Going Global

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

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

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

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

Going Gangbusters Globally

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

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

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

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

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

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

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

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

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

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

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

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

Navigating the Potholes

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

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

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

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

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

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

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

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

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

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

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

Inevitable Intersection

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

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

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

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

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

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

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

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

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

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

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

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

 Northern Exposure

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

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

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

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

 

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

Being Ben Edelman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DA: What are you working on now?

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

DA: What stealware is the most pernicious these days?

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

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

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

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

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

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

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

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

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

DA: What can be done about them?

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

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

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

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

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

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

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

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

DA: What are your biggest current concerns?

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

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

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

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.

Stumped About Stopping Spyware

Tuan Le is mad. And when he’s upset, he speaks quietly, deliberately and very thoughtfully. He’s hardly a hothead. But nothing gets him more riled up, if you can call it that, than knowing he’s losing a large percentage of revenue from his two affiliate Web sites to other affiliates that are acting in unethical and unfair ways.

Le, who’s been an affiliate for the last few years and owns wholesaler.com and findcheapauctions.com, has spent a lot of time researching spyware and adware and has many times considered taking legal action against the companies that use spyware or somehow interfere with his affiliate commissions. But he’s been reluctant to make waves.

“I think there is a percentage of what is supposed to be coming my way that is being diverted,” he says. “I want to do something about it, but I’m not sure what I can do.”

And Le isn’t alone in this. Whether you call it spyware, adware, parasiteware or any of the many other names used to describe the software that positions itself between Web publishers and their merchant partners, the pernicious applications are causing thousands of affiliates to lose a lot of money.

According to an industry watcher who asked not to be named, affiliates are losing up to 40 percent of their annual revenue to illegitimate affiliates (often called bad actors) that entice end users to download free software in exchange for being served advertising.

Le estimates that figure could be as high as 50 percent.

“It’s the most horrible thing on earth. It’s intrusive, evasive and it’s just a very nasty thing to do; and it’s fast becoming one of the hottest ways to generate traffic on the Net,” says Jason McClain, president and CEO of PrimeQ Solutions, an Internet marketer and lead generator.

Once loaded onto the user’s desktop, these free applications often replace ads, redirect links and disable existing browser cookies. That means the ads that users see are not those paid for by affiliates – a consumer is often clicking on another affiliate’s advertisement to make an online purchase or going to a competitor’s site to buy goods. For affiliates that means a loss of commissions and traffic, which ends up hurting their revenue stream.

This issue has been a huge one for affiliates for more than the last four years, according to Kellie Stevens, president and founder of the affiliate marketing resource Web site AffiliateFairPlay.com.

“Affiliates feel the most pain – their cookies are being written over, the merchants are then paying out commissions that are not warranted. The merchants feel the second level of pain,” says Gary Stein, a senior analyst for online advertising and marketing at JupiterResearch.

At the crux of the issue is, who owns the desktop, the browser or the application?

Those companies that derive the bulk of their revenue from selling advertising on free downloadable applications take the position that the user owns the desktop and that consumers have a right to decide for themselves what is displayed on their own computer screens, not publishers.

Thomas Storm, vice president for online services at VentureDirect Worldwide, a performance-based marketing firm, claims the desktop doesn’t belong to a publisher, and if a user agrees to receive an ad, that is their choice. He acknowledges, however, that user agreement licenses for the free software are often so complex that few people actually read them. Or, if they do, few know exactly what they are agreeing to. Still, Storm believes it is the responsibility of users to make sure they understand what they’ve read before they agree.

“If there are three or four steps in the download process and users don’t read through all of them, then that’s their fault,” he says. “You can’t get away with claiming ignorance in a court of law. That won’t fly.”

A Big Problem

Although most market researchers who follow this space do not have specific numbers on the size of the spyware market or how much revenue is generated by the traffic, they agree the market is huge. Anecdotal evidence puts the spyware market at nearly $500 million, and some oft-quoted figures claim that nearly 90 percent of personal computers are infected with spyware or adware.

“It’s very hard to get a sense of how big it is, but it is big, and the perceived impact is significant,” says Stein, who notes that a quarter of the advertisers Jupiter surveyed are “philosophically opposed” to adware. Furthermore, 7 percent said their respective companies issued mandates prohibiting them from buying adware.

In October, EarthLink, along with anti-spyware and system utility software maker Webroot Software, published their SpyAudit Report, which scanned more than 1.1 million PCs for the period of July through September and found an average of 25 spyware-related applications running on each system. That is a slight decrease from the instances of adware and adware cookies, as well as a decrease in the number of system monitors and Trojan horse applications, on Internet surfers’ systems for the period of January through March 2004, when the average was 26.5 percent.

This downturn was attributed to the increased awareness of spyware and adware infections and the increasing number of software tools available to fight the threat. Antivirus vendors, including Symantec and McAfee, have been adding some level of spyware and adware detection and removal tools to their software.

Defining The Problem

It’s hard to fight something that is not defined. One of the biggest issues is one of the most basic – defining what is and isn’t spyware. Spyware is a catchall term typically used to describe computer programs that are designed to stealthily install themselves on people’s computers – often when the users attempt to download seemingly legitimate programs. The most benign spyware programs – also called adware – simply serve up a barrage of pop-up messages, while the most intrusive ones can track online movements, steal passwords and hijack sensitive data.

The fact that different groups use different terminology to describe these malicious programs (see sidebar) has made it difficult for various entities – especially the government – to curb the problem, according to Steve Messer, CEO of network service provider LinkShare. “Everyone’s definition is different. There is not a definitive answer,” Messer says. “Managing this problem will depend on how the community comes together.”

There are a handful of companies that are most often named as perpetrators of these types of acts, including Claria (formerly Gator), WhenU and 180solutions. All say they are not spyware and are legitimate advertising networks (see page 44).

