groups.

PC makers have recently joined the fight against spyware in order to control their technical support costs and avoid any legal repercussions, according to Russ Cooper, senior scientist with TruSecure.

Forrester Research analyst Jonathan Penn says a spyware-related support call can cost $15 to $45, and a company may lose business if end users believe the spyware problems are related to its products. “Security is a component of loyalty,” Penn says. “People want all these various services, but they expect security to come with it.”

Yahoo, EarthLink and AOL have all begun offering spyware-detection tools. Hewlett-Packard and Dell also offer limited free trials of anti-spyware software preloaded on their systems.

Messer says he is shocked that some people truly believe the spyware situation can be resolved. “This problem is never going to be solved. It’s like spam or the war on drugs or illiteracy. You just have to manage it and do the best business you can.”

He adds that the concept of obliterating spyware is one of those lingering ideals from the early days of the Internet. “The idea that the Internet would be this free, safe, great place still lingers, but the reality is that we will have to deal with [spyware] for the rest of our lives. So, we need to work together to manage it.”

“I agree that we are not going to solve the problem, but we can minimize it,” says Trey Barnes, president of Public Policy Partners, a Washington, D.C. legal firm, and president of the Consortium Of Anti-Spyware Technology Vendors, a nonprofit organization of anti-spyware vendors that addresses the issue of spyware.

Barnes adds that the solution has to be multifaceted and must include the anti-spyware vendors, legislation, have a consistent code of conduct from the network service providers (see page 36) and focus on education.

“We need to get the word out about the risks of spyware to all the impacted parties without scaring them,” Barnes says. “Education is pre-emption, and pre-emption then goes a long way to help manage the problem. Spyware is not going a way, but if we don’t get it under control then it will threaten the commerce and growth of the Internet.”

Steps To Stop Spyware

Even though the affiliates are most impacted by spyware, they have not been able to mount a concerted and cohesive effort to fight it. Most are like Le. They are aware of the problems, but don’t want to make waves at that level. They fear repercussions from the networks or the spyware companies that could mean the loss of even more revenue.

In addition, there are so many affiliates, each with different strategies, varying levels of technical and business acumen and different opinions, that group efforts have yet to result in a consensus.

“Affiliates are an independent lot,” Stevens says. “Every group effort seems to fall apart due to differences in opinion. And individually they are not effective.”

The affiliates that are most impacted are mom-and-pop Web publishers. This group is not typically technically savvy, and some may not realize how much they are losing.

“Some affiliates don’t have any idea how much revenue is being lost,” Stevens says. “They figure that they are making $5,000 per month and paying their bills. But they are not put in the context that they could be making $12,000 per month. Most of these are smaller affiliates that started with this as a side income and were then able to quit their jobs. This is the first time they’ve been self-employed, and they don’t have as much experience with management.”

Many, like Stevens, believe the networks are in the best position to combat spyware problems. “The networks haven’t taken all the necessary steps,” she says. “Maybe with pressure from the affiliates they will do more. Maybe if the affiliates scream loud and long enough something will happen.”

While all the major networks have anti-spyware policies (Performics and Commission Junction have adopted a code of conduct, while LinkShare has its own contractual effort to curb spyware see page 36), some say those policies do not go far enough or are not enforced with regularity.

“Codes of conduct don’t mean beans if they are not enforced,” de Poel says. “And many times these guidelines are not enforced.”

Le says he believes the networks are dealing with the threat of spyware by setting up departments that are supposed to monitor and handle any inappropriate activity, but he also worries they are just a corporate façade.

“These are things they need to put up in order to get new accounts. They can say they have an enforcement department that exists, but if it’s not at all effective then that’s the issue,” Le says.

Stevens calls the networks’ policies related to spyware shortsighted. “When spyware and adware applications started, the networks were struggling,” she says. “Then they started to see revenue and traffic increases, and now they are top performers and have some really good statistics to attract more merchants. It’s like they were boxed into a corner.”

Others say blaming the networks is misguided.

“It’s not the networks’ fault that illegitimate marketers are trying to come up with ways to surreptitiously get to users’ desktops,” says Tim Hickernell, vice president at META Group. “Unlike spam and email, spyware and adware do not correlate to a service that users consider valid. With email, users thought it was a valuable service. Nobody said, ‘let’s do away with email’ to get rid of spam. It’s not the same for spyware. Consumers don’t understand the value at all.”

“As long as [spyware companies] are clearly stating that they will install a program and it’s easy for the user to understand what they are installing and say no, they don’t want it – and as long as users can clearly uninstall the program – then they are legitimate marketers,” he notes.

Still, the networks have not had an easy time policing their affiliates. In September, LinkShare awarded – and then revoked – its $15,000 Titanium Award to the affiliate with the highest quarterly percentage increase because the recipient, TheDesktopShopper.com, was accused of using spyware.

LinkShare took back the award after other affiliates complained on AbestWeb, an advertising/affiliate marketing chat site, that TheDesktopShopper.com had been blacklisted by several watchdog sites. To date, TheDesktopShopper.com has not been kicked out of LinkShare’s network. This was the second time LinkShare had to revoke its Titanium Award because an affiliate allegedly used suspect practices.

And while some companies with reportedly offending practices often remain in their respective networks, many note that trust between the networks and the affiliates may be eroding.

