The State of Online Marketing

By the time Revenue magazine hit newsstands in January 2004, performance marketing and affiliate marketing had already had their share of ups and downs. Online marketing had survived the dot-com bust and continued to evolve from the e-commerce craze into something that sparked enthusiasm and life in a shell-shocked market.

The idea that retirees, housewives and those with “real jobs” could work at home a few hours a day (or into the wee hours of the night) and make some extra money earning commissions by promoting products from someone else seemed too good to be true. But it wasn’t. And in many cases, people weren’t just supplementing their income, online marketing had become their main source of income. They were able to quit their day jobs and focus on their new business.

Revenue was born out of that passion and enthusiasm to help chronicle, sort out, explain, educate and bring to light all the pertinent issues facing online marketers. We’ve been here for two years now, and we hope to be here for many more as the market remains on its incredible growth trajectory.

To celebrate our milestone, we’ve brought together some research, voices from the industry and past history. It just may help you navigate your continuing journey into online marketing.

Search is hot. Local search is even hotter. The areas of podcasting and blogging are white hot. Then there are predications for growth in ad spending over the next year. There’s no lack of research to show that all segments of online marketing are going strong and getting stronger. The facts, the figures, the surveys and the data all point to a future filled with opportunities for online marketers. We bring you some of the key indicators (see page 58).

And if you’re still not convinced how the market will shape up, you can forget the numbers and go right to those in the trenches. We asked online marketing leaders to give their opinions on how things have evolved over the last two years, an update on where the online market is right now and where it’s headed. There are comments from a lot of different types of folks, all with different jobs and all with their own perspectives, but the optimism about online marketing is a common thread among them (see page 60).

If you’re wondering how businesses adapt and survive in such a rapidly changing marketplace, look no further than the “5 Who Thrived.” These are five individuals we profiled in our premiere issues because they had already carved out some early success in the affiliate space. We revisit each of these folks and find they all have been able to roll with the punches and not only survive but thrive. Actually, they’ve all grown their respective businesses and have no plans to rest on their laurels (see page 62).

Finally, Revenue magazine has worked hard to stay on top of the constantly evolving online marketing space. And along the way we’ve made some changes in the look of the magazine as well as how we handled the editorial content. Take a stroll down memory lane with us as we revisit each of our past issues (see page 64).

Facts & Figures

Online Retail Sales

Online sales were $96 billion in 2003 and are expected to reach $230 billion by 2008 (10 percent of all U.S. retail sales).
Source: Forrester Research

Online retail sales in the third quarter of 2005 reached $23.32 billion – 26.7 percent more than the $17.6 billion for the same period of 2004.
Source: The Census Bureau of the U.S. Department of Commerce

The proportion of online retail sales to total retail sales reached 2.3 percent in the third quarter of 2005, compared with 2 percent in the third quarter of 2004.
Source: The Census Bureau of the U.S. Department of Commerce

Online Ad Revenues

Total revenues for 2005 are expected to reach $12 billion, a 25 percent increase over 2004’s final tally of $9.6 billion.
Source: Interactive Advertising Bureau

Total U.S. online advertising and marketing spending will reach $14.7 billion in 2005, a 23 percent increase over 2004. It’s forecast to reach $26 billion (8 percent of total ad spending) by 2010.
Source: Forrester Research

Eighty-four percent of marketers had plans to increase U.S. online ad budgets in 2005.
Source: Forrester Research

Almost half of marketers plan to decrease spending in traditional advertising channels like magazines, direct mail and newspapers to fund an increase in online ad spending in 2005.
Source: Forrester Research

Display advertising, which includes traditional banners and sponsorships, will grow at the average rate of 11 percent over the next five years to $8 billion by 2010.
Source: Forrester Research

Search Engines

Forty-one percent of 1,577 Internet users surveyed in September and October reported that they had visited a search engine the previous day. That is up from 30 percent in June 2005.
Source: The Pew Internet & American Life Project

Search is the second most popular task on the Web with 41 percent. Email still leads the list with 52 percent of U.S. Web users saying they had sent or received email on the day before being surveyed this fall.
Source: The Pew Internet & American Life Project

Users average 24 minutes a day on email, compared with less than 4 minutes for search.
Source: comScore Media Metrix

Search engine marketing will grow by 33 percent in 2005, reaching $11.6 billion by 2010.
Source: Forrester Research

The Big Three

Yahoo’s third-quarter 2005 marketing services revenue grew 46 percent, to $1.16 billion, from $797 million in third-quarter 2004. Ad revenues at America Online increased to $324 million in the third quarter, marking a 28 percent leap from 2004. And Google saw third-quarter revenues surge to $1.578 billion – a 96 percent leap from the third quarter of 2004.
Source: Company information

Keywords

The average “cost per keyword” increased from $20 in July to $26 in September 2005.
Source: Performics

Keyword costs for the words kitchen, food and wine-related terms went up 8 percent in the third quarter of 2005. Prices for keywords about apparel and accessories rose 10 percent during the same period.
Source: SEMphonic

Travel

Among the 35 million consumers searching for travel, nearly one-third purchased a travel-related service either online or offline within the eight weeks following the initial search. Among these buyers, 80 percent completed travel purchases online.
Source: comScore Networks, Yahoo and Media Contacts

Only 20 percent of all travel transactions linked to search engine activity occurred directly following the initial search referral, while the remaining 80 percent took place in the days and weeks following the initial search session.
Source: comScore Networks, Yahoo and Media Contacts

Over the last year, Merrill Lynch reported that direct travel supplier sales increased 27 percent compared to 19 percent for online travel agencies. Travel search engines were driving direct supplier sales and accounted for $600 million in direct bookings last year.
Source: Merrill Lynch

Youth

Nearly 60 percent of children ages 6 to 11 go online at least once a month, and about one in 12 goes online daily.
Source: Mediamark Research

Forty-four percent of teens have purchased something online. Teens spent an average of $73 on their last online purchase.
Source: Teen Research Unlimited

Music

Apple Computer’s iTunes music store now sells more music than Tower Records or Borders. Apple has maintained more than 70 percent of the PC-based digital music download market throughout 2005.
Source: The NPD Group

Digital music sales accounted for slightly more than 4 percent of the market during the first half of 2005, up from about 1.5 percent during the first half of 2004.
Source: The Recording Industry Association of America

Gambling

Worldwide online gambling revenues will top $10 billion in 2005, up from $8.5 billion in 2004.
Source: eMarketer

In July 2005, 30 million U.S. Internet users (18 percent of all Internet users) visited gambling sites. This is comparable to the number of Internet users who visit retail music sites and is double the number who visited gambling sites in December 2001.
Source: comScore Media Metrix

Local

Local online advertising has more than tripled since 2000, going from just over $1 billion to more than $4 billion.
Source: Borrell Associates

More than 26.3 million online users had visited a top 15 classifieds site in September – 80 percent more than the 14.6 million in the year-ago period.
Source: The Pew Internet & American Life Project

Blogs, Podcasting and RSS

Sixty-four percent of respondents are interested in advertising on blogs; 57 percent through RSS and 52 percent on mobile devices, including phones and PDAs.
Source: Forrester Research

An estimated 5 million people will have downloaded podcasts in 2005, compared with just 820,000 in 2004. That figure is expected to reach critical mass in 2010 with 62.8 million users.
Source: Bridge Ratings

Newspapers

Almost one in four U.S. Internet users now reads online versions of newspapers.
Source: Nielson//NetRatings

More than 39 million unique Internet users visited newspaper websites in October 2005, up 11 percent increase from the previous year, and more than three times the year-overyear increase of overall Internet users.
Source: Nielson//NetRatings

Video

Spending for Internet video advertising in the U.S. will nearly triple in 2007 to $640 million from 2005’s $225 million.
Source: eMarketer

Navel Gazing In the Trenches

The Past

What’s been the biggest change in affiliate marketing over the last 24 months?

How could it be ANYTHING but Google AdWords?
– Seth Godin, Marketing Expert, Author

The biggest change we have seen is the surge of search-enabled affiliates.
– Joe Speiser, Co-founder, AzoogleAds.com

Google’s AdSense altered the pay-for-performance landscape forever!
– Beth Kirsch, Group Manager, Affiliate Programs, LowerMyBills.com

The negative campaign against ad-ware and the declining conversion of email marketing.
-Michael Stark, President, PostYourProperty.com

We saw more big players entering this industry, both good and bad, and the many different ways they capture the attention of the search engines and visitors.
– Greg Rice, Affiliate Program Manager, Commerce Management Consulting LLC

Gone are the days of putting a banner into rotation or some text links and waiting for revenue. Professionals realize that generating real revenue can only happen when they master the advanced toolsets available.
– Wayne Porter, Associate Editor, ReveNews

The demand for ethical marketing practices by networks, affiliates and merchants. Affiliate managers today aren’t just remarked upon because of how well they grow a program, but also how well they police that program.
– Chris Sanderson, Marketing and Affiliate Partner Manager, Mondera.com

The Present

What’s been the greatest development in online marketing during the last 2 years?

The need to be transparent. If you lie, you get nailed.
– Seth Godin

Complete and total domination of the search channel.
– Beth Kirsch

The emergence of blogs/RSS being leveraged by affiliate marketers has opened up a new frontier of quality, content-based real estate for affiliate ads.
– Shawn Collins. President and CEO, Shawn Collins Consulting

Probably the intelligence that can be built into online advertising. Intelligent advertising can be presented when the likelihood of a sale is at hand.
– Greg Rice

The rise in popularity of blogs and RSS feeds combined with the availability of contextual advertising technologies like Google AdSense.
– Adam Viener, President and CEO, IM Wave

There has been a turnaround in attitude on the part of media buyers. They have learned to trust the medium again and are bringing the dollars back.
– Dana Todd, Executive Vice President, SiteLab

Describe the state of online marketing right now.

Still chaos, because people haven’t figured out how to regularly and consistently test and measure.
– Seth Godin

Online marketing is here to stay, but it’s much too early to predict the methods we will use to market in the next couple of years. Truly disruptive innovations are yet to happen.
– Elizabeth Cholawsky, Vice President, Marketing ValueClick

The current state of online can be best summed up as The Second Coming!
– Michael Stark

The industry is very young still and needs time to mature and develop rules and regulations to play by.
– Brian Littleton, President, ShareASale.com

Exciting and fun! The shift from offline to online spend that we all have been talking about in the past 10 years is happening.
– Ola Edvardsson, CEO, Performancy

The key issues are confusion and consumer trust. Some consumers are becoming so turned off by the Internet pollution it hurts e-commerce as a whole and our emerging global community.
– Wayne Porter

Crowded, chaotic and filled with confusion. A massive cleanup is needed to sort out the bogus from the real and make it easier for legitimate firms to do business in an environment of trust.
– Chris Sanderson

The Future

What are the largest hurdles for online marketing going forward?