Still, many are upset at the practices employed by these and other firms.

“California and Utah have given Gator and WhenU a clean bill of health, spyware-wise. Now these two guys are legitimate in those states,” says Haiko de Poel, president of ABestWeb. “But parasite- wise they are dirtier than hell.”

Claria, 180solutions and WhenU have all been named in suits that involve improper use of trademarks or unfair trade practices related to advertisements and targeting. Gator’s activities have prompted more than a dozen legal challenges from companies including the New York Times, The Washington Post, Extended Stay, Hertz, Lending Tree, Overstock.com, Quicken Loans, Six Continents Hotels, TigerDirect, UPS and Wells Fargo, among others.

One merchant, who asked not to be named, says he had to drop 180solutions. “I made a lot of money with them working with us on an affiliate basis, but my sense in talking with other retailers is that they were avoiding them like the plague.”

Who Is Responsible?

So whose responsibility is it to try to stop spyware: the government, affiliate networks, the affiliates themselves, end users, anti-spyware vendors? Most think the answer is all these groups.

PC makers have recently joined the fight against spyware in order to control their technical support costs and avoid any legal repercussions, according to Russ Cooper, senior scientist with TruSecure.

Forrester Research analyst Jonathan Penn says a spyware-related support call can cost $15 to $45, and a company may lose business if end users believe the spyware problems are related to its products. “Security is a component of loyalty,” Penn says. “People want all these various services, but they expect security to come with it.”

Yahoo, EarthLink and AOL have all begun offering spyware-detection tools. Hewlett-Packard and Dell also offer limited free trials of anti-spyware software preloaded on their systems.

Messer says he is shocked that some people truly believe the spyware situation can be resolved. “This problem is never going to be solved. It’s like spam or the war on drugs or illiteracy. You just have to manage it and do the best business you can.”

He adds that the concept of obliterating spyware is one of those lingering ideals from the early days of the Internet. “The idea that the Internet would be this free, safe, great place still lingers, but the reality is that we will have to deal with [spyware] for the rest of our lives. So, we need to work together to manage it.”

“I agree that we are not going to solve the problem, but we can minimize it,” says Trey Barnes, president of Public Policy Partners, a Washington, D.C. legal firm, and president of the Consortium Of Anti-Spyware Technology Vendors, a nonprofit organization of anti-spyware vendors that addresses the issue of spyware.

Barnes adds that the solution has to be multifaceted and must include the anti-spyware vendors, legislation, have a consistent code of conduct from the network service providers (see page 36) and focus on education.

“We need to get the word out about the risks of spyware to all the impacted parties without scaring them,” Barnes says. “Education is pre-emption, and pre-emption then goes a long way to help manage the problem. Spyware is not going a way, but if we don’t get it under control then it will threaten the commerce and growth of the Internet.”

Steps To Stop Spyware

Even though the affiliates are most impacted by spyware, they have not been able to mount a concerted and cohesive effort to fight it. Most are like Le. They are aware of the problems, but don’t want to make waves at that level. They fear repercussions from the networks or the spyware companies that could mean the loss of even more revenue.

In addition, there are so many affiliates, each with different strategies, varying levels of technical and business acumen and different opinions, that group efforts have yet to result in a consensus.

“Affiliates are an independent lot,” Stevens says. “Every group effort seems to fall apart due to differences in opinion. And individually they are not effective.”

The affiliates that are most impacted are mom-and-pop Web publishers. This group is not typically technically savvy, and some may not realize how much they are losing.

“Some affiliates don’t have any idea how much revenue is being lost,” Stevens says. “They figure that they are making $5,000 per month and paying their bills. But they are not put in the context that they could be making $12,000 per month. Most of these are smaller affiliates that started with this as a side income and were then able to quit their jobs. This is the first time they’ve been self-employed, and they don’t have as much experience with management.”

Many, like Stevens, believe the networks are in the best position to combat spyware problems. “The networks haven’t taken all the necessary steps,” she says. “Maybe with pressure from the affiliates they will do more. Maybe if the affiliates scream loud and long enough something will happen.”

While all the major networks have anti-spyware policies (Performics and Commission Junction have adopted a code of conduct, while LinkShare has its own contractual effort to curb spyware see page 36), some say those policies do not go far enough or are not enforced with regularity.

“Codes of conduct don’t mean beans if they are not enforced,” de Poel says. “And many times these guidelines are not enforced.”

Le says he believes the networks are dealing with the threat of spyware by setting up departments that are supposed to monitor and handle any inappropriate activity, but he also worries they are just a corporate façade.

“These are things they need to put up in order to get new accounts. They can say they have an enforcement department that exists, but if it’s not at all effective then that’s the issue,” Le says.

Stevens calls the networks’ policies related to spyware shortsighted. “When spyware and adware applications started, the networks were struggling,” she says. “Then they started to see revenue and traffic increases, and now they are top performers and have some really good statistics to attract more merchants. It’s like they were boxed into a corner.”

Others say blaming the networks is misguided.

“It’s not the networks’ fault that illegitimate marketers are trying to come up with ways to surreptitiously get to users’ desktops,” says Tim Hickernell, vice president at META Group. “Unlike spam and email, spyware and adware do not correlate to a service that users consider valid. With email, users thought it was a valuable service. Nobody said, ‘let’s do away with email’ to get rid of spam. It’s not the same for spyware. Consumers don’t understand the value at all.”

“As long as [spyware companies] are clearly stating that they will install a program and it’s easy for the user to understand what they are installing and say no, they don’t want it – and as long as users can clearly uninstall the program – then they are legitimate marketers,” he notes.

Still, the networks have not had an easy time policing their affiliates. In September, LinkShare awarded – and then revoked – its $15,000 Titanium Award to the affiliate with the highest quarterly percentage increase because the recipient, TheDesktopShopper.com, was accused of using spyware.

