Land Rush

Suddenly, Joe Speiser’s phone rings more often than it used to.

The calls are coming from venture investors and executives at some “very familiar companies” who’ve taken a sudden interest in buying all or part of AzoogleAds.com, the performance marketing company that Speiser co-founded four years ago.

“It just kind of started,” he says, somewhat stunned by all the attention. “A lot of advertisers right now are just getting used to the idea of performance marketing. A couple of years ago, they didn’t understand the concept.”

Speiser is hardly alone. Since Revenue last looked at the consolidation trend six months ago, mergers of online marketing firms have created the sort of frenzy that hasn’t been seen in the online universe since the dot-com explosion of early 2000. Suddenly, large portals and advertising networks seem intent to acquire affiliate networks, search engines and interactive ad agencies in a quest to create end-to-end performance marketing products.

The numbers explain why. The online ad market, which was pronounced dead in 2000 when the average CPM rates dropped by more than 90 percent, rose like Lazarus to claim $6.6 billion during 2003, according to JupiterResearch.

What’s more, it’s expected to reach $16.1 billion by 2009 thanks largely to the emergence of marketing techniques that give marketers a low risk, highly measurable method to draw in new customers. Simply put: If a big advertising company can’t offer performance marketing to its clients, it won’t be big online.

“If you look at the marketplace today, I would say all the other players out there – the Yahoos, the Googles, the traditional ad guys – are feeling the pressure of what the affiliate marketing world has created, which is the ability to actually give back an ROI and to give back measurable success,” says Steve Messer, CEO of LinkShare, the largest privately controlled affiliate network. “You can’t get away with CPM alone anymore.”

ValueClick helped light the bonfire by purchasing the BeFree network just before snapping up Commission Junction. In other high profile deals of the past year: DoubleClick snared Performics; AOL bought Advertising.com; Yahoo acquired Overture; aQuantive grabbed Go Toast and SBI.Razorfish; Digital Impact took over Marketleap; and Agency.com absorbed Exile On Seventh.

While those names represent a diverse mix of online businesses, together they represent a crazy quilt that patches together every facet of performance marketing. From New York’s Madison Avenue to San Francisco’s Multimedia Gulch, companies are courting one another as the long-elusive promise of online marketing moves closer to reality.

“More and more players are looking at companies that survived and thrived in the downturn and are seeing them as great opportunities for the future,” says Jeff Pullen, general manager of CJ, now part of ValueClick.

While this activity may result in substantial rewards for determined entrepreneurs who built better models for online marketing, it also raises questions about the effect such mergers will have on affiliates, the companies, their services, the public, ad rates and competition in the marketplace. Are the lofty valuations offered in these acquisitions justified given the fast-changing nature of the performance marketing field? Will the lack of competitors result in higher rates and fewer options for performance marketers?

The real benefits (and drawbacks) of these mergers won’t be known for years. But our survey of industry executives found agreement on two points. First, it’s highly unlikely that a few big players will dominate online marketing the way they have dominated radio, billboards, TV and print publications because, unlike other media, cyberspace isn’t bound by frequency spectra and distribution channels. Second, the performance marketing space will continue to evolve for at least another decade, suggesting that some of today’s acquisitions may turn out to be tomorrow’s folly.

To be sure, mergers represent enormous gambles. If expensive acquisitions don’t perform, the strategies behind them can turn into nightmares for senior managers, employees, customers and, of course, the shareholders who financed the gambit. Case in point: the AOL-Time Warner debacle.

After the companies announced their plan to merge in the fall of 1999, Time Warner shares soared to an all-time high in the upper 90s. By mid-2002, Time Warner shares had fallen below 10. More recently, they’ve been trading in the upper teens, off about 80 percent from their highs. Over the same period, the Dow Jones Industrial Average has lost only about 12 percent.

Driving Forces

As philosopher George Santayana pointed out, those who forget the lessons of history are doomed to repeat them, and some companies will pay too much for too little. But the financial motivations for buying performance-based companies overshadow the risks for some industry players.

“Performance marketing is an enduring trend that is going to force the marketing community and their advertising agencies to embrace performance. It’s a different DNA set than the traditional advertising agencies have embraced,” says Rich LeFurgy, who serves on the executive committee of the Interactive Advertising Bureau, the group he served as founding chairman. LeFurgy’s view may be biased by his position as the principal of Archer Advisors, a San Francisco-based marketing firm. Still, he makes a strong argument for long-term change in the way advertising is valued.

As a stop gap measure, LeFurgy says Madison Avenue firms are working with consulting firms to develop economic models that show traditional advertising is returning an acceptable ROI, but that model won’t work for long. “I think it’s very much the lobster in the lobster pot where the heat is slowly being turned up in terms of performance expectations from marketers,” says LeFurgy.

As more media properties acquire performance- based expertise, media buyers negotiating ad contracts will demand more empirical evidence that ads are working. “That is going to trickle down from the marketer to the agency to the media property. There are companies, for example, that are looking not just for performance and ROI, but whether ads run at all,” says LeFurgy.

Another force driving consolidation is the economic recovery. To survive the downturn many performance marketing firms became lean, mean, competitive machines. They pared excess costs, closed offices, developed efficient technologies and bid jobs with a focus on winning and retaining top clients. As a result, these firms are attractive takeover targets because it’s faster for bigger players to buy them than to develop those capabilities internally.

“As the established players look to expand, they’re doing it through acquisitions, and these [performance marketing] guys are pretty close to the top of the list,” says Gary Stein, senior analyst for Jupiter Research. “They figured out a way to make the ads more effective, whether it’s through behavioral targeting or through an affiliate network where the affiliate guys are going to reach into niche audiences or do something clever with the brand.”

The most attractive targets, Stein says, are those that offer search-driven features or performance marketing abilities such as affiliate networks. Performics, recently taken over by DoubleClick, offered both.

