The Mobile Marketing Monster

Tony Phillip will tell you the exact moment he knew that mobile marketing and advertising – predominantly via cell phones – had crossed over into the mainstream.

It was when American Idol, the extremely popular TV singing contest, allowed viewers to vote for their favorite singer via text message – and more than 50 million did in 2005 versus 21 million in 2004, according to the CTIA – The Wireless Association. Also in 2004, 46 percent of text messaging votes for a new pop star sent in was from wireless subscribers using text messaging for the first time, CTIA figures state.

Less than a year before, UpSNAP had a deal with ABC to allow text-message voting during the Academy Awards. It was basically a disaster, according to UpSNAP CEO Phillip, who notes, “If viewers didn’t have text messaging, they weren’t going to use it.”

What a difference a year makes. There is little doubt that mobile marketing – that including text-message ads displayed with a mobile search or via opt-in, coupons sent via cell phone, video and display ads interwoven with downloads or streaming from cell phones or other handheld device connected to the Internet – has arrived.

More major brands, agencies and start-up companies are putting their energy and dollars into exclusive campaigns and technologies aimed at mobile marketing, and for some it is already big, big business.

As people in the U.S. become more reliant on their cell phones, mobile services such as mobile search and Web surfing will become commonplace. Consider the following facts according to The Pew Internet & American Life Project:

  • 52 percent of adults have their cell phones turned on 24/7.
  • 30 percent of adults say they want to Web-surf from their cell phones.
  • 47 percent say that mobile maps and driving directions are a must on the next phones they plan to purchase.

MOBILE IS GLOBAL

Mobile marketing adoption is shooting through the roof. Worldwide mobile ad spending is expected to top $870 million by the end of this year, according to Informa Telecoms & Media. Meanwhile, The Shosteck Group predicts mobile marketing will be worth $10 billion in the U.S. by 2010.

Furthermore, 43 percent of U.S. marketers are using or about to use mobile marketing in the next 12 months, according to Forrester Research. And nearly 90 percent of major brands plan to market to mobile phones by 2008, according to a survey by Airwide Solutions.

“It’s happening faster than anyone expected,” Laura Marriott, executive director of the Mobile Marketing Association (MMA), says. “2006 is certainly a year that more and more brands are getting involved but so much more can happen. Response rates from mobile are very high. There’s great engagement from the consumer.”

That sounds like a giant wellspring ready to gush, but the U.S. is not even in the lead here. Most of Europe is slightly ahead in the adoption of text messaging because of the availability of cheaper cell phones. In March, mobile phone users in Britain sent more text messages than they ever had before – 3.19 billion or about 103 million per day. That’s a region with only about 60 million people in it.

In Japan, NTT DoCoMo recently pulled in $2.5 billion in the first quarter of 2006 in non-voice revenue. About 35 billion text messages are sent each month in China, where about 426 million people have cell phones – that’s like giving one and a half phones to every person in the U.S.

Pay per text has also taken hold in the U.K., where users can request a text message of a phone number when calling directory assistance or have directory assistance send the number automatically. Phone numbers and special-offer text ads are sent when directory assistance is asked for a keyword such as “travel.”

“[Mobile marketing] can be a big cash cow for any company,” Holger Kamin, country manager USA for Germany-based Zanox, a multichannel commerce provider, says.

The ease with which so much of the world outside the U.S. has embraced handsets to communicate in ways other than phone calls means the choice for advertisers is simply how to reach out to them. Of cell phone functions available, the surprising choice for marketers so far has been the simple text message.

“We always go back to what the consumer knows,” says Marriott of the MMA, “and what is already available in handsets.” She says text messaging has made a pretty natural rise to the top, but also wants to make sure “we don’t get ahead of ourselves in technology.”

While Americans may own 200 million cell phones, marketers wonder if all these people are using even the simple functions on their phones. While 75 percent of U.S. teens (age 15 to 17) own a cell phone, according to eMarketer, only 36 percent ever send or receive a text message. These conflicting statistics are what may be holding back the really big advertisers from designing campaigns for mobile en masse.

It was only two years ago the CTIA – The Wireless Association introduced cell phone short codes, which are 5-digit numbers that text-messagers use to send their message instead of a standard 10- digit phone number. The short codes were designed to help marketers reach out to brand customers via mobile phones. Anheuser-Busch, Dove soap and Daimler-Chrysler are just a few of the major brands that ran successful short code campaigns to get customer feedback via cell phones.

CAMPAIGNS TO GO

That will not stop the innumerable mobile ad companies from vying for your attention.

MobileLime CEO Bob Wesley, for example, thinks of it as developing a one-to-one relationship. “This is all viral now,” he says. So far MobileLime has used radio ads to get opt-ins and serve coupons to cell phones. It is not only paving the way for m-commerce (paying for an item through your cell phone), but gathers rich data for the advertisers, such as if recipients opened the coupon, when they did, what they used it for and for how much, Wesley says.

Currently, some companies such as Bango enable payment via mobile phones through a deal with PayPal, but the selling merchant must sign up for Bango’s service to allow the capability. Other companies such as JumpTap aim at launching a mobile search index to challenge Google. Carriers join the search index and online auction platform and serve it to their customers.

Of course, in the online world, coupons are big business and they are not being left behind in the mobile arena. Mobile coupons are making great inroads to the electronic platform because of the “sheer inefficiency of paper coupons,” says Peter Sealey, CEO of consulting firm The Sausalito Group. He says with redemption rates for paper coupons at only 3 percent, advertisers realize they save more cash going electronic. The marketer pays only when someone prints a coupon, eliminating distribution costs. “Marketers after the 2000 dot-com crash said, ‘Thank God that’s over,'” Sealy says. “We can go back to TV and radio.” Now, mainstream marketers are embracing the full bloom of mobile marketing again, he adds.

Sealey predicts that within five years, the paper coupon will be as good as dead. Search giant Google recently said it would start to offer local coupons in conjunction with using Google Maps. Online coupons in general have already taken hold with as much as 50 percent of online coupons being redeemed, according to some estimates. Companies such as CoolSaving, Coupons, Inc. and Zixxo do well marketing coupons over the Internet. Sealey says as more marketers accept electronic devices as a viable vehicle, the better adoption rates will get.

Some mainstream advertisers and companies are already rolling out robust campaigns to cell phones. Strawberry music stores on the East Coast are text-messaging promotions and deals to mobile handset users who sign up to receive alerts and geographic-based special deals. While Strawberry has relatively few stores in its network, Starbucks with thousands of locations has run a scavenger-hunt-style loyalty promotion where cell phone users signed up to get questions via text messages, the solving of which could send five chosen players on a vacation to Costa Rica.

Recently named No. 2 carmaker Toyota spent $10 million on a mobile campaign targeting Hispanic cell phone owners to watch funny hidden camera clips on their phones featuring the 2007 Camry. And Google is undertaking significant testing for its own mobile ads on its mobile search results and to launch a version of AdWords for mobile. Google is testing the search ad in the U.S., the U.K. and Germany.

Popular eateries McDonald’s and Subway are also getting their feet wet by offering some promotions via mobile phones. Even Net vet AOL has had its Mobile Search Services up since December 2005 with search, a shopping comparison module and a Yellow Pages feature.

MOBILE ON TARGET

Firms with mobile technology know-how are not the only ones seeking to cash in on mobile marketing. AirG, for example, sets up social networks on its platform and has found great success in sending mobile promotions to its base of users. They worked five years to get 5 million users and in the last eight months that has bounded up to 10 million. AirG’s display ads and ad-sponsored games for handsets capture detailed demographics and consistently get a more than 28 percent response rate. Receiving the ads can be turned off and on at will and are all opt-in.

Along the way, AirG discovered they had a significant Hispanic demographic, so they customize certain promotions to target only those groups. Frederick Ghahramani, AirG co-founder, says he can find the Latino males in New York City who are single and send only them an appropriate promotion or coupon electronically.

“What’s been lacking isn’t the enthusiasm [for mobile marketing],” he says, “but the ability to target the active base of customers.” They share personal information with each other and find like-minded people. AirG brings relevant targeting to the table, he says, noting, “The industry has had the ambition but now is waking up.”

There is nearly universal agreement that the key element for the continued success of mobile marketing is targeting. Third Screen, the largest U.S. mobile ad network, got the jump on everyone when it started four years ago and has only recently said that targeting mobile ads has finally reached a kind of maturity. The company has stated that the next achievements in mobile marketing will be privacy standards for all carriers, predicting more detailed demographics from broad information and more and better mobile ads based on real-time location of the handset user.

With the popularity of buying and downloading ringtones and entering online auctions via cell, companies like Ad Mob want to make sure you can reach users based on their region, platform, device capabilities and even manufacturer. If you want ads to reach only Nokia users on MIDP 2.0 devices in Europe, AdMob, who also has polyphonic ringtone support, states they can do that. Of the many companies that now have a mobile marketing component, better targeting is their crown jewel, the company claims.

Some companies have come up with original ways to engage people via cell phones. Vibes Media has its Text-2- Screen that invites concert-goers to text to the Jumbotron screens at stadium-sized pop concerts. The text they send to the screen is displayed on the branded screens with messages such as “Get ready 2 rock!” and “Happy birthday, Sarah J.” Irvine, Calif., company go2 recently launched go2 SpeedPoll, which conducts surveys sent via cell phone that ask about attitudes toward certain brands – with results viewable in real time.

