Google Affiliate Network: Big-Time Backing

The performance marketing landscape changed dramatically last year when Performics, the third largest network, was sold along with its parent company DoubleClick to search giant Google. After more than a decade in the online marketing space, Performics became the Google Affiliate Network – gaining all the cachet of an association with Google, along with concerns from the privacy advocates about Google having too much information on advertisers and publishers. Chris Henger, group product manager for Google Affiliate Network, addresses those issues and talks about where GAN is headed.

Lisa Picarille: Let’s talk about the changes that have occurred since Performics was acquired by Google.

Chris Henger: We’ve moved to the Google Chicago office – three blocks from our old office. Speed and being fast is a good thing at Google. Phase One was the integration. That is done. And it was done well.

LP: So now what?

CH: I think Google brings a tremendous amount of vision, infrastructure and philosophy in their approach to market and business problems. We can apply much of Google’s core business to our business. Google is about making it simple, easy and fast and doing no evil. We have been thinking about how we can bring that to our channel. We really want to embrace that. We need to be relevant to create a great experience for our publishers, advertisers and end users – the whole ecosystem.In CPA and affiliate marketing, we are always thinking about how to convert better and what can we do that will make more money for us, advertisers and publishers. In affiliate marketing,we are continuing the integration to leverage Google’s technology infrastructure. It’s in our best interest and that of our customers (advertisers and publishers) to embed our systems into core Google software. We have access to great software. We were told by Google to engineer for the long term and not for the short term. Be smart about why you integrate into the system. Make sure you are enhancing the core platform. For example, we can use the payment and billing system of Google’s on the back end. This can benefit publishers by offering payments with more speed and transparency. We can send one, common check to AdSense and network publishers. It’s also important because we can now pay in 47 different currencies across many countries.Operationally, it’s important to understand the synergies with our publishers and advertiser and AdSense. There is overlap. There’s an opportunity there to make publishers happy. We can also centralize reporting and use Google Analytics. It’s our long-term vision to offer a centralized dashboard to their affiliate data, mobile, etc., in a single dashboard. We are leveraging Google’s focus on technology and innovation.

LP: What else is on your radar long-term?

CH: We want to make the platform easy and fast, integrate with Google and be more open for advertisers and publishers to communicate with each other. Open communication and the concept of transparency only work if the network is fully open and shares publisher information with advertisers. We think there is value from us, but that we shouldn’t stand in the way. Google has Blogger, Gtalk, Google Group, GMail, and many other communication tools.

LP: It’s great to leverage Google, but is there a downside to that?

CH: People are worried about Google having too much information. I understand the potential perception of conflict but we haven’t had any customer feedback along those lines. They don’t see it as a problem. From a long-term perspective, why would Google do things that are not in the best interest of the end user? It’s funny because the U.S. is known as a capitalistic country with an entrepreneurial spirit – the whole rags-to-riches thing – but America also loves to see the Big Guy fall. Some think Google is too powerful. It’s an unrealistic fear that is not in practice.

LP: How much emphasis do you place in compliance, and will Google play a role in that effort?

CH: Compliance is always important and remains very important.I don’t feel a seismic shift. We believe in quality in business. We have invested in technologies and methodologies.It’s a huge differentiator for us and will be more so in the future. We are working closely with Google on this. It has many technologies for malware detection, and if you combine that with our focus on quality, we have strength. We also hand-screen all affiliates and reject 50 percent of the publishers who try to sign with us.

LP: Does GAN have specific goals set for 2009?

CH: There was a lot of marketplace momentum for us that was very strong in 2007 and 2008. We were taking shares from competitors – which can singularly be attributed to affiliate marketing. Google is committed to the affiliate business as important. Over the next year, we want to continue to grow GAN through that same single-focused effort – driving publisher and advertiser growth. We want to grow programs and have already proven that we can do that. When advertisers and publishers are happy we are ultimately all winning.

LP: Do you think growth could be challenging in this economic climate?

CH: Current economic conditions are impacting online advertisers and all advertisers in the ecosystem. But advertisers are not naive. Online marketing is a vehicle that can help them and is accessible to them in tough times. We want to let them lean on us.

LP: Does that mean you are reaching out to a more diverse group of potential advertisers?

CH: A while back, we began a program to focus on small-to-medium-sized advertisers in addition to our big brands and catalogers. Google works with every advertiser on the planet – across all verticals. At the same time, affiliate marketing works for online e-commerce objectives – leads or sales, the big verticals, retail, financial services, travel and technology. We want to work with companies in all of those areas. It’s important to us to be diverse. For example, we know that in these times, in affiliate marketing and offer-driven channels, advertisers retreat on offers because of margin pressures. It could be right for one or two companies. But offers that are properly structured when the customer is price sensitive or ticket-size sensitive and consider the price point that consumers are fearful of, can work – and work well. So let’s put offers out there that are attractive. We should be talking.

LP: Google has a large global presence. Are there more expansion plans for GAN?

CH: GAN is ultimately a global business but right now we are going through a prioritization process to decide about further expansion. We are evaluating that.

LP: Where will GAN be in a year?

CH: We think that over the long-term we can bring about a real, fundamental change in the industry to make it easier and faster to do what is right for advertisers, consumers and publishers. Give us time. Google’s not out to hurt the affiliate marketing industry. Let us operate with these good intentions.We are part of a big company and things could take a little longer. But there is excitement, enthusiasm and support. The right things are in place. My team is 110 percent committed to do the right thing by customers and good things are going to happen.

Kristopher B. Jones: The Small-Town Big Man

His speech is peppered with “awesome” and “ready to rock and roll,” as if he were fresh out of high school. He’s only 32 but he feels luck has a lot to do with his good fortune. He took what was basically an idea to sell jam and turned it into a successful online marketing company.

But we’re jumping ahead. Jones is a small-town fellow. He grew up around the quiet northeastern Scranton, Pa., region – in towns with quaint names like Forty Fort and Wilkes-Barre. He still lives in basically the same area where he was raised and headquarters his business not far from those same stomping grounds.

He knew early on that he wanted to be in public service – drawn to the tantalizing returns of politics. After graduating high school in 1994, he got a full scholarship to Villanova University to study experimental psychology in 1998 after graduating from Penn State, but questioned whether he really wanted to be a clinical psychologist.

During that period, his brother Rick called and asked, “What do you think about selling grandma’s Mississippi mud over the Internet?” Jones says while he was the resident computer guru in school and was sitting on a lot of school and credit card debt, he was pretty committed to going to law school. He decided he would finish out his law degree and start this gourmet food business.

Grandma’s Mississippi mud was actually a kind of jelly he had eaten as a kid. He calls it a kind of gourmet dip. He typed the ingredients into the Web and out came the popular Northeast dip called pepper jelly. But Jones didn’t want to sell just another pepper jelly. In the end – and after consulting a friend in the food business – they decided on “Grandma Jones’ Originals Pepper Jam.”

It Started With the Jam

That, Jones says, was when his entrepreneurial spirit came out. He could point to other adventures in his business past – the lawn business he had in school and the 1-900 psychic service he started, even day trading – but they never really made any money.

The pepper jam, on the other hand, had legs. Through contacts in the gourmet food business, it started to get some traction. The business was started in 1999. “My brother was the creative side and he had all these flavors he wanted to do,” Jones says. “It all happened pretty quickly. I was going to do all the marketing. I drove the branding and launched the website called pepperjam.com. We personalized it with pictures and stories.”

Soon they realized in order to get traffic and sales, they needed to rank higher in the search engines. The most obvious way at the time was to cycle in fresh content. So, they then came up with the idea to interview famous chefs and put those up on the site. In the end, they posted interviews with the likes of Paul Prudhomme, Emeril Lagasse and Jorge Bruce, to name just a few.

Bruce sampled the product and loved it. At the time Bruce was looking to hire a consultant to get his brand and other chefs online, Jones said. “I will try to cook with this product,” he told Jones. “He may have thought we had offices when we were really operating out of a kitchen,” said Jones. Bruce suggested QVC. “I went into shock,” says Jones, “and had to put the phone on the bed and take a breath a minute. At the time, he was the highest-grossing chef on QVC.”

The chef interviews were getting a lot of traffic now and the question of how to monetize it all became important. That’s when Jones joined LinkShare and started adding affiliate links (his first check from ValueClick was for something like $37). He was just about to leave for law school and was trying to make money through affiliate marketing when in early 2000, he says he began his marketing journey in earnest. “I still own 50 percent of the gourmet food business,” he said. His brother told him to take the marketing business and he’d handle the product. “I knew that the Net marketing side of this requires work. I just started to build out websites – build out content based on a theme. My first was cookware.”

Also in 2000, he adds, Google came out with AdWords. “I was generating close to $100,000 per month in affiliate profits,” he said. He was doing this while doing his consulting work and serving as law school class president two years in a row.

“Once I had money, I wanted to do something with it,” he says. He put all the cash he had been earning while in school into this single idea – to turn his super-affiliate status into a new kind of marketing business – pepperjam.com. “We got an office. I hired my best friend as COO. We knew we could hire smart, young professionals and could help these businesses that were coming online and had no clue what affiliate marketing was,” Jones says.

Getting Into the Affiliate Game

2003 was the breakout year. Jones didn’t realize the impact his company was having until he went to his first LinkShare symposium (they got invited through Overstock.com). “We went to this event not knowing anybody and thought no one knew who we were,” he says. “My attitude was, ‘I’m a super-affiliate, let me manage your affiliate program.’ We were blown away.” When a merchant rep found out who he was, she hugged him. “You’ve been making us so much money,” she told him and introduced him to a whole bunch of merchants. “We were very well received,” he says.