“As any industry picks up, one of the methods for growth for larger companies is acquisition,” says Performics CEO Jamie Crouthamel. “So they look to acquire things that are complementary or additive to what they’re doing. In the case of affiliate marketing, it was additive in CJ’s case. It was complementary in our case.”

The Limitations

Aligning expectations with realities is a challenge following any merger and, without exception, there are surprises on both sides. Integration is always tricky. Perhaps the cultures don’t mesh, or the technologies prove problematic or the talents fall short of expectations. Quite often, the acquiring company will expect to save money by scrapping redundant operations, or by cutting back unprofitable lines of business. Other times, the acquiring company will invest more capital to grow certain capabilities faster than the smaller company could have grown on its own. Crouthamel says that is what’s happening now at Performics.

“In our case, DoubleClick had neither search marketing nor affiliate marketing,” he says. “So you wouldn’t reduce any services or people in a business that’s growing as fast as our segment is growing. You actually see more resources put against it.”

In the case of ValueClick, the acquisition of both the BeFree and CJ networks raised the potential for consolidating the two into a single, more efficient network while reducing redundant operations. “Commission Junction and BeFree have been integrated. ” We’ve done away with the BeFree brand name,” says Pullen, who now leads the combined entity.

“My personal sense is [ValueClick] is going to sunset the BeFree technology. Then you’ve got a lot of people who thought they bought the Maybach but found out they got a Mazda,” says LinkShare’s Messer. “People who picked BeFree actively chose not to pick CJ, and now it’s being imposed on them. So it will be interesting to see over the next few quarters how that plays out.”

Pullen notes ValueClick is still delivering BeFree products, which include the BeFast platform, and adds: “We’ll continue to do so. But at the same time we’re looking at ways to improve upon it and operate it more cost-effectively.”

The shifting dynamics in the affiliate arena mean good news and bad news for Messer. First the good news: He’s got two big competitors instead of three. Now the bad news: The two remaining competitors are backed by bigger companies. Still, he seems confident, almost to the point of being cocky.

Messer also takes a shot at DoubleClick, saying, “They’re talking about Performics as their great white hope for a company that’s struggling.” However, Crouthamel responds like a man preparing for a war, promising his affiliates a cache of new weapons as a result of the DoubleClick- Performics combination. “You’ll continue to see innovation and other things available to affiliates because the marketers want it,” he says. “Consolidation isn’t always a bad thing.”

Beyond Affiliates

The intramural sniping isn’t limited to the affiliate space. At Adteractive.com, Diego Canoso, the agency’s vice president of sales, raises questions about AOL’s decision to acquire Adteractive’s bigger competitor, Advertising.com. He noted the deal changed the playing field because Advertising.com has historically bought ad inventory from many companies and now may face limits.

“The interesting question now is whether Advertising.com can continue to structure big bulk contracts with the other big portals. Is MSN wanting to sell their inventory, essentially, to AOL?,” he asks. AOL declined to comment on that question, but in a June news release announcing the acquisition, the company appeared more concerned with building a performance marketing monolith than with buying remnant inventory from AOL’s competitors.

“We now have all of the pieces in place – premium inventory, a strong and growing search business and the ability to deliver customized pay-for-performance programs,” Michael Kelly, president for AOL Media Networks, said at the time.

Questions about the value of search engines also exist. Just five years ago, Yahoo was the undisputed heavyweight champ, then Google showed up. Yahoo’s purchase of Overture appears intended to make up some lost ground, but there are literally hundreds of smaller search companies fighting for market share.

“We’ve met with a number of publishers in the past couple of months who are coming up with Web-based, contextual-based platforms designed to compete directly with the Google AdSenses of the world, and some of these contextual models are desktop based,” says Tom Storm, VP for online sales with VentureDirect Worldwide, a marketing company. “If that model continues to play out, I think it will take market share away from some of these search engines who probably have more than they should.”

Executives at Yahoo and Overture declined to discuss their strategy for coping with that, but previously have spoken about Yahoo’s focus on building “the largest position in the rapidly growing Internet advertising market.” Between Yahoo’s bravado and Google’s rapid growth, the niche engines will need to fight to maintain their positions or grow, according to Scott Delea, a senior vice president of the Web management consultant DigitalGrit Inc. Delea also sits on the search engine committee of the Interactive Advertising Bureau.

“Look at Google’s mission statement – ‘to organize the world’s information,'” Delea says. “If I were an engine, I’d feel threatened. ” For a niche engine, as long as their content is unique, or their audience is unique, they will survive. Other than that, I don’t think they have too much to stand on.”

Who’s Next?

Enterprises such as VentureDirect, Adteractive, AzoogleAds and, of course, LinkShare all may be candidates for consolidation, along with dozens of others. But none would admit the prospect of sudden riches has altered the way their companies are run. “Everybody has a price,” says LinkShare’s Messer, “But that’s not what we’re looking at. We have a mission, and we’re executing very well on our mission.”

Meanwhile, Hagai Yardeny, editor of the marketing newsletter Digital Moses, points at a possible side effect as the merger craze rolls forward, one that portends more challenges for affiliates.

“With any kind of consolidation, there is less choice,” he says. “With less choice, there is less competition. It could adversely affect affiliates by lowering the bounties for the different advertisers.”

Tom Murphy is Editor in Chief of Revenue.

The Way To Ebay

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

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

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

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

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

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

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

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

Million-Dollar Club

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

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

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

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

Co-Op Ads

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

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

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

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

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

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

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

Mythical Disconnect

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

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

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

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

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

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

Adult Content

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

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

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

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

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

Share and Share A Link

Talking about Steve Messer’s role in online affiliate marketing is like talking about Davy Crockett’s role on the wild frontier. Since founding LinkShare in 1996, Messer has been a leader in the rapidly expanding pay-for-performance channel. Deloitte & Touche has named LinkShare the fastest growing technology company in the New York area for the past two years, and ABestWeb.com called LinkShare the best affiliate network provider in 2002.