MOBILE PERFORMANCE

Affiliate marketing powerhouse LinkShare won’t be left behind. President of LinkShare Steve Denton says its parent company Rakuten of Japan is having considerable success with mobile commerce. He says that at LinkShare Japan, a significant percentage of affiliate purchases are coming from mobile commerce.

“Our customers live and work and play in a world without boundaries,” Denton says, “and we must find ways to exchange with our customers, and then we need a platform for that; then mobilize.”

Japanese m-commerce is exemplified by someone shopping in a mall who finds a cool jacket, takes a picture of the UPC code on the tag, sends that to a browser and makes the purchase via cell. In addition, that customer can mobile email the code and a picture of the jacket to as many friends as he or she thinks would also like to buy it.

Denton says he has no doubt that “affiliates could plug this into their business models very quickly. But the infrastructure is not there yet.” He adds that publishers have great house lists but are not using text or cell phone numbers from their customers. “Cell phone numbers will be more valuable than email addresses in five years,” he says, adding that LinkShare in the U.S. will have some key additions to mobile in the near future.

But even as the adoption numbers keep steadily rising, there are still some gray clouds out there. For example, for a country with so much Internet usage, only 16 percent of U.S. mobile phone subscribers use their Web-enabled phones for the Internet. Some ad networks only work with certain brands of cell phones and even companies that say their platforms work across all brands and telecom networks can’t guarantee that the service will work for consumers consistently.

While marketers are very eager to reap the financial benefits mobile promises, some critics have said that not enough is being done to erect coherent marketing strategies. In the rush to go mobile, some companies are grabbing whatever firms are offering and not building their own goals, figuring out how to follow the metrics, putting up privacy standards or discovering a solid plan to get people to opt in. “Some companies are so decentralized,” says Zanox’s Kamin, “that they don’t even know they have [offices] in Europe.”

Other critics say a patchwork of partnerships keeps true standards from emerging. In the realm of mobile search, a giant like Google can go out on its own with few partnerships because most go to Google anyway, but other search companies (Yahoo, MSN and others) must become allies with a carrier to get the best traffic. These kinds of deals can shut out some cell phone owners from getting the right information when they want it. There are also bandwidth inconsistencies as there are with general cell phone reception depending on location and interference. SEO firm Oneupweb has noted that the myriad of technical issues with mobile commerce and advertising will smooth out for the next generation of mobile surfers and searchers because the interfaces will gradually become less technical. It will be like operating your TiVo or your iPod.

“Unlike a year ago – the early days,” says Phillip of UpSNAP, “search [via mobile] didn’t make a lot of sense, but now they will do what is relevant to their mobile lifestyle – comparison shopping, for example, before you get into your car.”

Marketers are also just beginning to realize that the mobile lifestyle cuts across socioeconomic barriers. Most people in the U.S. – even some of the most poor – have a cell phone. With 200 million handsets out there and growing, the young and old and rich and poor and racially diverse pretty much covers everyone who can participate in mobile marketing.

Gambling Stakes Rise

You can’t drive on the highway, watch TV or go to the supermarket without being reminded of America’s obsession with betting. Casinos are popping up faster than you can say “double down,” the World Series of Poker has become a prime time television spectacle and Powerball payoffs are reaching the size of state budgets.

Cashing in on a booming industry that offers some of the highest payouts around might seem like a good bet for affiliates, but not when that business is illegal. Gambling law experts say federal law makes it fairly clear that operating Internet sports books is a crime. But the law is not quite as clear regarding the issue of other Internet games, such as poker and blackjack.

Revenue from, and public support of, gambling (or “gaming” as the industry prefers) in all its forms has never been higher, but pressure from the federal government increases the odds that online gambling marketers may be putting their money and freedom on the line.

The policies of the federal government and some states are, broadly speaking, at odds with the rules governing online betting parlors in many countries, like Costa Rica and Antigua, where most casinos have their operations. The current regulations also put law enforcement in conflict with millions of Americans who place bets online, using their home computers to wager on sporting events and games like blackjack and poker.

Poker is hot right now and poker revenue at brick-and-mortar casinos in Nevada and New Jersey may have jumped 37 percent in 2005, according to the American Gaming association, but Internet gambling is the fastest-growing segment of the gambling market, according to a Pew Research report from March of 2006. Ignorance – whether real or feigned – leads to blissful betting, as nearly 20 percent of Americans surveyed by Pew denied knowing that online gambling is illegal.

More than 80 percent of Americans either support or don’t object to gambling, and last year between $10 billion and $12 billion were bet online globally, according to William Eadington, director of the Institute for the Study of Gambling and Commercial Gaming and professor of economics at the University of Nevada, Reno. Even though online gambling is illegal in the United States (with the curious exceptions of state-approved horse racing and lotteries), approximately half of the total online wagering comes from inside the United States.

Despite its popularity, even those who support gambling are reticent to admit it and many recognize its addictive powers. Less than five percent of Americans admit to gambling online, while 70 percent of Americans say that legalized gambling encourages people to spend money they don’t have, according to Pew Research.

Since no online bettors have been prosecuted, individuals log on without fear for all-night poker games, and some confident folks have even quit their day jobs to earn their living betting.

While online gambling may become a $25 billion annual industry by the end of the decade, legislative changes and more vigorous enforcement could prompt many U.S. gambling marketers to fold. However, some legal experts claim that online gambling will not end unless U.S. authorities prosecute every one of the 50 million Americans who bet online every year.

Sports Booked

In July, the “handcuff-click heard ’round the world” took place at a Dallas airport, where BetOnSports CEO David Carruthers was arrested following an indictment for racketeering, conspiracy, fraud and violation of the federal Wire Act. Carruthers, whose company was headquartered in Costa Rica, was charged along with BetOnSports founder Gary David Kaplan and four alleged co-conspirators who worked for U.S.-based DME Global Marketing and Fulfillment. BetOnSports later closed its Costa Rican office.

The arrest forced many companies who participate in online gaming to shuffle their strategy as they awaited trial, and to see if indictments against other organizations would follow. Proprietors of online gaming sites stopped traveling to the U.S., and a much-anticipated gaming conference in Las Vegas was scaled back.

Seven weeks later, law enforcement agents in New York arrested Peter Dicks, chairman of Sportingbet, which offers online sports betting and is traded on the London Stock Exchange. Sportingbet is one of the largest online gambling operators in the world with revenue of $193 million, for the year ended in July, with two-thirds of that coming from the United States, according to the company. Agents of the Port Authority of New York and New Jersey arrested Dicks upon his arrival at Kennedy Airport, acting on a warrant issued by the state police in Louisiana. The arrest was the first time that officials at the state level had adopted similar tactics and pursued charges against a director of a publicly held Internet gambling company.

“The best advice is to stay away from [online gambling],” says attorney Linda Goodman, founder of the Goodman Law Firm, a practice focusing on Internet compliance. Goodman, who primarily represents affiliates and advertising agencies, says this first-time indictment of a marketing company that promotes online gambling opens the door for other affiliate and ad networks to be prosecuted. “If you pick up one of those [gambling] clients on your network, they can charge you with conspiracy.”

Marketers minimally need to include language on their websites stating that advertisements are not intended for American audiences, according to Goodman. Gambling websites should not accept payments if the customer who attempts to set up an account lives in the U.S., she says.

Goodman believes the federal government is more actively pursuing online gambling agencies because the potential pot for taxation is getting sweeter. “Billions of tax dollars are going out the door,” she says.

Online bettors who live outside of the state of Washington probably need not fear as law enforcement’s limited resources prevent targeting individuals, according to Goodman. The Washington legislature passed a law in June of 2006 that upgraded the penalty for running a gambling site from a gross misdemeanor to a felony, and provides gross misdemeanor and felony penalties for betting online in the state.

Patrick Smyth, the president of Gaming Transactions, Inc. and CEO of Keno.com, says that marketers and online gambling companies can operate without fear if they follow one rule. “As long as you don’t take phone bets, you are fine,” says Smyth, whose wife Kate Kozak worked as brand director at BetOnSports (Kozak has not been charged).

Smyth says the Department of Justice only pursued BetOnSports because founder Gary Kaplan was alleged to have run a sports book in New York before heading to Costa Rica.

Because gambling is illegal in the U.S., many of the proprietors who accept wagers from the United States are headquartered in Costa Rica or Antigua and may have offices in Canada, as is the case with Smyth’s company. “I pay taxes in Britain, but I should be paying taxes in the United States, which is where my customers are,” says Smyth.

The BetOnSports indictment accelerated a change in the marketing of online gaming sites, according to Smyth. To help its partners avoid prosecution for promoting illegal gambling, online wager sites have created fun-only gambling sites with “.net” web addresses to supplement their existing .com gambling sites. The .net sites don’t outwardly promote online gambling, but once registered, participants will be asked if they would like to open an account on their pay-for-play sites, Smyth says.

Hedging Bets

The creation of .net sites provides a defense that has yet to be tested in court. Online casinos and poker sites are transitioning to promoting either just their .net sites, or promoting only the brand name, such as is the case with Bodog and PartyPoker, which operate both .net and .com sites.

Despite the potential revenue, the large networks have historically shunned online gaming, prompting the formation of gambling-specific networks. “We do not have any gambling sites within our affiliate network, nor do we allow any affiliates to link to gambling sites,” says Kristin Hall, product marketing director at Performics.

Gambling networks such as CyberSuccess Group, CasinoBlasters and MainStreet Affiliates have been happy to pick up the slack and offer generous commission programs. For example, PartyPartners.com offers signing bonuses of $75 for each new account opened, or a revenue share of 25 percent or more of gambling losses.