Standardization of data is a significant challenge. Until we can make it simpler to run online campaigns effectively, we’re excluding the small and medium businesses from full participation.
– Dana Todd

Enhancing customer trust and redefining online marketing ideology. The gap between reach and budgets will decrease and success-based models will be the future.
– Holger Kamin, Executive Account Director & Special Projects RoW, Zanox

Marketers must allow the consumer to choose which advertisements they would like to see anytime and anywhere.
– Elizabeth Cholawsky

Unreasonable client demands combined with impatience.
– Seth Godin

Once the major ad agencies fully embrace the Internet and its measurement and performance benefits, then the industry will really explode.
– Joe Speiser

Strategically, to bridge the gap between traditional brand/media advertising with the means to track and measure the ROI of online marketing. More tactically, to clean up the sleaze factor of online marketing including hammering the nail in the coffin on the spyware and spam issues.
– Beth Kirsch

I think we’ll see some overzealous enforcement of current and future laws related to email, adware and online advertising in general. Plus, there’s always the bogeyman of an Internet sales tax being enforced across the board.
– Shawn Collins

The constant abuse of the end user experience. As a marketer you always need to ask yourself: Is what I am doing really benefiting the end user? Is this the way I would like to be treated myself? The Golden Rule does apply in online marketing as well.
– Ola Edvardsson

Trying to make sure that we don’t behave so badly that the government steps in with strict regulation on tracking technologies.
– Brian Littleton

Where do you expect online marketing to be two years from now?

The separation between online and offline advertising will begin to blur. Online methodology will dominate and make the growth in online advertising appear even more dramatic than just the numbers would suggest. The handwriting is on the wall.
– Elizabeth Cholawsky

There will be fewer players, but they will be the more sophisticated, rule-abiding marketers that stick around through 2007.
– Shawn Collins

I think we will see far more sophisticated tools, better analytics and an emphasis on Web services.
– Wayne Porter

Online marketing will become a science of sorts. Since we’re able to track everything that happens online, we’ll see more companies focusing on analytics.
– Rachel Honoway, Vice President of Sales and Marketing, KowaBunga

Who Thrived

In our premiere issue we noted only about one in 50 affiliates finds real success. We profiled five affiliates who had beaten the odds. Now, two years later, we look at what’s happened to each of them over the last 24 months and what they’re up to now.

Rosalind Gardner

WHEN WE FIRST MET: Gardner had just finished writing her book, The Super Affiliate Handbook: How I Made $436,797 in One Year Selling Other People’s Stuff Online, and she was running Sage-Heart.com, an online dating service. She was making about $30,000 to $50,000 a month and had the business running to the point that she only needed to spend a few hours per month to keep it going.

WHAT’S HAPPENING NOW: In addition to being a columnist (Affiliate’s Corner), Gardner has been very busy with many projects. She’s working on more books – one is about how to make money selling books online. In the future she’d like to write books that have nothing to do with Internet marketing. But for now, she’s very in demand in the affiliate community. Gardner is consulting on a regular basis, speaking at high-profile conferences and seminars including Affiliate Summit and Affiliate Bootcamp, and building several affiliate sites.

Of course, Sage-Heart.com is still her bread-and-butter site, but she claims that NetProfitsToday.com, the site where she offers affiliate advice and a newsletter and sells her Super Affiliate Handbook, is taking up more of her time. She has what she calls a “virtual assistant,” but he only puts in an hour or so of work each day. Gardner recently started a forum on NetProfitsToday.com – something she had consciously avoided in the past, due to the huge amount of time forums require for monitoring, removing spam comments and just generally keeping things rolling.

The good news is that Gardner gets to unwind a little more. These days she works like a fiend for a stretch then heads off to China or Mexico for several weeks of rest and relaxation.

Wendy Shepherd

WHEN WE FIRST MET: Shepherd was a mom to three boys by day and a super-affiliate at night, working five to eight hours running her flagship site, TipzTime.com, plus a half dozen other retail merchandise sites. She was making about $40,000 a year and sending out her popular opt-in newsletter to more than 30,000 people.

WHAT’S HAPPENING NOW: Shepherd’s load certainly hasn’t lightened over the last two years. She’s still super busy home-schooling her boys, running two main sites (TipzTime.com and ChartJungle.com) along with about a dozen others and working into the wee hours of the morning. However, she has tripled her revenues of two years ago; she’s working on a top-secret unique site that will be launched later this year; and she’s thinking about hiring someone to help out with the Web development end of her growing business.

In addition, her husband stepped down from his managerial role at his job and is now working only about 30 hours instead of 50 or more. That means there’s a little more family time, which is more important than money or business, according to Shepherd, who admits that she never has time to be bored. Shepherd has been asked to speak at industry conferences and seminars, but declined – mostly because, she says, she “just can’t travel right now.” Meanwhile, she’s also contemplating writing a couple of books in the near future. She wants to help and encourage others.

Zac Johnson

WHEN WE FIRST MET: Johnson started his first Internet business at the age of 14 in 1997 selling website banners for $1. By 2004 Johnson was signing up people for free stuff like catalogs, coupons and samples on his site MoneyReignNetwork.com. He was also working with PostMasterDirect.com to push newsletter subscriptions by collecting names, addresses and email addresses through a double opt-in system. His income was in the low six figures.

WHAT’S HAPPENING NOW: Johnson’s MoneyReignNetwork.com site was recently redesigned and expanded to include more than a half dozen websites focused on games, celebrities, entertainment and community. He’s out of the email and newsletter business and more into building traffic through viral marketing. About a year ago he tried his hand at launching an ad network, but closed it quickly. A few of his new sites have cracked Alexa’s top 10,000 ranking. Johnson, who spends a “ridiculous amount of time working,” says 2006 will “easily be his best income year to date” as he prepares to add a couple of new sites to his growing stable.

Elisabeth Archambault

WHEN WE FIRST MET: After quitting her part-time job as a technical writing instructor, Archambault opened her flagship site (BuckWorks.com), a virtual mall that sold everything from auto parts to prom dresses. Her revenue was going up and down, depending on the month, but she claimed in a bad month she might make $3,000 and then make something in the low five figures in a good month.

WHAT’S HAPPENING NOW: Archambault continues to operate BuckWorks.com, but now it’s just one of nearly a dozen active sites she runs. She has expanded into areas beyond consumer shopping, and another site, which she won’t name, has become her money maker. Archambault also owns over 1,200 domain names along with a huge file of “great ideas.” In November she traveled to four cities and was able to conduct much of her online affiliate business. Her goal is to set up her business so she can completely run it from anywhere. Meanwhile, she’s doing more affiliate consulting work, which accounts for 20 to 30 percent of her business. She’s been so busy that she has turned down requests to speak at various industry conferences.

Ulrich Roth

WHEN WE FIRST MET: Living in the Canary Islands, Ulrich was running Last-Minute-Reisen-Weltweit.de, a travel service offering vacation packages, flights, rental cars, cruises and vacation homes. A native of Germany, he focused on the German travel market and was earning $150,000 per year, with monthly revenues ranging from $10,000 to over $20,000 at peak season.

WHAT’S HAPPENING NOW: Last-Minute-Reisen-Weltweit.de is still up and running and lists Roth as the contact. There is also a photo of Roth on the site’s landing page. However, he did not respond to attempts to reach him via telephone and email. The site continues to cater to German travelers and offers various last-minute travel packages to such exotic destinations as Ibiza, Mallorca, Turkey, Spain and Portugal.

Taxing Times

Back in the early days of the dotcom boom, rampant speculation arose about how or even if online sales should be taxed. For consumers, e-commerce was almost too good to be true: an ultimate extension of mail order, where any product could be ordered from an out-of-state seller with the click of a button, avoiding sales tax, albeit paying any shipping fees that were charged. However, since the mid-90s the e-commerce industry has evolved and U.S. economic conditions have changed, sparking legislators to make a serious push to implement some type of standardized tax code for purchases made online.

As a source of potential revenue for state governments, the topic of Internet taxation cannot be overlooked nor can the impact it may have on online marketers and affiliates searching for profits in an increasingly competitive medium.

According to a July 2004 research report from the Center for Business and Economic Research at the University of Tennessee, states are still losing billions of dollars in uncollected sales tax revenues from transactions that occur through electronic commerce. For 2004, the report estimates that states lost between $8.9 billion and $10.8 billion from e-commerce sales alone and predicts that this amount will continue to grow. By 2008, the report estimates that revenue losses from online sales will range anywhere from $11.8 billion to a high of $17.8 billion.

These figures may sound high, but they are actually below the previous estimates made in 2001. At that time, forecasters didn’t factor in an economic slowdown and miscalculated on volume of business-to-business transactions, according to Neal Osten of the Federal Affairs Counsel, which was behind drafting the legislation known as the Streamlined Sales and Use Tax Agreement (SSUTA).

The Legislation

The SSUTA (outlined at www.streamlinedsalestax.org), became effective on October 1, 2005. It lays the groundwork for standardizing the way participating states define, charge and collect sales and use taxes.

The idea behind SSUTA is that by taking the burden of sorting through tax jurisdictions away from retailers, the participating states could in turn ask federal lawmakers to introduce new legislation, which could challenge the 1992 Supreme Court decision that forbids states from forcing a business to collect sales taxes unless the business has a physical presence within their state.

SSUTA required at least 20 percent of the population of states with sales tax to sign on in order to get rolling. At press time, 13 states had made all the changes in their sales and use tax statutes and administrative rules to comply. Those states are: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. Utah, Tennessee, Ohio, Arkansas and Wyoming are next in line to comply.

“It is the intent of the SSUTA to treat all transactions in a competitively neutral manner,” explains the Federal Affairs Council’s Osten. “That is, sales, whether they are made in a brick-and-mortar retail operation or purchased online, are treated similarly for sales tax purposes. The agreement provides simplicity and some uniformity for out-of-state sellers in collecting a state’s sales taxes.” It’s important to emphasize that currently the agreement is voluntary for both states and sellers. “The states, whether they comply with the agreement or not, do not have the authority to require remote sellers (such as affiliates) to collect their sales and use taxes,” he says.

Osten explains that until Congress passes legislation giving those states that have complied with the agreement mandatory collection authority, remote sellers, online or not, have the option to volunteer to collect for sales made in the states that have complied with the agreement as of October 1, 2005.

If a remote seller volunteers to collect for one of the states in the streamlined system, they would have to collect for all the states in the system. Besides being compensated for collection costs, remote sellers that volunteer to collect are also given amnesty by these states if they may have had past collection responsibility in one or more of the states and did not collect sales taxes.