With that boost in his pocket, Jones parlayed that excitement into a new small office and started to hire employees. From 2003 to 2005 he built his client list. From 2005 on, he says, it took on a life of its own. In 2006, the company was about 28 employees. Then pepperjam made Inc. magazine’s list of the 500 fastest-growing companies in the U.S. It was the only affiliate marketing company on the list. “As a search engine marketing agency, we were one of three with iCrossing and MoreVisibility.” All he could say was, “It was just a big party. We’re pepperjam, we’re in the black and we’re an Inc. 500 company.”

While still nurturing a desire to serve in a public way, he was invited to speak at a conference for the first time in 2004. He’s been hooked ever since and speaks quite often all over the country. It kind of feels like he’s class president all over again.

Somewhere amid all this work, he did manage to get married – to someone who works for the company. He said while his wife, Robyn, and he did attend the same high school, they weren’t pals. One night when home from school for a spell, his COO and he went out for a drink and spied her. They remembered her from high school. Jones sat back and watched his COO walk over and try to flirt with her. Finally, Jones joined them and he said they hit it off right away.

“She kind of asked me out after 60 seconds,” he says, “and here she was talking to my friend for the last 15 minutes; but we’ve pretty much been together ever since.” She wasn’t happy at her other job and Jones asked her to work for Pepperjam.

“I know you don’t want to work for your boyfriend, but I’ll have you work from home and write an employee manual or something. We can have you write out some client case studies,” he remembers telling her. After about a month, she began to come into the office and has been with the company for two years.

Growth Spurt

Jones says there has been a lot of interest to be acquired and from venture capital money. Last year, with about 50 employees “we had to think about crossroads – and decided to focus on our own technology,” he says. The company decided communication in this industry was the problem. “It is difficult to get in touch with your affiliates to admonish or to praise them,” he says. There was a lack of affiliate transparency. “We said, ‘We will tell you who are the key affiliates and can protect your brand.'”

This led to the notion of launching a Pepperjam network. Jones worked and consulted with hundreds of affiliates and merchants to preview the network – robust players such as Affiliate Classroom’s Anik Singal, and super-affiliates Lee Dodd and Jeremy Schoemaker, to name a few.

In January 2008, he launched pepperjamNETWORK. This essentially turns Pepperjam.com into a technology company with exclusive merchants such as luxury brand Judith Leiber, clothier Ben Sherman and Jelly Belly. Jones sees this as a super-transparent network that can be an alternative to the big three – LinkShare, Commission Junction and Performics – as well as an alternative to ShareASale. “We are not going up against the big three networks,” he added. “They are much better financed than us and bigger. There is still only one investor in pepperjam and that is me.”

Jones proudly says pepperjam.com now has about 105 employees in a 13,000 square foot floor of a building in Wilkes-Barre. He has five executives and 15 senior-management-level people. He has divisions now – online media planning and buying, search engine marketing, pepperjamNETWORK and full-time salespeople – their first. In the next 18 months, he predicts 300 employees. But he thinks of everyone as family. His wife is director of affiliate marketing; his bulldog is in the office every day. He doesn’t want it to be a corporate environment – there’s Free-Pizza Fridays, ping pong and “Guitar Hero” on the floor. In early 2007, they launched a corporate blog where a randomly chosen employee is given less than 30 seconds’ advance notice to come up with a presentation to be videoed and then posted to the site (some can be found on YouTube; some featuring Roxy the bulldog).

Amid all this success, Jones was approached in the early summer of 2007 by publisher Wiley to write a book on SEO and search marketing. “Search Engine Optimization: Your Visual Blueprintâ„¢ to Effective Internet Marketing” will be published this spring. “In fact,” he said, “I had always dreamed of writing a book in college. I always thought, how can you make a difference? I can join the clergy, be a great father or write a book.”

If that isn’t enough on his plate, Jones and his wife are expecting their first child in August. That’s not going to slow him down. “We are very focused on building out what we are creating,” he says. “We have a bunch of families now; we’re not just a small family anymore. I’ve always been the kind of person that believes that my time hasn’t come yet. I want to focus on being a great father, and from a business standpoint we want to become a great affiliate network. I want to see where we take it.”

While the future seems like a busy one, Jones notes that “pepperjam has just started.”

Eastern Promises

Japan’s had it hard. After nearly a decade of stock market doldrums and an economy on the brink of disaster – just as the rest of Asia struggled too – Japan bounced back. Growth happened. Its economy is still a tad slow, but there are many industries looking way up. Online marketing is one of them.

Of Japan’s 130 million people, about 88 million are online. That’s about 68 percent of the population, according to Internet World Stats (Asia), compared with 210 million of the U.S.’s 300 million and 137 million of China’s 1.4 billion residents. Japan’s may seem like small numbers, but the momentum of online marketing and the ever-growing popularity of affiliate marketing in Japan make it a region everyone’s talking about.

Blogging, for example, in Japan is a popular way of getting products in front of the masses. Technorati Japan says that more than 85 percent of Japan’s bloggers write about companies and their products – and that over half of these bloggers have been contacted by companies to extol their wares. Japan’s Ministry of Internal Affairs and Communications says that bloggers totaled about 8 million in that country, making for an in-blog ad market of about $60 million last year.

Expansion on the Way

In the 1990s, the Japanese did not use credit cards much for online purchases, as bank transfers and postal transfers made e-commerce slow and a waiting game. But by 1999, a tech-hungry culture emerged and online spending came with it. Pay-per-performance business models were not far behind.

A leader in this space is online retailer Rakuten and its affiliates – managed through LinkShare Japan, a U.S.-led affiliate company acquired by Rakuten in 2005. Rakuten is the leader in online shopping destinations in Japan, so their penetration made them a default major player. In fact, Rakuten plans to be in about 27 more markets by 2012, according to Atsushi Kunishige, a vice president at Rakuten. He says they will use LinkShare, for example, as a way to "expand our business into the international market. We want to open a full-fledged Internet mall [abroad]."

Rakuten’s 20,000-plus online stores and merchants did about $66 million in operating profit in the second quarter of 2007. With the company traded publicly on the Japanese stock market, that’s a market capitalization of more than $5 billion.

LinkShare Japan has about 68 percent of the top-selling merchants in Japan and is the leader in customer satisfaction, according to a survey by Japan’s Affiliate Marketing Association. Atsuko Umemura, director, corporate planning, of LinkShare Japan, says that their focus on per-sales kinds of merchants has helped make them a leader. "Affiliate marketing has proven to have the best ROI for us," she says.

Late Bloomers

While the U.S. affiliate industry can trace its beginnings to the mid-1990s, the first affiliate providers in Japan didn’t start up until 1999. The U.S. market has had a few years to evolve and grow, whereas the Japanese affiliate space is still considered a "juvenile." There are more than 80 affiliate networks in Japan that cover both Web and mobile platforms. Some of the more high-profile affiliate networks include Adways, Access Trade, LinkShare Japan, Fan Communications (A8), TrafficGate, ValueCommerce and Zanox Japan.

Anthony Torres, president of affiliate marketing program management company MetaFlo Marketing, which is based in Japan, points out that the key difference between the U.S. market and the Japanese market is that the "Japanese affiliate networks can service only Japanese sites. U.S. networks such as Commission Junction operate worldwide due to English being the most popular language for Web content. So, no matter how large the Japanese affiliate industry gets, it will never be as big as the English-speaking networks," Torres says.

He also notes that Japan is still behind the curve in tracking technology and commission sophistication. For example, U.S. advertisers have more choices in how they reward affiliates. Generally, U.S. affiliate networks allow merchants to pay affiliates based on subscription status of digital content and, of course, future sales even if buyer clicks go directly to a merchant store. The U.S. networks also have more payout choices. A small CPA, plus a larger percentage of future sales generated by the lead is a method that hasn’t made it to Japanese network platforms.

Torres notes that the cost of acquisition of a typical online customer is high in Japan. "When you add in customer service and all of the accumulated costs in the sale cycle, you are left with a lower margin per sale," he says. Merchants in Japan are just not used to paying high commissions or lifetime commissions on a customer, he adds. "As the industry matures here and the ability to attract online buyers becomes more challenging, we may see online merchants less reluctant to try more aggressive commission terms." Unique to the Japanese market seems to be the cross-investment of media sites and affiliate networks. In order to increase media coverage, many networks invest in or make their own in-house media sites.

Considered the real pioneer in Japanese affiliate marketing is ValueCommerce (Yahoo Japan took a sizable stake in the company in 2005), started by a New Zealander named Tim Williams. ValueCommerce has more than 50,000 websites and blogs in its network, with about 2,000 advertisers. The company has about $43 million in annual revenue and trades on the Tokyo Stock Exchange. Goldman Sachs veteran Brian Nelson is now CEO, having come on in 2000 as COO. Nelson says that "we focused on our strengths, continued to hire great people, and launched new products and services that kept new customers, especially large brand name customers, coming in to work with us."

Consolidation is Coming

Nelson says that a large product database for shopping and their Web 2.0 applications have kept them in the No. 1 spot. It also doesn’t hurt that there is some consolidation going on in the Japan online marketing space now. "I have been telling people in the market for a long time that consolidation is coming " and it is in full swing now," Nelson says. LinkShare’s Umemura says, "It is a very saturated market right now. There is not enough room for everyone to survive."