Christopher Shawn, vice president of business development at CyberSuccessGroup, says very few affiliates have closed because of the indictments. “Affiliates, however, have expressed concerns about sending traffic to sports books that accept telephone wagers, as this could be a violation of the United States Wire Act, which is directly related to the BetOnSPORTS Indictments.”

In addition to the potential legal penalties, affiliates could also earn nothing if the gamblers they refer win. Dave Johnson, CEO of WagerWeb.com, says his company pays commissions once a week, and any losses by the gambling sites are carried over until customers lose.

Johnson, who has been operating WagerWeb from Costa Rica for seven years, launched an affiliate network that now boasts 1,500 members. Some of his affiliates who reside in the United States told him they were nervous about continuing operations during the new climate of prosecution, but he argues that the risk of prosecution has not really changed. “The potential [of being indicted] isn’t greater now than seven years ago, there is just more exposure,” he says.

Each state has its own rules about online gambling that marketers should be aware of, Johnson says. If an affiliate were torn about the risks, he “would recommend that they go another way.”

Marketing companies are also distancing themselves from online gambling activities. Mike Shopmaker, CEO of Virtumundo, Inc., says his Overland Park, Kansas, company draws the line at gambling sites that require customers to provide credit card numbers to play. Companies such as Virtumundo client GoldenArchCasino.net, a Cyprus-based gaming site, that offer both pay-for and free gaming, are acceptable, but Virtumundo only “occasionally” markets for gaming companies.

Crapshoot

A new law that makes it illegal for financial institutions to process transactions for customers of Internet gambling sites may reduce the amount of virtual wagering. Congress surprisingly passed the Unlawful Internet Gambling Enforcement Act as part of unrelated legislation during an early hour session, and President Bush signed it into law a few days later.

While most U.S.-based banks and payment processing companies such as PayPal have not been accepting payments to gambling sites from domestic customers, the new law all but guarantees they will stay away.

In the wake of the new law, Sportingbet sold its U.S. operations for $1, and electronic transaction processing company FirePay, which along with Neteller transferred U.S. payments to many online gambling companies, said it would no longer send funds from U.S. customers.

However, Goodman says lobbyists for the online gaming industry could ensure that more restrictive laws are not enacted and may eventually use their influence to erode the current laws. The gaming industry could ask for legislation with more exemptions or challenge the existing laws in court. Also, a desire to tap in to the billions of dollars of potential tax revenue from online gambling could prompt the federal government to change its policies.

Gambling expert Eadington says U.S. lawmakers’ stance on Internet gambling will be increasingly hard to maintain. The exceptions in the law that have been “carved out” for betting on horses and pay-to-play fantasy sports leagues, as well as interest from state lotteries in accepting bets online, have opened the door for more exceptions that would ultimately doom online gambling prohibition, he says. Consumers who support gambling and don’t have a voice in the political process could also become more vocal in opposing new laws, according to Eadington.

Online gambling is growing internationally as nations including the United Kingdom, Sweden and Italy are regulating and taxing the leisure activity, Eadington says, making the current U.S. laws politically untenable. “Can the United States continue its prohibition strategy when the rest of the world is moving in another direction?”

A complaint started by a tiny nation in the World Trade Organization (WTO) could ultimately result in the United States reconsidering its position on Internet gambling. American Jay Cohen was operating an online gambling site on Antigua and Barbuda, a Caribbean nation of two islands, when he was convicted in 2001 of violating U.S. gambling laws.

Antigua complained to the WTO that the United States was violating a trade principle known as “national treatment” that requires foreign companies are treated the same as domestic organizations. Since it was legal for U.S. companies to accept online wagers for horse racing, Antigua argued that gambling websites there should also be allowed to take bets. Antigua has been victorious in nearly all aspects of their complaint through several levels of appeal.

However, the WTO lacks the authority to force governments to comply with its ruling, according to attorney Goodman, so the United States could continue to prosecute foreign gambling organizations. But Antigua is likely to ask the WTO for permission to ignore U.S. copyright laws as a penalty for its noncompliance. If the WTO grants the action, Antigua could begin selling movie DVDs and music CDs internationally, that are produced in the United States, which Goodman says could result in the entertainment industry using its extensive influence to persuade Congress to legalize online gambling.

Wagering On Mobile

The next innovation in gambling will be play-by-play gambling from mobile devices, according to Gaming Transactions’ Smyth. Companies such as LiveHive Systems are creating services that enable bets on each play, such as whether a golfer will successfully sink a putt, from mobile phones or handheld computers.

Also, if China legalizes online gambling, the demand for online gambling will skyrocket, says Smyth. “There is still so much room for growth.”

Whether or not online gambling is made legal in the United States, the industry will continue to expand, according to Smyth. If American affiliates and marketers no longer support the industry for fear of prosecution, international organizations will happily take their place.

Disclosure: Revenue magazine accepts a very limited number of advertisements from online casinos in each bimonthly issue and only if those advertisers are promoting an affiliate program and not actual gaming enterprises.

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

The Lure of Youth

They’re wired, they’re affluent and they are a largely untapped market. This prized group is teens. They are often referred to by a variety of different monikers including Echo Boomers, Millennials, Netizens, Generation Y, Trophy Children (because of the strong impact that parents have in their decision-making process) and Generation N (for Net).

When analyzing this group, market researchers often slice and dice things in slightly different ways, but one common thread among all the facts and figures is that the group’s size is on the rise and its spending power is awesome and undeniable.

Northbrook, IL,-based Teenage Research Unlimited (TRU) put the current U.S. population of teens (age 12 to 19) at 31.6 million. TRU says this population, which has increased steadily since 1992 as children of baby boomers entered their teen years, spent $155 billion in 2005.

Alloy Media says 10-to-24-year-olds are a demographic said to be 60 million strong with annual spending power of as much as $250 billion. Alloy expects the number of teens to reach 35 million by 2010, while Forrester Research says there are 73 million people under the age of 18 in the U.S.

JupiterResearch reports that teenagers spent over $158 billion in 2005 and are expected to spend $205 billion in 2008.

A recent Harris study reports that American kids, teenagers and young adults, aged 8 to 21 years old, have annual incomes totaling $211 billion and they are spending 81.5 percent of their earned income – a whopping $172 billion per year.

Younger kids, the so-called “tween” set between ages 8 and 12, spend $51 billion per year, according to Alloy (see sidebar, page 58).

Futurist Jim Taylor, vice chairman of the Harrison Group, says boys under 18 have an average of $525 to spend each month, while girls have $430.

U.S. teens controlled an estimated $169 billion in disposable income last year – or $91 per week per teen – according to a study by TRU.

So where do these kids get their money? The major sources of teens’ income are: parents on an as-needed basis (47 percent); odd jobs (41 percent); gifts (41 percent); parttime jobs (28 percent); regular allowance (25 percent); and full-time jobs (11 percent), according to TRU. The average young consumer spent $84 per week. Some $57 of that was their own money, while they received the remaining $27 from their parents.

And unlike kids of the past, they are free to spend; 22 percent of U.S. teens have credit cards while in high school.

Getting Hip to the Kids

But this group is hard to get a handle on. Maybe that’s why researchers have devoted a lot of effort to trying to understand this highly coveted group. Here are some basic things you need to know about teens.

  • They are very wired and likely to stay online for longer periods than adults.
  • They are more likely to access the Internet from different locations.
  • They participate in a wider range of online activities.
  • They are more likely to adapt quickly to new technology, and embrace its changes.
  • They multitask while online.
  • They are fickle and not necessarily brand loyal.
  • They are savvy and often distrustful of traditional advertising methods.

No other age group matches teens’ enthusiasm for the Web or their use of broadband connections. About 21 million or nearly 87 percent of the 12-17 age group is online, many at least twice a day, according to a recent Pew Internet & American Life study. That’s more than the activity of 25-to-29 year olds, which have an 85 percent penetration. And 49 percent of teens have high-speed connections at home. That’s more than any other age group.

A Burst Media survey from June of 2006 reports that 69 percent of Web users (13 to 17 years of age) said if they had no Internet access outside of school it would “ruin” or make their day “not as good.” Bummer, dude. Among teens who go online from home, friends’ homes, libraries and other locations outside of school, more than one-third (37.4 percent) say they spend three or more hours per day on the Internet.

Teen males are more likely than teen females to say they spend three or more hours per day on the Internet – 39.9 percent versus 34.7 percent. Additionally, nearly one in five (17.9 percent) say they spend between two and three hours online; one-quarter (25.1 percent) say they spend one to two hours online; and 19.6 percent say they spend less than one hour per day online outside of school.

What Teens Are Doing Online

And while spending all this time online kids are multitasking – Web surfing, watching TV, sending emails, listening to music, sending instant messages and doing homework (see sidebar, page 54).

“Corralling these distractions to minimize their disruption is a significant challenge for marketers,” Chuck Moran, Manager of Market Research for Burst Media, says. “Marketers should use the Internet to create a central content point for teens on a variety of subjects and interests. By doing so marketers can then develop integrated marketing campaigns with advertising creative and programs referencing a central platform and working in tandem to get teens’ attention.”

One way to do that might be look to the growing popularity of social networking sites. Three out of five (61.4 percent) respondents in the Burst Media study had visited a social networking website. Of those, 60.7 percent joined the site and created a profile. Teen females are significantly more likely than teen males to say they have visited and joined a social networking site (67.5 percent versus 53.7 percent).

