Ask any guru in the affiliate universe what ValueClick’s acquisition of Commission Junction means, and you’ll get more answers (and more pitches) than you can imagine.
Is it consolidation? “Yes and maybe.” Does it matter? “Perhaps, but let me tell you why it won’t matter to my business.” Is it changing the nature of the affiliate industry? “No, but it reflects the changes.”
It’s all true. And here’s why. This merger is part of an evolution in affiliate programs, from the Fortune 1000-level represented by this deal to the small-business end. The reason behind the merger is simple. There are not only too many cooks, there are too many kitchens. The merger put two cooks – CJ and ValueClick’s BeFree – in the same kitchen under the CJ brand.
When More Was Good
In 1998, the first affiliate marketing conference, Beyond the Banner, featured teenage shadow-boxing between well-financed BeFree, LinkShare and upstart CJ. It was an industry founded in families and friends, from the brothers Sam and Tom Gerace at BeFree, to the LinkShare brother-sister team of Steve and Heidi Messer, to the sudden appearance of Lex Sisney, Per Pettersen and Todd Crawford bonding around an idea called Commission Junction.
In the those days, it was all about more. More affiliates. More free traffic. More sales at little cost. The promise was a good pitch, but the results didn’t match the promise for many Fortune 1000s, although many small businesses find it a cost-effective channel even today.
Those early days and definitions are still what many people equate with affiliate programs. But now instead of families, we see ValueClick acquiring companies. The opportunity for traditional affiliate companies to thrive is still in place. But it’s less of a cottage industry and more in the mainstream of performance marketing.
Now Less Is More
The affiliate industry is splitting in two. Fortune 1000 companies want to work with fewer vendors and build more integrated services, calling it performance marketing. For the rest of us, it’s about small business.
“As you look at the makeup of the client bases of CJ and BeFree, there are some distinct differences,” said Jeff Pullen, general manager of the new CJ unit. “BeFree focused on high-end retail merchants and has continued to be very strong in that market area. CJ has a fair number of clients, very strong in financial services, Web services, ISP market, and very strong in retails as well. If you look at the cross-section of our client base today, it is very comprehensive, which goes to the basic strategy of ValueClick: deliver full service digital marketing solutions.”
Executing that strategy requires an understanding of how affiliate marketing is maturing into performance marketing. “Over time you’ll continue to see services and technology to facilitate that growth and maturation,” Pullen said.
John Ardis, ValueClick’s vice president for corporate strategy, said the lines are blurring between search and affiliate and between media and affiliate marketing. “We tend to think of four main marketing channels: Web, email, search and affiliates,” he said. “These are not distinct channels. Seasoned Fortune 1000s are looking for a solution to simplify their lives, a one-stop place for performance marketing initiatives.”
The First Signs of Change
The affiliate industry is divided between the Fortune 1000 approach and that of small business. The top echelon includes:
- Commission Junction – Value Click’s beefed-up 800-pound-performance marketing gorilla, with five times the revenue of the competition;
- LinkShare’s continuing focus on just affiliate programs; and
- Performics’ agency-performance marketing mix of search engines and agency services, with an emphasis on affiliate programs.
“The CJ/BeFree merger is a long-overdue move toward consolidation driven primarily by two things: elementary, profit-driven economic factors and the need for the affiliate marketing industry to expand beyond its limitations,” said Jeff Molander, president of the marketing firm Molander & Associates. “Simply stated, the market is only so big … featuring a finite number of marketers [and] advertisers, and can support a limited number of service providers.”
Molander believes affiliate marketing was “merely a stepping stone” for Value- Click along the path to becoming a Web-focused marketing and advertising services vendor to large agencies and small retailers. And, like most changes in an industry, the first post-merger steps for ValueClick have been small. Pullen was appointed general manager of the two groups. BFast Express was closed in favor of CJ’s platform for smaller players. Accounting, sales and administrative functions are being brought within ValueClick. Technology integration remains a much more complicated challenge that will take some time, perhaps years, to resolve.
Merchants seem to favor the merger, as long as the technology change is taken slowly, which is ValueClick’s approach. David Morse, affiliate manager for Network Solutions and a long-time client of BeFree, sees it as raising the bar for all vendors. “Being able to combine two of the strongest affiliate tracking programs has obvious synergies that will provide merchants access to a larger population of affiliates and provides affiliates with more diverse product sets to sell,” he said.
When the smoke clears in a few years, there will likely be a single affiliate entity in ValueClick dominating the high end of the affiliate industry, powered by a stable financial backing and a well-rounded set of performance marketing services for clients of all sizes.
“CJ and BeFree can put out a package in the mid-tier and high-end of the market in the short term,” said Steve Messer, CEO of LinkShare. “It’s a good thing for them, but two separate entities is not a long-term viable entity, which is their challenge.” Messer said he doesn’t consider the combined company a threat. “We never really competed against CJ anyway, they are more mid-market than we were,” he said.
