Merger/Acquisition – UtilitesDB

Google Affiliate Network: Big-Time Backing

The performance marketing landscape changed dramatically last year when Performics, the third largest network, was sold along with its parent company DoubleClick to search giant Google. After more than a decade in the online marketing space, Performics became the Google Affiliate Network – gaining all the cachet of an association with Google, along with concerns from the privacy advocates about Google having too much information on advertisers and publishers. Chris Henger, group product manager for Google Affiliate Network, addresses those issues and talks about where GAN is headed.

Lisa Picarille: Let’s talk about the changes that have occurred since Performics was acquired by Google.

Chris Henger: We’ve moved to the Google Chicago office – three blocks from our old office. Speed and being fast is a good thing at Google. Phase One was the integration. That is done. And it was done well.

LP: So now what?

CH: I think Google brings a tremendous amount of vision, infrastructure and philosophy in their approach to market and business problems. We can apply much of Google’s core business to our business. Google is about making it simple, easy and fast and doing no evil. We have been thinking about how we can bring that to our channel. We really want to embrace that. We need to be relevant to create a great experience for our publishers, advertisers and end users – the whole ecosystem.In CPA and affiliate marketing, we are always thinking about how to convert better and what can we do that will make more money for us, advertisers and publishers. In affiliate marketing,we are continuing the integration to leverage Google’s technology infrastructure. It’s in our best interest and that of our customers (advertisers and publishers) to embed our systems into core Google software. We have access to great software. We were told by Google to engineer for the long term and not for the short term. Be smart about why you integrate into the system. Make sure you are enhancing the core platform. For example, we can use the payment and billing system of Google’s on the back end. This can benefit publishers by offering payments with more speed and transparency. We can send one, common check to AdSense and network publishers. It’s also important because we can now pay in 47 different currencies across many countries.Operationally, it’s important to understand the synergies with our publishers and advertiser and AdSense. There is overlap. There’s an opportunity there to make publishers happy. We can also centralize reporting and use Google Analytics. It’s our long-term vision to offer a centralized dashboard to their affiliate data, mobile, etc., in a single dashboard. We are leveraging Google’s focus on technology and innovation.

LP: What else is on your radar long-term?

CH: We want to make the platform easy and fast, integrate with Google and be more open for advertisers and publishers to communicate with each other. Open communication and the concept of transparency only work if the network is fully open and shares publisher information with advertisers. We think there is value from us, but that we shouldn’t stand in the way. Google has Blogger, Gtalk, Google Group, GMail, and many other communication tools.

LP: It’s great to leverage Google, but is there a downside to that?

CH: People are worried about Google having too much information. I understand the potential perception of conflict but we haven’t had any customer feedback along those lines. They don’t see it as a problem. From a long-term perspective, why would Google do things that are not in the best interest of the end user? It’s funny because the U.S. is known as a capitalistic country with an entrepreneurial spirit – the whole rags-to-riches thing – but America also loves to see the Big Guy fall. Some think Google is too powerful. It’s an unrealistic fear that is not in practice.

LP: How much emphasis do you place in compliance, and will Google play a role in that effort?

CH: Compliance is always important and remains very important.I don’t feel a seismic shift. We believe in quality in business. We have invested in technologies and methodologies.It’s a huge differentiator for us and will be more so in the future. We are working closely with Google on this. It has many technologies for malware detection, and if you combine that with our focus on quality, we have strength. We also hand-screen all affiliates and reject 50 percent of the publishers who try to sign with us.

LP: Does GAN have specific goals set for 2009?

CH: There was a lot of marketplace momentum for us that was very strong in 2007 and 2008. We were taking shares from competitors – which can singularly be attributed to affiliate marketing. Google is committed to the affiliate business as important. Over the next year, we want to continue to grow GAN through that same single-focused effort – driving publisher and advertiser growth. We want to grow programs and have already proven that we can do that. When advertisers and publishers are happy we are ultimately all winning.

LP: Do you think growth could be challenging in this economic climate?

CH: Current economic conditions are impacting online advertisers and all advertisers in the ecosystem. But advertisers are not naive. Online marketing is a vehicle that can help them and is accessible to them in tough times. We want to let them lean on us.