And MySpace leads the pack when it comes to social networking. From April 2005 to April 2006, the overall number of teen visitors (between the ages of 12 and 17) to MySpace grew from roughly 3 million to 7.8 million. That was up 162 percent, according to comScore Media Metrix. MySpace currently has approximately 85 million members.

Like Google, MySpace has spawned a cottage industry of sites that provide support and services to teen subscribers. Sites like MyGen.com.uk, Coshed.com and Poqbum.com, help kids create profiles, layouts, graphics, games, icons and quizzes for MySpace blogs.

But once something gains popularity there is usually some backlash – MySpace has drawn fire from parents and teachers – and now many teens are looking to newer, edgier social networks, such as Bebo.com, Tagged.com and MyYearbook.com. Tagged.com grew to half a million teen visitors in April 2006, from a virtual unknown, according to Nielsen//NetRatings. Also a newcomer, MyYearbook.com blossomed to 1 million visitors over the last year.

Marketers value these virtual communities for a number of reasons: They attract a very specific target audience; visitors return again and again; they provide a place to promote and sell products; it’s fairly easy to collect demographic and product- use information; and they provide a place to interact one-on-one with teens.

However, it’s not going to be easy for affiliates to crack.

“It’s an interesting market opportunity that has everyone salivating,” Blagica Stefanovski, affiliate program director at PartnerCentric, says. “But it’s difficult for affiliates to make headway on those social networking sites like MySpace or FaceBook. I think an affiliate would need to have a niche site that caters to teens or be a MySpace superstar with a large network of friends. It’s going to be hard for affiliates to get credit for driving registration and sales in that environment.”

She adds that there is significant opportunity for merchants on social networking sites as long as the merchant can get all 0f its divisions on the same page to drive success.

Consultant Shawn Collins agrees that it’s difficult to acquire teen-centric affiliates. He found this out in his role as the affiliate manager for Payless Shoes, which has several lines of shoes geared toward young women and teens.

“I tried to reach out but there were not a lot of savvy affiliates for the market,” he says. “Most teens aren’t serious affiliates or aren’t taking it as seriously as people who do it for income. They are not as diligent and business like. Also it’s a hard market to crack according to Collins, because it’s so community oriented and many of the popular online communities don’t do performance ads just CPM ads.

Teens also use such social gathering spots like MySpace to talk music. That means the social network is ripe with independent bands promoting free MP3s. But other music sites are also feeling the beat. Apple.com, for example, increased its teen visitor base by 68 percent to 3 million from April 2005 to April 2006, according to ComScore. A study by the Pew Internet & American Life Project reports 47.1 percent of teens download music (see Music story, page 68).

That same study from Pew also reports nearly half (49.3 percent) of the respondents play online games, which provide marketers with a great vehicle for keeping kids in the marketing loop with integrated product promotions called “advergames” (See video gaming story, page 74).

Another thing that teens love to do is talk, and online communication reigns as the preferred method of chat. A recent Lycos survey showed that once the school day ends, 45 percent of the teens surveyed preferred to communicate via Instant Messenger (IM) outside of school. Although public teenage chat rooms have become stomping ground for spammers and other unscrupulous prowlers, legitimate marketers can still be heard above the din.

And when they are not chatting online, teens are talking on their cell phones. In fact, 70 percent of teens own a cell phone. Many claim that creating online branded content for teens or reaching young buyers through their cell phones is the way of the future.

“Seen as the next frontier, mobile marketing appears to infiltrate teens at a rate much higher than adults,” a Forrester report says. In addition to buying ringtones, Web-enabled phones will make it possible to watch video clips and shop via cell phone.

And while the average teen spends seven hours a week on the Net, they spend 10 hours a week watching TV, a difference more pronounced than for online adults, according to JupiterResearch. Many suggest that a multichannel mix of online and television would likely reach the teen population.

Blogging is also something that has captured the attention of teens. More than half of all teens and 57 percent of teens who use the Internet have created a blog or Web page, according to Pew Internet & American Life Project. The most active segment among teenage bloggers is girls aged 15 to 17. One-quarter of online girls in that age group blog, compared to 15 percent of online boys of the same age, the study says.

But blogs can be tricky territory for online marketers because many blog sites are owned or run by individual users. These sites are often highly personal journal- based pages that are updated with no regular schedule and subject to the whims and opinions of the users. Many don’t even accept advertising. All this combines to make them a less attractive opportunity for marketers.

Hook, Line and Sinker

Many industry watchers characterized teens as fickle, cynical and not particularly brand loyal.

That’s a claim Forrester Research analysts dispute. “Although they admit to shopping around before making a purchase, more than half of both younger and older teens agree that when they find a brand they like, they stick with it,” the Forrester report says.

However, when it comes to trends and what’s new – the brand is not the issue – it’s all about what’s hot at the moment.

Still, for the most part, teens are incredibly marketing savvy and by the age of 19 the average teen has seen roughly 300,000 advertising messages, according to Peter Zollo, author of Getting Wiser to Teens: More Insights into Marketing to Teenagers. Zollo is also co-founder and president of market researcher TRU.

To cut through the clutter-marketers need to develop marketing that doesn’t seem like marketing, according to Boston College sociology professor Juliet Schor, author of Born to Buy: The Commercialized Child and the New Consumer Culture.

And while there are some common traits among teens, observers note that teens are profoundly accustomed to marketing and they can easily detect messages that are less credible. Most say resorting to stereotypical images will backfire. There needs to be a keen understanding of teen culture to develop messages that resonate with them. Marketing to teens is all about inspiring positive involvement. That takes clever creative and a commitment to delivering value.

“It’s important to speak the right language and use the right people,” Ron Vos, founder and CEO of Hi-Frequency Marketing, a street marketing company, says. “If you stay true to their culture, it can be very effective.”

Parry Aftab, executive director of WiredSafety.org says marketers tend to approach teens in one of two ways. “Either they treat teens as kids, in that they should do what they’re told, or they treat them like smaller versions of adults, in that they assume kids have the same values as adults,” Aftab says. “Neither approach works with teens.”

Because teens are especially adept at avoiding advertising through the use of pop-up blockers, marketers have gotten more creative in their delivery of their messages to this younger audience, according to a report by Forrester Research that highlights advergames, instant-win games, online coupons, streaming video ads and cell phone promotions as things that work with teens.

Under the Influence

 Teens have already been identified as music influencers and often the primary decision makers for consumer electronics purchases within their family’s household, according to Jupiter Research. But the real key to connecting with teens is to find the influencers within their peer community. The Jupiter report revealed that 17 percent of the online teens would qualify as highly active online “influencers” who spend roughly eight hours per week on the Internet, engaging in the broadest range of activities. More than half (53 percent) of the influencers are girls who actively shop and spread the word to friends about trends and products.

That’s why viral marketing and word of mouth seem to be working. A recent study from eMarketer says, “For the most part, it works. Teens are active users of viral marketing tools like forwarding video clips to friends, using ‘e-mail a friend’ links, and sending e-greetings. They use tools like ‘e-mail a friend’ links on retail sites, wish lists, and IM when shopping to get purchasing help from friends.”

Often marketing companies, such as Hi Frequency Marketing, will use an extensive network of teen influencers who are rewarded for promoting brands to their friends and acquaintances. But that can backfire if the promotion is uncovered or deemed fake.

Still some claim too many teens exhibited concerns that companies would steal their friend’s emails if they used a “forward to a friend” feature common in many viral marketing campaigns. Teens have also expressed concern about cluttering up friend’s inboxes as well as a reluctance to waste their friends’ time by forwarding jokes and other things found on the Net.

Instead, Vikram Sehgal, research director for JupiterResearch, recommends search engine marketing as an effective tool in reaching this age group.

Google is already part of teens’ online routine. According to comScore, Google got a rise from teens in the last year as the number of teen visitors to Google jumped 24 percent to 10.7 million from April 2005 to April 2006 (see sidebar, page 54).

The comScore report states “it’s clear that there are benefits to providing realtime inventory information to sites like Google when it comes to capturing young consumers. They’re three times more likely to use Google to find local businesses than online yellow pages from a phone company.”

According to a study by A Couple of Chicks Marketing firm, the younger generation is very patient when searching. Fifty-three percent of those surveyed by A Couple of Chicks say they go to as many pages as they need until they find the answer, with only 18 percent sticking to the first page. With 79 percent of the teens stating they have never clicked on a sponsored ad, most said they believe most of what they see on the first page is some sort of advertising – whether it is not.

Other findings from that report showed Expedia has clearly done the best job of building their brand with Gen Y. Over 56 percent of the respondents said their families had booked a vacation on Expedia. Hotels.com came in second at 28 percent. Identical statistics were cited when asked if they had ever visited any travel sites. From a marketing perspective, teens were not at all familiar with Travelocity, Priceline, Hotwire or even the ability to book travel on Brand sites. The survey concluded these habits will have an influence on future purchases as this group ages and begins to book their own travel.

Getting to customers early is what many are shooting for. In April, Toyota started a campaign to promote its Scion car in an unusual place – Whyville.net an online community that caters to 8-to-15 year olds. These kids can’t reach the pedals, let alone buy the car. The hope is that they will influence their parents’ purchase or grow up and have some brand loyalty to Toyota.

Toyota claims that just 10 days into the campaign, the word “Scion” was used in Whyville.com’s online chats more than 78,000 times; hundreds of virtual Scions were purchased, using “clams,” the currency of Whyville; and the community meeting place “Club Scion” was visited 33,741 times. These online Scion owners customized their cars, drove around the virtual Whyville and picked up their Scion-less friends for a ride. Cadillac has used similar tactics and incorporated its cars in a game for Microsoft’s Xbox.