“The networks themselves are in a great position,” Stein says. “They are getting all the traffic, getting all the commissions, but they are degenerating the trust of the network. And when that trust goes away, the affiliates will abandon the network.”

Many, including de Poel, make no bones that the bottom line for all of this is money.

“The networks aren’t doing anything about it, because they are making money off of those guys. It all boils down to the dollar, the dollar, and the dollar,” de Poel says.

de Poel suggests that action is more likely to be taken when parasites start impacting the merchant’s organic traffic and not just the affiliates. “The merchants need to make the networks do something or they should leave. This left-handed administration of the programs just isn’t working, and the networks are not trusted third parties anymore.”

For Le, the turning point will be when merchants get real proof they are paying out unnecessary commissions. “That’s when this will come to a head,” he says.

Spyware-Free Networks

Brian Littleton, president of ShareASale, says spyware is a large overall problem. That’s why his affiliate network provider will not allow any affiliates to sell downloadable software applications.

“It’s a customer nuisance, and I didn’t want our company and my brand and me doing business like that,” he says. “As we saw the problems it was causing affiliates and merchants on other networks, it reinforced the view that we wanted to stay away from it.”

He says it’s not a difficult stance to take. Instead, it’s about working only with those companies that make you feel comfortable. “Financially speaking, you’re better off accepting those affiliates, but that will not change our stance.”

Littleton feels for the other larger networks in their struggles to determine who is complying with their regulations and code of conduct. “It’s not an easy task with so many people trying new tricks, but I have confidence in the other networks that they want to enforce it. It’s very difficult to do so.”

KowaBunga Technologies, a provider of private affiliate tracking and management solutions, has also taken a stance on spyware. Although the company was not able to mandate that its clients become free of adware and spyware, it sent a message to its more than 1,800 merchants alerting them to the findings of an August 2003 study by Harvard graduate student and antispyware activist Ben Edelman (see page 50). The study focused on the practices used by 180solutions (also known as MetricsDirect) and Claria.

“This affiliate/company [180solutions] has recently been exposed as engaging in possibly fraudulent activity ” ,” the KowaBunga memo stated. “In summary, this company encourages users to install software on their computers, often in exchange for MP3 downloads or other incentives. This software, once installed, will track the user’s browser activity and, most importantly, will attempt to take credit for any hit to your Web site, regardless of how the visitor finds your site. In this scenario you are rewarding this affiliate for a commission even if the visitor actually found your site through another affiliate, or even if they simply typed your domain into their browser. We believe that these practices not only cheat your other affiliates, they cheat you directly.”

“We received hundreds of responses from our clients and saw that the majority of them removed this ‘affiliate’ from their programs” after KowaBunga sent out the message, says Rachel Honoway, vice president of sales and marketing.

KowaBunga has placed 180solutions and others like them in its Fraud Watch center, an area within its software that allows merchants to alert one another of possible fraudulent activities and the appearance of spyware and adware tactics.

The Upside

However, some think this method of advertising has its strengths and is a very viable tool.

VentureDirect’s Storm says that targeted marketing is a great vehicle as long as the user’s experience is not disrupted. From a consumer’s perspective, they are more likely to get more targeted ads that are helpful if the technology is used properly.

“We’ve got to make sure that we’re forward thinking and tomorrow will come and we will be still be in business. If spyware is wiped out, the end result is that we will be taking away an advertising route,” PrimeQ’s McClain says.

It’s a very effective advertising vehicle, according to Scott Delea, senior vice president and general manager of e-marketing services at Digital Grit. “We are aware of the issue from an industry perspective, and we are trying to be respectful. You don’t want to cross the line; it waters down the overall advertising vehicle and will eventually lead to its demise.”

He notes that affiliates have to be conscious of the brand they are involved with and the product they are selling. Otherwise, targeted advertising is “teetering on the brink of a large abyss where this is no longer a viable marketing channel,” he says.

Even Barnes, who represents anti-spyware vendors, claims that there needs to be consumer respect for distribution methods. “The reason there is not a monetary cost is because the ads are paying for that. My big concern is that all advertising on the Internet is suddenly deemed inherently bad. We need to be more thoughtful than that and focus on types of applications – but not all software that serves ads is bad,” says Barnes.

Ethical Or Technical Issue?

Most claim that the issue is both ethical and technical.

Robert Deignan, business development director at Stopzilla, an anti-spyware software provider, calls the programs that perform browser hijacking and take over a user’s desktop extremely technically savvy. Stopzilla is putting out updates on a daily basis to make sure users have the most current software to render the spyware applications inactive.

Deignan also says “big bucks are at stake” for these spyware vendors. Some of these peer-to-peer programs can easily reach more than 300 million downloads. That means the market for anti-spyware and adware has ballooned over the last two years as well.

AffiliateFairPlay.com’s Stevens says the boom in adware blockers is a no-win situation for affiliates. The affiliates can promote the removal applications to their users to get their computers clean, but then it removes the affiliate’s tracking cookies.

“Programs are getting more clever. Every day they are finding more sophisticated ways to get around protections and to exploit holes,” says Ron Davies, president of joepro.com, which develops affiliate marketing system and trains affiliate marketers and retailers.

“They are using the technology to their advantage. The ideas are usually good, and then they get perverted. Remember, pop-ups used to be the darlings of marketing; now they are the scourge of the industry and people can’t get enough of pop-up blockers.”

Davies is particularly concerned about drive-by downloads, where users don’t even know an application was downloaded on their machine. This can take place in a single step or multiple steps. He likens a three-step drive-by download to a gun.

