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

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

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

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

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

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

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

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

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

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

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

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

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

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

Driving Forces

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

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

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

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

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

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

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

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

The Limitations

Aligning expectations with realities is a challenge following any merger and, without exception, there are surprises on both sides. Integration is always tricky. Perhaps the cultures don’t mesh, or the technologies prove problematic or the talents fall short of expectations. Quite often, the acquiri

ng company will expect to save money by scrapping redundant operations, or by cutting back unprofitable lines of business. Other times, the acquiring company will invest more capital to grow certain capabilities faster than the smaller company could have grown on its own. Crouthamel says that is what’s happening now at Performics.

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

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

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

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

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

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

Beyond Affiliates

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

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

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

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

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

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

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

Who’s Next?

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

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

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

Tom Murphy is Editor in Chief of Revenue.