What some say works is to reverse the marketing process from aiming for awareness to achieving shared network respect. Let teens have an influence in shaping your brand’s identity. Build trust with teens by using words and images that make your website feel like a place (a destination or world); create friendly characters that encourage kids to identify with products and companies; develop Interactive games and activities that get kids to return; develop clubs that teens can join; offer contests, quizzes and brand-related games; and use bold graphics.

Just remember there are a host of issues to consider when dealing with highly impressionable teens. Parents are clearly worried about internet access exposing their children to sexual predators, to values they do not agree with or to ideas that their children are not ready to see or understand.

A nationwide poll conducted by Common Sense Media in 2006 found the No. 1 media concern for parents has shifted from television to the Internet. Currently, 85 percent of parents say the Internet poses the greatest risk to their children among all forms of media, compared to 13 percent who consider television the biggest risk.

So, if you don’t want parents to use parental controls to block your site, be sensitive to what might be considered parental concerns and that way you’ll keep the parents happy and the kids coming back.

Optimized for the Future: Q & A with Noah Elkin

Noah Elkin is the director of industry relations at iCrossing, which was recently named Best Search Agency of 2005 by industry trade publication OMMA. iCrossing, started more than nine years ago in Scottsdale, Ariz., is jumping into new arenas, such as the mobile search market, and expanding client services to include content creation and website design.

Elkin is responsible for iCrossing’s public messaging and interfacing with high-profile analyst firms, along with sitting on industry committees, such as the Interactive Advertising Bureau, the Direct Marketing Association and the Search Engine Marketing Professional Organization, which puts him in a unique position to observe the online advertising industry from a variety of angles. Elkin, who previously worked as a senior analyst at research firm eMarketer for five years, has a Ph.D. from Rutgers University and received a B.A. with honors from Columbia University. He recently spoke withRevenue senior editor Maria Sample about winning industry accolades, providing services for the little guys and where search marketing is headed.

Maria Sample: Your company calls search marketing “reverse direct marketing.” How would you describe it?

Noah Elkin: It’s something of a philosophical shift in how customers and businesses interact. Customers are now actively searching for brands and products and services, for information. It’s a seismic shift from a typical push-advertising model where you get an email message or a TV spot or a regular print advertisement. It reflects the degree to which the customer is in control. With reverse direct marketing, a customer has already given an indication of what he or she is interested in. Search, as we like to say, is like a giant focus group.

MS: What’s the main difference between iCrossing now versus 1998?

NE: Our recent restructuring of the organization into three main service lines – marketing services, marketing technologies and marketing properties – is a major shift. Another difference is the building of expertise in these separate business units. And the addition of certain services like creative is one of the biggest changes, not only for us, but also for our space as well.

MS: What has remained the same at iCrossing since 1998?

NE: Certainly the talent of our people has been the constant, and the expertise across the board has been a constant since the start, and it’s something we’re very proud of. It will drive us forward as we expand. And as we continue to receive accolades from the industry, it will enable us to attract the top talent that we’ve become known for.

MS: What has changed since iCrossing won the OMMA award?

NE: We’ve been building really powerful partnerships with the world’s leading brands for more than seven years now, and along the way, really changing the ad agency landscape by helping clients connect with their customers anytime, anywhere, however they want, wherever they want, whenever they want. We feel the OMMA award is a great honor. We’re really proud to have worked so diligently to build these kinds of partnerships that we have with Fortune 500 companies. That’s a tremendous validation of the work that we’ve done, and it sends a message about the potential that search and commercial brand marketing have for helping businesses interact at a much higher level than ever with their customers.

MS: How is iCrossing different from its competitors?

NE: As our founder Jeff Herzog likes to say, iCrossing has been an innovator in search advertising since before Google was Google. What we have that’s unique is our full-service approach. We’re not just a search engine optimization vendor; we’re a fullservice marketing connection. I think that’s a major differentiator between iCrossing and other companies. We’ve really been growing the company with the evolution of search as a medium. I think it’s that kind of vision that puts us on the leading edge, helping to drive the future of advertising – with our in-house expertise on the services side and also on the technology side. We’re the largest independent agency out there, and we back up our tremendous talent with our market research, our strategic alliances, planning and client services with our proprietary technology. That’s a one-two punch that most other places can’t really boast of.

What makes us different is that we have this expertise in market research that provides clients with the deep-dive analytics about their company and industry. We give them the knowledge and tools to help succeed by planning how to accomplish short-term goals and long-term opportunities, using a full array of tools and services organized around search.

Another exciting differentiator for us is the creative service we offer. It’s one side of the business that we’ve really been building in the past year, and it’s really going to grow quite a lot in 2006. It’s everything from copy to actual website design, all organized around improving and maximizing both user experience and optimization of search. We see ourselves as a one-stop shop when it comes to advertising online as well as through emerging technologies, mobile included. We are launching a major mobile innovation called mCrossing, expanding our expertise from natural search optimization on the Web to global devices.

MS: What’s the most important service your company offers?

NE: The most important service is the fact that we offer all of the services, but our strength is expertise in natural search optimization. It’s been able to help prepare us to expand to mobile devices. Bear in mind that natural search results are clicked on 80 to 85 percent of the time, far more than paid search. It’s very important to have that grounding in natural search; it’s the bedrock of what we do. It’s important to have strong expertise, and we’ve been able to complement that with strengths across the board as well as market research and our agency services.

MS: What kind of search are you going to be capitalizing on in the next year?

NE: Mobile search is a very exciting opportunity in the year ahead. Global is one initiative, and certainly local search and classified search – yellow pages. We’ll have a product geared toward the small- and medium-sized business market organized for local search that will be going out toward the end of the quarter.

MS: I’ve heard a little criticism that some of the smaller businesses can’t afford the products you offer.

NE: That’s why we built this technology in-house – that’s a real differentiator as well, that we build all our technology platforms inhouse. Technology is the largest department in our Scottsdale office. Expanding on that, we looked at the small- to midsized business market as well and discovered people that don’t necessarily have either the need or the budget, but they probably want some of the benefits of visibility on the Web. If you’re a plumber in Illinois, you don’t really care if someone in New York finds you on a search for a plumber, because chances are that person is not going to use your services. What we’ve done is to build a selfservice platform that integrates our optimization and tracking software in a way that will make it more accessible for the smalland medium-sized business. Our approach is, whether you’re local, national or international, we help your brand make the connection and quantify the results. What we do best is help companies reach their consumer at their point of interest.

MS: How are online retailers missing the boat in search?

NE: There’s a growing need of the importance of integrating search engine optimization into the workflow process and ensuring that this takes place before the product is launched and before the copy for it is written. Companies and clients need to understand that products must be optimized well before they’re launched, and make sure that search is a priority and not an afterthought. You’re going to get the majority of traffic from natural search, so we strongly encourage clients to plan for that well in advance.

Another way companies are missing the boat is not implementing recommendations in a timely fashion. Clients who receive recommendations from the search agency and then sit on them really run the risk of not getting the online visibility for their products that they would otherwise get from implementing optimization recommendations. This can be particularly crucial at specific times of the year, such as prior to the holiday shopping season, which is obviously the most important time of the year for online retailers.

MS: Give me an example of a client that implemented recommendations in a timely fashion.

NE: One of our best examples is Fairmont Hotels & Resorts. They’ve been a client with us for a very long time. It’s really a great success story of crowding out the competition, like critical search engine traffic drivers such as Orbitz, to really control the user experience and the message that consumers are getting. That’s one that we’re extremely proud of because, as a brand, you want to make sure you control the experience and not the search engine. So it’s been a great partnership for both Fairmont and iCrossing.

At the beginning of our engagement with Fairmont, in terms of keyword visibility, we saw the number of keywords appearing on the first three pages of search results increase to 2,579; a total jump of 1,156 percent, from a baseline of 223 keywords. In terms of baseline search traffic, which was established at 29 percent, within a month of implementing optimized coding elements, the search traffic increased by 41 percent and booking reservations increased by 150 percent over the baseline.

MS: Do you have any studies planned for 2006 that you’re particularly excited about?

NE: We have a relationship with Harris Interactive – they do studies for us and we have three or four planned for 2006. But we’re really excited about a couple of themes that we’re going to work on from both a horizontal basis as well as some of the vertical industries that we’re targeting. One is branding search – why major companies are becoming more comfortable with this concept and how we can augment individual marketing and help branding efforts.

In 2005, there was a lot of talk about paid search, and quite a bit of money spent on it, but we really see natural search as the biggest driver of traffic to websites. We want to focus on and evangelize why and how you can provide the best return on marketing spend and how to budget and manage for a successful marketing campaign.

Another area is about marketers themselves, about what kind of website, from a design and architecture perspective, is going to really reinforce the brand. One of our goals is to optimize the creative and maximize the value of the client’s investment in natural search results for years to come. We do this by optimizing Web pages, building specialized microsites and landing pages designed to drive specific consumer actions, and deploying paid media and mobile marketing campaigns. We partner with clients to break down the barriers between them and their customers.

MS: Is that one of the reasons you joined the Mobile Marketing Association?

NE: In part, yes. For us, that was an industry-leading move, and we’re certainly the first search marketing agency to do that. We want to make sure we’re positioned to take full advantage of opportunities in the mobile space and, in some ways, to branch out our contacts and gain potential opportunities to companies that might not think to come to us.

MS: What do you want most for your company in the future?