After Congress passes legislation and makes sales tax collection mandatory, amnesty will no longer be granted. Basically, nothing really changed for online sellers on October 1 unless they volunteered to collect for states where they did not have physical presence. Osten says that even if a company has a physical presence in one of the 18 complying states, it is not required to abide by the new agreement, which brings about an interesting point – compliance.

“The biggest problem that I foresee with collecting sales tax online is enforcement,” says Alan Townsend, a LinkShare affiliate and marketing manager for PersonalizationMall.com. “Who’s going to be responsible for determining who’s in compliance and who isn’t? There are so many opportunities here for loopholes it’s mind-boggling. What state is the business registered in? What state is the domain name registered in? Who is it registered to?

What state is the site hosted in? What state do the products ship from? The only way for this to be fair and effective for the states and the businesses involved is to have all 50 states participate. But overall, I think the states are headed in the right direction to achieve their goal with the SSUTA; not that I’m for more taxes.”

Taxation Inevitable

Some say the push for online taxes was coming. It was just a matter of when.

“I think the recent surge in interest by both old-world brick-and- mortar firms as well as by legislators to collect more taxes from Internet sales is, in the greater context, an awakening to the explosive growth and potential of online firms and our industry in general,” says John Lemp, CEO of online affiliate network Clickbooth.com. “Ten years ago, these types of laws were extremely unsuccessful. Even five years ago such laws would never have dreamed of passing, but now traditional firms are seeing the growth Internet companies are experiencing and how a law like this could slow migration of their customers to the Web.

“In the shift from offline to online spending the big losers are the states that collect less tax,” says Ola Edvardsson, CEO of interactive strategy firm Performancy.com. “Since they are in the business of collecting taxes they are not going to sit by the sidelines and watch.”

Dave Taylor, business blog strategist at Intuitive.com, adds that “arguably the situation is different today simply because the nation faces more debt with the war in Iraq, Hurricane Katrina and so on. Does that justify greater taxes? Perhaps.”

The Burden

Still, some worry about the impact this move will have on continued growth and how smaller businesses will handle the burden of dealing with complex tax regulations.

“Whether this slowdown will be very minor or very large is still up for debate,” Lemp says. “Personally, I wouldn’t worry about the larger- and mid-sized Internet firms as they will respond to the market and growth will continue – it’s smaller firms or individual proprietors trying to keep up with compliance that worry me the most.”

Townsend says he believes this is a Pandora’s box. Lemp agrees. “Even if these new laws are 100 percent successful in getting all 50 member states to enact them and they have consistency, they will still create enormous new costs and workloads for any small business attempting to sell products,” he says. “I have sold products in the past and the amount of paperwork and technological systems we had to create to keep up with one state’s laws was difficult enough for a small business. I worry more about the thousands of eBay sellers or small product sellers creating simple websites trying to sell products in their spare time or building product businesses from scratch. These are businesses with very limited resources and if significant amounts of those resources are tied up in purchasing compliancy software, hiring staff to file the sales and use paperwork with 50 separate states, then the new administrative and technological overhead could be too much for them.”

Although Osten has said states will pay for all the collection costs, the other obvious burdens on business owners appear to be equally daunting.

While the idea is to level the playing field, Lemp believes the opposite may happen. “Businesses that are attempting to comply and are located in states that are enforcing the new rules will attempt to compete with businesses in states not enforcing the rules or simply not complying, making an unequal playing field. Consumers are getting smarter than ever and will check prices at multiple sites and factor in sales tax and so forth when making purchases. If done right, eventually a more lenient national or at least uniform and extremely simple sales and use tax code would have much more success than what’s currently being presented.” Even Amazon.com, the king of online retailers, has stated it will not enforce the policy, bringing the competitive pricing issue further into the limelight.

Affiliate Impact

Besides all the possible logistical hurdles and potential negative consequences raised by the SSUTA, it’s important to note that the agreement does not even make clear what to tax or not to tax. Each state that complies with the agreement will still decide what’s taxable, according to Osten. The agreement only provides uniform definitions for the states to use to decide to tax or exempt an item. The agreement also does not define marketing and/or ad sales and any taxation thereof.

On the marketing front, Townsend says, “most affiliates will not be directly affected in my opinion. The vast majority of consumers shop online for the selection and the convenience of shopping whenever and wherever they want. That’s not going to change. In addition to that, online retailers will always continue to offer promotions such as coupons and free shipping; they have to in order to stay competitive online. Even if you take the convenience factor out of the equation, consumers can still get a better deal online because of the great selection and retailer promotions.”

Edvardsson agrees that affiliate marketers don’t have much to worry about. “It will have little direct effect on affiliates except if conversion rates go down in retail-based programs due to sales tax implementation,” he says.

Furthermore, advertising inventory itself is unlikely to be affected.

“Marketers that sell tangible products will be responsible for complying with these new laws,” Lemp says. That is if, in fact, it becomes law. “As far as I know, marketing, ad sales and intangible goods will not be taxed. These items should never be taxed, as a taxation system on them could possibly destroy certain industries. Intangible goods and payment systems such as PayPal do not have a physical delivery location and a location of origin can be near impossible to accurately calculate without losing significant percentages of sales.”

On the larger e-commerce front, Townsend says, “Very few retailers promote the fact that you don’t have to pay sales tax if you’re ordering outside of their home state. I can’t recall the last time I saw a banner ad for a retailer that read ‘Shop here ” no sales tax!’ Instead, online retailers promote selection, value, convenience and service, just like offline retailers do. This is what consumers are looking for.”

Additionally, shoppers will look at the total price regardless of taxes, shipping or other charges.

Down the Road

That’s not to say that there won’t be any long-term implications of either a voluntary or government-imposed online sales tax.

“The long-term effect for established businesses will be a readjustment of the marketplace unless there is still a good chunk of competing businesses that are not complying – whether international, eBay sellers or businesses located in states without consistency,” Lemp says. “The long-term effect of using the current system will be a hindrance of growth for very small, growing businesses and sole proprietorships.”

He says that as an affiliate network that works with more than 300 separate advertisers, anything that is affecting even a small portion of his affiliates could ripple back to impact his company. Though, he says, it’s not likely that the true effects of these laws would be felt for several years.

“Internet marketers can continue to do what they do best – react to the marketplace,” Lemp says. “If new regulations are put in place, advertisers will need to respond to these regulations and the marketers that work with these advertisers will need to continue to work side by side with their clients to fulfill any new needs that may arise.”

Townsend says that online retailers and affiliate marketers are smart and resourceful people and will likely invent new ways to survive.

“The cost of entry into the online marketplace is much lower than it is for offline retailers,” he says. “This drives competition and ultimately better deals for the consumer. With or without sales taxes, online retailing will continue to grow for a long time to come.”

DAVID COTRISS has spent the last 10 years writing about business, technology and entertainment for such publications as MIT’s Technology Review, Entrepreneur and Streaming Media. He has a B.S. in advertising from San Jose State University and currently resides in Los Angeles.

Crossing the Line

Years before the Nasdaq tanked and banner advertising died, e-commerce pioneers like Amazon.com and CDNow began partnering with topic-centric websites to drive revenues, paying a commission for each sale referred. The practice spread quickly and became known as “affiliate marketing.” By early 1999, Forrester Research proclaimed “affiliate programs” as the Web’s most effective traffic-driving technique – almost twice as effective as banner advertising.

Consider that by September 1999, more than three years after Amazon launched, there were over 1,000 merchants offering affiliate programs. And by 2000, Amazon’s Associates Program had grown to over 500,000 affiliates. What Amazon founder and CEO Jeff Bezos started as a polite conversation had grown into an entirely new industry, bringing with it affiliate networks, directories, newsletters and a variety of consultants. Affiliate marketing is now an integral part of the Web’s composition. It’s also now widely heralded as the Web’s most cost-effective marketing vehicle.

Still, as affiliate marketing evolved, issues with the model have been exposed. The affiliate community needs to remember that affiliate marketing is not about generating “cheap” advertising, but developing profitable strategic relationships.

But there is a way for merchants to offer a win-win where both merchants and affiliates have a vested interest. Improving technologies now make it possible for the formerly CPS, CPA, CPL performance programs and the CPM, CPC and flat advertising models to unify, creating a hybrid I call the CPP (cost-plus-performance) model.

The CPP combines a paid campaign with a performance campaign and offers the best of both worlds. I see this as the future of affiliate marketing, a wide-open world of performance and payment where the CPP takes back inventory lost to Google’s AdSense and advertisers. The result is a whole new world of opportunities for merchants, affiliate managers and affiliates.

The hybrid CPP is converting former CPM and CPC advocates into affiliate marketing believers. For many top websites, affiliate marketing now represents a chance to loosen the grip of pay-per-click search engines and costly advertising. The most difficult obstacle in affiliate marketing is finding good affiliates with traffic. If a site sells traffic then they must have it, and if you negotiate a cost-plus-performance payout, valuable opportunities begin to open up.

Merchants are also realizing that affiliates need better tools. Technologies such as data feeds, site and shopping cart abandonment (exit traffic) promise to increase EPC and EPM numbers without compromising the visitor’s experience, thereby improving monetization. By offering additional products and services at or after the point of sale, merchants can add revenue without diluting the sales process.

It’s becoming clear to merchants, affiliate managers and affiliates that the line between performance and traditional advertising has been breached.

It started with Google’s entry into the market. Google’s AdSense captured valuable affiliate program inventory, which caused the flexible affiliate marketers to evolve again. The industry’s response was to tangle with the paid advertising side of the market. Google’s method is to pay out for ad space – the same ad space that was used by affiliate marketers. That limits available inventory and changes the Web publisher’s expectations.

Some affiliate marketers using AdSense end up cannibalizing their own market. Why? To get guaranteed income from traffic. If you pay for traffic, you’re guaranteed to get it. The merchants get guaranteed traffic and the affiliates get guaranteed revenue from traffic. This presents a problem, however. Traditional advertising places the risk on the merchants, while performance places the risk on the affiliate. In either case only one has a vested interest in the campaign.

It’s clear from a handful of studies and reports that marketers are frustrated with the current process.

A recent survey of 135 senior-level marketers found that while 60 percent of respondents said defining, measuring and taking action on ROI is important, only 20 percent are satisfied with their ability to do so. In addition, 73 percent reported a lack of confidence in their ability to understand the sales impact of a campaign.

The study, conducted by Marketing Management Analytics, the Association of National Advertisers and Forrester Research in April 2005, was presented in July at the ANA’s 2005 Marketing Accountability Forum.

A Media Life survey of media buyers quantified what most already suspected: media buyers think that only about half of media reps know what they’re doing (MediaBuyerPlanner.com). A significant minority of the buyers – about one in six – have such a low opinion of representatives that they said only 10 or 20 percent are useful.

Complaints centered, unsurprisingly, on time wasting, in the form of over-contacting and proving ill-prepared when conversations do take place. Another big complaint proved to be overly hard selling, with some reps believing that repetition or browbeating may succeed in getting a property on the buy where the numbers won’t.