The Small Business Market
The opportunity for the small business networks – the cottage affiliate industry, the ones who can still identify with those sub-Fortune 1000s – is immense. The smaller players may gain more clients as the bigger players associate with bigger companies and small businesses choose the contact and familiarity companies like Kowabunga, ShareASale and DirectTrack can offer.
Of course, if those smaller players find success, they could become attractive merger targets for a bigger network seeking to emulate ValueClick’s approach. And so consolidation could happen in this space, too. After all, the smaller affiliate networks can’t be sustained forever by the small business market.
While small retailers may not generate the sales a LinkShare or ValueClick needs, they do generate a steady revenue for these smaller networks, with monthly fees that resemble the sales of a software vendor. Added up, it creates a healthy business for this group.
Even so, mergers of these smaller networks are somewhat less likely. For one thing, they don’t have enough revenue to attract bigger partners. For another, they don’t have enough cash to attract the owner of a smaller one. While the revenue may not be as scaleable as it is for the bigger players, it does provide a solid business that will continue to thrive.
But does the industry really need so many similar companies? Keith Kochberg of iMarketing believes the smaller networks are so dependent on email that they should already be closely examining their potential for the future.
“In time, publishers will have a major impact on which of these networks are worth keeping,” he said. “The networks that remain should carve out niches and focus on servicing their advertisers and publishers. I bet they could have a nice profitable run that way, but should not think of going public.”
DirectTrack CEO Jason Wolfe also sees potential for the “personal, smaller scale” players. “I don’t see a massive swap meet, or network, where one party controls it in the offline world for resellers. Why would it work in the online world? It won’t long term,” he said.
Wolfe believes there is potential for what he called a “small-scale with a vertical approach,” something that is the core strength of affiliate markets. Yet the verticals are not so much in specific categories, as in sizes of business. The needs of Fortune 1000s are very different, and more complex, than the needs of most small businesses.
Merger, schmerger. So what does it all mean to the affiliates? Will there be a major effect?
“For the majority of affiliates, this will be the end,” predicted Kowabunga CEO Todd Farmer. “They’ll realize that when they join a network and start promoting merchants, they are actually ‘trying out.’ They can stay where they are on the JV team, and can only move up to the varsity team when they’ve proven that they can play the game.”
However, most of the industry feels the impact on affiliates will be minimal. For the most part, the biggest impact will be that they’ll have to change the links on their sites. Affiliates are an adaptable bunch, but there will be a continuing separation between the needs of super affiliates – those players like eBates that generate high-volume sales – and the small affiliates.
To be sure, affiliates for the Fortune 1000 will be subject to more rules and more scrutiny, but this hardly means the end of small affiliates or networks. In fact Farmer’s company, Kowabunga, is often mentioned as a possible acquisition target precisely because of its cozy relationship with the smaller companies. If a high-end company acquired it and added a strong technology solution, the combined company would be able to serve several levels of affiliate marketing. But is that enough? And do the bigger players really need the small business end of the market, which thrives more on monthly fees than overall sales?
It seems the affiliate industry has separated into two separate worlds – that of big business and small business. Both are strong markets, but it is rare for a company to play both ends of the game, which is the challenge for ValueClick.
Is LinkShare smarter just focusing on affiliate programs, while BeFree/CJ and Performics become agencies with an affiliate emphasis? Only time will tell.
After the Merger
Are the old ways of affiliate marketing gone? Yes and no. For the Fortune 1000, the appeal of affiliate programs has always been too small. But with this merger, there is now an entity with the revenue, financial stability, public exposure, technical savvy and integrated opportunities to truly be called performance marketing.
Yet that very growth may intimidate the smaller market which will flock to the more friendly, cost-effective solutions. The roots of the affiliate industry are in that group. While they may not go public, and there will be fewer of them soon, the smaller players who survive will find it a bright future.
Like the early pioneers of affiliate programs, these smaller companies are more like families than agency monoliths. Being small can be as good as being large, depending on your goals. For ValueClick, LinkShare and Performics, the goals are loftier.
But for Kowabunga, ShareASale and DirectTrack (plus the absolute multitude of other smaller companies in the battle), the goal is just revenue and generating a good business. While there are other players in this industry, there will be fewer in the small business end and the high end.
This merger is the first sign of a long overdue consolidation, one that can only lead to a more effective affiliate industry powered by tradition and evolving to meet the demands of the biggest companies, and the smallest.
DECLAN DUNN was one of the earliest Internet marketers and is the author of two e-books, Winning the Affiliate Game, and The Complete Insider’s Guide to Associate & Affiliate Programs. He is CEO of DemandLab.com, a training program focused on Internet marketing.