LP: Does that mean you are reaching out to a more diverse group of potential advertisers?

CH: A while back, we began a program to focus on small-to-medium-sized advertisers in addition to our big brands and catalogers. Google works with every advertiser on the planet – across all verticals. At the same time, affiliate marketing works for online e-commerce objectives – leads or sales, the big verticals, retail, financial services, travel and technology. We want to work with companies in all of those areas. It’s important to us to be diverse. For example, we know that in these times, in affiliate marketing and offer-driven channels, advertisers retreat on offers because of margin pressures. It could be right for one or two companies. But offers that are properly structured when the customer is price sensitive or ticket-size sensitive and consider the price point that consumers are fearful of, can work – and work well. So let’s put offers out there that are attractive. We should be talking.

LP: Google has a large global presence. Are there more expansion plans for GAN?

CH: GAN is ultimately a global business but right now we are going through a prioritization process to decide about further expansion. We are evaluating that.

LP: Where will GAN be in a year?

CH: We think that over the long-term we can bring about a real, fundamental change in the industry to make it easier and faster to do what is right for advertisers, consumers and publishers. Give us time. Google’s not out to hurt the affiliate marketing industry. Let us operate with these good intentions.We are part of a big company and things could take a little longer. But there is excitement, enthusiasm and support. The right things are in place. My team is 110 percent committed to do the right thing by customers and good things are going to happen.

LinkShare: Leveraging Technology and Global Markets

Nearly a year ago, LinkShare president Steve Denton stepped down. The company named co-presidents. Jonathan Levine and Yasuhisa “Yaz” Iida are both veterans of LinkShare’s parent company Rakuten.

Lisa Picarille: LinkShare is the only major network to have co-presidents. Give me the break down of your duties.

Jonathan Levine: I used to be the chief technology officer at LinkShare. My primary focus is still product and technology development and to work with our chief marketing officer. I make sure we track, report and pay out commission – basically the nuts and bolts of the technology operations.

Yasuhisa Iida: I came from LinkShare’s parent company Rakuten. My role with LinkShare is just five months old, but I have been with Rakuten for 10 and a half years. My role is the business side – mainly client facing. I’m looking at sales and client development.

LP: When there are two people making critical decisions, can’t that be problematic since there is no real “the buck stops here” ruling?

JL: The benefit of having co-presidents is that two brains are better than one. Yaz and I came from Rakuten at different times and my background is products and technology with some business development.

YI: I was heading up the sales organization. I can bring the best practices from our parent company.

JL: Also, I think Yaz and I are in sync on most things. We are pretty careful when decisions overlap that we have time to have discussions and come to consensus. We are co-presidents of a bigger company. The buck stops with our board of directors and the CEO of Rakuten. Were there to be a case that was perceived as passing the buck, there would be no tolerance for that at Rakuten.

LP: What’s changed at LinkShare since you two took over?

JL: I think the world has changed since we have become co-presidents. LinkShare is still a great company, but I think the U.S. economy is really difficult right now. Retail sales are challenging and lead generation is challenging. We are still profitable and a great company, but we are going through the same issues as the retail and financial sectors.

YI: Rakuten is a very successful company that constantly brings best practices. LinkShare is not one company. It is part of a very strong Internet company. That gives LinkShare employees comfort and confidence. And because Rakuten is in other markets outside the U.S., we have a broad international perspective. We are in a good position.

LP: Is performance marketing poised to withstand a recession?

JL: In a world where things are not certain, for advertisers they want to know whether or not their dollars will be effective and they want the lowest risk possible. If you are a direct marketer you can measure on a performance basis. It will minimize the risk. We have started to see among the big advertisers that they are using comparison shopping engines. There is now more power for advertisers. They are pushing comparison shopping engines back to CPA from CPC. That trend is pushing the risk back to the publishers. Advertisers are in the driver’s seat right now. We do see an overall trend away from CPC and CPM to CPA – it mirrors what we are seeing in the economy as a whole. Credit cards are down. Loan and debt counseling are way up. The retail side is trending lower as consumers are seeking deals to save money. Cash back is attractive to consumers this year.