In this conversation with Editor in Chief Tom Murphy, Messer showed one of his secrets is the willingness to challenge conventional thinking, particularly in assessing the value of small- to mid-size affiliates

TM: You’re an attorney with a specialty in communications law, so I have to wonder what you’re doing running an affiliate marketing company.

SM: In 1995-96, I finished law school and was recruited to a think tank up at Columbia Business School that was called Columbia Institute for TeleInformation. There I recruited two other people from Columbia – Cheryl Ho and Horace Meng – as well as my sister, Heidi, who is now president of LinkShare. All of us had a technology and communications background, so LinkShare was a natural fit for us. (Meng is now LinkShare’s CTO; Ho directs media relations.)

TM: LinkShare has been around for about eight years as affiliate marketing mushroomed. Would you say the opportunities for affiliates during that time have gotten better or worse?

SM: LinkShare started the affiliate marketing concept in 1996 and we got the patent in ’99 for what we do, for what is today called affiliate marketing. If you had asked me that question two years ago, four years ago, six years ago, I’d say exactly what I’m going to say today, which is that every year the entrepreneurial spirit has driven this market into completely new directions that were unexpected when we started this in ’96.

TM: Would you say those are better directions or worse?

SM: Much better. Typically, you find that entrepreneurs build on the work of prior entrepreneurs. So this market takes what has been effective for the last seven or eight years and continues to build something new on top of it. For the most part, that has been great. Occasionally, you do find that someone takes it into a not-so-positive area.

TM: I know LinkShare is a closely held company, but what can you tell us about your revenue and your growth rate?

SM: We do not disclose revenue because we are a private company. We are obviously the largest company in the space. If you look at some of the statistics that do come out, that are public, we won the Deloitte & Touche “Fast 50” award two years in a row. The first year we won it with a 32,000 percent growth rate over a five-year period. Last year we won it with a 27,000 percent growth over a five-year period.

TM: When you talk about a 27,000 percent growth rate, can you give us a starting point or a finishing point on that?

SM: That would be the equivalent of giving you my revenues, which we don’t do. But I appreciate the question.

TM: With the long-awaited Google IPO, it seems like it’s a good time for other companies to think about going public. LinkShare, I would think, would be a prime candidate. Have you thought about going public?

SM: You know, LinkShare filed to go public in 2000 and the market window closed before that was possible. So we have some experience with that process. A company typically goes public for three reasons. One is they believe they can get a great currency to do tons of acquisitions. The second is they need liquidity for their investors or to raise capital to grow their business. And the third is, to be frank, ego. In LinkShare’s case, we’ve been profitable for three years and we continue to be extremely profitable. So we have quite a bit of true currency to do acquisitions that we want to. Being a public company is not necessarily the most positive thing these days, and it requires a lot of restrictions on the company and how it works. Our goal is to focus on our partners and our investors and, at this point, continuing our business as we think best.

TM: LinkShare’s home page says you have “over 10 million partnerships in the network.” What does that mean?

SM: We use a metric known as relationships as a way to judge how effective our business is and how well we’re doing. We’ve actually used that metric of 10 million relationships for over three years. The reason we use that metric is because an affiliate can join our network and not participate with any of the merchants; that has a potential for revenue of zero dollars. But another affiliate could join and partner with 10 of our merchants; that would be the equivalent of 10 relationships. That gives us a sense of where the potential revenue is for that affiliate and that partner. So the more relationships we have, the greater the revenue potential for our partners and our customers.

TM: Of those 10 million relationships, how many have been paid commissions during the last few months?

SM: When you look at our base, you see an extremely large and diverse base which is unusual in the industry. We have heard people talking about how only a few players are making money. That’s actually not the case at all. We find that almost all the growth of our company is coming from what we call the core producers. That would be the small- and mid-sized sites that don’t necessarily drive the volume of the majors, but are actually growing at a much faster rate. I’ll give you an example. If you look at the top 50 affiliates we have from last year, from the year-end perspective, and you look at the top 50 today, there are only about eight that remain from last year. They haven’t gone away, but we have new people constantly entering that list.

TM: Do you clean out your database after a while and break off relationships with affiliates if they’re not producing?

SM: We look at it from a relationship perspective. A relationship in our system has a time limit like any other contract. When that comes to expiration, it ends. By virtue of that, they do go away. We believe that if someone is registered in our system, there’s always a chance to reactivate them, so we don’t necessarily destroy the prior information.

TM: One of your investors is Comcast Interactive Capital. It seems like there’s a natural synergy between online shopping and TV shopping. Have you had any discussions with Comcast about doing something as a cooperative effort?

SM: We don’t disclose internal discussions, but you’re not wrong in the sense that, if you look at our business, the reason Comcast was so eager to work with us is, first, we all have cable backgrounds. The second thing that is interesting is that our technology is already interactive TV-enabled. So the idea that you could translate what we do online to the interactive television world was really exciting and compelling to them. And it’s nice to see now that Comcast is the No. 1 player in that space.

TM: A lot of people see a growing role for the niche networks, and there seem to be more of them popping up. It makes me wonder if LinkShare would consider spinning off a division to focus on a particular industry, or perhaps start a second company.

SM: Creating a niche network is challenging unless it’s built off somebody else’s technology because the volume that a niche network can drive is so small that it can’t really support what a transactional network needs. LinkShare’s tracking is set up like a bank’s. It doesn’t use cookies because it cares about accuracy and it cares about privacy and it has to be able to keep a record and an audit trail of exactly what happened. That equates to a bank. Cookie-based technologies are the equivalent of cashing 10 checks at a bank, but only nine of them get credited to your account. It’s not an accurate way of doing business. So as you begin to focus on different segments of the business, you still have to have that accuracy. That requires money. With most of the niches, you have don’t have enough money to support an accurate business.