Some seemingly harmless JavaScript code is downloaded to a user’s system (the rifle). The next day additional code is downloaded, the equivalent of a bullet. So far, those two components are not harmful. But on the third day, the user downloads code that is the trigger. Now all three components click together and become harmful.

Still, Davies believes the issue is more ethical than technical. “A good marketing company has to make the decision of how far are we as a company willing to go to make money,” he says.Clay Lingo, vice president of marketing at Illuminations states emphatically, “I just think it’s poaching. Some say it’s a natural synthesis of search. Someone is searching for a product and a pop-up appears providing a more focused return on what the end user is looking for.” Jupiter’s Stein says it’s an ethical issue, where technology is the weapon. He calls it an “arms race with either side using technology to get ahead.” Others fear the future of affiliate marketing hangs in the balance. “I don’t see affiliate marketing doing well if the thievery and the unethical behavior continue to be condoned and rewarded financially,” says de Poel. Meanwhile, Le says he’ll stay calm. Spyware will remain one of his main concerns, and even though it might not be immediately apparent, he’s fuming. “It is beyond belief. It is bad and it is wrong.”

LISA PICARILLE is the editor of Revenue. She has more than 15 years of experience as senior writer and editor at CMP (as executive editor of TechWeb.com), IDG and Ziff-Davis.

Being Ben Edelman

You’d be hard-pressed to find someone more knowledgeable or dedicated than Ben Edelman when it comes to the evils of spyware. The 24-year-old assiduously tracks the proliferation of adware from his own computer lab. He’s a fierce critic of spyware practices and has testified in several high-profile adware-related lawsuits.

Talk about overachievers: Edelman is a Ph.D. candidate at the Department of Economics at Harvard University and a student at Harvard Law School. He currently is analyzing methods and effects of spyware, uncovering affiliate commission fraud and examining Internet filtering efforts by governments worldwide.

DIANE ANDERSON: Where do you do most of your work?

BEN EDELMAN: I work primarily from my apartment. All the equipment is in my office, the second bedroom in my two-bedroom apartment. I currently have six PCs in my lab, though I’ve had more from time to time. In general, I install one spyware app on each PC, then test its behavior under controlled experiments. For some projects, I install spyware in virtual machines on my fastest PC – which lets me return the system to pristine condition for multiple rounds of tests of install-uninstall or for testing of many different programs in sequence.

DA: How did you get started researching spyware and adware?

BE: It was something I had long been interested in. My recent work focuses on the intersection of law and the Internet – generally including writing software to study whatever software I’m looking at. Programs that show extra pop-up advertisements are a natural candidate for study in this way, because by careful testing I can learn which ads are shown when, how the programs get installed, what personal data they transmit and so forth. I was thinking about these kinds of questions as early as 2001. My earliest publication in this field came in mid-2002, when I served as a technical expert in the case brought by The Washington Post, New York Times, Wall Street Journal and others against Claria (then Gator) as to its pop-up ads covering their sites.

DA: There seems to be a lot of confusion about what the differences are between behavioral targeting, adware and spyware.

BE: I think the differences are often surprisingly small. There’s a large class of programs that use behavioral targeting – meaning watching what a user is doing – to figure out what ads to show (an “adware”-type function) while also sending back information to central servers about users’ online activities (which some might call a “spyware” feature). So I see great overlap between the three terms.

The various programs using these methods have a lot in common. For one, users don’t generally want these programs on their PCs. For another, users don’t generally seek out even the most benign of adware programs. Instead, users get the programs through some kind of bundle, or auto-install (“drive-by”) that occurs when users visit certain Web pages. A further similarity: The resulting advertisements cover Web sites with, in general, their competitors’ sites – a result that I found incredibly surprising when I first experienced it, and that in my experience users continue to find surprising. What an odd thought that the ad you see, when you type in LLBean.com (and are otherwise looking at L.L.Bean content), is in fact an ad for L.L.Bean’s direct competitor!

Of course, there are other kinds of contextual advertising. Google shows ads according to what searches users conduct. Sometimes these ads are controversial – sites’ advertising being triggered by direct competitors’ brand names. But Google certainly isn’t sneaking onto anyone’s PC. The Google ads, at least, are within Web pages that say google.com, so even the most inexperienced user can always understand that the Google ads are there because Google put them there.

DA: What should affiliates and affiliate managers know about search engine cloaking?

BE: First, let’s step back for a quick definition: Search engine cloaking is a set of methods whereby sites attempt to boost their search engine rankings, primarily by giving search engines content different from ordinary users.

Cloaking is a risky strategy. It has rewards, but it has a downside too. For those with savvy competitors or critics, who might notice the cloaking and report it to authorities, the risks are particularly pronounced. Google’s FAQ says it may remove sites from its index, permanently, as a penalty for cloaking.

That said, to date the penalties for cloaking have been pretty limited. Cloak for a year, and you might never be caught. Even if you are caught, you might get at most a slap on the wrist, especially if you’re powerful and can convince Google to be lenient. So the fact is, lots of sites are using cloaking.

DA: What are you working on now?

BE: This year I’m finishing my last year of law school, and planning my dissertation for my Ph.D. in economics. I also have some ongoing testing of more spyware and stealware, work I expect to publish on my Web site in the coming months.

DA: What stealware is the most pernicious these days?