NE: Continued growth, continued profitability and continued engagement with the world’s leading brands. A deepening of relationships with both interesting and new clients. As online advertising continues to grow, the lion’s share of those dollars is moving to search. And to really be able to apply our expertise on the agency and technology side, to really be the one-stop shop when it comes to interactive marketing. We want to be top of mind when companies are looking to embrace interactive and emerging technologies.

MARIA SAMPLE is a senior editor at Revenue. In the past 15 years, she has worked for Ziff-Davis, CNET, Charles Schwab and Restoration Hardware. This is her first article for Revenue.

Casting a Wider Net

Podcasting is emerging as an interesting and potentially lucrative opportunity for online marketers who want to reach a wider audience.

The figures for podcasting vary, but by all counts the podcasting market is poised to explode and online marketers want in. A report from The Diffusion Group, a technology research consulting firm, showed that the use of podcasts is expected to grow from an estimated 4.5 million users in 2005 to 56.8 million by 2010.

Also called audioblogging or blogcasting, podcasting is a term formed from the combination of the words iPod and broadcasting. Podcasting started cropping up with some frequency in early 2004 and, despite its etymology, an Apple Computer iPod is not required – any MP3 player or computer will play the audio files that are created and downloaded from the Web.

These audio files, which can be about a diverse range of subjects (from cooking to computers and religion to comedy), are posted online and, by subscribing to RSS feeds, can be automatically detected and downloaded to a user’s computer.

Until recently, podcasting, like blogging, was the domain of those with a desire to create whatever sort of content they chose without regard to advertisers’ preferences, editorial guidelines, format or demographic targets. They were even exempt from government regulators such as the Federal Communications Commission.

Then in 2005 several events occurred in the span of just a few short months that shone the spotlight on podcasting and pushed the grassroots movement into the mainstream consciousness.

In April some impressive data emerged that showed podcasting was a large and still-growing market. The Pew Internet & American Life Project reported that more than 22 million American adults owned iPods or MP3 players. Nearly 30 percent of them had downloaded podcasts from the Web to listen to audio files at their leisure. Then in May 2005 BusinessWeek put podcasting in front of the average business Joe by running a cover story and special report focused on podcasting.

By October, Apple had announced the integration of podcasting into its popular iTunes music service software. This made it easier for users to search for and subscribe to podcasts. The move struck a chord with users who signed up for more than a million free podcast subscriptions in just two days after the announcement.

Also in October, Apple launched its much-anticipated video iPod. Users were overjoyed to find out they would be able to download episodes of their favorite TV shows including Lost and Desperate Housewives.

Marketers began jumping on board just as quickly. Only a little over a month after the video iPod was unveiled, fast-food giant Burger King sponsored a set of comedic shorts that could be downloaded and played on the new device. The Burger King sponsorship entailed a branded page for video files specially encoded for video iPods.

Also just shortly after the device debuted, a group of users of Adobe Systems’ software launched what may have been the first podcast infomercial, a half-hour tour of the company’s popular photo-editing software, Photoshop.

All of this was bolstered by surveys, data, research and reports predicting huge gains for podcasting.

A November report by radio and media market researcher Bridge Ratings estimates that 4.8 million people have at some time during 2005 downloaded a podcast from either a radio station or other source. iTunes was referenced as the most often accessed portal for podcast downloads. This 4.8 million estimate is up from 820,000 podcast users in 2004.

By 2010, conservative estimates say that 45 million users will have listened to at least one podcast. Aggressive estimates place this closer to 75 million by 2010.

The study shows that approximately 20 percent of current users who have ever downloaded and listened to a podcast do so on a weekly basis. This group downloads an average of six podcasts per week and spends approximately four hours a month listening to those podcasts. More interestingly, on average less than 20 percent listen to their podcast downloads on an MP3 player or other portable digital device.

A lot has changed since a year ago when Allen Weiner, research director with market research firm Gartner, referred to podcasting as largely a hobbyist phenomenon, attracting “anybody who’s ever had a microphone or worked at a college radio station.”

Now this burgeoning podcasting market, which had already quietly developed a huge and fiercely devoted following, was the object of interest for venture capitalists, traditional media players, advertisers and online marketers – all working overtime to figure out how to make podcasting profitable.

And that is a polarizing topic for the podcasting community.

At the Portable Media Expo & Podcasting Conference in Toronto in early November, keynote speaker Leo Laporte said, “If somebody gives you money, you owe them something. I listen to my listeners, but I don’t want to listen to advertisers.”

Laporte, an author and high-tech guru, appears in advertising-supported radio and TV shows but shuns commercial advertising and promotions for his popular “This Week in Tech” podcast.

But for most the basic questions are no longer, Is podcasting an advertising vehicle or a marketing vehicle, or is it an art form or a commercial form? The discussion has moved beyond that to acknowledge that it’s all of those things and more. Now the real question is exactly how and who will make money from podcasting.

Add Advertising and Stir

Adam Curry, a former MTV VJ from the early 1980s, is widely credited with helping get podcasting off the ground. Curry was among the first to create a podcast by working closely with Dave Winer, a programmer, who is also often acknowledged as the first blogger, credited as the father of RSS and a former resident fellow at Harvard Law School’s Berkman Center for Internet & Society.

In November of 2005 Curry’s company PodShow, which promotes podcasts and finds sponsors for them, acquired Podcast Alley, a grassroots podcasting directory that played a big role in sparking the podcast craze. Many define success as a spot in Podcast Alley’s Top 10 list. Those with top rankings are often downloaded hundreds of thousands of times.

The acquisition comes less than a month after news that PodShow, which also helps mainstream companies produce and distribute podcasts, received $9.85 million in funding from Silicon Valley venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital. Curry’s plan is to launch a podcast network with anywhere from 30 to 50 shows that will split ad revenues.

While Curry’s been in the podcast mix since the start – he often refers to himself as “the Podfather” – there’s no lack of jockeying for position among big tech players and some newcomers, many of whom are attempting to lay the foundation for selling shows and advertisements. Technology companies including America Online, Apple Computer and Yahoo are jumping into the mix with aggregation services that collect thousands of podcasts in a single location.

Apple’s iTunes offers 15,000 podcasts, and as of press time listeners had signed up for 7 million subscriptions. Listeners confirmed more than 10,000 podcasts can be found at PodcastAlley.com.

And there’s power in numbers. Once podcasts are aggregated it is likely to be easier to sell ads across a group of shows. A lot of different approaches are being tried, including placing advertisements in actual podcasts, offering subscriptions to individual shows and in some cases, getting podcasters to actually do shows devoted to specific products or talk them up, much like the early days of radio.

Curry plans to offer advertisers a variety of sponsorship possibilities, including spots where a podcaster tests a product and then devotes an entire podcast to that product or service.

Last November, the women behind Mommycast (part of Curry’s network), a weekly show hosted by two mothers from their homes in Virginia, secured a major sponsorship deal with paper products maker Dixie, a division of Georgia Pacific. In a 12-month, six-figure deal, and repositioning that will be happening this spring.

Another high-profile sponsorship deal was also inked just before Thanksgiving. Martina Butler, a 15-year-old podcaster, snagged sponsorship from Nature’s Cure, a top brand of acne treatment. Butler’s show, Emo Girl Talk, features the life and times of a teen girl who talks about her favorite music and interviews celebrities. Officials from Nature’s Cure said in a press release, “There are a number of teens now listening to podcasts. Sponsorship is an excellent way to increase our brand awareness in an environment that is meaningful and credible to them.”

Many say these deals prove the podcasting medium is starting to gain traction among advertisers, and not just those reaching out to early-adopter males.

Sponsorships typically involve a 15- or 30-second audio ad at the beginning of the podcast. In the past, the popular podcasts usually set flat rates ranging from a few thousand dollars a month to as much as $45,000.

For example: In early 2004, Volvo agreed to pay $60,000 for a six-month sponsorship of the monthly podcast of Weblogs Inc.’s Autoblog, as well as advertising on the site itself. Over that period, the show was downloaded 150,000 times.

Some industry watchers note that because the number of listeners is changing fast, a flat-rate sponsorship isn’t always such a good deal for advertisers.

KCRW, a public radio station in Santa Monica, Calif., cut a deal with Southern California Lexus dealers for a sponsorship this summer, when the station was getting 20,000 downloads a week. Since then the number spiked to 100,000. When the Lexus deal ends, KCRW plans to charge $25 per thousand listeners, according to Jacki K. Weber, KCRW’s development director.

That new rate is considered pretty high given that one morning radio show in New York City (America’s No. 1 market) often charges between $12 and $15.

Venture capitalist Mark Kvamme of Sequoia Capital says podcasting may end up diverting anywhere from $1 billion to $2 billion away from the $30 billion radio advertising market over the next three to five years.

To fend off that possibility, some in the radio business are getting into podcasting in a big way. National Public Radio, which offers 33 podcasts, pumped out 5 million downloads in less than three months. NPR grabbed Honda Motor Co.’s Acura division as sponsor and is wooing others.

Still, some like Laporte are seeking ways to support their podcasts without directly taking ads and instead are asking listeners for donations. Laporte’s “This Week In Tech” podcast has more than 200,000 listeners and asks for donations of $2 per month. It often takes in nearly $10,000 a month, he says.

Tools and Metrics

Once ads get placed, sponsors want to make sure they are getting exactly what they paid for.

The difficulty in tracking podcasts, however, goes beyond the number of downloads and instead is about the portability of the files. Because the player software is often on a mobile device, such as an iPod or other MP3 player that is not connected to the Internet, the marketer loses track of the downloaded file when it leaves the computer.