Half of the buyers said they agree with the statement that the rep problem was “no big deal. Sure, they’re annoying sometimes, but I’m sure they find me equally so. It’s how the industry is set up.” About 45 percent agreed instead that reps are “a necessary evil. Most are okay, but there are a few really obnoxious ones I hate doing business with.”

Even with all the issues, the good news is that the affiliate community is still evolving. Organic search is becoming more competitive. CPM rates are going up. Paid search is becoming cost prohibitive and the need for cost-effective online inventory is becoming stronger, causing the affiliate space to grow at ever-increasing rates. As merchants, affiliate managers and affiliates become even more interwoven, the friction decreases and new forms of integration and aggregation are made possible.

I see it this way: the race is on! In the last year the number of merchants offering affiliate programs has more than quadrupled. Literally millions of websites now participate as affiliates – from personal homepages at GeoCities and Homestead to Fortune 500 companies. And now, more often than not, merchants with affiliate programs are also affiliates.

Whether termed affiliate marketing, collaborative commerce, revenue sharing or syndicated selling, the affiliate space leads the way in the ever-changing landscape of online marketing and has become the Web’s fastest, simplest and most cost-effective marketing vehicle.

As both merchants and affiliates continue to recognize the power of change, affiliate marketing’s best days are yet to come. In a few short years, affiliate marketing looks to become the tail that wags the dog – controlling the majority of the adverting and marketing dollars.

GREG SHEPARD is the CEO of NetTraction, a firm that specializes in deploying, managing and growing affiliate programs. He can be contacted by visiting www.NetTraction.com or by email at cmo@nettraction.com.

Search for Tomorrow

It doesn’t take Edwin Hubble to recognize that the search universe is expanding. Instead of studying faraway galaxies to see the shifts in the cosmos, it only takes a glance at the home page of any major search engine to realize that search is moving at light speed.

The stars of search – America Online, Google, MSN and Yahoo – are attempting to extend their reach by launching a stream of search tools that provide custom filters of online information. The rate of change has sharply accelerated during the past year, and it seems that with every fortnight comes a new personalized, localized or visualized search method aimed at speeding up the delivery of relevant results.

A decade ago it was assumed that most users would find companies and information through portals that organize content into easy-to-navigate sections. However during the past few years search engines, led by Google, have become the primary resource for finding information.

According to an April 2005 Harris Interactive survey, Web surfers said they use a search engine during more than 90 percent of their online sessions.

“Google’s sneak attack was quality,” says Jon Cooper, vice president of interactive services at search marketing firm UnREAL Marketing. Instead of trying to direct users to content partners or handpicking links, Cooper says offering quality search results is the best model for satisfying surfers.

Google’s model of throwing open the doors through advertising-supported search has won out over trying to provide premium content. “As long as the content is pretty good and free, people will take the path of least resistance,” Cooper says. Google’s ad-supported search model has helped search engine marketing grow to a $4 billion industry in 2004, according to the Search Engine Marketing Professional Organization (SEMPO).

Tools of the Trade

Basic search tools provided by all of the big four include standard search, image search and news search, although the depth of the search results can vary widely among engines. For example, AOLSearch’s news tool generates results from news wire services only, while all of its competitors include links to articles from newspapers and online media outlets.

This year’s flurry of new search tools will generate additional volumes of Web traffic (and therefore advertising opportunities) by adding utility, increasing the level of competition and enhancing the significance of search in daily online activity.

Google and Yahoo have been the most active during a frenetic 2005 in rolling out new search tools, while AOL and MSN are also rapidly increasing the profile of search on their portals. Instead of taking away traffic from others, the new features will prompt more searches, and advertisers are expected to increase their search engine marketing spending by 41 percent in 2005, according to SEMPO. “The pie keeps getting bigger,” says David Berkowitz, director of marketing at search advertising agency icrossing.

Google and Yahoo have added personalization features that tailor results so that the most appropriate links for the individual are delivered at the top of the results page. Google’s Personalized Search enables users to scan their past searches to “re-find” information and uses the search history to refine the results. Yahoo’s personalization service, My Web 2.0, similarly uses past searches to refine results, as well as enabling friends to share pages that they have visited.

According to Nielsen NetRatings, nearly 70 percent of all search traffic flows through Google (48 percent) and Yahoo (21.2 percent). Personalized search could increase Google and Yahoo’s market leadership because it produces better results without asking users to change the way they search.

Most people use relatively simple one-or-two-word search terms that lack the context to filter out inappropriate results. For example, someone who searches on “Lincoln” will get results about the car, city, university and the president, but a personalized search relying on previous experiences would automatically narrow the results.

“Changing user behavior is a challenge,” says Gary Price, news editor of SearchEngineWatch.com and editor of ResourceShelf.com, because even after many years of searching, people still make the same mistakes. Since people won’t change, “search engines have to do things to make results more relevant,” he says. If what they are looking for is not delivered in the first 20 results, users will give up on a search, according to Price.

Getting Googled

Price says it’s much easier for the market leaders to get users to experiment with new search features than it is for their smaller competitors. When Google introduces a new vertical service, such as a search of academic papers or product catalogs, Web users and the press provide plenty of coverage.

“Google is a PR juggernaut,” says Price, adding that the word of mouth the company gets from enthusiastic supporters puts competitors at a disadvantage. Yahoo similarly generated considerable buzz when it launched tools for searching subscription content and comparison-shopping sites, even though similar services existed from lesser-known competitors.

The challenges for search engines not named Google or Yahoo in spreading the word will likely further the current trend toward consolidation in the search engine industry. Smaller companies that fail to distinguish themselves are likely to be acquired, according to Price.

Microsoft has become more serious about the importance of search on MSN, which previously served as more of a shopping and news portal and showcase for emerging Microsoft media technologies than a top-tier search engine. Microsoft decided in 2003 to replace the Yahoo search technology it had been using with its own search technology, which went online in February this year, according to MSN product manager Justin Osmer.

Osmer says MSN Search’s product development is focused on giving factual answers and not just links. When users type in a question, MSN searches Microsoft’s Encarta database as well as external resources for the answer, an approach similar to that of niche search engine AskJeeves.com. For example, typing in “Phillies score” will yield the score of the team’s latest game as the first result, while “population of Seattle” displays the latest statistics from the U.S. Census Bureau.

Google and Microsoft are further enhancing the importance of search in everyday computing by integrating Internet and desktop search. Both companies have launched free desktop search utilities, and Google’s Gmail email service replaces folders with a search model.

America Online is beta testing a new home page highlighting search tools that makes available to everyone a portion of the content that was previously restricted to subscribers. In addition to reference material and product search utilities, AOL now provides multimedia searches that enable users to tap into its considerable content partnerships.

AOL Search’s video search uses technology from fellow Time Warner subsidiary SingingFish and includes clips from television shows, movies and music videos, while the audio search displays radio program segments and music tracks.

Yahoo’s AltaVista also includes audio search technology, and Google is developing technology to search the text of audio, according to a report in the New York Post. Searching the spoken word currently requires developing faster and more accurate speech recognition technology, but eventually “will become just as important as the written word,” according to SearchEngineWatch’s Gary Price.

Steam Behind the Local Motion

According to Chris Henger, vice president of marketing and product development at Performics, the new tools will propel search marketing to become a $13 million industry within four years. Matching consumers with local sellers is expected to be one of the largest areas of search growth, according to Henger. “Local search is the biggest thing and opens up the door to a whole new set of advertisers,” he says. (See “Think Global, Search Local” on page 40.)

All four of the top search sites have launched local search services that look for nearby businesses selling services or items that match the search term. Henger says that working with smaller regional companies poses some challenges for search companies. Search engines will be interfacing with smaller companies that may be inexperienced in the business model, which may require search engines to augment their existing sales teams with a network of local sales representatives, according to Henger.

MSN’s beta local search service attempts to match the searcher with relevant local information by automatically scanning IP addresses, according to Microsoft’s Osmer. The location of the searching computer is used to call up nearby business listings, and the same technology is also used to identify the location of the results pages so that nearby websites are given priority.

The search engines will have to contend with established phone directory companies such as Verizon’s SuperPages.com, YellowPages.com, YellowBook.com and Amazon.com’s A9, which recently launched a visual search tool that provides images of the actual storefronts.

All of the search engines are experimenting with RSS (really simple syndication) search capabilities, which could further boost the amount of advertising opportunities. RSS is a method of formatting content used by many news sites and bloggers to share information with other publishers. Tracking feeds currently requires RSS reader applications, but search engines are likely to integrate RSS into search in the not-too-distant future.

Google rotates RSS feeds into its Gmail service, which could pave the way for broader RSS searching. MSN Search enables users to save any search query as an RSS feed, eliminating the need to repeat searches. Yahoo is integrating RSS into its news search, and AOLSearch includes video content formatted with Media RSS, which describes the content of the video.

Connecting search advertising with bloggers and news content through RSS would take advantage of some of the Web’s fastest growing segments. Google is currently posting some RSS advertisements on Gmail, and in July WashingtonPost.com became the first major news organization to include ads with its RSS feeds. Yahoo is testing RSS as a medium and looking into the viability of RSS advertising, according to senior manager of communications Gaude Paez.

Too Much of a Good Thing?

Keeping up with all of the search options and learning the benefits of each presents challenges to advertisers and users who must determine which variations will work best for them. The home pages of the top search engines now include a half dozen or more search options, and beta search technologies are often listed on their own pages.

When initiating a search, users have to keep mental notes as to which search tool will work best for each occasion. Users who would like to speed up searches through personalized search must remember yet another ID and password, and also have to remember to sign out before performing searches that they would rather not have saved on a search engine’s servers.

Marketers have to decide which of the multitude of search tools from a given search engine they want to participate in, and then figure out how to track their return on investment. For example, a search marketer might be getting good returns on standard search, but might not do as well on local search and generate no returns from news searches associated with their keyword or contextual ad.

Since each new tool increases the magnitude and complexity of search marketing, the need for interactive agencies will greatly increase, according to Chris Henger of Performics.

“Companies will need to go to specialists and third parties” to sort through the dozens of search marketing options, he says. Specialized agencies will track the new search tools for volume, user demographics and potential ROI.

Icrossing’s David Berkowitz says the rise in search tools “is phenomenal for interactive agencies because it makes it very difficult to keep track of everything that is going on.”

Search marketers also have to consider if they want to exclude having their ads show up on specific websites that include content that they consider objectionable. Berkowitz says large advertisers will call on agencies to protect their brands from unwanted associations, particularly with the rise in video and audio searches.

The search engines are committed to extracting the maximum value from the growing universe of content by producing personalized packets of information. New customized tools that anticipate the intent of users’ queries or automatically refine the scope of the search will further entrench search as the de facto first step in the quest for online information.