Online marketing observers in Japan note that there are just too many networks trying to service the same advertisers. With about 1.3 million affiliates registered with the major networks and the majority of transactions driven by a group of search affiliates and "incentive media sites," there are not enough "quality" affiliates to take on all the offers out there. This means the networks are starting to look at new channels for ads.

One of those new channels is mobile, a platform that has performed very well for Japan. Because the Japanese adopted 3G standards fairly early, more than three-quarters of all cell phones in Japan have smooth Internet access. This means delivery of interactive content and ads to about 86 million cell phones (compared with 31 million in the U.S.). There are more than 48 mobile affiliate networks in Japan, with names such as Moba8, Pocket Affiliate and Smart-C. In 2005, the Japanese spent more than $3.8 billion on purchases over cell phones – 57 percent over the previous year. In addition, the CPA-based mobile affiliate provider model does much better in Japan than in the U.S., where CPC or CPM models prevail. It’s been said the culture in Japan plays a role in this since there are so many more commuters in Japan – leaving more travel time for the Japanese to experiment with their cell phones.

And with greater mobile traffic comes the opportunity to serve more Internet phone search advertising. Local search engines like Goo, Nifty and BigGlobe get a share of those eyeballs, but the leaders are Yahoo Japan (with about 63 percent of searches), Google Japan at 23 percent and about 14 percent left to split between MSN and the regional engines. Yahoo Japan is also the biggest local player in Internet auctions, Web email, mobile content and broadband.

Search Challenges

Japanese online marketing agency and search specialist Sozon sees challenges in the search marketing arena. One area in SEO that is unique to Japan culturally speaking, says Andy Radovic, VP of strategy and planning at Sozon, "is its variety in language used. Essentially, there are four methods of writing – kanji, the character system borrowed from China; hiragana, a more simplified form of kanji; katakana, the Japanese expression for foreign words; and romaji, which is the alphabet," he says. "Depending on what you intend to communicate, you may use just one or a combination of these. This greatly impacts the keyword planning stage of your SEO program. Another major difference is Japan’s reliance on Yahoo as the search engine of choice."

Radovic notes that Japanese-run companies are the leaders in services and customized solutions. "There are very few successful, market-leading international companies in the online space," he says. The international companies that operate in Japan tend to do so with a local partner. The exceptions, he says, are technology- dependent products, where some U.S. companies are in the lead, such as in search (Google) and bid management and Web analytics tools (like Omniture). "Some of the Japanese homegrown companies in the mobile, travel and insurance space are getting more sophisticated in their online marketing programs and are tracking to off-line sales," he says.

Scott Neville, COO of Sozon, says that, creatively speaking, ad messages need to really know their audience. "International ad concepts simply will not work most of the time," he says. "Text is definitely king here. More information is better and creative is often very busy with multiple propositions." He says you will need to provide as much detail as possible in your campaigns – that Japanese users will definitely read your privacy policy. He says that text email is the standard and somewhat limiting in terms of email marketing campaigns that may rely on HTML. Flash and graphic-centric sites tend not to work that well at either an advertising or a site-campaign level. He says that Flash campaigns "are not really supported by major portals for media buying and tend to be not that well received." Also, comparison campaigns are not generally used in Japan and "culturally not respectable to run."

While online ad agencies in the U.S. are slowly starting to synergize their off-line traditional ways and the brave new web of interactive display advertising, the Japanese banner ad companies are not doing too well. Two online ad agency leaders, Cyber Communications and D.A. Consortium, actually had negative growth in recent years.

The Network View

Aside from the few U.S. companies acquired or now run by Japanese companies, there are few pure U.S. players in this market and there are not likely to be more anytime soon. Observers note that U.S. networks just don’t have the Japanese-language support. While LinkShare and ValueCommerce have a bilingual platform interface, they are the only two out of dozens. One of the U.S. networks to gain a measurable foothold in Japan is DTI. They host affiliate programs for Japanese adult sites, but since most networks in Japan won’t handle porn ads, DTI has found its niche in this area. Some experts point out that one opportunity for U.S. companies would be to acquire small- to medium-sized networks and re-brand. LinkShare’s Umemura says that in Japan, U.S. companies could have come in at an earlier stage, but that "starting now from scratch would be pretty difficult whether you are a U.S. or European company. There are some smaller U.S. networks that do quite well here."

In terms of what hasn’t been popular in Japan’s affiliate programs are third-party management vendors. Currently, only a handful of the affiliate networks have management services, mainly because they are pushing their own media. However, experts say, tool and service vendors could eventually find a market in Japan. Keywords tools such as Wordtracker, recruiting tools such as Syntryx Executive Solutions and competitive keyword research tools such as the makers of KeyCompete could enter the market fairly easily.

Perhaps the best indicator that the online marketing landscape in Japan is maturing is the formation in May of 2006 of the Japan Affiliate Service Kyokai, an association that started to draw up guidelines, educate the public and monitor ethical behavior in online marketing. The six major networks in Japan founded the association when they felt that "shady affiliates" were starting to encroach on the growth of the business.

A learning curve, however, still applies. Sozon’s Radovic says that "everyone is struggling with how to market in a Web 2.0 environment. The Japanese blog and peer consumer trust are major drivers of consumer purchase. So this is an ongoing challenge." And solutions to the challenge will certainly add up to a better marketing landscape.

Ringing IN and Hanging UP

In the old days, a telephone came in two designs and had one ring. With the rise in cell phones, the styles are endless and so are the types of rings you can make the phone chime. There are master tones, ringback tones, polytones, monotones and they all have a price. Users can download them over the Internet and program a ring to sound only when mom or that special someone calls. Users can also send a ring out to someone to let them know who is calling. But they aren’t cheap – as much as three times the cost of one hit single from iTunes. But that hasn’t stopped people from buying the tones in droves.

The music industry loves that users will pay a premium for the 30-second melodies and still come back for more. What the industry doesn’t like is the Florida Attorney General office, which has it in for certain ringtone sellers over the Internet. Whether or not Florida officials can make a civil case for deceptive practices, the damage is done. When sites such as Blinko.com, Jamster.com and DirtyHippo.com are accused of bait-and-switch tactics by offering supposedly free ringtones that are not free, every ringtone seller over the Internet takes notice, as do consumers.

Ringtone affiliates, sites that sell ringtones and networks with ringtone sellers in their lineup are all concerned about the black eye a few misbehavers are leaving on a growing sector of the digital music revolution.

“No reason for one very bad apple to ruin it for everyone,” Steve Richter, president and general counsel for Media Breakaway, says. Media Breakaway owns CPA Empire, a network that was at the center of a ringtone firestorm a few months ago when it was discovered that an affiliate’s website offered free ringtones when, in fact, they were not free (the free tones only came with a paid subscription). CPA Empire noted that within an hour of identifying the affiliate’s website, it was pulled down. “We had no idea that this was running,” says Richter. “We took a pretty severe action against this affiliate. Any of our affiliates that are discovered to violate our terms and conditions, we take action immediately.”

Tarnished Reputation?

Matter closed. Or so it would seem until another online network is targeted. The coverage this issue has received sheds light on the power a few individuals have on the whole reputation of a budding digital music phenomenon and how hard it will be to police the vast reaches of cyberspace.

“It’s a highly competitive market and a burgeoning industry,” says David Haverly, senior executive, Mobile Vertical, at MIVA. “It’s very hard to break through.” He says that, “technically there are no free ringtones. But websites must be clear that to get the free ringtones you must buy a few; say 10 or more.”

That is what caught the attention of the Florida authorities. The alleged bait-and-switch tactics – when a seller never intends to sell consumers the advertised thing so that it can sell them a more expensive other thing – are pretty much illegal in most states. In the case of Florida, its civil investigation means that the upshot will probably not lead to criminal charges for the companies under the microscope, but can lead to accusations of fraud, which means if someone wants to sue the companies, they could have a pretty good case.

“The content provider industry has guidelines to not blur what they are getting,” says Haverly. “Sometimes, in fine print you see that if you sign up, you get the free ones.

Our goal is to give a quality experience. We have to say when an affiliate is not clear.” With a ringtone affiliate reaping as much as $15 for every new customer, the incentive is there to cut corners.

If more investigations in other states are opened, the reputation of all of digital music sales over the Internet could take a beating at a time when the ringtone market is at an all-time-high. Revenues for ringtones have more than doubled year-over- year, says JupiterResearch. Ringtones brought in about $420 million in 2006 and JupiterResearch predicts the pot will grow to $724 million by 2009. In 2005, more than 24 million people downloaded ringtones to their cell phones; that’s about 13 percent of cell phone users, according to eMarketer. IDC predicts that more than 54 million people will download a ringtone by the end of this year.

An Alternative for Record Companies

For the record companies, this is good news in the wake of its falling sales of music CDs since 2000. When Nielsen’s SoundScan launched the tracking of mastertone sales in December of 2006 (mastertones are portions of the original recording, whereas polytones are just the melody played by usually a keyboard. SoundScan has tracked polytones since 2004.), the numbers surpassed the sales of single-track songs, and in many cases at three times the price. When the first polytones numbers arrived in 2004, Geoff Mayfield, director of charts at Billboard, has said he was “floored.” The ARC Group in London has predicted that global sales of ringtones will surpass $5.2 billion in 2008 – that’s more than 10 percent of all digital music sales. Internationally, the numbers are equally big. The Wireless World Forum estimates there will be 28 million Indians under the age of 24 with cell phones by the end of 2007, and nearly 15 million in the U.K. That spending on ringtones comes to $23 million by the end of this year.