LinkShare took back the award after other affiliates complained on AbestWeb, an advertising/affiliate marketing chat site, that TheDesktopShopper.com had been blacklisted by several watchdog sites. To date, TheDesktopShopper.com has not been kicked out of LinkShare’s network. This was the second time LinkShare had to revoke its Titanium Award because an affiliate allegedly used suspect practices.

And while some companies with reportedly offending practices often remain in their respective networks, many note that trust between the networks and the affiliates may be eroding.

“The networks themselves are in a great position,” Stein says. “They are getting all the traffic, getting all the commissions, but they are degenerating the trust of the network. And when that trust goes away, the affiliates will abandon the network.”

Many, including de Poel, make no bones that the bottom line for all of this is money.

“The networks aren’t doing anything about it, because they are making money off of those guys. It all boils down to the dollar, the dollar, and the dollar,” de Poel says.

de Poel suggests that action is more likely to be taken when parasites start impacting the merchant’s organic traffic and not just the affiliates. “The merchants need to make the networks do something or they should leave. This left-handed administration of the programs just isn’t working, and the networks are not trusted third parties anymore.”

For Le, the turning point will be when merchants get real proof they are paying out unnecessary commissions. “That’s when this will come to a head,” he says.

Spyware-Free Networks

Brian Littleton, president of ShareASale, says spyware is a large overall problem. That’s why his affiliate network provider will not allow any affiliates to sell downloadable software applications.

“It’s a customer nuisance, and I didn’t want our company and my brand and me doing business like that,” he says. “As we saw the problems it was causing affiliates and merchants on other networks, it reinforced the view that we wanted to stay away from it.”

He says it’s not a difficult stance to take. Instead, it’s about working only with those companies that make you feel comfortable. “Financially speaking, you’re better off accepting those affiliates, but that will not change our stance.”

Littleton feels for the other larger networks in their struggles to determine who is complying with their regulations and code of conduct. “It’s not an easy task with so many people trying new tricks, but I have confidence in the other networks that they want to enforce it. It’s very difficult to do so.”

KowaBunga Technologies, a provider of private affiliate tracking and management solutions, has also taken a stance on spyware. Although the company was not able to mandate that its clients become free of adware and spyware, it sent a message to its more than 1,800 merchants alerting them to the findings of an August 2003 study by Harvard graduate student and antispyware activist Ben Edelman (see page 50). The study focused on the practices used by 180solutions (also known as MetricsDirect) and Claria.

“This affiliate/company [180solutions] has recently been exposed as engaging in possibly fraudulent activity ” ,” the KowaBunga memo stated. “In summary, this company encourages users to install software on their computers, often in exchange for MP3 downloads or other incentives. This software, once installed, will track the user’s browser activity and, most importantly, will attempt to take credit for any hit to your Web site, regardless of how the visitor finds your site. In this scenario you are rewarding this affiliate for a commission even if the visitor actually found your site through another affiliate, or even if they simply typed your domain into their browser. We believe that these practices not only cheat your other affiliates, they cheat you directly.”

“We received hundreds of responses from our clients and saw that the majority of them removed this ‘affiliate’ from their programs” after KowaBunga sent out the message, says Rachel Honoway, vice president of sales and marketing.

KowaBunga has placed 180solutions and others like them in its Fraud Watch center, an area within its software that allows merchants to alert one another of possible fraudulent activities and the appearance of spyware and adware tactics.

The Upside

However, some think this method of advertising has its strengths and is a very viable tool.

VentureDirect’s Storm says that targeted marketing is a great vehicle as long as the user’s experience is not disrupted. From a consumer’s perspective, they are more likely to get more targeted ads that are helpful if the technology is used properly.

“We’ve got to make sure that we’re forward thinking and tomorrow will come and we will be still be in business. If spyware is wiped out, the end result is that we will be taking away an advertising route,” PrimeQ’s McClain says.

It’s a very effective advertising vehicle, according to Scott Delea, senior vice president and general manager of e-marketing services at Digital Grit. “We are aware of the issue from an industry perspective, and we are trying to be respectful. You don’t want to cross the line; it waters down the overall advertising vehicle and will eventually lead to its demise.”

He notes that affiliates have to be conscious of the brand they are involved with and the product they are selling. Otherwise, targeted advertising is “teetering on the brink of a large abyss where this is no longer a viable marketing channel,” he says.

Even Barnes, who represents anti-spyware vendors, claims that there needs to be consumer respect for distribution methods. “The reason there is not a monetary cost is because the ads are paying for that. My big concern is that all advertising on the Internet is suddenly deemed inherently bad. We need to be more thoughtful than that and focus on types of applications – but not all software that serves ads is bad,” says Barnes.

Ethical Or Technical Issue?

Most claim that the issue is both ethical and technical.

Robert Deignan, business development director at Stopzilla, an anti-spyware software provider, calls the programs that perform browser hijacking and take over a user’s desktop extremely technically savvy. Stopzilla is putting out updates on a daily basis to make sure users have the most current software to render the spyware applications inactive.

Deignan also says “big bucks are at stake” for these spyware vendors. Some of these peer-to-peer programs can easily reach more than 300 million downloads. That means the market for anti-spyware and adware has ballooned over the last two years as well.

AffiliateFairPlay.com’s Stevens says the boom in adware blockers is a no-win situation for affiliates. The affiliates can promote the removal applications to their users to get their computers clean, but then it removes the affiliate’s tracking cookies.

“Programs are getting more clever. Every day they are finding more sophisticated ways to get around protections and to exploit holes,” says Ron Davies, president of joepro.com, which develops affiliate marketing system and trains affiliate marketers and retailers.

“They are using the technology to their advantage. The ideas are usually good, and then they get perverted. Remember, pop-ups used to be the darlings of marketing; now they are the scourge of the industry and people can’t get enough of pop-up blockers.”