LP: Given those factors, what are LinkShare’s plans for this year?

JL: We will continue to do in 2009 what we did in 2008. We are continuing to lay the foundation for a broader variety of distribution tools to make performance marketing practical for a wider array of publishers – like those in social media. We are also working with outside companies as vendors to build WordPress plug-ins. We are enhancing our Web Services that syndicate out to ToldYa and Yahoo. Also, using an API to pull URLs for CPA distribution. There will be more interactive links. We will keep enhancing our Flex Links. It’s not just for video and can be used for other things. My roots are in writing code, so we want to develop an ecosystem around a critical mass of products for other developers as well. To be fair to the other networks, Google is also very technology focused as well. They have an army of people writing widgets and they are opening up APIs to the network. Time and again we see that folks who build a platform and open it up to others create a robust, survivable ecosystem for everyone.

LP: Since you brought up Google…

YI: We feel like we have superior service over all of our competitors. We are focused on what we do best, what we can do for clients and what makes us different. Our differentiator is superior service.

LP: What are some of the biggest challenges for LinkShare and the industry at large?

JL: For us, I think as a smaller company, there is always more stuff you want to do. Your reach often exceeds our grasp. That’s nice and natural. You always want that desire to do more. It’s nice to have a parent company like Rakuten. They are the largest e-commerce company in Japan and extremely profitable. They are making investments in areas where we need to be. That helps since it’s going to be a big storm in retail and financial services this year.

LP: LinkShare has gone from a privately-owned family company started by Steve and Heidi Messer to be part of huge Japanese company. How has that impacted business and the LinkShare corporate culture?

JL: One of Rakuten’s biggest distinguishing factors is that everything is fact-based and transparent. If something is good, they say so. If it’s bad, they say so. Rakuten’s founder, Hiroshi Mikitani, has founded the company on five corporate principles that guide the culture of Rakuten and LinkShare including; be professional at all times; it’s not about personal opinions; what matters is the data. That makes for an egalitarian culture. It’s the kind of place I like to work.

YI: We are good at building a strategy. It’s fact based. We have good management and skills and can execute. It’s not all talk and no action. We think, and then we act. We think, act and then make everything into a system. That makes us stronger.

LP: How will you apply those principles this year?

JL: Products and markets continue to diversify outside the U.S. We have a growing U.K. network and there are other markets to get into. We will continue to work on distribution tools and realizing the power of APIs. We feel that we will make the network more useful for a wider range of publishers.

YI: The U.S. economy is tough. We will continue to help clients grow on the retail side – online and offline. We will stay closely working with existing customers and gain new customers by expanding our global footprint outside the U.S.

LP: Any plans to leverage different technologies to facilitate better communications between advertisers and publishers?

JL: It’s all about relationship building. We have our LinkShare Symposiums – East and West. Like the other networks, we use events to effectively put advertisers and publishers together and let them do deals. We are trying to expand the deal-making parts over time to help drive revenue for all parties. The traditional method of a network development sales organization is reliable for relationships. We believe in that and want to expand it. We have a lot of data that we can mine and make those network development people more successful at getting good publishers. Technology can help us with the matchmaking side of things. There are social media tools. We have a joint venture with LinkShare Japan that has been successful in using social networking to connect publishers and advertisers. We like the idea that we are already seeing Facebook and LinkedIn data in the network.

LP: So what does 2009 hold for LinkShare?

JL: I’m excited about 2009. I think it’ll be a challenge. I think we can build a number of new, compelling products and services. Some that are completely new and then also build on existing technology – like out Easy Links and Merchandiser APIs. I’m also excited about bringing on some smaller advertisers. Historically we have done a good job of serving big advertisers and publishers. But some of our new processes will help us handle everyone from Best Buy to small companies like Peet’s Coffee & Tea. 2009 is going to be a good year.

Shaping Up Your Business

Facebook, of course, is the social networking site college students used to call their own. Since the site opened up to the general public, its profile has definitely been on the rise. Bay Partners’ Facebook program – called AppFactory – will be aimed at giving entrepreneurs microbursts of funds as they need it, from $25,000 to $250,000 in as little as a few days’ turnaround.