BE: It’s hard to know. If I knew which software were most problematic, I’d surely make it my highest priority! Generally, I try to keep an eye on the programs with the largest installed base – figuring that they’re the programs affecting the most users, and that they’re the programs best positioned to show a large number of pop-ups or to falsely claim a large volume of affiliate commissions.

DA: You’ve studied these programs for some time. What do you think are the biggest dangers facing affiliates right now?

BE: I think the biggest danger is complacency. Affiliates would be wrong to assume that all is well in the affiliate marketing space – that they can simply link to merchants, then wait for the money to come rolling in. Fact is, powerful outside forces seek to profit from affiliate marketing and garner their profits by interfering with the referrals made by other affiliates.

DA: What actions would you suggest affiliates take to protect themselves?

BE: I wish there were more that affiliates could do. As it turns out, the major stealware problems are problems for merchants, primarily, and for affiliate networks to the extent that the integrity and value of their tracking systems are called into question. Ordinarily, rule-abiding affiliates lose out when stealware seizes their commissions. But there’s not much an ordinary affiliate can directly do to address the problem.

That said, it’s always good for affiliates to be informed, and to help spread the word. Revenue readers are surely better informed than most. I’m a big fan of ABestWeb, where there’s lots of savvy discussion about which programs are doing what. Those affiliates who have personal relationships with merchants can learn what’s going on and can help keep their merchants in the loop, especially as to programs found to target their merchants.

DA: You write about 180solutions, WhenU, Claria. Which companies are the most egregious violators?

BE: I was, and remain, particularly concerned about the behavior I have observed from 180solutions software. 180’s software was setting affiliate network cookies even on “organic-traffic” type-ins, where users reached merchants’ Web sites directly (not through any other affiliate). So merchants would be paying commissions to 180 for traffic that resulted from their own background marketing efforts. 180 was also overwriting cookies set mere seconds before by other affiliates – so merchants would be paying 180 when the commissions should have gone to other affiliates. These activities had been going on for at least six months when I began to write about the problem publicly. But somehow the existing processes – merchants’ fraud control efforts and affiliate networks’ efforts – had failed to detect what was happening, or to do anything about it.

Claria is notable for continuing to be installed on a huge number of PCs, some 40-plus million, according to recent reports. That’s a lot of users getting extra pop-up ads!

DA: What can be done about them?

BE: To the extent that these programs set affiliate cookies in violation of merchants’ and networks’ rules, I would ordinarily expect merchants and networks to detect the behavior and to issue sanctions, presumably including forfeiture of ill-gotten commissions. Litigation also seems like a possible way forward. After all, merchants might want refunds of commissions wrongly paid six months ago, not just of the most recent months of commissions not yet paid to stealware companies.

In thinking through enforcement options, it’s important to realize that affiliate networks face some odd incentives here. Remember that merchants pay networks a share of the amounts merchants pay affiliates. For example, if a Commission Junction merchant pays $10,000 of affiliate commissions, CJ’s 30 percent fee might be an additional $3,000. Usually, this is a good thing: Networks make more money when affiliates make more money, so networks have an incentive to stop merchants from cheating their affiliates. However, networks also make money when “stealware” affiliates claim commission they’re not entitled to. So networks face an incentive to look the other way and to allow or even to promote programs that claim affiliate commissions in violation of merchants’ and networks’ rules.

Set against this incentive are networks’ overall reputations for honesty and integrity: If the networks try to cheat the merchants too much, or if the networks let the merchants get cheated too much, then networks’ reputations are likely to go down the drain. But these forces are in tension, and my sense is that lots of merchants are coming to question whether they can count on networks to make sure affiliates, especially affiliates using software downloads, are in compliance with the necessary rules.

DA: What role does government play? What are your opinions about the various bills?

BE: I’d love to see legislation that truly addresses the problem of unwanted software getting on users’ computers. So far, though, I’ve failed to see much legislation that addresses the subtlety of the situation here.

The real problem, as I see it, is defining user “consent.” It turns out to be pretty easy to get a user to press an “I accept” button – especially if that button is in a box that looks official, or if it comes as one step in a many-step process of installing some software the user actually wants. But what should we infer from the user pressing “accept”? Can the user, with one quick click of a mouse button, allow a software distributor to claim commissions on the user’s every purchase? Allow the distributor to install whatever software it wants, from whatever third parties, at whatever point in the future? Can the user authorize the software provider to create on-screen advertisement displays that are, to many users, not just annoying but also misleading and confusing, and that many online publishers regard as damaging to their brands?

Then there’s the problem of licenses not actually shown to users. In many drive-by installs, the user gets a message like, “Do you want to, after reading our license (click here to view it), install [program name]?” How should we understand this prompt? If a user clicks on “yes” without reading the license, is the user still bound? What if the link were broken, such that clicking on the license link didn’t actually produce a license? If the unread license claimed “user will pay software provider $100,” I suspect we’d all consider the license unenforceable. What is so different when the license instead says, “We will cause your PC to show extra pop-up ads”?