Also, with artists and their labels pulling in less from pure CD sales, other means have to be explored – such as ringtones. David Bowie was one of the first to release unique music to subscribers over his Bowie.net network. Some artists are dipping their toes into ringtone-only releases. Snoop Dog releases ringtones on his website, to name just one artist. “[CD] sales are so down and so off that, as a manager, I look at a CD as part of the marketing of an artist, more than as an income stream,” artist manager Jeff Rabhan recently told The Wall Street Journal.

Yet some vocal affiliates continue to be wary of the return ringtones offer. One forum poster stated that “I really don’t trust most of the merchants that offer ringtones; their websites have that spyware feel.” He also stated that he had “recently checked my stats and I had a measly amount, which was less than the meager $10 I made last year.” Other voices on the Internet second that sentiment. “Making money with ringtones has never worked for me,” a forum entry states.

“I’ve tried the high-paying offers; I tried the low-paying offers. I bought ads with PPC through AdWords and AdBrite and still lost money.”

In the short term, affiliates say, the term “free” always gets a higher place in a search engine result and that alone will make it hard to rid the ringtone universe of the “few bad apples.” One affiliate states that “this is actually good for some of the little ringtone affiliate players out there like myself. I always hated complying with the [terms of service] by removing the terms ‘free, no cost,’ etc., from an ad when my competition clearly wasn’t following suit. Makes it a little harder to compete and slims the margins up for a lot of markets.” Another says “all these guys are at the top of search results because their ads get much higher [clickthrough rates] than publishers that are doing the right thing and are staying away from using the word ‘free.'”

Leads from ringtones are also at an all-time high, offering no incentive to “fly by the rules.” Some affiliates in 2006 generated as many as 1 million clicks and 100,000 leads through ringtone keywords. The payout per lead has fluctuated anywhere between $5 and $15 per lead.

The Search Effect

The continued battle for high-ranking ringtone search results has had an impact. Antivirus maker McAfee rates the keywords “ringtone” and “free ringtone” in the top 10 of the most dangerous search terms to use, just after “free screensaver (per chart pg. 62)” and “Kazaa.” Clicking through to sites resulting from these searches is more likely to send the user to questionable sites or install adware or spyware, McAfee states. One of the most popular “scams” is a “free” tone site that checks a terms of service box for you when you enter your phone number. The terms of service state somewhere that you agree to a subscription price to receive the free tones. When users try to uncheck the box, they can’t.

Some ringtone affiliates have said that when they use Yahoo Search Marketing, the titles and descriptions in the ad are sometimes changed to what Yahoo Search Marketing perceives is still an accurate description. The affiliate may bid on the term “free realtone” but submit copy that leaves the “free” out. Then Yahoo Search Marketing will reinsert the “free” since that was in the keywords they bid on. The affiliate doesn’t see the change until it gets served up. In some of these cases, the affiliate will immediately cancel the campaign when they see the mistake. Sometimes, not.

Other questionable techniques include using a ringtone company’s images and logos to build a unique landing page that goes to a completely different destination when consumers go to sign up. Some advertise MP3 ringtones that are, in fact, lesser monotone files.

Ron Czerny, CEO of PlayPhone, has had experiences with bad ringtone affiliates on his network. “We are very active,” he says. “We are constantly monitoring our affiliates. We take action in 24 hours if we find bad apples and we will report them to the carriers.” The cell phone carrier may pull their short code, he says, which means that the connection between the affiliate’s ringtone servers and the customer will be cut off. “This kind of thing happens in all entertainment areas,” says Czerny.

Government Intervention

It happens with piracy in movies and music, he says, adding that the slowdown in ringtone sales in Europe in 2005 and 2006 was because of “bad customer experiences” with fraudulent ringtone sellers. What was done in a lot of European countries was the carriers imposed regulations that sellers were required to meet before they could sell ringtones. Czerny says the market over there has bounced back.

“[Regulation] is not going to happen in the U.S.,” he says, “because companies like ours are taking that right action,” adding that the bigger companies have a stake in making it work. He says that consolidation is playing a role in weeding out the troublemakers. “We will see consolidation in the top 10 businesses,” he says. “A lot of small ringtone companies are using the backbone of larger ringtone companies and are just simply giving up.” He says the larger market will be in China. Brazil and Mexico have proven they have many willing to pay for tones. Innovations, he says, will come in the way people share the ringtones and not in the tones themselves.

As with the online lead generation industry, the perception and the practice need to mirror each other. The top online lead generation firms formed an association last year to help monitor their industry and set guidelines. Currently, ringtone sellers want to keep the market unregulated. “You must have communication with the network,” says MIVA’s Haverly. “We schedule weekly calls with some of the affiliates,” so that the lines of communication are always open. He adds that if a drugstore runs a two-for-one ad for aspirin but you have to pay full price if you want Excedrin, is it a misleading ad? Does the fact that it might be perceived as fraud warrant the government or the cell phone carriers to step in? Who is going to make the judgment call?

PlayPhone’s Czerny says the government will not step in. “It will not come to that.” Richard Jesty, an analyst at ARC Group, states that ringtone sales will also see a slowdown in the U.S., but not because of fraud. “Over time, the novelty will wear off, but not yet.”

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.

Performance Powerhouse: Q & A with Steve Denton

Earlier this year Steve Denton was named president of LinkShare, following the resignations of Chairman and CEO Stephen Messer and President and COO Heidi S. Messer, who led LinkShare’s development from its founding in 1996 through its $425 million sale to Rakuten in late 2005. Denton heads up all day-to-day operations including management and continuous development of the talent and processes required to drive LinkShare’s continued growth. Revenue Editor-in-Chief Lisa Picarille spoke with Denton about the cultural, organizational and other big changes that LinkShare is dealing with in order to achieve its goal of becoming a performance marketing powerhouse.

Lisa Picarille: What’s changed since LinkShare became part of Rakuten last year?

Steve Denton: Rakuten USA is the company set up in Boston, and the CEO of Rakuten USA is John Kim and he’s the CEO of LinkShare. LinkShare was the first international acquisition for Rakuten. It’s been great working with John and the entire team at Rakuten, including Hiroshi Mikitani, the CEO. Rakuten is now the sixth-largest Web services companies in the world from a market cap standpoint. And having access to those resources from that organization has been very rewarding and very fulfilling. When there are new products we want to roll out, new markets we want to enter, new geographic footprints that we want to establish, I don’t have to wait for two years to accumulate the capital to do that. I have an owner that has the resources and that’s why we sold the company. We also sold the company because we don’t just compete against affiliate companies. We are in a performance marketing industry – so we are competing against everyone out there that is going for inventory on these publishing or distribution sites.

As far as the way we operate the business, there has been no real change. The financial results roll up into Rakuten. That is obviously a structural change. There’s a new board of directors. But as far as running the day-in-and-day-out business there’s John Kim and myself. We have seven teams’ employees working with counterparts in Japan on integration projects to see where we can find some synergies and some best practices from both organizations. That’s taken a good amount of time and we just looked at the final presentations [in June] and there have been some subtle changes there that you wouldn’t notice externally. We’ve been the beneficiaries of development resources from Japan, which again, Jonathan Levinson, our CTO, came from Rakuten. But as for the nuts and bolts, it’s all about continuing to build on what we have.

LP: What impact has there been for LinkShare since the departure of Steve and Heidi [Messer]?

SD: Clearly anytime the founders that established a business and an industry leave, they are missed. But as an organization we are moving forward. I run the day-to-day business or the customer-facing business. I deal with distribution services, merchant services affiliate support, marketing, product development, client development and search. All of those roll up to me. And beyond the customer-facing – tech, legal, GNA, finance – John Kim manages that.

We’ve been focused on three things since this past February: the leadership transition; strengthening our core offering; and the cultural transition from being a New York-based privately held business to a business unit in a division in a large international media company. That’s been a big transition – culturally, and the leadership change, that’s been a big focus.

The second big thing – strengthening the core offering – not that we had any issues with the core offering and some of the products we announced at the symposium – rolling out Link Locator Direct, which is our first Web services offering. It enables affiliates to have easy access to links, and have them defined in categories: coupons, hot products, logos, general promotion, free shipping and best converting.

We’ve made some changes to our merchandising product. We have a client in beta now for whom we’ve recently categorized the data feeds; so, working with normalization and unification. Synergy Analytics has been in beta for some time. We held the affiliate and merchant advisory boards in San Francisco at the [LinkShare] Summit; we got some great feedback. And working with the development teams, and it’s our intent to take both of those products out of beta by the end of the summer, then run dual reporting for six months as the performance testing and get the feedback from the users. It’s been in beta a long time but that’s because it’s a product that’s going to change and revolutionize the way we do things here at LinkShare and send information to our partners. That’s been a big focus.

LP: What changes have you made at LinkShare since being appointed president?

SD: Lead generation, ad networks, AdSense itself and shopping comparison, performance- based and what used to be known as affiliate marketing deals have all evolved. I think that we need to embrace that and find a way to be inclusionary with that, rather than just watching it grow up around you.

People ask me if the affiliate marketing industry is slow – no. I don’t define affiliate marketing as just what I do; I look at performance marketing. Anytime you are paying a third-party website a commission for some sort of thing that is a measurable and definable event – applications, sales, subscription – that’s inventory that a company like LinkShare should be going after. Because we’ve got great merchants, and we’ve got great distribution partners. That’s inventory we should be going after.