TM: Some merchants are running their own in-house programs. And there’s an argument to be made, as affiliate marketing becomes a bigger part of the revenue stream for a particular company, it might make sense to take that in-house to reduce the costs. What’s your take on that?

SM: You don’t really see it happening often with any of the major players. You see it in some of the smaller players, and frankly that’s the scarier side of the business. The smaller players have a higher incentive to manipulate the information because there’s no third-party audit going on. That can happen behind the scenes, and there’s nowhere to go to resolve the issue. When you get to high volumes, the big names don’t want to do it themselves; they don’t want to put their brand on the line. What they’re looking for is a company that will represent that this is a fair and accurate program and also do all the underlying work. Large companies who try to do this on their own typically don’t succeed at it or find that the cost of doing it doesn’t really work. Geoffrey Moore, a legend in the business school world and in the business thinking world who wrote Inside the Tornado, has a great concept called core competency, which is that you should only focus on your core. Anything else you do just distracts you and you’ll do poorly, and over time you’ll only lose and it will become a drain on your company. He spoke at our summit event, which we held in New York in January, and he focused primarily on why LinkShare is the exact example of why you should not be doing this on your own, why you cannot survive. And I think he’s dead on. Obviously, I have an incentive to believe that, but I think he’s right.

TM: Let’s look at your revenue models for both affiliates and merchants. Can you first give us a typical model for working with a mid-sized merchant?

SM: With all merchants we do an evaluation. There is no standard package in our business. Because we’ve been doing this for eight years now, we do a needs assessment. We ask them, “What kind of resources do you have for this program? Here is what a well-run program requires you to do.” Then we usually walk through and say, “Do you have the expertise to do these things, and do you have the people to do these things?” At the end of that, we make an evaluation and say, “Here’s what we’re going to do. Here’s what you’re going to do. And here’s what it costs to perform that.”

TM: Roughly speaking, what kind of figures would you throw out to a mid-sized company about costs?

SM: On a monthly basis, the lowest is about $3,000. And it can go up to $25,000-plus, depending how big [they are] and what they want to do.

TM: Let’s look at the affiliate side now. What is a typical model for working with your affiliates?

SM: On the affiliate side, we have two teams who work with them. One is called distribution services, which is a concierge-level service designed to help our partners grow. We look for high potential partners and we look for up-and-comers. We also look to support our existing partners who are doing high volume. And finally we go out there and source new business. The second team is our support group. It goes beyond answering basic questions like “How do I copy and paste?” They’re also there to provide you with proactive information, such as “Have you thought about working with this merchant or that merchant?”

TM: You recently gave a $15,000 award to a superaffiliate for driving growth with a large number of merchants. Do you plan to give that incentive each quarter?

SM: We do have a titanium award. And our LinkShare Club program, which started in the fourth quarter of last year, is the first loyalty club for an affiliate marketing company. It was extremely successful. We did award a $15,000 titanium award. But we also award, every week, lots of cash – thousands of dollars. In our Earn More in Q4 program, which was the first program in which we awarded the titanium award, over $350,000 in bonuses were paid. Every week, people were getting a tremendous amount of money. That was great. We were able to see some of the things our partners are able to do. Affiliates can do some amazing things when given the right motivation.

TM: Speaking of motivation, beyond cash, how often do you communicate with your affiliates? What kinds of things do you do to motivate your affiliates?

SM: Great question! We have the Club Award, an email that goes out every week to let the affiliates know where they stand in hitting their goals. We also do other things for promotions inside. We have Consumer Promote, where we tell affiliates what a merchant is promoting, what specials they have that week. We also have promotions of what the affiliates are selling to the merchants every week, so the merchants can see affiliates have a service they want to sell. We have weekly meetings where if we hear there are special deals or we source special offers for our merchant partners, we bring it to them. And that’s essentially an affiliate saying “Can you get me a sponsor for this or that?” So we spend a tremendous amount of time communicating with them. But that’s all online or on the phone. We also take it a step further and, twice a year, we have both a symposium and a summit. The summit is an intermediate to advanced level thought leadership opportunity for people to get together and take this industry and really move it a step forward. The summit is an amazing event. The second thing we do is the LinkShare Symposium, which is now going on seven years in existence. It’s an invitation-only event. We have about 700 people come out to see incredible speakers, listen to panels and then, in the afternoon, conduct Deal-Maker Direct – an opportunity for them to sit down at a table and meet all the affiliates and merchants together so they can try to cut some deals. This year, we’re taking it a step further by doing the LinkShare Golden Links Award. We’re doing a black-tie, evening event where affiliates and merchants have been nominated for awards. It’s also where we’ll be awarding the titanium award to winners and given them their checks.

TM: What’s your company’s position on “parasiteware?”

SM: We’ve taken a very unique position in the industry. We originally changed our affiliate agreement about a year before anyone else realized this was an issue. A year later, we added the anti-predatory advertising addendum. What that does is to contractually restrict what downloadable software can do before it can work within LinkShare. We are today the only company taking such a strong stance. We chose not to participate in the Code of Conduct because we felt it was too loose a set of rules. It didn’t hold anyone’s feet to the fire. So we’ve taken a very strong position. We’ve kicked out players who were unwilling to sign the addendum. And once they sign the addendum, we do require ongoing testing to make sure they’re in compliance.

TM: There’s been a lot of talk about Norton’s program that blocks ads. Has LinkShare been in discussion with Norton, trying to get them to change the defaults on their software?