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, AlterNet.org and in MIT’s TechnologyReview.com.

Think Global, Search Local

If you are looking for help with your water heater in Plano, Texas, Harvey West is your man. Type in “water heater plano texas” on Yahoo and this ad will come up as the top sponsored result: Harvey West Plumbing Company: Water Heater. Family owned and operated repair and replacement plumbing company with fair prices and fast service. $25.00 discount to all new customers.

Off to the right, you’ll see sponsored results from the likes of Lowe’s, eBay, Target and BizRate. But West, who sold his 35-person plumbing company and now works solely with his son-in-law, manages to get the primo spot on search engines these days.

Run a Google search with the same keywords and, once again, Harvey West will be the top dog.

West admits pricing varies by geography and estimates that he shells out a mere $2 per click. Because it’s so cost-effective, Internet advertising is the only marketing the Texan plumber does these days, and it accounts for most of his leads. West is on to something: Local search is growing at an astonishing rate, and the numbers are absolutely staggering.

Searching for Profits

According to comScore Media Metrix, more than 421 million local Web searches were conducted in February. That means the number of times users conducted Web searches for local information more than doubled from January 2004 to February 2005.

Online merchants are eager to capitalize on the trend. Commerce sites typically convert 2.4 percent of visitors into customers, according to a study by retailer association Shop.org. The typical brick-and-mortar conversion rate is about 1 percent. The proliferation of broadband should help e-commerce grow even more. As people can more quickly find results, they are more likely to make purchases.

Industry observers say the already sizable local search market is likely to lift even further. Total local online advertising sales are expected to grow to $5 billion by 2009, with $3.4 billion of that coming from search engines, The Kelsey Group predicts.

Compare that figure to $670 million in 2004, with $162 million coming from search engines.

Sales of sponsored links and other forms of search advertising are expected to increase at a 12 percent compound annual growth rate, generating more revenue than display ads by 2010, according to JupiterResearch.

ComScore found that 111 million people execute 46 billion Internet searches yearly. And The Kelsey Group-BizRate estimates that 25 percent of all Internet searches are local in nature, meaning local consumers are looking for local merchants.

Although local search has really taken off only recently, local search queries already account for more than a third of all search engine queries. If surfers add a geographic term (like city or ZIP code) to their search queries, the results show them businesses within their area, usually giving them results they want – happy searchers, happy local businesses and happy publishers.

Make fun of the Yellow Pages if you want; the local listings are laughing all the way to the bank. This market has been dominated by local phone directories, like the Yellow Pages, with profit margins of 50 percent or more.

SBC made a hefty $2 billion in profits from its publishing unit last year on revenues of $3.8 billion. Researchers at The Kelsey Group predict at least $3 billion of Yellow Pages money will move online by 2008. To put that in perspective, the total Internet ad market was $9.6 billion last year.

But search engines attract 66 percent of online local search users, according to comScore. Clearly, local search is exploding. There is a huge potential to make money – it’s reportedly a $1.2 billion market – and that’s why search localization is the focus of efforts by AOL, Google, MSN and Yahoo.

Competitive Landscape

New data from Hitwise, an online competitive intelligence service, show that the top three search engines – Google, Yahoo Search and MSN Search – accounted for 93.5 percent of U.S. Internet searches across major engines in July 2005.

Visits to Yahoo Local (local.yahoo.com) were 4.4 times greater than visits to Google Local (local.google.com) in July 2005. However, Google Local’s market share increased 61 percent between February and July, while Yahoo Local grew 14 percent.

Google Local’s catch-up is occurring amid the growth of Google Maps (maps.google.com), which has quickly grown to become the third-ranked site in the Hitwise Travel-Maps category in July 2005. Maps have become important to local search users, as 17 percent of Yahoo Local’s visitors went directly on to Yahoo Maps in July 2005.

Yahoo has another advantage when it comes to local search: it has 176 million registered users, so it can direct local ads to people who have provided their cities or ZIP codes upon registration. While Google and Yahoo currently dominate the landscape, MSN has the financial resources to maneuver its way into search superiority. Microsoft spent $44 million marketing various MSN services in the first four months of 2005, while Yahoo spent $14 million – versus just $2 million for Google, says TNS Media Intelligence.

Still, underdog AOL is striving to play catch-up. AOL has long been for members only but it recently opened up its borders, enabling more of America to access its content. The move is meant to encourage advertisers, both national brands and local businesses, to fork over ad dollars because their ads will be seen by more than just AOL subscribers. It is clearly intent on trying to grab a share of search profits. And for good reason: Internet search advertising is set to overtake pedestrian online banner advertising by 2010, as online sales double to $18.9 billion, up from $9.3 billion at the end of 2004, according to JupiterResearch.

Executives at the Big Three realize that local is the way to go. “The local search market should be larger than [Google’s] other markets because most people’s purchases are local,” said Google CEO Eric Schmidt, at an investor conference in May. And Google isn’t alone in its thinking. All the major players are looking for more ways to attract the most local search dollars.

The various search parties are using several approaches to move into local advertising. Maps are a leading tool. MSN has launched a beta of its Virtual Earth application. A Locate Me feature finds a present location and lets the consumer explore and discover the area around them. The Locate Me link activates Microsoft Location Finder, which uses Wi-Fi access points or Internet Protocol address geocoding, to determine a person’s location.

Google has its Keyhole technology. Google bought dodgeball.com and, at press time, aborted plans to acquire Meetroduction, “location-aware social networking software.” Google’s interest in social networking and mobile technologies show its commitment to localized services.

Mobile search is a promising prospect because people are attached to their cell phones and are often looking for goods and services while on the go. Eyeing this mobile climate, AOL bought mobile software company Wildseed; Google has local search for mobile phones; Yahoo introduced a texting service for getting local search listings. While mobile search is still in its infancy, it is likely to take off quickly and add another element to the local search wars.

Local Winners

In August 2005, Affinity Internet announced the launch of ValueTraffic Local, a service that helps small business to target their online advertising to Web searchers in specific geographic areas. Mastering the art of local search is a skill that few possess, but those who do stand to reap rich benefits.

Harvey West, the Texan plumber, is so good at bidding on keywords and tweaking ads that a number of other plumbing outfits, from Philadelphia to Palo Alto, Calif. hire him to help them with their local search efforts.

Cabrillo Plumbing & Heating in the San Francisco Bay Area does extensive advertising – TV spots on local cable, direct mail, Yellow Page ads and moving billboards in the form of company trucks.

“We track every piece of advertising scientifically,” says President Jeff Meehan who handles Cabrillo’s advertising himself. He even shot Cabrillo’s TV commercial on 35 mm film in his mother’s kitchen.

But when it comes to Internet marketing, Meehan hands the reigns over to West. “I’ve given him carte blanche to get us at the top bar for our service area which is San Francisco and Palo Alto.”

West says a Philly plumber doesn’t have much competition and only has to pay around 75 cents a click. Meehan, however, forks over more like $4 or $5 a click because there’s more competition for eyeballs in the Bay Area.

“If you bid the most, you’ll get the highest listing,” explains West. But plumbing is a business where you can spend $300 acquiring new customers – he recalls the days when he spent $8,000 a month on Yellow Page ads alone – so $5 is a deal, says West. But local search isn’t something you let stay static.

Tweak, Tweak, Tweak

Searches for “yoga San Francisco” and “spa San Francisco” found International Orange, located in San Francisco.

“We do local search marketing for good reason,” says co-founder Amy Darland. “It’s effective, and you aren’t committed for a month or year. It’s a nice get-out-of-jail card.” Still, it’s such a tricky business that, like Meehan, she entrusts her search marketing to a Web advisor.

In the past year the average advertiser’s roster of keywords grew by 50 percent, according to Efficient Frontier a Mountain View, Calif., firm that manages $100 million in keyword purchases for its clients.

“People will go in and put in keywords and leave it like it was Yellow Pages,” says West. “You’ve got to tweak it, work on different ads, change it 15 times to see what gets the best clickthrough rates. As soon as it works, you’ll find it changes.”

Local search is a huge and expanding market. The major players are constantly changing and so it’s important to understand the evolving landscape. So how does local search impact primarily merchants and affiliates? It means that large, established merchants are bidding more to get top listings.

The growth of local search is a case of half-full, half-empty for affiliates. But they can take advantage of overlooked locales. They can bid for the top spot in small towns, getting local shoppers to connect to online merchants through their sites. While a spa search in San Francisco or New York results in a raft of sponsored results, there are many towns with only natural search results. So affiliate sites that link to SpaWish.com, for example, can take advantage of the undiscovered towns and bid to get sponsored spots that lead to commission payouts.

But affiliates hoping to be local leaders would be wise to heed Harvey West’s words: “You gotta keep on top of it.”


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

Stand By Me

The last of the big independent affiliate and performance marketing networks was finally swallowed up by another large international conglomerate.

In early September, Japanese e-commerce portal Rakuten took its first step into the U.S. market by agreeing to acquire privately held New York-based performance marketing network LinkShare for approximately $425 million in cash.

Speculation was swirling around the online marketing community for several months that LinkShare, which has investors including Mitsui & Co. Ltd., Mitsui & Co. (U.S.A); Internet Capital Group, and Comcast Interactive Capital, an affiliate of Comcast Corp., was looking for a buyer.

Enter Rakuten. The public company, with a market capitalization of $9.7 billion (as of September 5) was looking to break into the U.S. market and wanted to establish an immediate presence. Founded in 1997, Rakuten has several divisions and is involved in e-commerce, media, travel and financial services and owns a professional baseball team in Japan (the Tohoku Rakuten Golden Eagles).

“LinkShare’s performance-based marketing expertise across affiliate, search and email capabilities provides Rakuten with an excellent first step to launch our U.S. operations and continue our international expansion,” said Hiroshi Mikitani, chairman and CEO of Rakuten. “We can leverage LinkShare’s client relationships and technology advantages worldwide, so that LinkShare will be able to achieve significant growth in the future.”

For many big players in online marketing, pairing up with larger, more diversified companies that provide additional financial resources is nothing new.

LinkShare rival Commission Junction was bought for $58 million in cash and stock by ValueClick in October 2003; ValueClick previously purchased affiliate network BeFree in March 2002 for $128 million in stock; Performics was acquired by DoubleClick in a cash deal estimated at $58 million (plus an earn-out of up to $7 million) in May 2004; DoubleClick was acquired in July 2005 by Click Holding Corp. in a deal valued at $1.1 billion.

There are conflicting views on why LinkShare sold for so much more than its competitors.

One poster on affiliate marketing forum AbestWeb.com called the sale price “An insane amount of money!!” while another wrote, “I was actually surprised they got it for as little as $425 million. Especially considering MySpace was purchased for around $580 million and Shopzilla.com went for around $560 million. I guess the going price for big sites like these is between $400 million and $600 million I can’t believe ValueClick paid so little for CJ; they certainly got a deal there.”