LP: What are some of the initiatives LinkShare has planned over the next 12 months?

SD: It’s been a busy four months: leadership transition, cultural changes, integration with Rakuten. The Synergy Analytic product – getting it out of beta is just step one, but then refining that product and taking the feedback from users and enhancing that product over the next six months and beyond is key for us. The work we’ve been doing on the merchandising data feeds and expanding that out. Taking this new locator direct and expanding our Web services offering in new ways of distribution of links is critical. Then we’ll be in the middle of back-to-school, then right into fourth quarter, and that’s not a time to roll out new products. So, our road map is fairly well-defined, with some of the exciting things we did last year and with Athena and enhancements we’ve been making to that – the affiliate analytics and the changes to that. It’s been busy. And launching U.K., that road map is fairly well-defined. And at the end of the day it puts us in a space where we can make LinkShare a safer, more reliable and more profitable place to do business on the Web. We’re focused on the right things.

LP: Is the reign of the “Big Three” (CJ, LinkShare and Performics) over?

SD: When you talk about the big three, I think Yahoo, Google and Rakuten, and we’re all going to be just fine.

LP: Interesting that you don’t count Microsoft in there at all.

SD: I do, but you said three, not four. I think Microsoft all the time. I spend a lot of time thinking about Microsoft. I spend a lot of time thinking about Yahoo. I spend a lot of time thinking about Google. And eBay. And Amazon. And ValueClick. That’s what changed. Because all those folks are in my game. They all have performance- based products – they are called different things. They look different, but they’re all in this space. It’s just not LinkShare against CJ and Performics. We are competing against well-funded big organizations with many assets. What you need to talk to your clients about is, How can I help you with your performance- based needs?

LP: But many of the big three you talk about have mainstream mindshare. What is LinkShare going to do to establish itself among those players?

SD: LinkShare is a B-to-B company – not a customer-facing brand. Although Rakuten is a customer-facing company in Japan. As a B-to-B, we need to stay focused on executing where we are. It’s new markets, new product and new ways to monetize. As we move forward there are lots of other areas we can make headway in. Like mobile. That’s an area in which we are very successful at LinkShare in Japan. We have a significant amount of transactions through mobile devices. As new platforms become available for us to work with, that’s an area where we can do really well.

However, the affiliate terminology limits us. I would submit that LinkShare brought affiliate marketing mainstream. We are recognized as the pioneer in affiliate marketing. When you are the leader in any space, it’s great; people look to you for your thought leadership but you can get pigeonholed as well. The difference between lead generation and ad networks and AdSense is those are affiliate sites, but just the way you compensate them and contractually the way that the relationship is set up may be different, but at the end of the day a third-party website is getting paid to drive a commissionable action to your site. And who manages that salesforce for you – that’s where the differentiation lies. So, if an ad network is managing that salesforce for you and they’re taking a financial risk and they’re putting their money to work and they are working on a spread – then that is called an ad network. If Google is doing it and they’re sharing a percentage of it – that’s called AdSense. But yeah, it’s jargon. But the bottom line is websites are getting paid commissions to drive commissionable and measurable events.

We need to stay focused on providing our clients with new ways to engage with their customers, new ways to monetize those engagements and expanding that global footprint.

LP: How are you doing that?

SD: We are opening our LinkShare U.K. office [on July 1, 2006]. We have space over there and we are staffing it up. We’ve got people on the ground. We already had the LinkShare U.K. network, but we’re putting people on the ground there and aggressively going after that marketplace now. There will be five to seven people to start out. Mostly customer-facing – sales, service, distribution, affiliate support, things like that. I’m really excited about that. That’s the resources of Rakuten. I can make the commitment to do that and aggressively go after that market. Our clients expect that from us, being part of a global company.

LP: Give me an idea of what you think the performance marketing space will look like in three years.

SD: From a LinkShare standpoint, we’ll reflect the needs of our customers, we’ll help them grow their business cost-effectively by acquiring new customers at a fair price or on a pay-for-performance basis. We’ll introduce new products, new channels of distribution and new marketing. International expansion is key in this space. New tools, Web services.

The performance space in the next three years. Let’s take a look back three years. Search has transformed this landscape. And that was very new three years ago. I imagine there will continue to be transformations like that in the future. The key with LinkShare is to remain flexible enough to ensure that we can offer our customers any new performance-based marketing tactic.

We do that today, but need to remain flexible to continue to give them insight to the ROI – whether it’s a click to a sale, or subscription or pay per call or mobile.

As our merchants find new ways to monetize and exchange with their customers we need to be there – one dashboard – to provide that feedback. I think the methods are going to vary but LinkShare’s core value proposition will not. The performance marketing space will still exist – it will experience robust growth as we see today, continue to grow. The performance-based marketing industry outpaces the growth of e-commerce. That’s where we need to stay focused: on this platform that can track all of that and provide the markets and the channels that our clients need to get there. I think it’s a two-pronged approach – platforms and channels.

CJ’s Missing Link

When Commission Junction announced its Link Management Initiative (LMI) on May 23, the reaction from the affiliate community was swift and decisive. It was interpreted as a mandatory change for affiliates from HTML to JavaScript links and it was not embraced. In fact, it sparked petitions, anti- LMI buttons, forums and message boards decrying LMI and hundreds of blog entries questioning Commission Junction’s, actions and motives.

Every online marketing constituency – affiliates, affiliate managers, merchants, other rival networks, agencies and industry watchers – weighed in on LMI. Observers and insiders speculated the change was motivated by CJ’s parent company ValueClick’s desire to use affiliates to gather traffic information on customers as well as perform some behavioral targeting.

Following the community outcry, Commission Junction has backed off its position that LMI will be mandatory. The company sent this update to publishers in mid-August.

“On August 30, 2006, publishers will notice changes in getting links in the CJ Account Manager. This change will make it easier for publishers to choose either HTML or JavaScript links. To reiterate, there are no plans to remove support for HTML links.

However, advertisers will have the option to designate a link as JavaScript-only (with the exception of keyword links), if they deem it necessary. Commission Junction encourages its advertisers to support both HTML and JavaScript link formats, to meet the varied needs of publishers.”

CJ executives were unavailable at press time to comment.

The change of positioning was hinted at on the most recent ValueClick earnings call on August 6, 2006. CEO Jim Zarley said, “We are not mandating it [LMI] however, and it could take a considerable amount of time to do such a migration [from HTML links]. “We got a response loud and clear from our publishers that they are not willing to do this on a wholesale basis, but we believe that over time, maybe it takes a year or two, that this will be the way that the market will go. So we are going to be patient with it. Right now, we are just working with our publisher on a one-to-one basis, and eventually I would anticipate that we will get there over time.”

One source close to CJ says that the overall Link Management Initiative encompasses more than just JavaScript versus legacy links and that LMI is intended to provide additional options related to links. Several sources, who asked not to be named, say, “There is more than meets to the eye to LMI,” but no one offered any specific details. However, all hinted that the scope of the overall initiative had not been completely revealed.

“Long term, whatever is driving this hasn’t gone away, but CJ has realized that they cannot do it quickly or force it on affiliates, so they have at least slowed down,” says Scott Jangro, owner of affiliate MechMedia, who is also a former BeFree and CJ executive. “JavaScript might be the way to go someday in the future, but certainly not in the current technological climate.”

Jangro, a very vocal opponent of LMI (see sidebar on page 101) says, “As long as you’re defining LMI as the mandatory elimination of plain HTML links in favor of JavaScript, I don’t see any upside for affiliates. Affiliate marketing is so much more than renting out space on a website in which a third party can serve ads.”

He offers an example: A website includes a blog entry how-to on repairing your projection television set. There are text affiliate links in the content pointing to a merchant that sells the parts required. He says it would make “no sense to serve some of the text in my page as JavaScript. To someone who doesn’t have JavaScript enabled (as well as search engine spiders), the text would be invisible.”

The bottom line, according to Jangro, is that JavaScript can only make a page less reliable, perform more slowly and be more difficult to maintain.

Jeremy Palmer, a super-affiliate who runs QuitYourDayJob.com, explains that most of the benefits of LMI are to merchants that get more control over the “who, what and when.” He also says that, “LMI also benefits CJ’s Network Quality team because they have more insight into the traffic sources and behaviors of their affiliates. Right now, they rely on an image pixel to gather this information, but if an affiliate omits the pixel, they are unable to get this data.”

On the flip side, Palmer has many concerns including creative control. “I seldom use the creative offered by merchants in the CJ account manager,” Palmer says. “Being able to customize images and ad copy is what helps separate me from the competition.”

Anne Fognano of CleverMoms.com agrees. “The links are cookie cutter with designated creative that may or may not present the message affiliates want to get out to their customers. Affiliates who run Java creative will have links that are too similar, and the unique site feel that many affiliates work to employ for these merchants will be very difficult, if not impossible, to maintain,” she says.

“There is no upside,” says Scott Hazard, president of Brightside Media and a superaffiliate. “The downside ranges from inability to use databases, to the fact that JavaScript takes away basic design elements. Limiting an affiliate with JavaScript links is keeping that affiliate from using their creativity in presenting the merchant or the merchant’s product to the customer.”

“I am not sure of the upside of LMI, but a downside that I see is that some affiliates can’t use the codes in their article management systems and possibly other systems. Personally, my article system strips the code out,” Wendy Shepherd, a super-affiliate who runs TipzTime.com, says. “In this case, I have to use the old CJ links for as long as they are available. When those links are phased out, I won’t be able to use the links within articles or reviews in the article system anymore.”