SM: We are. We’ve met with Norton many times. We continue to have discussions and dialogues with them. We’re fortunate in the sense that we have a very good story with the names behind us to help them understand we are more than just a behind-the-scenes company. We’re a real entity with real names behind us. So that’s been very good for us. We also work not just with Norton but with any of the other parasiteware removal companies to make sure they don’t make mistakes and think that we might be associated with them.

TM: What do you think is the biggest challenge to affiliate marketing for the next couple of years?

SM: To be honest, there are a lot of concepts out there without a lot of data behind them. There are very good concepts that end up with very poor results. For example, we see a phrase up there that is “shrink to grow,” which means to shrink your program down to grow its revenue. We’ve seen that time and time again fail as a concept and hurt affiliates. Affiliates are up-and-comers. Affiliates are people who can add value to a merchant’s products and help them to differentiate in a positive way. These concepts are sometimes wishful, but they most likely are inaccurate. The data is often overlooked, and that’s the place we probably should be looking first.

TM: By shrink to grow, you’re talking about a company weeding out its less active affiliates and trying to emphasize growth by the most productive people, is that right?

SM: True. The numbers just don’t pan out. When you look at the top players who are out there, they’re all growing at a slower rate than e-commerce. Yet their commission rates are growing at double the rate we see in the marketplace. So what you’re doing is you’re paying more and more for less volume and less traffic. And over time that makes the programs less effective on behalf of the merchants. You also find those top players offer a very low-level, value-add: cash-back models, coupons and loyalty-type programs. Those models don’t help our merchant partners get new customers, and the costs of retaining customers continue to increase. So, if our partners’ goals are to find new customers, they need to look into new markets and they need to manage a blended average of new partners and new customers with their existing base of retention sites.

TOM MURPHY is editor in chief of Revenue and author of the book Web Rules: How the Internet is Changing the Way Consumers Make Choices.

Online Travel Takes Off

Schlepping his burgundy leather briefcase and navy canvas travel bag through the Portland airport, George Bragg doesn’t care as much about how he gets his ticket as how soon he’ll get home to Dallas. He’d happily buy tickets from affiliates, discounters, travel agents or airlines.

With travel representing the single largest source of Internet commerce, travelers like Bragg have so many options "it’s hard to keep up with them any more," drawled the weary business traveler with five frequent-flyer cards in his wallet. Airlines and hotels sell directly from their own sites. Discounters offer an array of fares. Travel agencies – hit hard when airlines stopped paying commissions – offer online fares and more. That leaves affiliates with a hearty marketing challenge: reaching consumers and agents already bombarded by messages from the big brands and the discounters that resell the brands. But there’s hope in the numbers: "Close to 100 million people have purchased travel online at some point over the last year," said Melissa Derry, a spokeswoman for Expedia. "While there are 20 million people coming to Expedia’s site each month, there is still a huge number of people who are out there looking for a place online to get these services."

Though higher fuel prices may put a crimp in auto or jet travel, industry watchers still predict record years. Online bookings have never been more popular. Out of all flight and hotel reservations, 30 percent come from online bookings, reports travel researcher PhoCusWright. By 2005, it predicts half of all flight and hotel reservations will be made online. "It just continues to grow," said Bill McGee, a consultant who watches the sector for Consumer WebWatch. "A few years ago, it was mostly business travelers, but now it’s really across the board. It’s used by leisure travelers, by families, by just about everybody."

Airlines, hotels, cruise lines, rental car companies and travel discounters see this huge market, and know their marketing can’t capture it all. So they turn to affiliates. "We think of them as an extended sales force," said Blagica Stefanovski, online marketing and affiliate manager at Orbitz.com. Nearly any site can sell flight, hotel or rental car bookings, whether it’s a sophisticated rewards site or a simple Web page put up by a neighborhood association to fund speed bumps or stop signs. "There are so many opportunities for travel on the local level," said Jason Price, vice president of marketing at Hospitality eBusiness, an Internet consultancy for hotels. "You can post local news or sports information, and provide a travel link to help fund the site. Maybe some kid in his basement wants to talk about high school sports in the area – why not have a Marriott button there for the hotel around the corner?"

Whatever the site, now is the best time for sales. "We’re [in] our best seasonality – the peak summer travel season – so it’s a great time for affiliates of travel merchants to promote their travel options and improve their placement or for new affiliates to give it a try," said Veronica Young, affiliate marketing manager at Hotwire.com. "The winter holidays are another big travel season: Thanksgiving, Christmas, New Year’s."

Travel is perhaps the easiest entry for new affiliates. They are credited for sales up to 30 days after customers click through their links, even if customers don’t go through the affiliate when they actually buy. New banner and link codes are sent within emails so affiliates don’t have to log into an interface. Many travel affiliates don’t even update their codes anymore. Their merchants do it for them using dynamic rich media. Travel merchants often have teams of "program managers," rather than one affiliate manager, to give personalized service to affiliates. "It’s certainly an ongoing challenge to stay on top of all the changes," said Michael Bauer, senior vice president of affiliate marketing for Hotels.com, which offers an online "university" for new affiliates. "What we offer affiliates is we are the eyes and ears of our industry. If there’s a swing, we identify it."

Travel merchants also actively help affiliates convert the curious into buyers. Interactive banners, for instance, are the hottest buzz in this industry and are offered by most travel merchants: Customers input their destination and dates at the affiliate’s site first, moving them further into the search and committal process.

Since the peak summer travel season is in full throttle and holiday travel is just around the corner, these perks should prove beneficial to affiliates trying their hand at the high-flying online travel industry.

Hotels

So what’s the hottest-selling travel product now? Hotels top the list. Eighty percent of active business travelers and 73 percent of active leisure travelers went online for hotel reservations in the past 12 months, according to the 2004 National Travel Monitor (NTM).