Davies is particularly concerned about drive-by downloads, where users don’t even know an application was downloaded on their machine. This can take place in a single step or multiple steps. He likens a three-step drive-by download to a gun.

Some seemingly harmless JavaScript code is downloaded to a user’s system (the rifle). The next day additional code is downloaded, the equivalent of a bullet. So far, those two components are not harmful. But on the third day, the user downloads code that is the trigger. Now all three components click together and become harmful.

Still, Davies believes the issue is more ethical than technical. “A good marketing company has to make the decision of how far are we as a company willing to go to make money,” he says.Clay Lingo, vice president of marketing at Illuminations states emphatically, “I just think it’s poaching. Some say it’s a natural synthesis of search. Someone is searching for a product and a pop-up appears providing a more focused return on what the end user is looking for.” Jupiter’s Stein says it’s an ethical issue, where technology is the weapon. He calls it an “arms race with either side using technology to get ahead.” Others fear the future of affiliate marketing hangs in the balance. “I don’t see affiliate marketing doing well if the thievery and the unethical behavior continue to be condoned and rewarded financially,” says de Poel. Meanwhile, Le says he’ll stay calm. Spyware will remain one of his main concerns, and even though it might not be immediately apparent, he’s fuming. “It is beyond belief. It is bad and it is wrong.”

LISA PICARILLE is the editor of Revenue. She has more than 15 years of experience as senior writer and editor at CMP (as executive editor of TechWeb.com), IDG and Ziff-Davis.

Targeting Affiliates

Name: John Hobson
Job: Manager, Online Advertising, Target.com
Date of Hire: September 2002
Previous Job: Manager, Online Advertising, Fingerhut

Target’s program is powered by LinkShare and earns affiliates 5 to 7 percent on purchases based on volume. The program currently has a 10 percent commission offer for October 1 to December 31.

DIANE ANDERSON: How did you come into the world of affiliate marketing?

JOHN HOBSON: Fingerhut was an early adopter of affiliate marketing. Commission Junction was started in Minneapolis, and Fingerhut was part of the early days. When I joined Fingerhut the program was in place, so our team expanded the CJ program and then added Dynamic Logic (Performics) to the mix.

DA: What is the best thing about Target’s program?

JH: The Target program continues to evolve and change with our business. These changes allow us to continually update our program to better serve our affiliates.

DA: How many people work on it?

JH: There is one full-time person committed to the program and two supporting team members that dedicate a portion of their time to the program.

DA: Why should affiliates work with you?

JH: The power of the Target brand coupled with strong site promotions and an aggressive commission structure should result in increased revenue for the affiliates. Also, we are listening to what our affiliate partners are suggesting and want to create lasting partnerships. This is evident by the updates we have made over the past year. Keep the suggestions coming!

DA: How many active affiliates do you have?

JH: Can’t disclose.

DA: How often do you update creative?

JH: We have great promotions on our site that update as frequently as weekly. We update our creative to reflect these site promotions. We also have a standard, more general set of creative that is updated every two to three months.

DA: What sorts of promotions do you run?

JH: Target.com has a very robust promotional calendar that includes free shipping and percentage off offers. The affiliate program supplements this with activation campaigns, stretch-goal campaigns and category-specific campaigns for increased commissions.

DA: What sorts of sites should think about affiliating with you?

JH: Being a general retailer with such a selection of products allows us to appeal to a wide variety of affiliates. I think coupon and deal sites do really well with us because of our aggressive pricing. Target.com carries products that appeal to a wide spectrum of customers on affiliate sites. The key is for us to work closely with the affiliate site to get the right messaging and creative in front of their customers.

DA: What do you do to help boost conversion rates?

JH: Supporting our strong site-promotion schedule with appropriate banners and text links for affiliates as well as providing affiliates with information on best sellers in each category help boost conversion rates.

DA: What accomplishment at Target are you most proud of?

JH: Within two months of starting, we launched Target’s first affiliate program in time for Q4.

DA: What trends do you see in the industry for 2005?

JH: Continued growth. I see more and more great affiliates popping up each year with new and unique business models that keep pushing the affiliate space. For as much controversy as some of the business models cause, I appreciate the innovativeness.

DA: What will be the hottest products in 2005 that your affiliates should think of promoting?

JH: We have some fantastic new products in our Home category. The merchants have a great eye for new furnishing items. We are also expanding our Gift category to include some very unique, global items that will be exclusive to Target.com. And as always, our Electronics department will be carrying the latest in cool gadgets.

DA: What advice do you give your affiliates?

JH: The two biggest tips that I can give our affiliates are: Read our weekly news- letters to make sure you are up to date with the latest site promotions, hottest selling items and any changes to our program; and continue to give us feedback. We want to hear from you and hear your suggestions. One of the toughest problems we are currently having is how to best communicate with affiliates. Email newsletters are a great way to share a large amount of information with everyone, but affiliates receive emails from each of their merchants making it difficult to cut through the email clutter. I can’t imagine being an affiliate and reading every single merchant newsletter. In the next year we will be testing a number of new communication tools, but I would enjoy hearing from more affiliates regarding this issue and their suggestions.

DA: What’s getting heavy rotation on your iPod?

JH: Sting and John Mayer are staples. Current heavy rotation includes Franz Ferdinand, The Killers, Spymob and Switchfoot.

DA: Where do you live?

JH: Minneapolis, Minn.

DA: Who do you live with?

JH: I live by myself.

DA: What is your most treasured possession?

JH: I don’t really have a most treasured possession, but if I had to pick I would most likely say a collection of items that were left to me by my grandparents (books, mementos, etc.).

DA: Which person currently living do you most admire?

JH: My sister.

DA: Which person currently living do you most despise?

JH: Really depends on the day. Most days it is that really slow driver in the left lane holding up traffic.

DA: How would you like to die?