For many, the problem is that in order to use JavaScript they will have to change nearly 90 percent of their links, which can be a laborious process. That effort is likely to take a vast amount of time, resources and money if they need to hire someone to handle the process. All that can translate into decreased revenue.

“I think LMI will be a hindrance. Some of the bigger affiliates have created internal systems that rely on using their own redirect to an affiliate link, and I am not sure how they can adapt when LMI becomes compulsory, unless they rebuild their infrastructure,” says Shawn Collins, president of Shawn Collins Consulting. “Also, I am among a great many affiliates that redirect affiliate links through META redirects, .htaccess files, etc. This makes things more efficient in the event that a merchant changes networks or closes their affiliate program. I am able to simply change the affiliate link in one place to control dozens or hundreds of instances of that affiliate link.”

QuitYourDayJob’s Palmer also raises issues about the load time of the JavaScript code and users that might disable JavaScript, which is not supported by all browsers, while traditional hypertext links are 100 percent supported.

Spyware expert Ben Edelman says that it’s uncertain what effectiveness LMI will have at blocking improper activities like forced clicks, “because it seems wrongdoers can easily circumvent the additional security provided by LMI.”

Still, some affiliates are searching for something positive.

Adam Viener, president of search affiliate IMWave, says, “The upside of having JavaScript links is that in certain situations you can have dynamic code that can be updated with the latest special deal or promotion. For example, if you wanted to have a ‘deal of the day’ link, that would be a perfect use for a JavaScript link.”

However, he notes, “The problem is JavaScript links don’t work in every situation, and offering them as an option is a great idea. Moving to a 100 percent JavaScript solution just won’t work for many affiliates and for many websites.”

FREEDOM OF CHOICE

Because JavaScript won’t work for everyone, affiliates didn’t like the idea that CJ appeared to be making this mandatory. Affiliates interpreted this stance as Commission Junction not listening to their concerns, and that caused much concern.

“I personally think that CJ should take into account what affiliates want instead of pushing them to use what they think is better for affiliates. If they don’t listen to their affiliates, this will have an effect on their business,” TipzTime’s Shepherd says.

Others say that CJ “will have to chalk LMI off to a poor PR effort and settle for ways to provide JavaScript links as options,” according to Viener.

“I don’t think they will be able to switch everyone over to these links, and may risk alienating some of their top affiliates if they attempt to force this on everyone. I would like to see them offer these as options, and remove them from being the default option. It has been quite a pain to keep hitting the legacy code button every time I want to get a link from them. Personally, I haven’t implemented one JavaScript link from them at this time,” Viener says.

“I’m sure they invested a lot of time and resources in LMI. It is a shame to lose that, but they will lose market share if they force it on affiliates,” says Hazard. “Affiliates have money and time invested in their online properties and operations. For a network to demand such an extensive change and restructuring is an over-the-top move in my opinion. The reaction it got seems to support that.”

Many say that if CJ doesn’t listen to its affiliates, they may shy away from using the network’s merchants and opt to work with those merchants on other platforms. In some cases, affiliates have already reduced the amount of time they are spending on CJ merchants rather than swap out the links.

MERCHANT DILEMMA

“I am aware from my interactions with many other affiliates, that many have reduced, and in some cases even stopped generating legacy links because it is so time-consuming to do so since the introduction of the JavaScript links,” CleverMoms’ Fognano says. “I am not aware of anyone I interact with on a daily basis using the Java links yet.”

Affiliate and best-selling author (The AdSense Code: What Google Never Told You About Making Money with AdSense) Joel Comm didn’t pull any punches. “For our site, DealofDay.com, CJ’s LMI requires that we totally revamp our back-end administrative tool. As of now, I’m still not sure how well the new links will work. If it comes down to it, we will just write off CJ merchants from promotion on our site. I don’t understand the logic behind making it more difficult for affiliates to link to merchants. If I were a CJ merchant, I would be extremely upset.”

Many are, but they are extremely cautious about commenting publicly.

“This was not good for affiliates or merchants. It’s only good for ValueClick,” says one CJ merchant who requested anonymity. “But there isn’t much that affiliates could do except vote with their feet and leave. That really sends a message.”

eBay, CJ’s largest advertiser, has already informed its affiliates that it will not require JavaScript links and instead it’s working on its own HTML tracking methodology. Here’s what eBay told publishers in an email:

“Many of you have asked us what eBay’s recommendation is regarding LMI and the promotions you are currently running for eBay. We have been working on a new HTML tracking methodology specifically for eBay that will work seamlessly with the Commission Junction interface so that all of the current reporting capabilities will remain supported. While we do not have a deployment date, we are confident that it will be deployed prior to the holiday season, and we recommend waiting to change any tags related to eBay US and eBay International auction-related accounts until the new eBay tag schema is available. Given that Commission Junction is taking a phased approach for publishers to change out their tags, we think this approach will cause you the least amount of disruption.”

UNITED FRONT

Many are taking a wait-and-see approach to assess the overall industry impact.

Others claim this is one of the few issues that have united nearly the entire affiliate community.

“It has caused the affiliate community to come together to sign Scott Jangro’s online petition. I think it is one of the first times we have seen the affiliate marketing community agree on something,” IMWave’s Viener says. “Clearly everyone, except maybe some people at CJ, agree that the forced LMI initiative is a bad idea. We can only hope it goes away as fast as it has arrived.”

“I think the other networks have learned something from it. If you are going to insist that your affiliates change out millions of links, there needs to be something of value in it for them. The word ‘mandatory’ should probably not be used,” Hazard says.

This strife could work in the favor of other networks.

“I think it’s got both affiliates and merchants at least concerned enough to start looking elsewhere for their affiliate solutions. LinkShare, Performics, ShareASale and the other networks, on the other hand, are loving it,” says Jangro.

“Recently there has been an increasing shift on the part of both merchants and affiliates away from the ‘big three’ networks and onto more focused and specialized tracking platforms,” says Stephanie Schwab, vice president of Converseon, which offers an alternative platform. “I think this trend will continue to grow, and if CJ pushes LMI it will accelerate even faster.”

ThePartnerMaker.com’s president, Jeff Molander, says, “CJ has already seen the defection of retail-focused advertisers and this will likely continue. First they forced BeFree customers into a public network (something they actively voted against when they chose BeFree years ago). Now the LMI sends the message that scale and automation is more important than what affiliate marketing has traditionally been built on: labor-intensive relationships.”

He continues, “ValueClick is happy to keep the many lead-generation and offer-based advertisers within CJ as these advertisers are seeking a performance-based solution that scales. ” LMI supports this.”

Choots Humphries, co-president of ad network LinkConnector, says that his company also uses JavaScript links (LinkConnector Hot Link) but makes it a voluntary decision for affiliates, since there are individual challenges and advantages to implementing the technology. “Having it be an option is the key,” he says.

Deborah Carney, the affiliate manager at Rextopia.com, likens the situation to when Coca-Cola pulled Coke off its shelves in favor of New Coke in 1985. It was an infamous public relations debacle, and the beverage giant was forced by public pressure to bring back the much-beloved soda as Classic Coke.

“Anytime you take away something and force people into a new business model, it doesn’t work,” Carney says.

Many pointed out that although other advertising systems such as Google’s AdSense use JavaScript and have never provided affiliate flexibility and control, the uproar regarding LMI is because CJ and competing affiliate systems have always granted such control and “taking it away feels like a loss,” according to Edelman.

Dialing for Dollars

Whether it’s fashion, technology or commerce, what’s old often becomes new again. Pay per call is the latest revolution in performance marketing, and it focuses on incorporating a 130-year-old technology – the telephone – into the process.

While it’s not a surprise that pay per call is rapidly becoming a preferred model for local advertisers, it’s remarkable that it hasn’t been a significant part of the equation all along.

The rise in popularity of performance marketing, which now represents 40 percent of online advertising revenues, made it inevitable that someone would create a mechanism for businesses that do not have websites to market themselves, according to Greg Sterling, senior vice president at analyst firm The Kelsey Group.

Instead of ads linking to a website, pay-per-call marketing lists phone numbers, often accompanied by phone icons. Merchants pay a fee to the publisher when someone calls after seeing the ad. The number of calls is easily tracked because each ad is associated with a specific phone number, a practice that has been used for many years in print and broadcast ads.

The pay-per-call market, in all forms of media, is expected to reach $60 million this year, and rise by an astonishing 6,000 percent to $3.7 billion by 2010, according to The Kelsey Group. Pay per call enables small and medium-sized enterprises (SMEs) that do not have websites to spread the word and only pay for phone leads.

“Most local businesses don’t know how to deal with clicks,” says Sterling.

He notes that many small businesses complain that understanding and monitoring pay-per-click advertising is too complicated. Approximately 70 percent of SMEs prefer receiving calls to receiving clicks on their websites, according to Sterling, who estimates there are 10 million SMEs.

A survey of SMEs, by The Kelsey Group, indicates that 74 percent of small businesses would pay up to $1 for a call.

The persistent problem of click fraud will also spur advertisers to shift to pay per call, which is difficult to fake, Sterling says. Most companies that advertise in local Yellow Pages are more comfortable with communicating with customers on the phone. Also, two-thirds of SMEs that have websites do not participate in online marketing, suggesting that companies have been reluctant to commit the money and attention to develop leads online.

SMEs also believe that a person who calls is a better quality lead than someone who clicks on a website for information, Sterling says. “If you pick up the phone, you are more buy-oriented than people who are clicking,” he says.