Other industry watchers claim that the high selling price is a combination of a better economic climate and the growing popularity and desirability of performance marketing.

“The price – especially compared to their competitors – is startling,” says Shawn Collins, a consultant. “But the economy is in better shape than a year ago. Affiliate marketing is more respected and on firmer ground. It’s a real testament that affiliate marketing is going well.”

Haiko de Poel Jr., president of online affiliate community AbestWeb.com, says that affiliate marketing is only a little hotter than when CJ was purchased two years ago.

“Even though the climate is better and affiliate marketing is a little hotter, it’s not enough to justify $425 million. There is no way you can tell me that LinkShare is worth twice what was paid for CJ and BeFree combined. There’s just something wrong with that. In fact, there are just too many things wrong with this whole deal.”

LinkShare, which was established in 1996, has a network of more than 500 merchants including J.C. Penney, 1-800-Flowers .com, American Express, Avon Products and Dell. It has more than 10,000 affiliates in its network and claims that for 2004, approximately 2 percent of U.S. retail e-commerce, or $1.4 billion, passed through the LinkShare network.

LinkShare’s chairman and CEO, Steve Messer, says, “By partnering with a successful portal with global aspirations, LinkShare has positioned itself to take advantage of the increasingly universal nature of the Internet and e-commerce.”

Messer goes on to say, “Our merchants and our affiliates will benefit because taking the network worldwide can only increase volume, which means growth for everyone.” Messer, along with the rest of LinkShare’s senior management team, including President and COO Heidi Messer, will remain with the company.

Affiliate Alan Townsend, marketing manager for PersonalizationMall.com, says the sale of LinkShare is bittersweet.

“I can tell you that Steve Messer is passionate about affiliate marketing and LinkShare. I don’t think this deal is just about money. I think if anyone wants LinkShare to succeed, it’s him. I’m confident that he’ll help make decisions for LinkShare that will allow them to grow well into the future,” Townsend says. “With that being said, I think it’s always bittersweet to see a great company that you love get sold. It’s much easier to buy a company than it is to build one.”

In the short term, affiliates are questioning everything. When will they be paid? How will they be paid? Who will pay them? What changes are going to be made? What improvements are going to be made? How will current issues be resolved?

Townsend notes that continued communication with affiliates will be key for LinkShare’s future success.

“I think LinkShare has to keep the affiliate community informed throughout this entire process. Affiliates deserve to know how this is going to impact their livelihoods,” Townsend says. “In the long term, affiliates are going to benefit. The new owners will want to see growth. LinkShare will be trying to expand into new markets quickly. Eventually LinkShare will have a global presence that will attract more affiliates and more merchants. As a result, LinkShare services, such as check processing, affiliate support, etc., will have to improve to meet the growing needs of these affiliates and merchants.”

Going Global

Affiliate Networks are striving to extend their reach by entering foreign markets, but local challenges threaten their chances of international stardom.

If the affiliate model is effective for selling necklaces in Nantucket, shouldn’t it also work to move wurst in Wittenberg and mobiles in Manchester?

U.S.-based affiliate networks are hopeful that taking their business models to all four corners of the globe will translate into the same kind of success that they have enjoyed in North America. The networks see nations that have lagged behind the U.S. in embracing e-commerce as fertile ground for sowing the seed of performance marketing.

Commission Junction set down roots in the U.K. and Germany, while LinkShare put out its shingle in Japan. Both companies, as well as their European counterparts, have designs on extending their global footprint sooner rather than later. Commission Junction, LinkShare and Performics are the leading U.S. affiliate networks.

Going Gangbusters Globally

"My prediction for 2005 is that this will be the year that affiliate marketing truly goes global," says Heidi Messer, president and COO of LinkShare. Messer says the company "will be aggressive in expanding into Europe" and is interested in participating in the burgeoning economies of China, Korea and Australia.

LinkShare began its global odyssey three years ago, according to Messer, when it partnered with Mitsui & Company, a leading Japanese retailer. LinkShare provided the marketing platform while Mitsui contributed the business relationships and knowledge of the local requirements. "Going it alone wasn’t a possibility," says Messer, because each country has its own buying pattern, laws and culture.

Messer says LinkShare is evaluating opening networks in European countries on an individual basis. "We are very methodical and will not enter markets where we are not 100 percent committed," she says.

The increasing willingness of Europeans to purchase goods and services online makes the region a likely destination for American marketers, according to Hellen Omwando, an analyst with Forrester Research’s consumer markets group. Omwando says that within the first year of going online, 16 percent of Europeans now buy items such as travel and clothing, whereas in years past only 2 percent would have purchased commodity items such as CDs or books online in the first 12 months.

Omwando says that affiliates’ potential audience is also growing – 55 percent of Europeans online now participate in ecommerce. "It’s all good news from a consumer perspective," she says.

The United Kingdom and Germany are driving most of the growth in Europe and account for two-thirds of all e-commerce, according to Omwando. Not surprisingly, Commission Junction launched its first two European affiliate initiatives in those two countries.

"We are up to our eyeballs in international expansion," says Elizabeth Cholawsky, vice president of marketing and product development at Commission Junction. She adds that the company will next launch in France in mid-2005, and that Spain and Italy are also priorities for expansion.

By entering new markets, the company would be able to better serve its advertisers through an international network of websites, says Cholawsky. In addition to Europe, Commission Junction has launched eBay in India and Australia, and has China on its radar.

The most difficult aspect of Commission Junction’s European launch was not technological or cultural, but bureaucratic, according to Cholawsky. She says that because European tax officials are not well-versed in the intricacies of e-commerce, the company hired auditing firm PricewaterhouseCoopers to work with government representatives in the U.K. and Germany. The European Union’s adoption (with the exception of the U.K. and Switzerland) of the euro has simplified currency exchange.

The company hired a design firm from Germany and a language translation firm from Washington, D.C., to create a website acceptable to local affiliates, according to Cholawsky. She says launching in the U.K. first simplified establishing a presence in Germany. "Europe has more things in common than different," she says. "Culturally it’s similar all around."

European expansion has contributed to Commission Junction’s rapid growth. The company’s revenue jumped from $24 million in 2003 to an estimated $54 million in 2004, says Cholawsky.

Affiliate network Performics is unlikely to join the European fray this year, according to Chris Henger, senior vice president. He says Performics is focusing on integrating its resources with new parent company DoubleClick. "In the longer term you could see us moving in that direction, but it’s not an immediate strategy," Henger says. 

Navigating the Potholes

Ashley Friedlein, CEO of London-based E-Consultancy.com, says that incumbent local companies have the upper hand over Americans in attracting retailers. "European merchants want to deal with companies who understand their markets," he says.

Citizens of each country have their own preferred methods of purchase, revenue model, topselling products and legal requirements, according to Friedlein. Europeans are much more likely to purchase products through their mobile phones, and the laws for online data protection and privacy protections vary from country to country, he says.

European e-commerce trends run about six to 10 months behind the U.S., Friedlein says. And European affiliates continue to use the pay-per-click revenue model that Americans have largely moved beyond, according to Friedlein. Search engine marketing in Europe requires local expertise, especially for American companies used to operating in a Googlecentric universe.

Europeans have their own searchengine marketing techniques, and affiliates and merchants are working out how to cooperate with search partners, according to Friedlein. He says that affiliates and retailers have been in a bidding war over getting priority for brand names in search engine rankings. "It’s a bone of contention," he says.

One similarity with American affiliate marketing is that merchants depend on a few affiliates for most of their revenues. "I reckon that 90 percent of sales come from 10 percent of affiliates," Friedlein says.

Affiliate marketing’s rapid growth in Europe has made it difficult for retailers to find in-house expertise to manage their programs, according to Friedlein. Many large retailers do not have a dedicated affiliate manager, so the responsibility is either part of the marketer’s job, or it’s outsourced.

European sales generated through affiliates during 2004 are estimated at $1.1 billion, a 100 percent increase over the previous year, Friedlein says, and he expects similar growth this year. Friedlein says 3.5 percent of all e-commerce sales in Europe are generated by affiliates.

Forrester’s Omwando warns that while affiliate marketing in Europe is in a comparatively early stage of development, Americans looking to land on the Continent in 2005 may have a hard time forging relationships. Europe already has three significant networks in place: Zanox in Germany; TradeDoubler, which has operations in 16 nations; and Commission Junction, which began its U.K. operation in 2001.

She says retailers unfamiliar with affiliate marketing are unlikely to partner with a foreign entity. "Marketing at the end of the day is very localized, and anyone participating has to understand the nuances and cultural sensitivities," Omwando says.

For example, to work with German companies, networks must first establish relationships with the local trade associations, Omwando says.

"I really don’t see what the opportunity is for American companies," she says. To have any chance at attracting European retailers, American companies must bring with them an impressive roster of international advertisers, according to Omwando.

Inevitable Intersection

The American networks’ grab for affiliates abroad will put them in direct competition with European companies that also have designs on expanding into Asia, and perhaps even in the U.S.

TradeDoubler poses a formidable challenge to foreign competitors. The company has been in operation since 1999 and has a presence in 16 European countries.

It is assessing possible expansion into Asia, and clients have frequently asked TradeDoubler to consider opening an office in the U.S., according to Will Cooper, chief marketing officer.

"Having a pan-European footprint has given us access to the world’s largest advertisers," says Cooper, who counts Dell, Apple, Sony and Reebok among his clients. TradeDoubler’s network includes more than 800 advertisers and 450,000 publishers across Europe.

Cooper says the challenge of starting networks in several European countries should not be underestimated. Each country has a unique cultural and business climate that requires networks to retool their business model, he says. "Every market is so incredibly different in terms of things such as broadband penetration, size of market and payment models," Cooper says.

While Spain and the U.K. are both large markets with populations of more than 40 million, their e-commerce demographics are quite different, according to Cooper. The U.K. has the most mature e-commerce marketplace, and the costper- action revenue model works well. But Spain has very different characteristics. "The culture is not to buy online. People prefer being able to touch the products," Cooper says, and cost-per-click is the preferred commission structure.

Heavier reliance on mobile phones provides another opportunity for networks looking to move into Europe. TradeDoubler developed a program for Swedish mobile phone users who are more comfortable with brick-and-mortar purchases. Customers can download coupons that contain an identification number for the referring affiliate to their mobile phones, which they take to the checkout counter where scanners read the coupons.

Another example of a TradeDoubler affiliate program designed for a specific country is its British lottery program. After registering online, Britains text message their Lotto picks, which takes advantage of the U.K.’s interest in mobile phone e-commerce.