That venture capitalists would sustain a program for such a niche field as social network applications on a single website speaks volumes about how strong the tech sector is these days.

In fact, most non-manufacturing businesses are riding pretty high. Venture capitalists are bolstering this image with their wallets, putting $25.5 billion into companies in 2006, according to PricewaterhouseCoopers, Thomson Financial and the National Venture Capital Association. That’s up 35 percent from the previous year. While that is less than the $52-plus billion VCs put into firms at the height of the dot-com boom in 2000, it is still 85 percent higher than the lowest of low points for investment five years ago.

In the online advertising and performance marketing industries, there is similar reason to celebrate. Venture capitalists and equity firms are in a buying mood, too, as they realize that many start-ups are making their funds last longer, having learned their lesson from the outrageous burn rates of the go-go late-1990s – companies such as Pets.com went through $110 million in about two years.

While start-ups are getting less from VCs (about $8 million, on average; down from $11 million in 2000), their ideas are better, fulfill better-defined business goals and, more importantly, stay lean enough to make them very attractive to larger companies looking to buy adjunct technologies and services. ValueClick, for example, owners of Commission Junction, Search123 and others, has acquired several companies this year and “are clearly not done yet,” according to company officials.

This wild west of mergers and acquisitions in the online advertising and performance marketing space means great opportunities for smaller and mid-size companies with three to five years since launch and profits or a road map to profits. Of course, it isn’t that simple. Start-ups can’t just have a cool technology and a funny mascot anymore. Being acquired or becoming a target for acquisition is a lot more difficult than calling up a big ad network and asking if they are interested.

It’s About People

More often than not, VC firms are the ones spearheading these complicated dances and advising smaller companies with an innovative technology or compelling business plan on what to do to make themselves attractive to buyers. Consultants say that one of the most important signs of a strong company, ripe for acquisition, is a talented team. Sara Holoubek, who consults with companies looking to be acquired, says, “Strategically you need the right vision, but tactically you need – especially if you are the sole owner – to know what you need when you sell. Do you want to sit on a beach or do you want to stay and grow the company?”

She says larger companies looking to acquire prefer when a founding executive team wants to stay and grow the firm. A start-up might have a good idea, she says, but the founders might be very young and not really know when to hire people smarter than they are. Early on in the life of a company, a few people do nearly everything and often they have a hard time giving up those roles. But, she says, those workers are more likely to stay on and be passionate about the business.

Mike Kwatinetz, a founding partner at Azure Capital Partners, which invests in early-stage companies, says the hardest decision to make is to determine whether a CEO and founder can “take it all the way.” In a transition from founder CEO to IPO, the easiest road to success is to have the founder stay. But it’s an unknown quantity, he says.

Sam Paisley, chief administrative officer at ValueClick, who has spearheaded about 13 of the company’s recent acquisitions, says, “Our criteria are that it must be complementary to the online performance marketing world. Our aim is to be a full-service company.” Beyond that, ValueClick is definitely interested in the people at the businesses it buys. “Sometimes you think that when you acquire an entrepreneurial company you expect them to stay nine months,” Paisley says. “And some stay three years or more and some others are still here.” He says it is the people who know how to make the assets work.

Profits Get Noticed

Profitability is also very important and crucial for a deal – with ValueClick anyway. “We love companies that are growing even faster than us,” Paisley says.

Profitability helps a company receive a strong valuation, ultimately making for a better purchase price for the seller. “We love unfinished businesses that can finish it with us. We put heavy emphasis on postclose and integration. We have a reputation of being fair with the deals. We pay a fair price that treats them fair and our shareholders fairly.”

ValueClick has vetted more than 700 companies to close on 14 deals. Holoubek, who was iCrossing’s chief strategy officer, says while her advice is solely strategic and not financial, profitability is way up there on her list, too.