For that reason, some podcast advertisers are turning to techniques used for traditional media like radio, such as custom 800 numbers or offer codes. And since podcasting uses RSS feeds for distribution – the same syndication and distribution mechanism used by blogs – RSS-centric technology companies such as FeedBurner are leading the way to help podcasters build the format into a moneymaking business.

There are also tools that make it attractive to launch ad campaigns across various mediums including blogs, podcasts and RSS feeds. Blog and RSS advertising network Pheedo is developing a program for advertisers looking to launch integrated multichannel campaigns across blogs, RSS feeds and podcasts.

If your advertising message is in only one of these channels, there’s a chance it will be missed by part of the customer base, according to Bill Flitter, Pheedo’s founder and chief marketing officer.

Advertising buys will be a package deal, with guaranteed impression counts for the RSS and blog inventory, while the podcast portion will be measured by the number of average downloads from previous shows.

While Pheedo has been testing integrated campaigns for a few advertisers since June, the company is still developing technology for podcast ad serving and is building its podcast network. Pheedo’s podcast ad network currently offers ads on about 30 podcasts and has run campaigns for six advertisers. The RSS and blog components are already in place. To date, technology, video game and automotive advertisers and publishers have the most success with blog and RSS advertising, according to Flitter.

While many applaud the moves to provide some basic metrics, they admit that strategic marketers are always focused on the return on investment and need to know who’s viewing the page and who’s downloading the file in order to accurately measure the impact on their own end, according to John Furrier, founder of PodTech.net and host of the Infotech podcast series.

Shelly Palmer, president and CEO of Palmer Advanced Media, a marketing consultancy in New York, says, “If you think about podcasts as marketing vehicles, you would be taking advantage of all the tools available to Internet marketers: tracking software, affiliate marketing schemas, SEM (search engine marketing), and SEO (search engine optimization) methodologies, etc. This makes huge sense since, for the moment, podcasts require a personal-computer-based client and an Internet connection.”

Palmer adds that brand awareness, lift and purchase intent are three of the most common metrics that brand managers use when calculating return on investment for advertising and marketing dollars. “What’s nice about podcasting is that the Internet enables census-based metrics. Properly used, podcasting can tell you a great deal about how effective it is for your business.”

Furrier claims that better ROI calculations won’t be possible until the different systems involved are integrated.

Many are working hard to make that possible. At the Portable Media Expo & Podcasting Conference in November, much of the focus was on tools or ways for podcasters to count audiences, deliver ads and charge listeners.

Furrier’s startup, Podtrac, announced a demographics-and-advertising program that attaches a prefix to the name of MP3- formatted podcasts that will obtain an exact count of downloads per show, thus far a vexing challenge for podcasters because some podcast directories cache shows on their own servers. The company also plans to help podcasters create sales kits and then work to connect them with advertisers, with Podtrac taking as much as a 30 percent cut of the revenue.

Audible.com, which sells audio books and news programs online, has launched a new service called Wordcast that lets podcast creators chart listener usage behavior somewhat like the Nielsen ratings do for TV – a huge step for getting advertisers to make precise choices.

By providing a way to track not just how many times the show is downloaded, but also whether it is played and for how long, Audible hopes to give podcasters some audience information.

The company will charge 3 cents per downloaded podcast to report whether a downloader listened, and for how long. Audible will also offer tools that will stop the podcast from being emailed to others. It will charge 5 cents per download to track listening and attach the access restrictions. For half a cent per download, Audible will insert an ad relevant to the podcast. Audible also would take a 20 percent cut of any subscription fees it collects.

With the tools, “you can build a bona fide rate card” for advertising, says Foy Sperring, Audible’s senior vice president for strategic alliances.

BitPass, a 3-year-old Menlo Park, Calif., company, showed off a similar process that enables podcasters to sell their content, while Taldia unveiled its podcast-production service. The Altadena, Calif., company has a deal with the Associated Press and other news outlets in which Taldia’s army of voice talent, which is spread across the nation, records audio summaries of printed news reports. For $5 a month, subscribers can select what news topics they want to hear about, how many minutes of content they want and at what time of day they want it delivered to their computers.

Microsoft has also announced plans to integrate support for RSS throughout the Windows Vista operating system to make creating, viewing and subscribing to content of all types, including podcasts, easier. Microsoft is also working with companies like Doppler, a podcast aggregator, to ensure it can take advantage of the open architecture in Windows Media Player for its podcast applications.

Lukewarm

Still, not everyone is convinced podcasting is the next big, big thing. Many are tempering their enthusiasm with a healthy dose of skepticism.

Mark Cuban, owner of the NBA’s Dallas Mavericks and an avid proponent of blogging, wrote in one of his posts at BlogMaverick.com that he expects podcasting to level off soon.

Here’s the picture he paints: “The number of podcasts available individually or through aggregators will explode beyond where they are today.” Then, “that will create a massive dilution in the audience size of the early-entry podcasters. Everyone’s audience will fall as the marginal listeners find something they like better. Yes, there will be some podcasts that get more listenership than others, but most of them will be repurposed content that already has demand.”

Finally, “Individual podcasters who don’t have some other means of generating demand other than being on aggregators will fall off first and the fastest. They will just go away, the only trace remaining will be tiny Web pages on the Wayback Machine. So in about three years, the podcast phenomena will have run its course and will just be a normal part of the digital media landscape.”

Ted Schadler, vice president at Forrester Research, says, “Podcasting feels like the Internet first did: a whole new way of experiencing the world. But at the end of the day, radio is radio and consumers will only listen to things they find valuable.”

Schadler says there are many people with various agendas. “To the rising tide of podcast hosts, podcasting is better than blogging for becoming famous. To venture capitalists like Kleiner Perkins Caufield & Byers, Charles River Ventures and Sequoia Capital, podcasting is a bet on the next big thing. To commercial operators like Clear Channel, it’s yet another channel for selling advertisements,” he says. “Each of these groups expects podcasting adoption to mirror Internet adoption with giddily exponential growth. Alas, there is another precedent that all must consider: Push. Push exploded on the scene with Pointcast, landed faddishly on millions of desktops, and then just as quickly died away. (Of course, push has been rehabilitated as RSS, but push’s big problem – content overload – remains.)

Schadler’s bottom line: “Podcast listening will follow a natural progression: enthusiastic experimentation, disenchanted abandonment, and value-driven adoption.”

By the start of 2006, Schadler says, “Enthusiastic experimenters will find that most podcasts aren’t worth listening to and even the useful ones pile up unopened in the podcast corner of the hard drive. After all, who has an extra hour a week to listen to a radio show? Disenchanted, consumers will abandon most podcasts.”

However, it’s not all so grim, according to Schadler. “Somewhere in the midst of the experimentation and abandonment phases, podcasting will become valuable to consumers that want control over radio or access to niche content. Thus, value-driven adoption will characterize the mature phase of podcasting.”

And based on a historical analysis of Internet radio adoption and a forecast of broadband and MP3 player adoption, Forrester expects 12 million households to be regular podcast listeners by the end of the decade. That’s a far cry from Bridge Ratings’ estimates of 75 million users by 2010.

That kind of conflicting data is likely why some advertisers are also not jumping into the deep end with both feet.

A survey by the American Advertising Federation rated blogs, podcasts and Web-enabled cellular phones as newcomers in the market that are worth watching, but have yet to prove they’re worth major investments.

On a scale of 1 to 5, respondents rated the three new Internet-based channels in the middle of the scale, which is considerably lower than where they placed traditional media and other forms of online advertising.

An AAF representative says that because these media are so new, people are more cautious and are taking a wait-and-see approach. The “cornerstone” of advertising remains the 30-second spot on television, but consumer adoption of new technology is forcing ad execs and marketers to look beyond newspapers, magazines, TV and radio, and question their return on investment.

Pod Porn

One market segment that is always lightning fast to react to new media and new technologies is adult content.

Andrew Leyden, founder of Podcast Directory.com, is quoted in a Newsweek published report saying, “No matter what the technology is, sex finds a way to get involved.”

This shouldn’t be surprising since 85 percent of those who use the search engine’s podcast directory are men according to Yahoo senior product manager Joe Hayashi.

At PodcastDirectory.com, six of the top 20 shows are adult-oriented. On Apple’s iTunes store, “Open Source Sex” is No. 11 and climbing. “Porn” is the second-most-searched-for term at Podcast.net; “BBC” is tops.

Industry watchers also say the plentiful storage capacity, portability and privacy afforded by MP3 devices make it enticing to listen to such titillating adult content. The video iPod is only expected to increase the amount of X-rated content available for download since anyone with a microphone, a video camera, a computer and some privacy can create such adult content, according to Violet Blue, the host of the Open Source Sex podcast. “You don’t need big breasts or big advertisers.”

The flip side of the emergence of sex-related content is religious programming. There are already many religious-themed podcasts – often referred to as godcasting – including Dharma.net, GospelAudio.com, Catholic Insider, Pray-station Portable and Pagan Power Hour.

“Casting” is also being co-opted by all sorts of other industries, market segments and groups. There have also been suggestions of food marketers looking into gastrocasting, music marketing called rockcasting and pharmaceuticals delivering medical education to physicians via medcasting.

In the end, it looks like everyone, including God, is looking for podcasting to pay off in a big way.

Affiliates Yearn For Standard Bearers

Affiliate marketing is entering its adolescent phase, but the lack of standards for delivering data is inflicting some serious growing pains. If the industry is to grow up as well as out, merchants and affiliate networks need to provide affiliates with consistent methods of accessing the data that feeds their development.