Zanox, an affiliate network based in Germany that spans 22 European countries, launched the ring-tone download service Jamster in the U.S. and Australia. "You cannot compare Europe and the States," says Holger Kamin, Zanox’s executive account director.

Kamin says his company has an advantage over American networks because it has already established relationships with major retailers in Europe and provides many affiliate services, including consulting, email permission marketing programs and a transaction platform.

The cultural differences between countries that share a common language can be difficult for non-Europeans to understand. "You can’t think that because they speak the same language in Austria, Switzerland and Germany that the culture is the same," Kamin says.

To succeed in the long term, affiliate networks must have international reach, according to Kamin. "This business is global," he says. Kamin predicts that the market will consolidate to five top-tier international affiliate networks that will compete with smaller regional players.

 Northern Exposure

American affiliate networks are not alone in their hemisphere in seeking a share of the international marketing dollars. Canadian affiliates are enjoying success selling products such as prescription medicine, adult content and sports books in the United States.

Nicky Senyard, CEO of Montreal-based network ShareResults.com, says merchants in her country are significantly behind their southern neighbors in understanding affiliate marketing. "Online merchants don’t know what they are or how they are to be used," Senyard says. Many Canadian affiliates are currently selling American products, but her company and others are educating Canadians on the possibilities of selling their goods in the U.S.

Just as Commission Junction and others are now operating networks in Canada, she expects that Canadian networks will increasingly do business in the U.S. "[Opportunity] flows in both directions," Senyard says.

American networks that wait until 2006 to launch European initiatives may find the window of opportunity closed. Local companies who become established with retailers now will have a definite advantage, according to Gary Stein, a senior analyst with Jupiter Research. "The advantage is to the incumbent," Stein says. U.S.-based advertisers who are expanding their European online marketing programs have to weigh the factors of familiarity with American networks versus local expertise, according to Stein. "There are arguments on both sides of the equation."

 

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, AlertNet.org and in MIT’s TechnologyReview.com.

iPod, Therefore iTunes

Affiliates interested in offering digital music downloads should pay tribute to Apple for legitimizing an over-hyped and under performing market that was close to flaming out before it ever got off the ground.

Despite the continued existence of freely available music through peer-to-peer networks, Apple has sold more than 125 million songs through its iTunes online store since it opened in late 2002, according to the company.

Apple’s iTunes dominates the industry, representing 70 percent of all music files downloaded legally between December 2003 and July 2004, according to market researcher NPD Group. Napster, with 11 percent of the market, was the second-largest download seller, followed by MusicMatch, RealNetworks and Walmart.com.

But how long can Apple top the download chart? Analysts say Apple’s continued leadership of the non-free world of music downloads is largely tied to the success of the iPod, which is both asset and encumbrance for the Cupertino, Calif., company. According to Apple, the company sold 2 million of its industry-leading iPods during the quarter ending in September 2004.

Apple was able to grow and dominate its market because of the company’s product design skills and because consumers and the music labels felt comfortable with them, according to Mike Goodman, a senior analyst at the Yankee Group. Apple was the first digital music distributor to be fully supported by the recording industry, Goodman says.

“They were the first to have access to the (music) libraries needed to make a successful online music service,” he says. The company that offers the largest music catalog, as Apple does with more than 1 million tracks, has an advantage in attracting consumers, according to Goodman.

Apple is unique in selling both the songs and the music players, which gives the company an advantage, according to Goodman. “The iPod received the blessing of the youth as the coolest music player,” he says, adding that the iPod’s interface and ability to manipulate it with one hand distinguish it from the competition.

While other music download services try to eke out a living on the slim margins offered by selling songs for less than a buck apiece, Apple makes a hefty amount of its profit on hardware sales via the iPod, Goodman says. Apple is turning the model of selling razors to make money on razorblades on its ear because “iTunes exists to sells iPods,” according to Goodman.

“Apple will continue to lead as long as they continue to innovate with hardware,” says Tim Bajarin, president of analyst firm Creative Strategies. He says that with 92 percent of the hard disk player market, Apple has a large customer base ready to purchase music. “Because the iPod is one of the most elegant music players, people want to get out there and use it,” Bajarin says. “It’s viral.”

Orchestrating The Future

While these numbers are impressive for a market fractured by a variety of incompatible file formats and hundreds of generic portable music players, the market penetration has been small and the potential for growth enormous. Accord-ing to NPD Group, less than 1 percent of US households legally downloaded music in July of 2004.

The Yankee Group’s Goodman expects iTunes to keep humming along in the short term. Although he says the market will heat up through competition from new services developed by music seller Virgin and online portal Yahoo, “I don’t see [Apple’s dominance] changing in the next six to 12 months,” Goodman says. Because its dominant iPod portable device will not play most other file formats, Apple doesn’t have to worry about competition to iTunes today, he says.

Companies would have to either license Apple’s FairPlay digital rights management or reverse engineer it, as RealNetworks has done, to enable songs encoded in its file format to play on the iPod, Goodman says.

However, Goodman argues that iTunes may eventually have to outgrow the iPod if Apple wants to continue to grow with an expanding market. He says that only 30 percent of music downloads end up on hard disk devices today, so Apple is limiting iTunes’ potential reach.

Goodman is not convinced that tying a music service to a proprietary hardware device is the best strategy if viable iPod competitors are developed. “Over the long term, just selling to the iPod will not be successful.” Tracks can be downloaded to Macs or PCs through the iTunes Web site, but users cannot copy them to devices other than iPods.

Apple recently began to increase its hardware reach by creating more versatile iPods and agreeing to allow mobile phones to play iTunes. Apple hopes to attract a new audience with the recent introduction of the iPod Photo, which includes a color screen and can store up to 25,000 digital photos. Apple also licensed the iPod to Hewlett-Packard to sell to Windows users, and Motorola announced it would introduce handsets capable of storing and playing iTunes in mid-2005.

Network Competition

Every download seller has an affiliate program in place to try to increase the overall market by encouraging links from other Web sites. Apple launched its iTunes affiliate program in September with affiliate network LinkShare. The company provides tools that enable affiliates to directly link to single tracks and albums and will offer special promotions to encourage sales

According to Apple spokeswoman Liz Einbinder, the company pays a 5 percent commission on all sales stemming from affiliate leads. The company sends out checks 45 days after the month in which an affiliate accrues $25 in sales. Einbinder says the company does not disclose details about the number of affiliates who have signed up for the program.

Nathan Wright, who runs music Web site MonkeyCube.com, says it took about three days for Apple to approve him as an affiliate. “It was a very easy process,” he says. MonkeyCube made the cut because it does not include offensive content and has sufficient traffic with more than 800 unique visitors per day, according to Wright.

Wright says that while he did not earn any commissions through the first 60 days of being an Apple affiliate, he is happy to include links on his site to Apple products. “Apple has been a great brand and company to associate with. If I could chose any (music seller) to partner with, I’d choose Apple.

Michael Sullivan of FreshTuneage.com signed up to become an iTunes affiliate on the first day, but he says Apple wasn’t fully prepared to partner at the beginning. “They kind of stumbled out of the gate,” Sullivan says. Apple initially offered links only to the iTunes page, but set up a program for linking to individual tracks within a few days.

FreshTuneage also has links to buy albums on Amazon.com and CDBaby .com, says Sullivan. He is hopeful that readers will be attracted to iTunes because they can download tracks immediately instead of having to wait for CDs to arrive in the mail if they purchase from another of his partners. Sullivan also suggests that Mac enthusiasts such as himself might prefer to buy from iTunes instead of other services because of their passion for the brand. “There is some inherent snobbery,” he says.

So far no one has purchased any iTunes by clicking on his links, Sullivan says. He says the music reviews and news bloggers he has spoken with have not successfully converted their traffic into music download sales.

Music download competitor Buy.com pays 10 percent, a higher commission than Apple. And like Apple, Walmart.com also pays per track sold. MusicMatch, Napster and RealNetworks pay their affiliates based on their ability to locate new subscribers for their monthly fee services. RealNetworks offers incentives ranging from $2 to $11 for corralling new subscribers for its services, and MusicMatch offers bounties of $7 to $10.

The Yankee Group’s Goodman does not believe that the subscription model will be successful. “The negative backlash will intensify as consumers realize that when they end their subscription, access to their music goes away,” he says.

Goodman doesn’t expect Apple to launch subscription services. Streaming services won’t help them sell iPods since the devices do not directly connect to the Internet. “The rental model works for movies, but not for music,” according to Goodman.

The Early Innings

As the New York Yankees painfully discovered in 2004, even commanding leads can be surpassed, and Apple has a competitor that may prove as tenacious as the Boston Red Sox. Microsoft, which has its own protected music format and an unequaled bank account, has been upping the ante by developing a new mobile device platform and revamping its music service.

Microsoft recently rolled out the 10th version of its Windows Media software for playing audio and video files, and several hardware partners announced portable devices that can play them. Through MSN Music, consumers can download music videos, single tracks or albums from more than 3,000 independent labels. Microsoft updated its music service to better integrate with its Windows Media Player software that is included with all Windows PCs as well as 70 handheld devices, including PDAs and smart phones.

“There are far more devices that play Windows Media files” than iTunes, says Michael Gartenberg, vice president of research at Jupiter Research. “The challenge is for one of the [Windows hardware] vendors to come out with an iPod equivalent,” he says.

“In the marketplace now the digital distribution of protected music files is strongly determined by the device,” according to Gartenberg. “For now it’s the iPod, but it is hard to predict the future.” Digital music sales are expected to double to $270 million in 2004 and could reach $1.7 billion by 2009, according to Jupiter Research.

Gartenberg said that because portable audio players have penetrated only 5 percent of the American market, “discounting Microsoft or RealNetworks at this stage of the game would be extraordinarily foolish.” While iTunes is the leader today, “the online music offerings aren’t all that different in terms of content, selection and usage rights,” according to Gartenberg.

Microsoft has been less aggressive and forthcoming about its plans for teaming with affiliates. The company has a “preferred partner program” instead of an affiliates program. Spokeswoman Sarah Williams says the company does not provide financial information about relationships with affiliates.

Since Microsoft’s primary focus has always been selling software, the company may use its music service as yet another avenue for selling devices powered by Microsoft applications. The MSN Music service integrates links to download sellers Napster, Walmart.com and MusicMatch and CD site Amazon.com.

Microsoft has frequently let other companies compete in a nascent industry before pouncing on the opportunity, as it did with spreadsheet and word processing software. The company also has established a reputation for getting things right after the third or later generation of software, so the landscape could change, according to Goodman. “Microsoft is probably better off being out of the box late rather than early,” he says.

ITunes’ status as the download service front-runner will depend largely on the iPod’s dominance over devices manufactured by consumer electronics companies who often partner with Microsoft, so the pressure is on to continue the company’s initial success. As Goodman says, “In a market-share business, everything can turn on a dime.”

