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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SM: Creating a niche network is challenging unless it’s built off somebody else’s technology because the volume that a niche network can drive is so small that it can’t really support what a transactional network needs. LinkShare’s tracking is set up like a bank’s. It doesn’t use cookies because it cares about accuracy and it cares about privacy and it has to be able to keep a record and an audit trail of exactly what happened. That equates to a bank. Cookie-based technologies are the equivalent of cashing 10 checks at a bank, but only nine of them get cred

ited to your account. It’s not an accurate way of doing business. So as you begin to focus on different segments of the business, you still have to have that accuracy. That requires money. With most of the niches, you have don’t have enough money to support an accurate business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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