I’ve been surprised at how many courts have been willing to accept the “consent” argument – giving so much weight to a user’s thoughtless and hurried press of the “accept” button. Most legislation also places great significance on “I accept” – sometimes requiring that users be given specific information before they accept, which I think is a good start, but ultimately letting users accept almost anything, no matter how one-sided. I’m not usually one to intervene in free markets – so I, too, have the instinct that if users actually want this stuff, we should let them have it. But my experience is that few users actually do want it. Instead, they’re just not paying attention when they “accept.” So I think there’s a role for government to be helpful here, in requiring consumers to really think before they leap, to read a few screens of disclosures and to press a few different “accept” buttons in a procedure reminiscent of signing a rental car agreement. The formalism of the multiple steps of acceptance might go a long way to helping users understand that pressing “I accept” is actually a big deal.

DA: What are your biggest current concerns?

BE: The current fight over unwanted software on users’ PCs actually seems to me a very big deal. As a society, how do we make sure that users have the freedom to install what they want on their own computers, yet that big companies can’t trick users into signing away (or should I say “clicking away”) their rights for nothing? In the real world, we’ve built up various kinds of unconscionability laws – a prohibition on various kinds of misleading real-world offers that make a user think he’s getting one thing, when the truth is far removed. Can we find the right online balance? Or will corporate interests run rampant and seize users’ computers for their own benefit?

More generally, I’m interested in the balance between public and private on the Internet. The fight over spyware ultimately comes down to how easily users can give up their own desktops – how much of a showing a software company must make to defend its right to be on a user’s PC, when the user quite likely didn’t actually want it there, but when the company claims the user pressed “accept” and granted permission. We shall see.

DIANE ANDERSON is an editor at Brandweek. She was the managing editor of Revenue Magazine for Issue 4 and she previously worked for the Industry Standard, HotWired and Wired News.

The Way To Ebay

To state the obvious, eBay has become a household name, at least in the US where everyone recognizes the brand as the largest online auction site. What may be less obvious is that eBay also has one of the largest affiliate programs.

That may seem odd given that most merchants use affiliates to sell goods or services, and eBay doesn’t sell goods or services. Instead, it’s a virtual warehouse filled with millions of constantly changing items being sold by other folks.

So why does eBay even need an affiliate program, and what do those affiliates do? As it turns out, eBay is a company based on a different business model, and that has led to a slightly different use for affiliate marketing. First, eBay uses affiliates to attract new bidders. It’s especially anxious to build its account base internationally, and there is some churn when deadbeat bidders are removed for failing to pay on three winning bids.

And then there are all those items passing across the auction block. EBay affiliates include sites like RollingStone.com, which links to the rock memorabilia category on eBay. They also include collectible sites that keep a sharp eye out for rarities. The Web, after all, is a great vehicle for finding rare items (see story, page 66). There’s just one limitation: You can’t be both a seller and an affiliate. As an affiliate, you can point to someone else’s auction, but you can’t point to your own.

Aficionados of the site who want to get involved find plenty of opportunities. The company offers $5 cents to $16 for every new member referred who bids or transacts within 30 days of registering on the site. The site also pays 5 to 15 cents per bid or BIN (short for “buy it now”) placed by referees per visit. Repeat bids on the same item don’t incur additional commissions, despite the fact that many affiliates believe they’re entitled to such recurring revenue. The discrepancy is simply an example of a larger trend: Affiliates tend to sign up for programs without reading the terms of service.

Another way to score affiliate cash is by referring merchants to eBay’s PayPal subsidiary, which the auctioneer acquired in late 2002. Buyers, sellers and affiliates can participate – the one catch is that the referrer needs to have a pre-existing business relationship with the referee. Once the latter sells $1,000, the referee scores $10. Another sawbuck is awarded for each additional grand until the maximum bonus of $100 is reached. Also, payouts are only applicable for the first six months after the merchant joins PayPal.

But these fees can be earned in some interesting ways. “We have shopping cart vendors who earn referral fees” by PayPal enabling their merchant servers, explains Dave McClure, director of the PayPal developer network and senior manager of the merchant services group, which launched the referral program last fall.

“In the eBay world, there’s a natural buyer-seller crossover,” he said. “But now we’re trying to move from the seller viral model to the buyer viral model. We’ve been thinking of ways for buyers to, say, petition their merchants to start accepting PayPal. This is the first step in allowing buyers to refer sellers.”

Million-Dollar Club

PayPal’s program may be growing, but there’s more money to be made from affiliating with eBay. In fact, it ranks among the top 10 percent of the advertisers on Commission Junction, which provides indices of merchants’ commission sizes and volumes. “EBay is a strong program with lucrative payouts,” says Lisa Riolo, vice president of client development at Commission Junction. “They have publishers who’ve earned $1 million or more. They talk about the sizes of these payouts in the eBay newsletter, so publishers can see that some of the top performers receive really large checks.”

The newsletter boasts that the largest affiliate made more than $1.4 million in commissions in February of this year, but doesn’t disclose who that big earner is. That same party became the first affiliate to hit the seven-digit-commission-in-one-month threshold last December. The newsletter puts this in perspective: The top 100 affiliates earn almost $25,000 a month each. The top 25 affiliates average more than $100,000 monthly, suggesting an annual income of $1.2 million or more.

“EBay is working with most of the top performers in the pay-for-performance space,” Riolo said. “They’re very forward-thinking, they’ve taken the principles that have been successful to them and extended them to the community they created. We’ve given them numerous awards. This is a win-win relationship for us.”

But there’s one way in which you can’t win it all. As stated earlier, eBay is very explicit about keeping sellers and affiliates separate. You can only be one or the other, so the publishers tend to be folks lacking fulfillment capabilities or other resources. Sellers who try to become affiliates are banned from the site – including those who attempt to do so using aliases – because directing traffic to one’s own listings is considered fraudulent.