JH: Peacefully after a long and fulfilling life.

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

The Journey to Become an Affiliate

Malcolm Lubliner contacted me in early November, just a month into my taking over the duties as editor of Revenue. He was looking to our magazine as a trusted source to give him some advice about getting started in the world of affiliate marketing. I was also in the process of trying to learn everything I could about this new market I would be covering. I responded to Malcolm’s email with a handful of links to sites that had information about affiliates that had been helpful for me as an editor and journalist trying to get up to speed on a new subject area. I also passed along some names of authors and books, some interesting articles I had encountered in my research and my sincere wishes of success.

I didn’t expect Malcolm to continue to correspond with me and update me on his progress, but I’m certainly glad he has. So I thought it might be interesting to keep tabs on Malcolm’s journey to become an affiliate – the problems, the progress, the successes and the lessons he’s learning along the way.

Malcolm Lubliner has been a commercial photographer for more than 30 years. Before that he was a painter. He’s a self-described “visual person” who didn’t find my advice of reading all the information he could find about affiliate marketing – then reading some more – all that helpful.

Malcolm wanted someone to just lay out the basics. He says everything he read about the world of affiliate marketing assumed a certain level of knowledge about the fundamentals that he readily admits he did not possess. “I just wanted someone to hold my hand for five minutes,” he says.

What he wanted was basic information about how to take his Web site and turn it into a sustainable online magazine about urban life and culture. Malcolm has owned the domain name cityvisions.com for more than eight years and was originally using it as an online portfolio to showcase his work focusing on product, industrial, architectural and advertising photography.

Malcolm admits that a magazine covering urban issues is not a novel concept, but he believes that his unique perspective and passion are what could make the site a success. For the last three years he’s been focused on how to take this passion and make it a reality, but he wasn’t sure how to make enough money to support the magazine.

Although he doesn’t have a business plan mapped out, Malcolm has spent a lot of time thinking about this transition. One of his initial steps was to trademark the cityvisions.com domain name. Meanwhile, he continued to be plagued by the thought that in order to support the magazine he needed to generate money.

Then about a year ago he saw something on TV. It was an advertisement for a book promoting affiliate marketing as a tool to make money. The book was The Super Affiliate Handbook: How I Made $436,797 Last Year Selling Other People’s Stuff Online by Rosalind Gardner.

“I had never heard about the concept before. I knew about pop-up ads on Web sites, but didn’t know much more than that,” he says. “I had no idea this was a viable way to make money.”

But, the book cost $75, and Malcolm thought that was a bit too pricey considering he was still a little skeptical about the concept. That’s when he made the decision to conduct his own research. He spent hours scouring the Internet, doing Google searches, and what he found is that “nobody tells you the nuts and bolts.”

His limited experience in marketing and advertising made it hard to figure out his first step. “I just don’t know where to put my foot down first,” he says. “No one puts all the steps down in real simple terms that you need to follow steps A through Z to get started.”

It was overwhelming for him to try to decipher the language and the jargon associated with affiliate marketing that he found on the Internet. “The world of affiliate marketing is all so mysterious,” Malcolm says. “It’s like learning a new language. At first glance just not knowing all the terminology made me very uncomfortable.”

Malcolm is perplexed by the lack of affordable consultants that can be hired to help small publishers sort through the process of starting an affiliate site.

“How come I can hire a computer guy to come over to my house and help fix my computer, but I can’t hire a consultant that is affordable to come in and help with this?” he asks. “Most of the consultants are guys looking for big bucks and work with big companies.”

In mid-November, Malcolm called Commission Junction to inquire about the networks’ affiliate programs. “I remembered their name from my research, and I think that book I never bought was authored by a woman who works there,” he says.

The phone call gave Malcolm some fundamental information about Commission Junction’s services and the basics of signing up to be an affiliate. He also feels that talking to a live person rather than just reading about these concepts clarified a lot of issues. He claims that the call made “it all seem so easy.”

He’s going to sign up as an affiliate within a month, but in the meantime he says there are three things he’s concentrating on – design, driving traffic and acquiring content. And to complicate matters, Malcolm would also like to figure out how to give a portion of any profits he might make to charity.

To date, he’s had some problems finding a Web site design that satisfies him visually and is likely to entice people to navigate the site and ultimately click on the affiliate links. He is also concerned about how to best promote the site. He knows that he needs to start driving traffic before he can expect to generate any revenue. To do that, he plans to advertise in mediums other than the Web. He also wants to try to connect with like-minded companies or individuals with “an altruistic interest” that may help drive traffic to his site. An email newsletter is also in the works to help promote the site to previous visitors, former clients and others who might be interested in his concept.

He is continuing to acquire content for the online pictorial publication. He’s trying to keep his costs down by getting people to submit content. He’s focused on trying to get travelers to submit photos and journals, as well as those that live in cities big and small to contribute their pictures and stories.

Malcolm has thought about creating links to travel sites or book publishers that have travel books. He’s also contemplating putting links for subscriptions to travel magazines on his site.

Ultimately, he believes letting his site evolve organically, rather than following a rigid business plan, will be more conducive to an artistic venture.

Malcolm spent the entire month of November gathering even more information about affiliate marketing and preparing to launch his site. By the beginning of 2005, he expects to be a full-fledged affiliate. In forthcoming issues of Revenue, we’ll keep you posted on Malcolm’s progress.

Lisa Picarille is the editor of Revenue.

The Secret to Being Super

They’re called superaffiliates, but there are no secret powers behind their amazing sales. They follow the same path every other affiliate does: They publish a Web site, sign up for affiliate programs, download the affiliate codes and troll on the search engines.

But they work a little smarter, make a few more calls, send a few more emails and do a lot more testing. And what they do better than anyone else is integrate all of the standard affiliate marketing pieces – email lists, merchant relationships and showcased products – to get more people to their site and more people to buy. Their efforts net results only dreamed of by other affiliates: transactions by the thousands, and monthly commissions often measured in six figures.