While nearly anyone with a Web address can create a static storefront with a few dozen links or banner ads, affiliates looking to stand out from the competition are finding it necessary to incorporate near real-time feeds of product information. These feeds allow affiliates to differentiate themselves by displaying daily promotions, available inventory and updated pricing.

Unfortunately, sales sophistication comes at a cost. Because many merchants and their network intermediaries continue to deliver data using 20th century technology and proprietary data formats, affiliates must develop custom applications for each partner relationship. This time- and resource-consuming process detracts from the goal of promoting products.

The State Of Disunion

Today most affiliates receive creative materials for banner ads and product information as text files delivered via email, or by downloading them from a merchant file transfer protocol site or password-protected Web site.

Chris Henger, senior vice president of marketing and product development for affiliate network Performics, says that the current process is one whereby affiliates are mostly responsible for retrieving the information. In cases where the merchants deliver information to affiliates, it’s usually formatted as XML data or comma-separated value files. But there is no consistency of formats or order of product names, categories or descriptions, Henger says.

Performics converts the merchant data into customized files for each of its 75 affiliates, which requires considerable data massaging and some human intervention, he says. However, he notes that even as technology advances, affiliate networks will continue to deliver information in multiple formats because of the lack of technical sophistication of many affiliates.

“There will always be some (affiliates) who are happy with cut and paste,” Henger says. And for affiliates who sign up to offer products from dozens, or even hundreds, of merchants, that’s a lot of cutting and pasting, which inevitably leads to embarrassing errors.

The level of technical expertise among affiliates varies tremendously, according to Kellie Stevens, president of AffiliateFair-Play.com, an industry advocacy group. Stevens says some networks have developed application scripts to somewhat automate the retrieval of data, and frequently affiliates “install them on the servers without knowing what they do.” And while some affiliates have a background in programming, “For some it’s a stretch just creating a Web page,” she says.

But getting pricing information and daily promotional materials aren’t the only items that have affiliates clamoring for data feed standardization. Most also need to get near-real-time data about their specific commissions, click-through rates on banner ads and raw sales data. The largest networks, including LinkShare and Commission Junction, use the same technologies to track those important affiliate statistics, but affiliates may still have to do some of their own number crunching to figure out the top-selling products and those that are merely taking up screen real estate. Some networks with fewer affiliates provide performance feedback via instant messenger.

Because affiliate marketers are by nature independent-minded and have a variety of opinions on how to streamline the data-sharing process, there is not likely to be a single data standard anytime soon, Stevens says. And because there is also no strong industry association to recommend or impose standards, affiliates will likely have to grapple with proprietary data feeds for the foreseeable future.

Networks Eye RSS

However, a few forward-thinking networks are embracing a standard from the online publishing world that simplifies receiving real-time data feeds. The real simple syndication, or RSS, standard was developed to allow news publishers to seamlessly share headlines and article content with other Web sites and is currently used by many media leaders including Yahoo, the BBC and Wired News. RSS standardizes the XML tags used to identify components of an article and is popular with many Web logs, which also use RSS to publish their own content so that other Web sites can link to it. Online marketers realize that the RSS standard could be used to define tags for product and pricing information and reduce the amount of programming needed to extract information. RSS data can be distributed via email or FTP, or automatically streamed to remote Web servers. To view RSS feeds, you need to obtain an RSS reader application, such as FeedDemon or NetNewsWire, or point your browser to a feed-reading service such as Bloglines or MyFeedster.

One of the early adopters of RSS is diamond jewelry seller Mondera of Bangkok, Thailand. Chris Sanderson, Mondera’s marketing and affiliate partner manager, says the company is turning to RSS because email “has started to reach its limit as a useful tool.” Affiliates, like the rest of the wired world, receive a high volume of spam, so they use email filters that frequently block the data files, he says.

“We needed an easy way to reach out to our affiliates that wouldn’t clutter their mailbox, that they could opt into É and that provides easy access to more detailed information,” Sanderson says. Shawn Collins, who runs several affiliate sites and merchant programs, including ClubMom, is making the transition to RSS for his data feeds. Collins recommends that companies disseminating information via email should switch to RSS because it can be used to get around spam filters. Collins uses NewsGator, a news reader plug-in for Microsoft Outlook that enables RSS feeds to be sent directly to folders without screening by spam filters. RSS enables Collins to more quickly manage multiple programs and affiliates. A small number of affiliates are starting to use RSS but, Collins says, “Most affiliates don’t realize that they are missing out.”

Merchants who aren’t interested in developing technology themselves or negotiating with affiliates are turning to consultants and affiliate management companies for guidance. These groups often minimize the technical hurdles of sharing data with affiliates by taking data in whatever format the merchants prefer and finding a method of matching it with the affiliates’ preferred means of communication. Michael Stalbaum, CEO and affiliate manager of UnREAL Marketing, says affiliates get what they pay for in making a technology investment and that many affiliates are happy using email and FTP files to find out how their shops and ads are performing. However, he notes that the quality tracking of referrals through a timely data feed is key in a performance-based industry. “Since you only get paid when you generate leads, you need to understand what is working and what is not,” Stalbaum says.

Affiliate marketers are looking at the networks to organize the data distribution process using standards such as RSS, according to Gary Stein, senior analyst at JupiterResearch. He says that any standardization is likely to come from larger players like Commission Junction, LinkShare and Performics.

Standardization of product and performance data would give marketers more timely insight into their customers and allow them to more quickly make decisions about promotions. “Product feeds are getting more in demand. If you can set up an automatic feed using RSS, you can do all kinds of things,” he says. For example, if prices change, you can automatically rotate the least expensive item to the top of the list. Stein says that while many marketers grab the cheapest technology to get the job done, “20 percent of the affiliates are really sophisticated and passionate” and are willing to invest in technology.

Blogs: The Interactive Affiliates

Blogs, which are often personal opinion, news and rumor Web sites, have attracted huge followings during the past few years, and they are now monetizing their popularity by becoming affiliates. Entrepre-neurial bloggers are now using scripts to combine their RSS-formatted content with affiliate links. This ensures that when another Web site uses content that features text links to merchants, the original blogger is credited with referring the traffic.

Dick Costolo, CEO of data feed services company FeedBurner, says several networks have asked his company to help them create a commerce solution leveraging RSS feeds. Affiliates who receive RSS feeds no longer have to read through emails or check the Web sites of all their merchants to see if new content has been posted. RSS is a “more efficient way of tracking Web-based content,” he says.

There is a substantial business opportunity to combine blogs and commercial publishing traffic with affiliate marketing, according to Costolo. He claims there are currently about 4 million RSS feeds being distributed, 95 percent of which come from bloggers. Affiliate marketers can have their referral IDs inserted into RSS content streams, enabling them to contextually link within articles while maintaining tracking information.

Costolo recently began working with one of the biggest fish in the affiliate stream, Amazon.com. The online merchant is streamlining its affiliate program using RSS to make it easier to track purchases and associate relevant sale items with content. For example, an affiliate that has content about books can scan the RSS feed to find related content that is continually updated. “We are giving publishers more options by enhancing their feeds,” Costolo says.

Merchants At Your Service

Affiliates looking to partner with the largest online sellers may be required to make a more substantial investment in technology, but in the process they can gain experience with the leading e-commerce standards. Amazon and eBay have granted access to their massive inventories via Web services application programming interfaces, or APIs. Web services are platform-independent applications broken into component functions that are used to share information over the Internet.

Amazon and eBay have provided Web Services blueprints detailing how affiliates can query their databases to obtain real-time price and product information using tools common to many developers, including Java, the simple object access protocol (SOAP) and XML. Through Web services, affiliate developers can access product images, perform searches and find related products through standardized APIs. “The focus [of the Web services initiative] is to give programmers the guts of Amazon’s technology so that they can build a storefront on top of it,” says Jeff Barr, program manager for Amazon’s Web services.

Combining Web services with RSS data feeds is a “great example of creativity” that enables affiliates to mass-produce dynamic Web pages, and “this allows small companies to compete with the bigger guys,” Barr says.

But don’t look for Amazon to provide comprehensive tools that enable affiliates to cut and paste some code or download a utility and immediately hang out their virtual shingle. Barr says the Web services method requires some programming, and third-party companies are filling the void by developing applications that are more affiliate friendly. However, affiliates who aren’t afraid to learn a few simple scripts and shop around for third-party tools could put up a basic site within a few days, he says.

Choosing A Path

Affiliates looking to promote products from many merchants must manage the tradeoffs of committing to create custom feeds for each partner with the overhead of implementing cutting-edge technologies such as RSS and Web services. Or, they can take the path of least resistance and join up with a single affiliate network.

“Signing up with an affiliate network is the way to go,” for most affiliates today, according to JupiterResearch’s Stein. He says it is the affiliate networks’ responsibility to be the trusted source “guaranteeing that all the clicks are being counted.”

However, some affiliates are leery of committing to affiliate networks without being able to understand the networks’ proprietary data feeds that are used to calculate their commissions, according to AffiliateFairPlay’s Stevens. She says the networks were created to intervene between merchants and affiliates, but now some affiliates are learning how the data feeds operate so they can police the networks.

Understanding what goes into your feed is never a bad idea.

John Gartner is a freelance writer living in Philadelphia. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com and AlterNet.org.

iPod, Therefore iTunes

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

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

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

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

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

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

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

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

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

Orchestrating The Future

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

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

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

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

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

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

Network Competition

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

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

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

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

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

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

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

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

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

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

The Early Innings

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

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

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

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

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

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

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

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

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

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