Co-Op Ads

Affiliates do get to participate in eBay’s developer program, which encourages third parties to create software for buyers and sellers. “We think that’s in the affiliates’ best interests,” said Vaughan Smith, senior director of Internet marketing at eBay. And sellers get to market themselves in other cost-effective ways, through the auction’s Co-Op Advertising Program, which reimburses 25 percent of the insertion fees that are placed on co-branded advertisements.

While sellers number in the millions, the affiliate community is around 10,000 strong. But most of them are active entrepreneurs, says Vaughan. This flies in the face of industry benchmarks like those of Affstat, which holds that only about 5 percent of a program’s affiliates are actually active.

“We work closely with our affiliates, and we look for affiliates who want to work with us,” explained Smith. “It’s better for the affiliates that way. The most important thing is we like people who are interested in making lots of money, and we think we’re in a great position to provide that opportunity. We want quality affiliates, rather than quantity.”

While many merchants listed on CJ get all their affiliate members from the network’s directory, roughly half of eBay’s affiliates discover the affiliation opportunities by surfing through the links on the auction site. The remaining half come from Commission Junction.

Unfortunately, eBay wouldn’t disclose what portion of its revenues come from affiliate marketing. The company’s latest filing with the Securities and Exchange Commission indicated overall sales and marketing expenditures of $192.7 million during the first quarter of 2004, mostly dwarfing the numbers posted by other publicly held merchants participating in Commission Junction.

With such scope, you’d think that eBay would be quite capable of running its own affiliate program in-house. But the site handed this business to CJ in March 2001. “We essentially decided that we’re experts at running a marketplace, and Commission Junction’s comparative advantage is running a network with lots of affiliates,” said Smith. However, eBay also has an in-house staff of six people who work with affiliates on improving their performance.

Smith’s sidekick, Eva Hung, manager of Internet marketing, adds, “EBay decided to work with Commission Junction because it’s simply the best solution for building and managing a strong pay-for-performance program. Three years later our publisher base is still growing and our pay-for-performance channel is responsible for a significant portion of eBay’s customer acquisitions.”

Mythical Disconnect

The auctioneer certainly dispels the myth that affiliate programs and television advertisements don’t mix. EBay’s show tune-inspired TV spots are so catchy that fans are blogging about the lyrics enthusiastically on the music video site Clipland.com.

The ads and the affiliate marketing are intended to be synergistic. “When people are online and they see an affiliate ad present itself in front of them, they remember what they saw on TV and that prompts them to come to the site and transact,” said Smith. “Then repeat users come from the offline ads.”

As with all programs, there are some grumbles among affiliates whose expectations about commissions are unclear: Many presume they’re entitled to commissions on repeat bids on a listing, a frequent occurrence in competitive auctions. The terms of service state that an affiliate gets only one such payout per referee visit that comes from visitors clicking off the referrer’s site. Many affiliates’ reports show reversals of commissions ensuing from such repeat bids Ð apparently, that’s a software glitch that eBay adjusts manually on all transactions, said Kelly Stevens, president of the testing and analysis site Affiliate Fair Play. The site consulted eBay on this very topic.

“The Commission Junction cookie should expire after that one-time commissionable event, and it doesn’t expire; it just tracks any further bids or Ôbuy it now’ transactions, so eBay has to manually reverse them,” Stevens said, explaining this is essentially a conflict between Commission Junction’s technology and eBay’s stated policy.

One member of eBay’s program is GovindaMall at Govinda.nu, which participates in several hundred other affiliate programs, 20 percent of them through Commission Junction. Govinda Proprietor Wu Chung Fai says that, based on the number of Web surfers that he has referred to the auction site, his earnings per click are on the lower end of the spectrum, comparable to the rate he gets paid by Amazon.com. However, his traffic is “easy to convert” because there’s “something for everyone” on the site, he said. And he noted that eBay’s “editor kit offers great flexibility to add content to an affiliate site.”

However, he lamented that the program has grown to the point that the market is “saturated in terms of current commissions,” and there’s “too much competition from other affiliates.” He also questioned the reliability of eBay’s tracking mechanisms for tallying up referrals.

Adult Content

Another affiliate also had some beefs about the program. “I am not happy with some aspects of eBay’s program Ð notably one incident that remains uncorrected,” said Amber Lowery of EastCoastWebs.com, a three-person site building firm. “Several months ago, I contacted [eBay] because mature and inappropriate business category auctions (with text and images) were showing up on my pages and I run several family-friendly certified sites. There was no way to filter this and I ended up dropping eBay from all of my sites that promoted the Business/ Industrial Category. The part that upset me was that no one at eBay seemed to care, despite the fact that the material in the auctions was against eBay’s own [Terms of Service], as well as the TOS of the affiliate network, CJ. This problem remains uncorrected.”

Lowery also had positive comments. “On the upside,” she said, “I do find eBay’s [Application Programming Inter-face] to be helpful, easy to use and comprehensive. Display of auctions is in real time and actually provides not only revenue but also makes for decent content when integrated nicely into one’s pages. I do see both positives and negatives in the eBay program.”