To illustrate the point, Revenue decided to introduce our readers to Bob DiCerbo, a Chicago resident who never dreamed he would be working just 20 hours a week to make a very comfortable living. He started ClearSave.com with his wife in October 2002, affiliating with merchants such as Overstock.com, Nordstrom.com, QVC.com, Land’s End, FoodSmart.com and Pet Food Direct. Now he does little more than chat up affiliate managers, tweak keywords and cash checks.

ClearSave is a “check here first” site, where visitors come just to see if any of the merchants they regularly patronize are offering discounts, sales, coupons or bargains. The 2-year-old site gets a whopping 300,000 hits per day. Merchants drool over that kind of traffic. And DiCerbo and his wife pull in enough commissions to pay themselves salaries and hire a part-time assistant. Eventually, they expect their “super” efforts to send their kids to college.

What exactly is a superaffiliate? Well, it’s not one particular thing. It could be one person or 100. It could be an individual or it could be a company. It could be a site offering discounts, rebates, rewards, funding for charities, dating services, apparel, travel arrangements, downloadable music or any of the Internet’s hot products. One thing they all have in common is that they’re treated well – even heavily recruited.

Being a big dog has its benefits. “Merchants reach out and help us put together creatives just for us because we’re doing so well,” said DiCerbo. Many affiliates also get higher commissions, special offers and other assistance from merchant partners.

Here are some ideas from DiCerbo and others on how you can get similar treatment.

Find the best programs.

DiCerbo believes one reason he does better is simply by keeping the lines of communication open with the right merchants. “Only a handful of merchants – Overstock, Avon, Sierra Trading Post, Blair and Eddie Bauer – will actually reach out and call and talk to you to see what it is you actually need,” he said.

Glenn Sobel, founder of AffiliateAdvisor.com and webmaster for DatingTek.com, said some of the best programs offer lifetime commissions. “The key is to look for programs that pay residual income – I’m just kicking back right now and enjoying my Internet income,” he said from his Vegas retirement home. Dating sites are a prime example. When an affiliate refers someone, many programs give a commission for the new member and each time that person renews the membership.

To help choose great merchants, would-be superaffiliates should read contracts carefully before signing up. Contracts should spell out exactly what earns a commission, when commissions are paid, how long affiliate referrals are tracked and what happens if buyers come from more than one affiliate site. If the contract doesn’t spell it out, then add it in writing. “There are a lot of issues like that that really matter,” said Sobel. “They greatly impact your income.”

Provide only those products your visitors want.

This may seem elementary, but many new affiliates spend months discovering it. A site posting sports scores, for instance, should have links to sports magazines and sports betting, not printer ink.

“We wouldn’t promote Overstock as hard as we do if our audience didn’t think it … met their needs for discounted products,” said DiCerbo. “The proof is in the pudding.” That pudding consists of $40,000 to $50,000 in monthly sales, resulting in commissions of $2,800 to $3,500 for ClearSave.

Loyalty site FreeRide.com, which gets 30,000 hits per day and affiliates with hundreds of merchants, asks visitors for demographic information when they register. “But a lot of the way we figure out our demographic is by watching their activity – What are they buying?” said FreeRide.com director Corey Newhouse. FreeRide then beefs up selection for that audience.

“Once you’ve found the ideal types of products, choose one or a handful of really good quality products and promote those well,” said Internet Marketing Center founder Corey Rudl, who built his one-man affiliate operation into a $6.6 million-per-year company. Top affiliates in his program use this strategy to earn $4,000 to $8,000-plus each month.

Email your site visitors.

Superaffiliates always collect email addresses when visitors come to their sites. They have visitors sign up for free offers, newsletters or access to more information already on the site. More than 200,000 of ClearSave’s visitors have filled in their email addresses when prompted to “sign up for exclusive deals, bargains and coupons.” DiCerbo blasts them carefully honed emails once or twice a month. Jermaine Griggs, the superaffiliate featured in our story on religion sites (see page 68), credits his email list for the success of his piano lesson sites. Visitors enter their first name and email address anytime they want to pick a free lesson, see a full music score or add a comment to the lesson forum. The options are free anyway, so Griggs turns them into selections that require visitor input: “I could automatically direct them to all 60 lessons, but ‘Choose a free lesson’ is better than saying ’60 free lessons,'” Griggs said. “This way they enter their information. We have a 60 percent conversion rate with that list, and we’re building it by 6,000 people each month.”

Finally, if you really want to win big, produce a newsletter and promote the heck out of it. Have site visitors subscribe through an opt-in section of the site’s home page, and load the newsletter with advice, news or updates on your industry. Affiliates can work great deals with merchants just by the breadth of their newsletter subscription base.

Hire help when needed.

DiCerbo has part-time help finding new coupons and codes to post on the site. He also has an IT person on retainer. Superaffiliates must either be webmasters or have one on hand. These days, even knowing HTML may not be enough. “We found that XML is much more search engine friendly,” said Rick Schneider, VP of business development for World Choice Travel, an all-affiliate travel merchant. “XML lets you more deeply integrate an affiliate product with the merchant’s brand.”

There are even small companies that are really superaffiliates. They run virtual online stores with lots of customer support, information, great design and other labor-intensive elements. That’s what FreeRide.com – which uses “tokens” redeemed for merchant gift cards to reward visitors for purchases, surveys or Web surfing – does. It’s a four-employee loyalty site run by New York-based Endai Worldwide, an online marketing and technology company with 20 employees of its own. From his loft office overlooking downtown Manhattan’s South Street Seaport, Newhouse knows this isn’t an ordinary affiliate company. But it could be a glimpse at what in just a few years might be the norm. Major affiliates are already being acquired by their merchants – Hotels.com owns hundreds of affiliate sites.