Affiliates could work directly with the brands, but few offer affiliate programs. "Only two or three brands have actually launched an affiliate program – only in the past two or three years and with moderate success," said Price, who cites Accor Hotel’s worldwide affiliate program with 3,700 hotels. "The rest of the brands have not embraced the affiliate market. As soon as these early adopters come out with performance, the others will jump on." Individual hotel properties may be willing to negotiate with affiliates who can give them Web bookings. Try it.

Affiliates can work with discount sites that show fares for dozens of hotel partners, ranked by price or brand. They can work with "opaque" sites like Priceline and Hotwire, which rank unbooked hotel rooms – along with excess airline seats, car rentals, vacation packages and cruises. Both pay 2 percent commissions to affiliates. "We’re kind of the Costco of the online travel industry," Young said. "Any affiliate that has a site where customers are going to be looking for cheap prices is a great fit for our program: a travel site, a discount site, a coupon site."

Affiliates also can work with affiliate-only networks like World Choice Travel. World Choice offers fully branded travel search pages, with an underlying software that combs the Web for lowest fares. World Choice pays 5 to 10 percent on hotel bookings, plus half of any transaction fee.

Flights

Nearly 75 percent of consumers who researched travel online bought their airline tickets online in 2003, reports NTM. The incentive for online bookings is there: Internet fares are now, for the first time, the cheapest way to buy airline tickets, according to Consumer WebWatch.

Affiliates can sign up with specific airlines like Alaska Airlines/Horizon Air, which pays $2 for every ticket booked. Affiliates can sign up with discount sites that rank searches by price, flight times or airline. The largest are Expedia, Orbitz, Travelocity, CheapTickets, OneTravel and TravelNow. Consumer WebWatch found that Expedia leads in the greatest number of lowest fares but Travelocity, which has the best booking tools, has the largest array of flight times and low fares.

There’s also World Choice’s branded program, which searches anywhere in the US, Canada, UK or Europe for the lowest prices from about 30 airline and booking sites. Affiliates earn 5 percent on online sales and 3 percent on call center sales.

Car Rentals

Forty-five percent of active business travelers and 32 percent of active leisure travelers went online to rent a car during the past 12 months, reports NTM. Those numbers should only grow, as insiders predict that more than 20 percent of all car rental bookings will be made over the Internet this year. Alamo’s program pays 3 percent of time and mileage, with checks mailed monthly (no minimums). Expedia and Travelocity pay 2 percent commissions, and Orbitz pays a flat $2 per rental. World Choice Travel searches 28 worldwide car rental companies for best fares and pays 5 percent on any of those booking. Plus affiliates can split the optional $2.99 to $6.99 transaction fee.

Cruises

In the first quarter of 2003, more than 2.2 million travelers worldwide took a vacation with major cruise lines – a whopping 23 percent increase over 2002, reports the Cruise Lines International Assoc. (CLIA). "As the cruise industry has grown and as more people take cruises and become confident with the components of the cruise, they’re becoming more confident with booking online," said Brian Major at CLIA. "A lot" of affiliates, he said, have benefited as a result – most notably CruiseCritic.com with 110,000 registered members, as well as affiliates CruiseMates.com and Cruise Addicts.com.

Packages

Packaged travel is emerging as a solid moneymaker. More than 68 percent of online travel buyers buy more than one component, reports PhoCusWright. Among active leisure travelers during the previous 12 months, 20 percent went online to book a complete vacation package with flight, hotel and often car rentals in one transaction. "If you look at the online travel space, 2003 was the year of the package," said Joel Frey, a spokesman for Travelocity. Sites like Expedia have even added theater reservations, sports tickets and transportation to and from the airport. Flights are now "like the milk at the back of the store," said Derry at Expedia.com. "By packaging options together we can afford customers better pricing and affiliates better commissions." Now affiliates can get paid for the whole trip and not just one flight.

Affiliate Options

Affiliates have a number of ways to get into the travel industry.

Link or banner: You don’t have to be a travel site to make use of affiliate links. Webmasters with sites touting everything from book reviews to financial advice have travel banners on their home pages, suggesting that the appearance of having advertising support from a big travel provider has its benefits.

Powered by: More travel-specific sites often go with co-branded versions of the merchant’s site. Visitors make their reservations on a page of the affiliate site that is "powered by" a merchant. After typing in their destination and time frame, their travel options are displayed on the merchant’s site.

Private label: With this option, affiliates can carry their own site design onto every one of the travel reservation pages. And affiliates can offer personalized call center services to buyers. Options are either a generic toll-free number, where the call center asks for the discount code or special Internet code from the affiliate’s site, or a dedicated private toll-free number answered on behalf of the affiliate and its brand. "We are usually the ones that come to the affiliate and say, ÔI think it’s a good time to offer this customized toll-free number,’ which doesn’t cost any additional dollars," said Bauer from Hotels.com. World Choice Travel’s private label program even puts the affiliate site’s name on consumer credit card statements.

Trends

The implementation of account management teams is enabling more personalized services for new and existing travel affiliates. "There’s a lot of competition, so merchants have to differentiate themselves from the competition," said Young of Hotwire. "Part of that is how they treat their affiliates."

Globalization is another big trend. The Internet has no borders, so these days an affiliate in Europe can be a merchant’s top producer of US travel bookings and an affiliate in the US can produce great bookings for an Italian air travel site. "We encourage our affiliates to think outside of their boundaries," Bauer said. "No matter where they are in the world it’s up to them what region they want to target." Hotels.com supports five different languages and 13 different currencies through its US, European and Asia/Pacific affiliate networks.

Meanwhile, last-minute bookings are moving online. Several integrated sites like Travelocity offer cheap rates up to three days prior to a trip.

Bus and train bookings online are still in their infancy in the US. In Europe, Euro Railways is ahead of the game, offering 5 percent affiliate commissions on discount rail passes.