How does eBay feel about such an incendiary opinion? “The affiliate industry is fragmented: There are the people who work hard and the people who don’t,” said Smith. “Very often the vocal ones aren’t the ones who are earning the most, so they have plenty of time on their hands to make negative comments. From time to time we do change the way in which we compensate affiliates, and each time we do that we try to communicate how we do so. But inevitably there are people who still misunderstand these changes.”

To put that another way, eBay’s affiliate program may not be much different from many others after all.

JACKIE COHEN is managing editor of Revenue. She has been covering online affiliate programs since 1998. She previously edited the Net Returns section at The Industry Standard.

Wooing the Lonely Hearts

With thousands of dating sites on the Web, it can be as hard for surfers to find the right site as it is to find the right mate.

Affiliates are the matchmakers of the online dating world, bringing lonely hearts to dating service merchants who can light the path to true love, or at least some warm companionship. In a space Jupiter Research projects will more than double to $642 million annually by 2008, it’s no surprise that affiliate marketers are falling in love with the sector.

“Over the past one or two years, the stigma [about Internet dating] has fallen away,” said Graham Mudd, analyst for comScore, a Virginia market research company. “It’s a cycle that builds upon itself. The more people that use it, and have positive experiences with it, the more it’s talked about and used.” And, said Mudd, that usage is “at least partially driven by the fact that it tends to work.”

That’s right. People are actually finding real love on the Internet. Seventy percent of couples that meet online – and survive the first face-to-face meeting – are still in love and together two years later, reports scholar Aaron Ben-Ze’ev, who conducted the first full-length study of cyber-mating, Love Online. Additionally, dating sites tap into the very real, emotional needs of their members: to discreetly find like-minded individuals with similar interests willing to share a date, a sexual encounter or a life together. Jewish sites are a great example of this, as are sites for those with STDs, gays, religious groups and even couples seeking a third.

A few dating service affiliates claim they make as much as $500,000 per month. Our research found superaffiliates in the dating service arena make anywhere from $1,500 to $50,000 per month. Take LovingYou.com, an affiliate with three staff members and a reported 40 million page views in peak months. The site earns $10,000 per month from dating service commissions alone. Its secret, said LovingYou.com Vice President Bob Narindra, is “to not only have good content, but [get the visitor to] perform some kind of action – submit a poem, read an idea and do it, send a postcard – actually do something. Once you get them to actually do something in your site, you’ve created a connection.” Narindra said that connection is what leads people to buy.

The potential buyers are out there: Dating sites drew 20 million unique visitors in December 2003, reports Nielsen//NetRatings (55 percent men and 45 percent women). Some went for curiosity’s sake, others went for the free trials, and roughly 1.2 million plunked down $8.95 to $19.95 per month for paid memberships. Commissions vary widely. Merchants pay referring affiliates anywhere from a nickel to $3 for every click-through, and 15 percent to 110 percent of member fees if the site can convert those visitors from free registrants to paid subscribers.

Online dating is among the biggest paid-content categories on the Internet. “For the foreseeable future, it will be at or near the top in the paid ad category,” said Nate Elliott, an analyst who monitors online dating for Jupiter Research. The trick for affiliates is to get those looking for love to their sites first. That’s a task particularly hard for new entrants, who don’t have the advantage of the flush of media publicity that followed 1998’s “You’ve Got Mail” nor the virtue of being a top-ranked link in search engines. “The top-10 [dating] sites normally get between 32 and 50 percent of the search traffic when combined,” said Drew Jackman of 10x Marketing, a Utah Internet consulting firm (see chart).

Niche Monogamy

So how do affiliates of dating service sites survive and succeed?

“When you talk about online dating, you really need to talk about niche markets,” said Michael Jones, CEO of Userplane, which makes software for the dating industry. “Does it operate like a small bar that caters to regional interests? We’re finding so many of our clients, and so many small dating sites, exist very happily with less than 20,000 users.”

Even the big dating services, like Match.com, which is listed by Hitwise as the second-highest dating-traffic generator, see value in aligning with carefully niched sites. “We can only serve a certain number of markets ourselves, so having an affiliate network that’s willing to go out and present unique niche opportunities that are relevant to a certain number of members in a category [is a big plus],” said Gerard Sample, Match.com’s affiliate program senior manager. “Our best affiliates always find that niche and present personals relevant to that niche.”

Niche categories are definitely a growth area, said Elliott at Jupiter Research. He’s seeing dating services targeting alumni groups, ethnic groups, sexual preference, religion, language and geographical locations. Those affiliates are creating high-traffic sites just by affiliating with 10 dating services in their category. “They don’t need that many users,” Jones said, “before they become comfortable and are making money.”

Fresh Content

With so many different services out there, affiliates must do something to set themselves apart. “The most commonplace strategies are affiliates that take the time to describe, in editorial fashion, the nature of their site,” said R. J. Lynch, senior product marketing manager for Matchmaker .com. Though many dating services offer free content that affiliates can post, the most profitable affiliates come up with their own, posting free content two or three times per week. “When people find content on your site that they can’t get anywhere else, they build an affinity for your site,” said Narindra.

Here are some value-added features that can be used in various combinations to help differentiate sites:

Newsletters LovingYou.com has 16 double-opt-in newsletters, one for each demographic it targets, ranging from its 180,000-opt-in Daily Expression of Love (a romantic quote, idea or gift of the day) to its 450,000-opt-in LoveWire. Its founder and president, Jennifer Good, writes the copy.