Help searchers find your site.

Keywords, search engine placement, refer-a-friend programs, viral marketing – these are a few of the steps to bringing new viewers to your site. Pay-per-click search engines let affiliates quickly test search words. Through Google AdWords, DiCerbo creates his own ads, chooses keywords to match the ad to his target Google audience and pays only when someone clicks on the ad. He said his site has the most success with high commission products like perfume and footwear. He tries words often provided by his merchants and then tinkers with different landing pages – those pages that actually advertise the product, rather than directing people to the home page – to find out which word and page combinations would help to make the most sales.

Griggs gets even more distance from his hosting service, which gives him unlimited email accounts with his domain name. “If you have an attractive domain name, you can easily offer free theirname@your site.com email addresses to site visitors,” Griggs said. “I’m getting at least 1,000 [viral] impressions a day with that strategy, because my site names appear at the bottom of every email they send out.” Griggs also suggests that affiliates search out the forums or online chat rooms where their ideal customers congregate.

Meanwhile, FreeRide.com is trying its hand at co-registration campaigns, where visitors to other sites can check a box and be added to FreeRide’s list. “So far so good,” Newhouse said.

Once visitors get to your site, keep them there through easy navigation, great design and an established sense of community. “The bottom line is, you’re selling ideas and you’re selling community,” said Web site designer Dean Peters. One way to establish community is through personal endorsements and testimonials. Place them well and make them convincing pieces of friendly advice rather than an obvious cash grab. Testimonials “could increase the response you receive by 400 percent or more,” said Rudl, who has trained 75,000 affiliates in his strategies.

Roll up your sleeves.

This is a day-and-night business. Click-through problems aren’t reserved for 9 to 5; if not cared for immediately, these problems can harm sales. Affiliates must be able to respond as soon as problems occur. That doesn’t mean you actually have to work 24 hours a day. Many successful affiliates grow with just 40 hours per week of combined staff time. But they’re regularly checking their stats, regularly checking their site operations, regularly testing new promotional methods and regularly working with merchants to improve their affiliate offerings. “It’s definitely roll up your sleeves and a lot of grunt work to see what works and what doesn’t,” DiCerbo said.

Test response rates for different affiliate banner ads and text links. Put them in different spots on your site. Try different articles and newsletters. Use different autoresponders. Test promotions on the small scale before taking them to your mass list. “While this might seem like a lot of work, it will ultimately increase their traffic and their affiliate commissions,” said Rudl.

Newhouse at FreeRide.com seconds that: “Giving people a variety of ways to take an action helps a lot.”

Be ready to respond to changes.

“I never look too far out into the future,” DiCerbo said. “The e-commerce landscape changes so quickly that I’m not going to say that the way we’re doing business now is the same way we’ll be doing it next year. Paid search is a new thing that has just taken off. The spam area is closing down. It’s hard to say what’s going to happen.”

In the end, the superaffiliate must be committed to working regularly on its site, must talk frequently with its merchants, must constantly be in touch with its customers and must be able to wait for its efforts to pan out. The buyers often don’t come running. But with the right products and the right customer capture mechanisms in place, at least they’ll be following the right tracks.

JENNIFER MEACHAM has worked for Revenue, The Seattle Times, The Columbian, Vancouver Business Journal and Emerging Business magazine.

Indie Labels

As the affiliate manager for Calendars.com, Hilary Poseski hawks more than 6,000 different calendars. They feature dogs, fashion models, families, folk art, God, teens, transportation, lesbians, history, cooking, ethnic groups, patriots, sports, cars, photos, travel, nature, music and wild animal tamers. Among many other things.

“Whatever your hobby is, we have a calendar for it. These all translate into niches to find affiliates to work with us,” said Poseski. “Since we focus on affinities, the customers our representatives generate for us are highly responsive to the additional marketing that we do. Affiliates who come in are highly qualified, with great conversion rates because they come from Web sites that have a strong affinity for our product.”

Her success is not only due to having great affiliates, it has to do with how she finds them. Unlike the vast majority of companies, Calendars .com runs an independent affiliate program with the help of off-the-shelf software, shunning the popular option of paying a network to run its program.

From retail giant Amazon.com to smaller players such as ABCLeads.com and ChoiceShirts.com, there are hundreds if not thousands of companies that choose to take on the task of running their own programs. And they have no problem finding affiliates. Sixteen percent of affiliates prefer to work with indies instead of networks, according to AffStat, a statistical study published by Shawn Collins Consulting. Another 41 percent said they have no preference.

Of course, there are drawbacks. It’s more work for both the affiliate manager, who has to make payments, recruit affiliates, fix technical glitches and handle myriad other tasks. And it can be harder for affiliates to work with a lot of different managers instead of collecting a single check through a network representing multiple programs.

Networks are quick to point out the positive things about working with them. “As a trusted party, we offer value much greater than the cost of the network,” said Elizabeth Chowalsky, vice president for marketing and product development at Commission Junction. “Certainly the software that allows you to do it in-house handles the technical issues, like tracking. But when you run a network there’s a relationship between the advertisers and the publishers, and we make sure they all abide by the rules of the advertisers.”

And then there is the sheer bulk of the networks. CJ, for example, claims 70,000 “active” publishers, which the company defines as affiliates who’ve earned commissions within the last six months. LinkShare claims 10 million “partnerships,” but Ð by policy Ð doesn’t purge inactive affiliates from its ranks (see story, p. 38).

Nine of the 10 leading online retailers work with CJ, Link Share or Performics, including such giants as Sears, JCPenney, QVC and Gateway. For affiliates who depend on big brand names to lure customers, that’s a big incentive to work with networks. The notable exception is Amazon.com, a pioneer of the affiliate marketing industry that set up its own “associates” program in 1996.