Profitability and a great outlook to profits driven by rapid growth could mean a greater valuation and indeed a higher purchase price. Paisley says that they “insist that a potential target have a same profitability growth as us,” if not more. He admits that a target company with a better valuation will ask for a higher purchase price and that they may be willing to pay more, especially if you fill a need the company may have strategically or technologically. He says ValueClick recently paid $95.5 million in cash for Mezi- Media because of its presence in China.

Azure’s Kwatinetz says he advises companies that want to be sold that they should never say they are for sale. “We will try to form strategic partnerships with companies that may be buyers down the road,” he says. “You get yourselves known to buyers without putting yourself on the block.”

Holoubek confirms, “Nobody really wants to know that you are looking to sell.” Kwatinetz says that there is a lot of danger for an entrepreneur who can make a mistake by trying to appease someone who could be a buyer later. “It’s hard enough building a company without going down a rat hole.”

Todd Dunlop, president of British Columbia-based online marketing company Neverblue, brought in KPMG to help advise them when they thought they were ready for acquisition.

“We wanted to see what would be the best market condition,” he says. “When would be the best time to be acquired? We leaned on them a little bit.” Direct marketing services company Vertrue bought Neverblue in February. During the six to eight months it took to close the deal, Dunlop says the hard part was staying focused on “keeping the company going forward while doing this process.”

Get Your House in Order

Going forward means keeping your financials in order. Devon M. Cohen, COO of Customer Acquisition Network and who was CEO of FordDirect, says having a strong financial and management reporting system will make a deal more seamless. “Lots of companies are built on QuickBooks [accounting software],” he says. “And that’s OK, but realize that if you are acquired, you need good financial statements and that they will be reviewed.”

Bruce Kreindel, CFO of Customer Acquisition Network, adds that “young entrepreneurs know their business but don’t know how to measure their own operations.” He says a beautiful core diamond could be muddied by bad bookkeeping.

Conversely, says Holoubek, a company can look great on paper but the principals stumble over explaining the business. This is especially true in marketing companies where services and products can be somewhat intangible. “Marketers are the worst marketers,” she says. They sometimes have “a hard time explaining what their company does.” You want everyone to talk about you but in a positive way, she says.

“Everything is a story,” says Cohen. “What are you selling and what are you buying? What are the strengths and weaknesses of your business? How can we strengthen them together?” Holoubek says to “get your story down tight and understand the process before talking about it. Bankers can’t be fooled.”

Speaking of bankers, a common mistake entrepreneurs make is inflating revenue when they sit down with investors, banks and suitors. Holoubek says that may work well at industry conferences when no one is checking your numbers, but doesn’t when the books are open. She says that a banker may get a call from a company who says it is probably worth $2 million to $5 million, but that banker’s going to say to come back when they are worth $10 million. “If a CEO can’t admit that he doesn’t make $100 million, I walk away,” she says. Kreindel says that, “We may still buy them if they aren’t ready, but the valuation will be different.”

Make Sure It’s a Match

Just as the talent is really with the people behind a company, Cohen says that corporate culture is more important than first thought. “Blending corporate cultures can really be bad for the merger,” he says. His first business sold to Mercedes- Benz but when it came time to integrate the teams, they could not blend them together. ValueClick’s Paisley says, “If you don’t ever have that chemistry, you will never close.” Entrepreneurs who are one of only three people in a company may have a more difficult time not being in charge, not being the one to run the FedEx packages down the street, not being able to pick up the lunch check without approval. Neverblue’s Dunlop says that the similar corporate cultures helped close the deal between them and Vertrue. “We were both very entrepreneurial companies.”

Part of that start-up culture may include a determination to grow the company without any outside help – VC or otherwise. One downside of VC money is the potential control they take of your idea. Just ask Jim Kukral, online marketing consultant who runs AskTheBlogger.com. He hates the idea of start-ups taking VC investment. A recent blog included: “Taking money from anyone besides yourself is risky and complicates the issue. Yes, yes, yes. Perhaps you must take money to grow to a certain level, etc. In my experience, owning what you build is 1 billion times more important in the long run than the money you raised and the control you had to give up to get it.”