Reviews Rosalind Gardner at Sage- Heart.com, a superaffiliate making up to $50,000 per month who was profiled in the last issue of Revenue, writes reviews of the various dating services she promotes. Other affiliates write movie or book reviews for those sappy romantic titles.

Articles Article ideas come from emailed questions, chat room topics or frequent site search requests. Rather than hire costly magazine freelance writers, insiders recommend recruiting a talented writer who can be more proactive to users’ needs by producing regular articles in-house.

Visitor contributions Many sites post poems and love stories submitted by visitors. Others offer online forums, which provide ready reading material for visitors interested in a particular thread.

Companion affiliates Successful affiliates don’t just stop at dating service sites. They branch out by affiliating the site with related retailers offering romantic gifts, lingerie or flowers. People in every income bracket and lifestyle, ranging from very conservative to the swinger set, are actively looking to buy on the Internet. This means a ready supply of residual income for both affiliates and dating services themselves. Gay.com, a dating service for gays and lesbians, reports that its members are twice as likely to have household income of more than $60,000, twice as likely to have graduated from college, and more than twice as likely as the national index to be professionals or managers. It uses those figures to sell premium-advertising packages to companies targeting the gay and lesbian market.

Multimedia Many offer downloadable love songs, video welcome emails or e-cards. “We extensively use viral marketing in our site,” Narindra said. “Visitors to our site can send online postcards, and the person they sent it to comes to us to look at the postcard.”

Cutting-Edge Marketing

An active marketing campaign is what gets date seekers into an affiliate’s site. “If we know one particular site is hot at the moment, that’s our focus – to promote that one,” Rauschenbach said. “And it changes a lot.” Banners are readjusted on pages, keywords are updated to reflect the most popular search terms, and easy bookmark and active-channel options are added to a site to make it easy for first-time surfers to return.

Meanwhile, high search engine rankings still can be achieved. “It boils down to collecting as many reciprocal links as you can [and] getting as much original content as you can,” said David Hayden, owner of Rabbit Rabbit Ltd., which runs DrDating.com. These strategies, plus a few more Hayden guards closely, seem to be working. He’s grown the site to No. 9 in the search rankings without pay-per-click search engine tactics.

Another way affiliates boost profits is by working with merchants to improve pay-per-click or pay-per-membership commissions. When LoveSites.com signs up to be an affiliate, “we do it in the traditional way, and send out an email afterwards letting the [dating service] know we’re a superaffiliate and we’re looking to promote your program at a higher-than-normal level,” said marketing manager Brian Rauschenbach. “We tell them we’re going to be taking a couple of different approaches to marketing their program, but we want to have a custom program set up first.”

The key to negotiating with merchants, Rauschenbach said, is to not just send them an email. He follows up by phone, and asks to speak directly to the affiliate manager. The net result: “We have a couple of companies that we actually have contracts with,” he said. “In case we get sold to another entity, we still have those contracts.”

Conversion Rates

Since most affiliate profits are made through membership fee commissions, it’s key to partner with dating services that have high ratios of registrants who convert to paid members after a free trial. Matchmaker.com, for instance, reports conversions of roughly 7 percent of visitors from general sites and 15 percent of visitors from dating-specific sites. That’s higher than industry standard, which pencils out to 8 percent conversion rates for males and 2 percent conversion rates for females, according to a December 2003 Nielsen//NetRatings study.

Dating service sites typically pay affiliates if that visitor returns to make a purchase within 30 to 60 days. Some services are sweetening the pot even more. Matchmaker.com, for instance, now offers unlimited return days. Its software records where visitors come from, even if those visitors don’t sign up for a service, and gives credit to the original affiliate if that visitor comes back at anytime during the course of their life. “Giving the affiliate the ability to earn commissions during the length of a subscriber’s time with us mirrors what we’re trying to achieve with our subscribers,” said Lynch. And that’s creating long-term relationships.

Looking Forward

While some product categories are tightening or dropping affiliate partner programs, experts say that won’t happen any time soon in the dating realm. Match.com, a Forbes 2002 and 2003 “Favorite for Dating,” soon will roll out affiliate features now offered only to big-name partners, including advanced searching capabilities, customized channel designs, personality tests and seven-day free trials directly from affiliate sites. “We’re continuing to find new ways to connect affiliates with our users,” said Gerard Sample, senior manager of Match.com’s affiliate program.

Meanwhile, Matchmaker.com will become one of the first dating service sites to offer automatically updated banners: “Traditionally, affiliates would grab new creatives from BeFree and implement them on their site,” Lynch said. “Now the change can be made automatically. This not only simplifies the day-to-day execution of their site, but it also allows them to take advantage of things we do promotionally.”

There are also buyouts afoot. Companies such as Match.net are purchasing smaller services with 50,000 to 100,000 member profiles, said Jones at Userplane. “They either buy you directly or set you up as a portal into their site.”

Increasing competition is causing consumers to act more fickle. “About a year ago, the average lifetime of a subscriber used to be three months,” Narinda said. “Now, with all the competition, the timeframe has dropped to two months.” That means affiliate sites either have to refer more potential members by bringing more people to their site, or come up with additional revenue streams such as books, gifts or even background checks. MatchPatrol.com, for instance, has signed up 25 affiliates for its new fee-based program that gives online daters an identification number that proves they are who they say they are.

Even with all the changes, insiders see online dating revenues getting bigger and better. “There are so many single people out there,” said Gardner, “and everyone is looking for love.”

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.