The promise of pay per call has prompted a variety of networks and technology providers to enter the market in recent years, including ADSclick, Jambo, VoiceStar, Miva, eStara and Ingenio. Publishers currently offering pay per call include Verizon’s SuperPages, YellowPages.com, Local.com and Amazon’s A9. Search giants Google and Yahoo are currently testing the pay-per-call model to attract local and small business advertisers.

Microsoft is also working on a click-to-call solution to be included in its Windows Live offering, according to David Cole, a Microsoft SVP and head of MSN and the Personal Services Group.

The click-per-call capability, introduced in mid- March, will let users connect to businesses via Web-based calls by clicking on MSN search links. Last September, just a week after Google launched its Google Talk instant-messaging service, Microsoft purchased Internet-calling startup Teleo to expand the capabilities of MSN Messenger. With the Teleo acquisition, Microsoft also gained click-to-call dialing capabilities that would allow MSN’s upcoming adCenter service to offer pay-per-call pricing.

Dialing for Dollars

Sterling says the potential rewards from pay per call dictate that eventually all publishers involved in local search will incorporate some form of pay per call. “Calls can generate much more revenue than clicks,” he says.

Pay per call is desirable for publishers because companies are willing to pay a lot more for a call than a click. According to The Kelsey Group, the advertising categories willing to pay the most for leads include mortgage lenders ($35), lawyers ($30) and travel agents ($8).

More than 1 billion searches per month are performed on pay-per-call network Ingenio, according to chief marketing officer Marc Barach. Ingenio’s launched in 2004 and has relationships with America Online, MySpace, Miva and Infospace.

Pay-per-call advertisers can decide if they want their ads to reach local or global audiences. Ingenio ad network can specify geographic region, and the company has also implemented IP tracking to determine the consumer’s location, according to Barach.

One potential limitation of the pay-per-call model for publishers is that unlike clicks, which are generated around the clock, call revenue will primarily be generated during business hours. By specifying that pay-per-call ads only run at certain hours of the day (or “day parting”), customers can make sure they don’t receive calls off hours, Ingenio’s Barach says.

The amount that Ingenio’s customers pay for a call depends on the amount that competitors are willing to pay. Taking a page from the SEM model, Ingenio’s auction model charges one cent more than the next highest bid at the time the call was placed. The company sets prices based on categories, not keywords to simplify the model. The minimum charge for a call is $2, which is the case for many categories.

David Clarke, the marketing manager for American Incorporators Limited of Wilmington, Del., began placing pay-per-call ads on America Online one year ago, and is happy with the results. “The biggest advantage is that those who call are a lot further along in the decision-making process and are more serious than people who click,” he says.

Clarke pays between $15 and $18 per lead for calls requesting information about AIL’s services for forming corporations, and approximately 10 percent of those calls result in a sale.

Publishers will have to weigh the potential revenues to determine if ads that generate money from calls or clicks get top billing. Where they are available, the higher-priced pay-per-call ads seem to get preferential treatment, getting the prime spots on AOL and YellowPages.com.

Pay per call is a “small but growing portion” of Ingenio’s overall revenue, which was $83 million in 2005, according to Barach. Ingenio has deals with networks Performics and Miva to promote pay per call, he says.

While pay per call has promise, it will not overtake traditional ads in search marketing, according to Mike Kerans, a senior vice president at Miva. Pay per call is appropriate for selling complex goods such as financial services, travel and “high-ticket items” like flat screen TVs, but because of the higher premiums charged, “I wouldn’t use it if I were selling ink cartridges,” Kerans says.

Pay per call will grow in popularity for the 25 percent of searches that are local, but national ad campaigns will continue to rely on other models, according to Kerans, whose company began offering pay per call in late 2004. “It’s never been that new media completely replaces old media,” notes Kerans, adding that pay per call is an effective way for small businesses to dabble online, as only one in three have a website.

Miva works with local TV stations, newspapers and larger publishers, including Verizon’s SuperPages and Infospace in the United Kingdom, and recommends that advertisers include a telephone icon to distinguish listings from pay-perclick ads, Kerans says. Companies should also use landing pages with maps to show the proximity to the customer, or promote special offers to induce people to call, he says.

Kerans says publishers have to determine how much ad space to give to pay-per-call versus payper- click ads based on the cost per thousand (CPM) that they expect to receive.

Calling All Clicks

An alternative form of pay per call enables consumers to prompt a phone call from the advertiser by entering their phone numbers online. Click-to-call technology was originally used to provide customer service, and automatically connects the two parties when consumers click a button. Click-to-call work can be financed through a pay-per-call model when applied to advertising, or through a flat fee or volume pricing.

Using click to call for sales enables customers to continue with their online sessions without having to stop to dial the phone, according to John Federman, CEO of eStara, which offers click-to-call and pay-per-call services.

While pay-per-call advertisements require unique phone numbers that identify the referring publisher, eStara’s Web-initiated calls save money by requiring only tracking numbers for each publisher, according to Federman. Using “cross-channel data passing” technology, the customer’s information is automatically forwarded to the advertiser’s call center, where sales representatives can view it on their screens. eStara customizes the pricing for each publisher, offering auction as well as flat pricing and subscriptions.

Click-to-call technology is also being used on commerce websites to prompt customers who are idle on a website. For example, after a shopper is browsing a website for a few minutes and stops clicking, a pop-up window offers customers the chance to talk with the merchant live to complete their order or to ask for more information, Federman says.

Some people aren’t anxious to fill out forms or give credit cards or social security numbers online,” according to Federman, whose company provides click-to-call services for Amazon, DaimlerChrysler and Continental Airlines. Federman said that after switching from formbased leads to click to call, DaimlerChrysler cut its conversion time from 30 days to four days or less, and doubled its conversion rates.

Search engines and local publishers of Voice over Internet Protocol (VoIP) technology reduce the cost of click-to-call phone connections, Federman says. Consumers using dial-up connections may be hesitant to go offline to call an advertiser, but click to call using VoIP enables them to instantly converse online. Technology developed by eStara automatically checks to see if the consumer’s PC has a microphone, and if so, launches a VoIP window.

While clicking an ad to talk live with someone is a “lower barrier to action than picking up the phone,” according to The Kelsey Group’s Sterling, consumers are not yet comfortable with making calls through their computers.

However, the rise of inexpensive VoIP services from Skype and Vonage could change consumer perception. “When VoIP is mainstream, you may start to see ads with phone icons (that initiate PCbased calls), but that is years away,” Sterling says.


JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, Alter- Net.org and in MIT’s TechnologyReview.com.

New Network Flavors

The affiliate network menu is expanding to offer many more options than just vanilla, chocolate and strawberry.

Call them what you wish – ad networks, sub networks, CPA networks, CPA ad networks. No matter the name, these aggressive challengers are mounting pressure on the “Big 3” affiliate networks.

CPA ad networks, which use a cost-per-action payment model, are providing increased competition, which is likely to mean publishers will benefit from more choices, bigger payments, a wider range of potentially lucrative offers and what some observers claim is a more nurturing environment.

Affiliate consultant Shawn Collins refers to ad networks as the “hybrid of affiliate marketing – part merchant and part affiliate.”

Like traditional affiliate networks, CPA ad networks rely on publishers willing to promote their advertisers’ offers. But unlike their cousins, ad networks act more like direct CPA-deal brokers and generally focus on lead generation, registration-based offers and bounty programs. In addition, CPA ad networks often don’t require start-up fees and advertisers to prequalify, thus lowering the barrier to entry. It’s estimated that one needs approximately $5,000 to get a CPA network off the ground.

However, many claim the life span for the bulk of these emerging ad networks is limited and this crop will never be able to truly compete on a larger scope with the bigger established networks such as Commission Junction, LinkShare and Performics. “

CJ started in 1999 and the landscape has changed over the last six and a half or seven years,” says Kerri Pollard, director of publisher development at Commission Junction. “There’s been an increase in competition and new CPA networks.”.

Some affiliate managers argue that CPA networks fail to add value because they poach advertisers who are already in merchant affiliate programs. Others insist CPA networks add tremendous value because they attract new and unique advertisers who in turn, deliver new valuable customers.

Regardless, CPA networks are emerging as major players in the online marketing world. These marketing companies have direct access to groups of advertisers who, through a wide array of techniques, have the potential to drive a high volume of clicks, sales and new customers.

Maybe that’s why you can’t attend a conference or trade show related to online marketing without seeing the booths of the exhibit hall jam-packed with CPA ad networks looking to woo affiliates and garner some attention.”

Who’s on First

With so many players in the game, it’s difficult to keep tabs on everyone. Some well-known current networks include CPA Empire, DirectLeads, Endai Worldwide, Adteractive, Metarewards, The Vendare Group, XY7.com, YFDirect, eMarketMakers and TheBizOppNetwork. In addition, several new ones are popping up nearly every week.

In 2005, many of the major players gained a bigger foothold by partnering with other companies. Affiliate Fuel, also known as Thermo Media, LLC, was acquired by Experian in April. PrimaryAds was bought by Think Partnership for nearly $10 million. And ValueClick purchased Web Clients for $141 million.

For affiliates, much of the appeal of these ad networks is the size and frequency of payments. Affiliate networks usually pay on a monthly schedule or when a certain revenue level has been achieved, whereas CPA networks typically pay affiliates weekly so they don’t need to float the costs of advertising or, in the case of incentive sites, the costs of the incentives themselves. CPA networks often negotiate top-rate commissions for their publishers. In many cases, these deals are much better than what a publisher can negotiate from the merchant’s affiliate manager.