"For me," said businessman Bragg, ready to board a flight to Dallas for the 12th time this year, "it’s all about price and convenience and the simplicity of the site." Affiliates or not, sites offering those features have the potential to get him, and 100 million others, on board.

JENNIFER MEACHAM is a freelance writer who has worked for The Seattle Times, The Columbian, Vancouver Business Journal and Emerging Business magazine.

Less Is More

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

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

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

When More Was Good

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

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

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

Now Less Is More

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

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

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

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

The First Signs of Change

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

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

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

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

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

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

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

The Small Business Market

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

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

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

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

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

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

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

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

The Affiliates

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

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

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

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

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

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

After the Merger

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

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

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

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

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

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

Wanted: Affiliate Manager

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

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

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

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

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

1. Great Communicator

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

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

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

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

2. An Entrepreneur

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

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

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

3. A Bit of a Nerd

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

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

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

4. A Marketing Maven

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

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

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

5. Resourceful

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

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

6. Good with Numbers

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

7. Graphically Inclined

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

8. Respectable

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

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

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

9. Contactable

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

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

10. A Team Member

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

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

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

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

Here’s Herby

From his passionate crusades against spam and “scumware” to hosting his group’s annual summit, the baritone-voiced entrepreneur has a knack for stirring things up and forcing long-neglected ethical issues to the front burner. Now, he’s ready to launch an accreditation program that would require participants to act more responsibly.

Herby (hardly anyone uses his last name) has been a leading advocate for the creation of a magazine about affiliate marketing and generously shared his expertise as we assembled this first edition of Revenue. Herby sat down recently with Editor-in-Chief Tom Murphy for a frank talk about his organization’s background, problems and goals.

TOM MURPHY: Why was your group formed, and what does it hope to accomplish?

HERBY OLSCHEWSKI: In 1999, I was a speaker at an affiliate marketing conference in San Francisco. There were about 700 people in the audience who basically paid money to listen to different affiliate solution providers bicker with one another. It made me realize there was a need for an association.

Our main goal is to help merchants and affiliates keep it fair in revenue share. That’s really a two-sided coin. It’s to help merchants understand what affiliates need in an affiliate program. And we have to help affiliates understand how best to reach the revenue share opportunity offered by merchants.

TM: How big is your association?

HO: We have just over 4,000 members, and that’s really without having done any sort of membership drive. Hence, we know that there’s a need to band together into a professional platform that will help to further the interests of affiliate marketing.

TM: How many of your members are merchants?

HO: We estimate about 55 percent of our members are merchants with affiliate programs. About 45 percent are pure affiliates. We must remember the overlap; there are affiliates who are merchants and vice versa.

TM: What are the top two issues facing the industry right now?

HO: Predatory advertising and the need for the public to understand just what affiliate marketing really is.

TM: Let’s start with the second one. What do you think is the misconception about affiliate marketing?

HO: The first misconception is that affiliate marketing is actually some kind of multi-level marketing. Nothing could be further from the truth. The basic difference between an MLM program and an affiliate program is the commission structure. In a multi-level program, you can have anywhere from three to 16 levels. In an affiliate program, there are only two levels, a first tier and a second tier. It can be equated to a car dealership where you have a car manufacturer making cars available to a wholesaler and the wholesaler having dealers out there.

TM: I think a lot of people who hear “multi-level marketing” think about pyramid schemes. Do you think that?

HO: One of the goals of the association is to fight the trend of multi-level programs in companies that are trying to get around the stigma of that area by calling their revenue-share opportunities affiliate marketing. The Internet Affiliate Marketing Association takes a strong stance against that. And the way to do that is to educate the public on what affiliate marketing really is.

TM: The other area you mentioned was predatory advertising. Can you explain the problem there?

HO: Let’s first see how these predatory advertising mechanisms are distributed. The first is a Trojan horse mechanism where a software company will offer freebie software that might appear to be a music file-sharing program or whatever the case may be. What they include in that software program is a memory-executable program that will determine when the user goes online to search for a particular product or service. So, if somebody were searching the Web for “baby clothing,” that program in memory will remember that and will pop up an advertisement for baby clothing. That makes it very targeted for a merchant. The merchant will have a much higher success rate from that pop-up. But the problem is, how did that pop-up get into that system? The user, nine times out of 10, doesn’t even understand that they loaded that program onto their computer.

TM: When people first hear of affiliate marketing, the first image that pops into their heads are all the ads for male potency drugs, bank loans, or weight loss products that trash-up their in-boxes. Is that affiliate marketing at work?

HO: No, that is not affiliate marketing, but we do have affiliates that go out and spam in order to increase their commission rates. We help merchants identify who those affiliates are, and we would actually report them to the merchant. It’s in the best interest of the merchant to curtail that and to expel that affiliate from their affiliate program.

TM: I know you certify people within your organization. How does that touch on some of the ethical issues, like spamming or predatory advertising?

HO: We’re launching a certification process where our members can apply to be an approved merchant, an approved affiliate, a recommended solution provider, etc. The difference between membership and the certification process is that we want everybody to feel welcome to be a member, including the unethical people and the uneducated people.

Our mission is really to educate our membership, and the certification process revolves around our manifesto. The member voluntarily agrees to sign the manifesto and agrees to abide by a certain code of ethics. One of those line items in the code of ethics is regarding spamming. They have to make a public declaration that, A, they won’t spam, and, B, they won’t tolerate affiliates who do spam.

TM: You’ve had your share of controversy within your organization recently. Some of your postings on bulletin boards were deleted and I know you took some flak personally for making that decision. Can you tell me what happened and why you did that?