Along those lines, experts suggest that just because a VC firm is willing to invest in a company doesn’t mean they are doing so wisely. A company should also do just as much due diligence on the funding firm as they do on you. Equity investment firm Golden Center for Private Equity and Entrepreneurial Finance at the University of Illinois Urbana-Champaign says companies should ask for references from a potential investor, meet up with other CEOs the firm has invested in and grill them on how involved the investors are – do they meddle, do they know the industry, do they come to meetings knowing about your business?

Neverblue’s Dunlop acknowledges that when being acquired, the greatest fear is fear itself. “Fear was around every corner that there would be a problem,” he says. “Or if you let your guard down the acquirer would take advantage of it. We were lucky and smart in our choice of acquirer. Vertrue bought seven or eight companies over the last several years and we talked to some of them. They gave us great insight.”

There were 399 company acquisitions or mergers in the media and information industries in the first half of this year, on track to beat out last year by more than 20 percent, according to The Jordan, Edmiston Group. “Are you ready psychologically and strategically?” asks Holoubek.

Power Plays

By their brief descriptions – “online auction website” and “Internet searching and online advertising company” – it does not sound like eBay and Google are rivals for the same business. But behind the boilerplate company descriptions, many experts claim that as these giants seek to grow even larger, they are going after the same types of acquisitions, which is exacerbating tensions that already exist between them.

In June, Google planned to throw a “Freedom Party” in Boston for users of Google Checkout. The event, which was to protest the exclusion of its Checkout service from the list of accepted payment providers on eBay’s sites, was to coincide with eBay Live, a conference for users of eBay.

Irked by the timing and the name, eBay pulled all of its U.S. ads for a week from Google. Later eBay reinstated “limited” ads on Google but reallocated ad dollars to Google rivals Yahoo, AOL and MSN, a move that industry watchers say served as a proof point of the simmering tensions between the two Internet powerhouses.

To date, eBay has been one of the biggest buyers of keyword ads on Google AdWords – financial analysts estimate eBay has spent just shy of $25 million per quarter on it. It is believed that eBay has been Google’s single largest advertiser, responsible for nearly 5 percent of Google’s revenue. Despite pulling its ads, eBay claimed that its traffic actually went up that week – inferring that the ads were meaningless to their business. eBay Power Seller Skip McGrath says eBay’s decision “woke a lot of people up” – causing those who spend money on AdWords to rethink their spending – in fact, he moved his spending from Google to Yahoo PPC, Miva and Seven Search after disappointing results.

Greg Sterling, founder of Sterling Market Intelligence, notes that tensions between Google and eBay existed before June. He says that eBay has long considered Google to be a rival – more so Google considering eBay to be a rival. In fact, a popular sentiment among experts is “eBay needs Google more than Google needs eBay,” Sterling says.

Matt Hulett, CEO of MPire, an online meta-shopping service, points out that eBay is a marketplace without a search engine – making it dependent on Google. It is estimated that 15 to 20 percent of traffic generated for eBay starts at Google and that 60 to 70 percent of online shoppers start at search engines. Marketing Pilgrim founder Andy Beal notes there are few companies that can say, “If I don’t get any traffic from Google, it won’t matter.” Beal agrees that eBay, like most other companies, needs Google for revenue and users.

That seems confirmed by Google’s second-quarter earnings report showing that the pulling of eBay’s ads did not hurt Google’s business. Beal says that the amount of revenue from eBay is pocket change to Google – it’s the perception of losing eBay that could potentially damage Google’s brand, he says. “It’s more a fear of a domino effect. The last thing that Google wants is for other large companies to think there is life beyond Google.”

Rising Tensions

Scott Wingo, CEO of ChannelAdvisor, explains that Google and eBay’s relationship can’t be described in black-and-white terms – Google and eBay have areas of competition and areas of partnership (e.g., Google powers links for eBay in non-U.S. countries). He says it is new to both parties and they are feeling it out but that it has created a complex relationship that goes beyond “friend or foe.”

With its clear lead in the search market, Google is focused on determining which high-margin online business to try next. As Google looks for new areas of monetization, it has gone into some very similar businesses as eBay.