JOHN GARTNER is a freelance writer living in Philadelphia. He is a former editor at Wired News and CMP.

Being Ben Edelman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DA: What are you working on now?

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

DA: What stealware is the most pernicious these days?

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

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

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

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

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

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

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

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

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

DA: What can be done about them?

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

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

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

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

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

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

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

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

DA: What are your biggest current concerns?

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

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

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

Search For Tomorrow

It was the summer of 1998 when GoTo.com launched its pay-per-click (PPC) program in a fairly straightforward way. Back then, there were few competitors and the bids were low. Often a top slot could be had for a penny a click, and the reporting was bare bones.

It was morning in paid search country.

Six years later, the paid search landscape has gotten a lot more crowded. According to PayPerClickSearchEngines.com, there are now about 600 PPC engines. It has also gotten a lot more expensive, with the minimum of a dime per click at Overture. And all that has made things a lot more complicated.

If you want to know what the future holds for the fusion of paid search and affiliate marketing, strap in and hold on tight.

The typical affiliate program is heavy on affiliates utilizing either natural optimization or paid placement. A third of all affiliates promote their links in PPCs, according to a survey in the AffStat 2004 Report. Additionally, 16 percent cite data feeds as their preferred method for promoting an affiliate program.

When CAN-SPAM (Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003) took effect on Jan. 1, 2004, the email affiliates were significantly bridled. This has resulted in a seismic shift by affiliate programs and their growing reliance on search engine affiliates.

According to Kevin Lee, CEO of the search marketing technology firm Did-it .com, paid search is moving toward more personalization, automation and the greater emergence of vertical portals. There are also some changes on the horizon with regard to use of company trademarks by affiliates, says Lee.

Personalization Per Click

Affiliates using Google AdWords can now target regionally and locally, so they can reach the prospects who are most appropriate for the affiliate program they are promoting. For instance, if an affiliate is running a fan site for the New York Jets, it wouldn’t make a whole lot of sense for them to use paid search to push a Jets banner to a national audience. But with regional, city-level and IP targeting (using the address uniquely identifying a certain computer on the Internet), affiliates may focus on specific cities and metropolitan areas to market Jets goods. Google even enables affiliates to define their own target area by choosing a point and a surrounding radius of 20 or more miles or by picking points in order to define a border.

Personalization could be focused on regions or interests. “Rich media search, image search and news search will gain in popularity, and paid results will become available within these areas,” says Did-it’s Lee. “All the search engines will roll out some kind of personalization or personalized search where the engine remembers things about you. This will help with targeting ads better as well as algorithmic results.”

You can expect affiliates to begin using this option more extensively, bringing in a more attractive and effective CPM (cost per thousand advertising impressions) and CPC (cost per click).

Automate To Elevate

Affiliates have long relied on spreadsheets to manage all of their keyword bid campaigns, but as the paid search space matures, the administration and tracking of PPC campaigns is getting more advanced.

“In order to continue participating in the ever-increasingly competitive marketplaces for keyword bids, marketers will be forced to use marketing automation techniques that take into account order profit values and lifetime value, not just simple ROAS (return on advertising spending) or immediate ROI (return on investment),” according to Kevin Lee.

Some of the more popular tools for automating paid search processes are Atlas OnePoint (formerly Go Toast), the Maestro Client from Did-it.com, and PPC Track from KowaBunga Technologies. Additionally, search engine marketing firm iProspect unveiled iProspect Search Engine Bidding Agent (iSEBA) in the summer of 2004. ISEBA manages the keyword bidding process for pay-per-click advertising campaigns on both Google and Overture’s paid search programs.

Making A Vertical Leap

As affiliates get deeper into personalization, it’s natural that they’d also gravitate to vertical portals that serve the channels for the affiliate programs they promote. While search engines do not generally define themselves as servicing certain types of users, the MarketingSherpa Search Marketing Metrics Guide reveals that just like any other media property, each search engine has a remarkably distinct type of user.

This MarketingSherpa report, which surveyed 3,007 marketers in July, reveals that highly educated men with an interest in technology tend to use Google. Kids are more likely to Ask Jeeves for their search results. Older teens rebel by making MyWay their way. Moms tend to prefer MSN search.

So for affiliates trying to reach the men and kids, Google AdWords is the way to go to get your ads on Ask Jeeves, MyWay, and of course, on Google itself. But if you want to hawk wares to moms, you’d better be using Overture to place your targeted ads on MSN. Bear in mind that things may change due to consolidation and new business arrangements, so keep an eye on who’s serving whom.

Lee expects that vertical portals will become hotter, including the shopping portals, as well as portals within specific industries or customer segments.

On Your Mark. Get Rules. Go!

In the early days of affiliates bidding on keywords, there were no regulations being enforced by the affiliate programs. This can be attributed to a number of issues, including good old-fashioned ignorance; many affiliate managers have never been affiliates and don’t know how they do what they do. However, you could also attribute it to self-preservation. Affiliate managers are aware of activity that’s not particularly beneficial to their company, but it makes the affiliate program look better. This resulted in an environment where multiple affiliates, and the trademark owner, were competing for ad placement on trademarked terms.

The bad news for affiliates is that things are changing. Over the past year, there’s been a significant shift. In a poll of affiliate managers on the AffiliateManager.net Forum in August 2004, 65 percent said they were no longer allowing affiliates to bid on their trademarks.

And why wouldn’t they feel that way? It’s a low hanging fruit that converts well, and if the company isn’t in a bidding war with their affiliate, it’s a cheap cash outlay. Why outsource that sort of thing to affiliates and pay exponentially more for it?

Don’t Jerk That Knee

But all things considered, merchants ought to be most concerned about controlling what’s above the fold. At least that’s the contention of David Lewis, president of 77Blue, which operates private- label shopping portals and coupon sites with more than 800 merchants in three countries. “There are unintended consequences to restricting trademark bidding. It’s not all about ROI. You have to consider PR,” says Lewis.

Lewis’ view is decidedly merchant-centric, which is surprising for an affiliate. According to Lewis, “Advertising on a merchant’s trademarks is a privilege and not an affiliate’s right. Merchants should consider creating a separate agreement with two or three affiliates they trust, and allow them to bid on the trademark,” he says. “This gives the merchant control that is forfeited when banning trademark bidding.”

By banning affiliates from bidding on trademarked terms, Lewis argues, “merchants are giving management of their brand to Google and Yahoo, with whom they may have no relationship. I would want to control the results that come up when a user searches on my trademarks, especially knowing that most users click predominantly on the first 10 results.”

While the majority of merchants are currently banning their affiliates from bidding on trademarks, Lewis’ view is gaining ground. Beth Kirsch, the affiliate manager for Audible.com, had a policy against affiliates bidding on her company’s trademark. But after taking Lewis’ thoughts into consideration, Kirsch did something of an about-face.

She says, “While Audible is our trademark, it’s also an everyday word. No affiliate PPC bidding left room for other companies to promote ‘audible’ products. It clearly damaged the brand. David’s input made us change our policy, where we now allow a couple of trusted affiliates to bid on our trademark,” she says. “What’s a few bucks, when we have spent millions to build a brand?”

Another affiliate, Steve White, sounds a similar note. “Affiliates have an incentive to apply creativity to the bidding and keyword selection process. That incentive is more commissions,” he says. “Therefore, a dedicated group of affiliates can far outweigh the internal efforts of a program, unless that program has the resources to hire full-time search engine experts, as well as the capital to bankroll the campaigns. The affiliates bring both to the table at no cost (to the merchant), and the results are almost instantly calculable.”

The Other Trademark Issue

Even though affiliates may not be able to bid on the trademark for Company X, they can bid on the trademark of Company Y (the chief competitor to Company X). The bids on Company Y can then direct traffic to Company X. This is an escalating problem, says Lee of Did-it.com.

“There may be some significant litigation regarding trademarks and search engine marketing (SEM),” he says. “Some marketers may try to encourage affiliates into bidding on competitive trademarks (not their own) in an attempt to shield themselves from litigation.”

In the past, Google granted requests from advertisers to bar competitors from bidding on their trademarked names. However, Google will now only review trademark complaints that relate to text appearing in sponsored listings on its Web site and those of its partners. So affiliates cannot mention a company in copy for their competitor, but they can bid on the trademarked name of that company, and that could be a liability for the affiliate program they are promoting.

Trademarks aside, the bulk of affiliate programs permit bidding on most keywords, and there are still bidding bargains to be had. Communication between affiliate managers and affiliates is essential, and the well-informed affiliate is the most efficient affiliate.

Audible’s Kirsch knows this, and she makes a “keyword kit” available to her affiliates. It’s a document outlining which keywords affiliates cannot bid on, as well as a list of suggested keywords for affiliates to use that convert well.

It’s The Brand, Stupid!

In some cases, affiliate programs have forbidden SEM outright for their affiliates. For instance, the fund-raising affiliate program for the Republican National Committee doesn’t mince words when it comes to how their affiliates may promote them. The description of their program states: “Please note that search marketing is NOT allowed. Affiliates will NOT be paid for donations generated through search engine marketing.”

Often, the reason that companies will ban affiliates from utilizing search engines in their promotion efforts is that they are concerned about the way affiliates will represent them if left to their own devices.

“We’re seeing some increased dissatisfaction from consumers who are clicking on paid search ads and being directed to an affiliate site,” commented Rob Key, president and CEO of Converseon, a communications agency. “Companies need to think very carefully about how they allow affiliates to bid on their brand names. For brand-sensitive companies, we recommend they own their brand names and derivatives. With inflation expected to grow in paid placement, finding efficiencies is absolutely critical. A merchant’s affiliate network cannot afford to work at cross purposes.”

One cautionary tale, or marketing parable, depending on where you are sitting, was on a popular marketing message board. As affiliates debated whether it was okay to use pay-per-click search to promote affiliate programs, one affiliate comments, “If in doubt, just do it!” This was followed by another affiliate who commented “It’s always easier to get forgiveness than permission in anything … just do it.”

It may come as little surprise that when affiliates were asked in the AffStat survey, “When signing up for an affiliate program, do you read the affiliate agreement?” only 45 percent responded that they always read it.

Ignorance of the affiliate program terms is bliss for some affiliates. And when an affiliate program is on autopilot, it makes it that much simpler for affiliates to game the system.

So where are we headed with all of these changes? Well, we have seen the future of affiliate marketing and paid search, and with all of the personalization, automation, verticalization and gate keeping, we will be better equipped than ever before to measure ROI.

Gone are the days of pray-per-click.

SHAWN COLLINS is CEO of Shawn Collins Consulting, an affiliate program management agency; webmaster of the AffiliateTip.com affiliate program directory; and a founder of the Affiliate Summit conference. He authored the book Successful Affiliate Marketing for Merchants and the AffStat affiliate marketing benchmark reports cited in this story.