HO: In most online forums, people sign into the forum with a pseudonym, Zorro123, or XYZ. We’re opposed to that in our forum. We have a very strict first-name, last-name policy. We believe that anyone who says something in our forums should do so under their own name and with personal decorum. We don’t have moderators. What happened recently was that some of our members got too emotive about the industry, and specifically about predatory advertising. We don’t believe in making litigious, derogatory statements against merchants, so we curtailed that sort of behavior.

We created a thing called “Forum Decorum,” which is very basic. It’s Professionalism 101 on how people can debate with one another. Four of our members chose to flaunt that publicly, and we had no choice but to enforce a seven-day posting suspension. They reacted to that as censorship, and they voluntarily left the association. And, to be quite honest, good riddance. Our forums have ended up being far more professional as a result.

TM: In another recent controversy, you recently had a split with one of your long-term colleagues within the association. Could you talk about that?

HO: That involved the previous president of the United States chapter of our association. We had a difference of opinion as to the role of affiliate managers in the association. He wanted a bigger voice for affiliate managers and a separate forum that only affiliate managers could enter. The association in general is against that sort of thing because we don’t want to create a them-versus-us situation. We believe affiliates, merchants and anybody else in the industry should be on equal footing and should be available to each other to discuss issues. This individual subsequently decided to start his own forums for affiliate managers and also decided to start a rival summit to our summit, which is now in its fifth year. (See sidebar: Shawn’s Turn)

TM: Do you have a rough estimate of how many affiliates there are in the world?

HO: It’s almost impossible to say. If I had to take a guess, I’d say it’s in the 10 million, to 15 or 20 million range. Now these are people who may or may not be operating a successful affiliate program.

TM: I would think many of those would be participating in more than one program. When you eliminate the duplicates, the final number of affiliates is actually quite a bit smaller, isn’t it?

HO: Yes, an affiliate may be a participant in more than one affiliate program. It’s almost impossible to say [how many affiliates do that] until we can establish from the affiliate managers themselves. Because of the privacy policies in most affiliate programs, it’s almost impossible to say.

TM: When we talk about the number of affiliates out there, the truth is most of them don’t make a lot of money. Isn’t that right?

HO: Absolutely. I would hazard to guess that less than 5 percent of the affiliates out there actually make any money at all. A popular theory is that most affiliates don’t even make $100 a month. But there are some that make hundreds of thousands of dollars a month. It works in the two extremes.

TM: We’re looking at a few of those success stories in the magazine. What in your mind is the difference between them and the others?

HO: The difference is really how well the affiliates niche themselves. If you look at a stay-at-home mom or someone trying to derive a second income from the Web, then they need to focus on something. Let’s take baby clothes for example, or retail clothing. They really have to build a site around that, and they will make money. You’re not going to make money by just creating a site and slapping up a banner for it. Your success will be extremely limited that way.

TM: How many merchants would you say are involved?

HO: We have a mailing list of over 7,000 affiliate managers, so the estimate is that there are anywhere between 7,000 and 10,000 affiliate programs.

TM: That strikes me as a very low number when you consider the number of corporations there are in the United States.

HO: The problem is that affiliate marketing was perceived as the underbelly of the Internet. It was seen as people sitting at home in their pajamas, writing scripts in order to generate incomes from affiliate programs. In the dot-com era, it was one of the things that suffered. A lot of affiliate programs went under. And affiliate marketing was hyped up. Companies didn’t get the return they were expecting, and they left affiliate marketing. Our job now is to get those companies back.

TM: What do you see as the greatest challenge for the year ahead?

HO: The greatest challenges for the year ahead are, A, get the public to understand what affiliate marketing is and, B, keep the companies from being wooed away by the predatory advertising agencies. What ultimately could happen is that affiliate marketing could die away, and a great opportunity would be lost to help companies market their goods on a pay-per-performance mechanism that makes far more sense.

TM: What is your vision for the association going forward?

HO: The vision is that everybody is welcome, and those who do choose to be part of the organization need to abide by a simple manifesto that lays down industry standards. We’re not going to get all merchants in there. We’re not going to get all affiliates in there. We just want to create a little oasis for people and to grow the association. Over a period of time, people on the outside will realize the benefits of being on the inside, and the association will just grow naturally.

TM: It almost sounds like you are building a self-regulatory organization. Is that because of the lack of regulation internationally on the Internet?

HO: Absolutely. If you look at the Internet as a whole, it’s a great medium for global communication, but without frontiers. We already know it’s going to be absolutely impossible for any one country to control the Internet. That’s even truer in the case of affiliate marketing where an affiliate in New Zealand can be making a lot of money out of merchandise in Cleveland, Ohio. Who is going to lay down regulations? No country can do that.

TM: Say I’m getting spammed. Is there anything I can do as a consumer to get your association to help me out?

HO: Yes, absolutely. We’re shortly going to be publishing a series of guides to look at affiliate marketing from various points of view. And the very first guide is actually the rev-share guide from a consumer perspective. And we’ll be telling consumers how to combat spam, how to get discounts on products, how to use affiliate marketing to their advantage.

TM: I have a personal philosophy that it takes about 20 years for new media to develop. We saw that with radio and television. Since the dissemination of the first popular browser, Mosaic, it’s only been about 10 years. I think we have another 10 years to go before the Internet really matures. Do you believe that’s true?

HO: I do. We see a lot of consolidation in the industry. Web sites are consolidating. Dot-com companies are getting together. Affiliate marketing is really an opportunity for the average guy or lady in the street to derive a second income from the Web and also for the small merchant to sell their products on the Web beyond the realm of traditional advertising, which is unaffordable in many cases.

I think probably in the next 10 years, affiliate marketing is going to grow in three ways: as a way for merchants to sell their products, as a way for people to make a second income on the Web, and as a way for corporations that can actually reduce their advertising expenses by learning how to pay for performance and not just shove money into ads.