Some say this is intentional – Google wants to beat eBay specifically in its core areas. Others believe it was inevitable that Google and eBay bump into each other as each expands its empire. “When two 800- pound gorillas are in the same cage, they eventually are going to step on the same banana,” Kevin Ryan, vice president of global content at Search Engine Strategies and Search Engine Watch, says about the companies going into overlapping/competing areas.

Google Checkout vs. PayPal

One such area of contention is online payments. eBay owns PayPal, which generated a fourth of the company’s revenue in 2006. PayPal has become more important to eBay as auction sales growth has slowed. Second-quarter revenue for PayPal grew 34 percent to $454 million. It shows little sign of slowing down.

In June 2006, Google introduced the alternative payment system Checkout. eBay President and CEO Meg Whitman claims she is not worried about Checkout’s ability to make serious inroads, and says that eBay does not offer the use of Checkout because it is an unproven service. According to a J.P. Morgan Securities survey of 1,000 consumers in January, 44 percent of PayPal users reported “Good” or “Very Good” service experiences; only 19 percent of Google Checkout users said the same.

But most everyone agrees that Google has the strategy, talent and programming needed to catch up to eBay. Google has attracted users to Checkout by offering cash incentives and it is very visible at many high-traffic online retailers such as Buy.com. Checkout is putting its icons next to their paid listings and Ryan says that, “Studies show there is increased click activity ” that’s a big advantage over PayPal.”

Google has done a good job of seducing top retailers by offering margin incentives so that it’s cheaper to deploy, according to MPire’s Hulett. A study by Internet Retailer shows that 26 of the top 200 online merchants, or 13 percent, now accept Google Checkout, as of June. But in terms of users, PayPal is by far the leader in the space.

However, PayPal has others also vying for its top spot. In early August, Amazon.com opened its payment system, called Amazon Flexible Payment System – to other websites – a move that pits it squarely against PayPal. Market analyst Scott Devitt of Stifel Nicolaus wrote in a note published August 6 that he anticipates alternative payments to be one of the most active areas in the online retail sector for the next several years.

“In the long term, we believe that the card companies and certain categories in the traditional retail channel have the most to fear about the activities by technology-driven online innovation,” Devitt wrote.

Shopping Spree

Another area where Google could steal eBay’s thunder is its comparison shopping offering, Google Products, which was previously named Froogle. Sterling says that last year Google took down Froogle on its home page in favor of video but predicts that once Google starts promoting Products, it will be a top shopping site.

According to David Rodnitzky, vice president of advertising at Mercantila, for those selling products online, it doesn’t make sense not to use Google Products because it is offered for free, as opposed to CPC pricing for eBay’s Shopping.com. Google monetizes Products through AdSense, and (ironically) Shopping.com generates some of its revenue through Ad- Words, he says. “With this in place, Google can give Products away forever and cause Shopping.com’s margins to compress as a result,” Rodnitzky notes.

SES’ Ryan agrees that Google Products can make a run at eBay’s Shopping.com because shoppers do a tremendous amount of research. When users shop for electronics, for example, they go from comparison engine to brand site to dozens of product pages across many sites.

Going Off-line

Another potentially big battleground for Google and eBay is the arena of off-line advertising, where both companies have made moves in the past year. Google offers radio ad inventory to advertisers using its AdSense platform, and in April struck a deal with Clear Channel to sell ads across its 675 stations. In June, eBay began auctioning radio spots – providing advertisers the ability to buy unsold radio inventory from 2,300 radio stations in the top 300 media markets.

In April, Google got into TV advertising by announcing it will sell ads for the 125 national satellite channels on the Dish Network of EchoStar Communications through Spot- Runner. In March, eBay launched its media auction system designed to allow buyers of national TV ad time to bid for slots via the Internet.

The motivations behind Google and eBay’s move into off-line advertising efforts are very different. eBay may ultimately be trying to persuade its huge base of online sellers to promote their goods off-line – like on the radio. ChannelAdvisor’s Wingo says that eBay’s foray was put together to try and auction off TV ad time by large advertisers – the buyers would be Toyota, Wal-Mart and Microsoft and the sellers would be the networks such as ABC, NBC and CBS.