A post on the ABestWeb.com forum from an affiliate sums up the appeal of CPA networks:

“As an affiliate, I love them because they often pay considerably higher commissions than the major networks, they often pay quicker, and most don’t allow reversals,” writes Michael Coley, president of AmazingBargains.com.

While the affiliate appeal is high, some downsides to dealing with ad networks exist, including poor practices, such as cookie stuffing, adware, spyware and spamming. “

The biggest problem I’ve had is that campaigns will get canceled without any notice sometimes, so I end up having to find another source and switch out my links,” Coley continues. “I don’t think any of them are ‘clean.’ Most seem to work largely with email marketers, some of which are notorious for spam.”

Merchants claim to be somewhat cautious for a variety of reasons. Although CPA networks reduce the risks for publishers while maintaining the direct-response needs of the merchant, the merchants have no control over how their offer is presented. “

As a merchant, you don’t know who is promoting you, and the CPA network is not going to tell you, because you’d cut them out of the deal if they did,” according to Collins. “

What I like least about CPA networks is they build loyalty between the network and the affiliate with merchants’ money,” says Beth Kirsch, group manager of affiliate programs at LowerMyBills.com.

J.T. Stephens, director of auctions marketing and business development at Overstock.com Auctions, offers some tips for advertisers dealing with CPA networks:

  • Communicate your business needs;
  • Provide networks with an email suppression list of marketing companies/ affiliates on your blacklist and a list of your top affiliates that the network cannot contact;
  • Be on the alert for unsavory affiliate activities (adware, spam, spyware); and
  • Do not let the networks determine how to market your offer.

Many CPA network advertisers are huge proponents of free iPod offers and promotions. That tactic is likely to bring in customers more interested in the prize or giveaway than the merchant offer. This type of promotion fuels the perception that CPA ad networks only cater to less-savory advertisers.

Still, some figures state that big brand names make up 30 to 45 percent of all CPA advertising. Big-brand sites can also act as affiliates accepting CPA ad buys, such as MSN, when it has remnant inventory. Big-name publishers are selling CPA buys, but often it’s directly to the advertiser and not through the network.

Everybody into the CPA Pool

Though networks generally make more money selling on a cost-per-thousand (CPM) basis, some will sell leftover inventory and run CPA offers, according to an executive at one of the major affiliate networks, who asked not to be named for fear that the industry stigma associated with CPA practices would be damaging. In most cases, the networks are “booking these revenues as CPM,” the source says.

Another network executive says her network will continue to stay focused on its overall value proposition.

“We want to make CJ remain the preferred place for the new publishers,” Pollard says. “We have many different categories of publishers. They are the backbone of affiliate marketing. The top request from our 1,500 to 2,000 advertisers is overwhelmingly, ‘How can we help publishers trying to make money?'”

Pollard claims that by leveraging CJ’s connection with its parent company ValueClick, it can provide more value than CPA networks can by going beyond affiliate marketing to include lead-generation business, click integration, tracking and email.

“It’s a bigger and better picture to the clients. We have more synergies and offer them in a streamlined way,” she says. “But there is a lot of value that CJ brings as a trusted third party and the value associated with that is worth a lot to our clients. It’s currently a win/win situation and we want to make sure it remains that way.”

Rob Key, president and CEO of online agency Converseon.com, says the Big 3 are doing well with fraud initiatives and payment services. He also applauded LinkShare’s efforts in the area of analytics, which he says adds a higher level of sophistication to its program. However, he feels there is some room for improvement in the area of data feeds and customization.

“There will always be a place for LinkShare, CJ and Performics,” Key says. “But the space is expanding and people want more customization than the Big 3 can offer.”

He claims the movement toward more customized platforms has “topped out in the networks, which are looking to be all things to all people.” Instead, by offering specialized services, certain network alternatives help “people look beyond the traditional and reinvigorate.”

Converseon’s network-agnostic custom platform is designed to aid companies that are trying to get a view of their data across all channels, Key says. “You can’t do that if the affiliate data is off to one side, like it is with the networks,” he says, adding that the traditional networks will see continued price pressure.

Pollard expects to see consolidation in the CPA network space over the next year or two and says there’s no threat of a CPA network displacing any of the Big 3.

“I also expect that one or two other larger players may come in, but nobody that’s the size of LinkShare and CJ. CPA networks will evolve for months and years, but many of them will not be around for long,” she says.

The increasing power of ad networks was brought to the forefront at the end of last year when Commission Junction ousted AzoogleAds from its network. Because AzoogleAds was a CJ affiliate that grew into its own revenue-sharing network, many industry watchers claim it was just a matter of time before CJ kicked out the sub network.

Joe Speiser, AzoogleAds.com cofounder, called the move by Commission Junction “flattering,” adding that his company was clearly “dangerous enough from ValueClick’s point of view” to warrant giving up the “nearly 80 percent of traffic we brought in on the eBay campaign.” That’s a huge factor, since eBay is CJ’s biggest campaign.

Speiser also says that CJ was threatened by Azoogle’s growing presence.

Pollard says despite the incident with Azoogle, CJ has no plans to ban sub networks.

“Our business is always changing and we never want to put policies in place that hamper publishers and stop them. I want the creativity to remain,” she says. “Sub affiliates are great partners and we want to continue to have relationships with them.”

From Pollard’s point of view, sub affiliates “have found good niches and are good at servicing the advertisers.” However, she notes that it’s important for CJ to maintain network quality and ensure sub networks do not do business with affiliates that are engaging in questionable practices, such as performing downloads and software installations.

Collins says CPA networks are a dime a dozen. “A good amount of them fail quickly. If 10 new CPA networks open today, most of them will fail within months,” he says. “I guess it’s sort of like affiliates; there are a million affiliates and only about 10,000 that are doing things. Some aren’t going to move the needle,” Collins continues. “The networks certainly don’t need to sweat it just yet.”

Rather, according to Collins, pay per click is a much bigger threat to the networks than CPA. He expects a viable challenger to soon emerge (such as Direct Response or KowaBunga) that is backed by significant capital from a public company.

Regardless of the challenges, Pollard claims the good news is that the performance marketing pie is getting bigger and there’s room for everyone.

Affiliate Market Maturing

The affiliate space is getting more sophisticated and complex, according to the findings of the AffStat 2006 Report, an annual study examining the state of the affiliate marketing industry.

Released earlier this year by Shawn Collins Consulting, the survey polled nearly 200 affiliate managers from a cross section of the industry on their overall statistics, as well as a number of issues about their affiliate marketing channels, such as staffing, recruiting and management.

Of those surveyed, 77 percent were pay-per-sale, 19 percent pay-per-lead and 4 percent bounty affiliate programs, which is almost exactly in line with the report’s 2005 breakout of how companies paid out commissions.

Over the last year, however, the size of pay-per-sale programs seems to have shifted. The latest report shows an increase in the number of affiliates in the midrange, with 23 percent of this year’s respondents reporting 5,001 to 10,000 affiliates compared to 13 percent a year ago, yet 18 percent said they had too many affiliates to manage effectively.

The trend toward smaller programs is also on the rise. A year ago, 16 percent of respondents had between 2,001 and 5,000 affiliates. The latest figure jumped 7 percent for 2006. Last year, however, 26 percent of respondents had 5,000 or more affiliates and rose just 3 percent for 2006.

Part of moving to small programs is that merchants are giving more scrutiny to the affiliate approval process. And while 17 percent still approve affiliates manually, that is down from 23 percent for the previous year.

Another interesting finding from the survey: Nearly two-thirds of in-house affiliate managers earn $40,000 to $80,000 a year. In the pay-per-sale programs, 71 percent had dedicated affiliate managers; 24 percent had fewer than 500 affiliates; 22 percent had 501 to 2,000 affiliates; 23 percent had between 2,001 and 5,000 affiliates; 15 percent had 5,001 to 10,000; and 14 percent had more than 10,000 affiliates.

Commission Junction continued to lead the pack when it came to which affiliate networks, solution providers or software solutions were being used to track affiliate programs. CJ had 31 percent of the total survey respondents, up from 26 percent in 2005. Some of that gain is likely from Be Free, which is owned by Commission Junction. Be Free dropped 2 percent to comprise 6 percent of this year’s total for respondents.

The use of homegrown tracking solutions rose to 22 percent from 17 percent in 2005. LinkShare moved up 2 percent from last year, to account for 11 percent in 2006. Performics also gained some ground; up to 3 percent from 2 percent in 2005, while ShareASale.com inched up 1 percent to reach 6 percent overall for 2006.

Still, some lost ground. My Affiliate Program//KowaBunga dropped to 8 percent from 13 percent for 2005. Direct Track dipped to 8 percent from 9 percent in 2005, while the response for “other” dipped to 5 percent from 9 percent in 2005.

There was virtually no change in attitude from 2005 to 2006 in responses to the question, “Do you permit your affiliates to bid on your trademark name in pay-per-click search engines?” Fifty-nine percent responded no; 29 percent said yes; 7 percent said yes, but with restrictions; and 5 percent did not know.

As for blogging, of those surveyed, 21 percent had a blog, compared to 15 percent last year.

And the biggest challenge for affiliate marketing for 2006, according to the report, continues to be recruiting new affiliates. This year 31 percent cited it as the largest challenge, compared with 24 percent in 2005.

The entire report can be found at http://www.affstat.com/products.shtml.