“A company deciding whether to out- source this or do it in-house has to decide whether having expertise in online marketing is important,” said Sara Spillman, senior manager for Amazon.com Associates. “For us, understanding consumer buying behavior is most important, along with encouraging Web sites to merchandise our products. That’s our key to success.”

Amazon has a whopping 900,000 affiliates. Spillman said the percentage of active associates is “healthier than average,” but wouldn’t say how much revenue the program generates. “We are very intent on optimizing the experience and creating a compelling program. We continue to invest in this program, which should tell you that it’s very successful,” she says.

Part of Amazon’s success stems from the number of authors who promote their own books, then steer customers to the Amazon site. “I get more money on Amazon clickthroughs buying my book than I get in royalties from the publisher on the same sale,” said Michael Dean, who writes textbooks and novels. His titles include $30 Film School and $30 Writing School. “I make $1.10 per book from Amazon.com, and $1 from my publisher,” said Dean.

Some affiliates see a bit more risk working with indies, depending on the nature of the affiliate and the time they have to work on their programs. Take PhillyBurbs .com, a local news site that supports itself in part through both independent and network revenue sharing programs. “Affiliation is a small portion of our revenues, so investing too much time into one of them isn’t good,” said Executive Editor Karl Smith. “When you’re dealing with networks, the real upside is consolidated payments. But the downside is that some of their affiliates use predatory tactics that can steal business away from us. If the company is an indie, it’s much easier to know for sure what their practices are.”

CJ’s Chowalsky chafed at the notion that networks are havens for predators. Her company monitors all of the links from affiliates and, if they catch anyone redirecting traffic from other affiliates, the fraudster gets the boot, she said.

The single biggest consideration in deciding whether to work with networks or remain independent is, of course, the cost-benefit equation. Networks charge fees, often large fees. The fees may be thousands of dollars a month, since the cost structures are as high as 30 percent of total payouts. So the question becomes: Are the services rendered worth it?

ABCLeads.com didn’t think so. The company generates sales leads for licensed long-term care insurance agencies. It started out paying network fees that kept the company from paying its affiliates more than $7 per lead referred. After it brought the program in-house, ABCLeads was able to raise payouts to $8 and to keep more money for itself.

ABCLeads Marketing Manager Karen Hudgins said network rules also prohibited it from paying recruitment bonuses. Now it pays affiliates 50 cents for each lead generated by an affiliate they’ve referred to the program.

Control is another big reason that indies go it alone. At DomainDirect.com, Affiliate Program Manager Bessy Nikolaou noted that 20 percent of her 2,400 affiliates produce 90 percent of her sales, so she likes to shower affection on them.

“The small mom-and-pop shops that are listed with the mega-networks have never proven profitable with us,” she says. “I want to have control over who can participate in our partner program. My main focus is on identifying potential partners whose product offerings complement our domain and hosting services.”

Likewise, says Pat Matthews, CEO and affiliate manager for WebMail/Excedent. “We almost went with a network, but I didn’t like their managed model,” he says. The network “works with a lot of regular retailers as affiliates. We prefer to recruit webmasters and consultants for our enterprise email solutions. You have to find the right affiliates to promote your products and services.”

Poseski said Calendars.com’s customer acquisition costs are much lower as an indie than they were when the company was in a network four years ago. The cost of software is quickly offset by the lowered costs of being independent, she says. Another tradeoff is the time it takes to run an independent program.

“The biggest challenge is the time and effort that it takes. But this is also what makes the program successful. I stay really involved. It’s grass-roots marketing,” says Poseski. It helps that Calendars.com is part of a larger company, CalendarClub, which has its own accounts payable and customer service departments.

Kerri Kaufman, the affiliate manager at ChoiceShirts.com, found some affiliates aren’t very “sophisticated” when it comes to promotional and technical issues Ð a potential time drain. “But once we get in touch with them and help them get going, it’s easier to get them to stick around,” she says. “A lot of prospective affiliates apply to a bunch of programs at once, so once you approve them, you want to get them to come to you rather than to another merchant.”

Kaufman says the time factor also helps to make sure her affiliates are productive. “We deactivate a lot of affiliates who don’t become active because we can’t spend the time trying to work with a small affiliate who won’t generate enough revenue,” she said. That limits the program size to several hundred affiliates, but Kaufman boasts that two-thirds of them are active.

Being independent can also save time. At ABCLeads, Hudgins said they were seeking leads for long-term care insurance, but many network affiliates would ignore the very important adjectives before the word insurance. “One affiliate drove 12,000 leads to our site seeking health insurance, and we had to get refunds [from the network] on all of those. That kind of thing happened more than once,” she says.

Now, if affiliates send any mismatched applicants, it’s much easier to eliminate them from consideration, in part because Hudgins is in direct communication with the affiliates Ð she requires affiliates to list their contact information on their sites. “This fosters stronger relationships and makes it easier for us to get in touch with them,” she says.

Under the network system, the only way she could contact affiliates was through the network’s messaging system.

Rapid communications often translates into quick profits. For example, when illusionist Roy Horn was mauled by a tiger during his Las Vegas show, Siegfried and Roy souvenirs started selling, well, like wild. Calendars.com’s Poseski quickly got in touch with the operators of fan sites, alerting them to push for sales of calendars based on the famed duo.

“We understand the multitude of niches that we market to, and no network can do that for us,” she says. “We retain the ability to respond really quickly when a new affinity catches on. Trends come out of nowhere, and you have to capitalize on them.”

Running an indie site just might be one of those trends.

JACKIE COHEN has been covering affiliate marketing since 1998. She previously edited the Net Returns section at The Industry Standard.

The Way To Ebay

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

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

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

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

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

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

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

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

Million-Dollar Club

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

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

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

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

Co-Op Ads

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

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

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

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

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

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

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

Mythical Disconnect

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

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

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

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

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

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

Adult Content

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

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

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

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

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

Share and Share A Link

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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