On the other hand, Marketing Pilgrim’s Beal says Google is diversifying into off-line channels as additional ways to serve small companies. By streamlining the off-line advertising model, Google enables small companies to tap in to radio, print and TV with the same efficiency and ease as signing up to advertise with AdWords.

Wingo predicts that because eBay has a team of only two or three people doing some experimentation and Google is spending hundreds of millions on their initiatives – Google will likely win this battle. But Mercantila’s Rodnitzky says it will be quite some time before we see an impact.

Skype vs. GrandCentral

Telecom is ripe for another turf battle between the powerhouses. In July, Google acquired GrandCentral Communications (for $50 million), which allows users to combine all of their phone numbers and voice mail into a single number. There is buzz that Google could build the unified communications and call-handling functionality of GrandCentral into Google Talk, its computer application for VOIP and instant messaging.

If Google successfully integrates these features with both its Gmail and Google Apps and offers them for free, Skype will be unable to compete, according to Rodnitzky. He also notes that this tact by Google could be a very effective way to reduce eBay’s ability to monetize Skype, which the company purchased for $2.5 billion in late 2005.

Lately Google has been making headlines because company officials say Google wants to spend billions to build a new, open network that would loosen the grip telecom operations have over how consumers use their cell phones. To do so, Google plans to extend its tools, which include email and video, to the rapidly expanding mobile phone market.

Acquisition Fever

Wingo says that with the exception of Skype, eBay has focused on acquisitions that enhance their core offerings. For example, eBay recently bought StubHub.com, which expands its marketplace of ticket sales. And eBay also just acquired StumbleUpon, which gives users a way to bypass search engines – it’s an alternate means of finding information online. Rodnitzky says this could be a very smart move considering Google has won the search engine war.

Speculations about eBay’s next purchase run the gamut – some say eBay could acquire advertising network ValueClick so it can compete as an ad network. Others speculate that eBay may buy a video site and compete with YouTube.

MPire’s Hulett says it could be likely that eBay forms deeper partnerships with Google’s direct search rivals – such as Yahoo. Wingo agrees that long term, it makes a lot of sense for eBay and Yahoo to merge to form a supersized entity that provides balance to Google’s rapid ascension.

And Marketing Pilgrim’s Beal speculates that Google is going to acquire companies that will achieve its goal of dominating as many advertising channels as possible. ChannelAdvisor’s Wingo agrees and notes that, “If you look at their acquisitions from that point of view, they make a lot of sense.” Google also wants to serve small to medium-sized businesses and has made acquisitions in those areas to help it do that.

Google made nine major acquisitions in 2006, and as of July had already acquired 11 companies in 2007. So far they have been comfortable paying large sums to explore uncharted territory, but some people point to YouTube when they talk about an acquisition that has yet to turn a profit. Still, most experts say it’s almost impossible to figure out the next company that Google will buy – anything from a software developer to a network to a hosting company.

The one thing that most industry observers agree on is that the turf wars between Google and eBay are only going to get more heated as each jockey for the powerhouse position online.

The Desire to Acquire

The new geography features auction-based ad exchanges and conglomerated companies with divisions that buy, sell and distribute ads: something that would have been unthinkable a decade ago.

The emergence of these new entities with intertwined relationships has the potential to streamline the media marketplace and drive costs down and return on investment up. Consolidation will likely enable the biggest players to increase their market share while also growing the demand for independent agencies and networks that operate outside of their reach.

Fast and Furious

To recap: In a shorter span than is required to complete the NHL playoffs, Google gobbled up DoubleClick, Yahoo lassoed RightMedia, Microsoft acquired aQuantive, WPP Group won 24/7 Real Media and AOL absorbed Ad:Tech AG.

LinkShare, a subsidiary of Internet services company Rakuten, purchased lead generation company Traffic Strategies in June. Rival Commission Junction is owned by potential acquisition target ValueClick, and Performics is a property of Google’s DoubleClick.

The acquisition frenzy has made tracking industry relationships as challenging as keeping up with the latest Hollywood romances and legal tangles. For the first time the largest media companies own ad networks and/or agencies, one of the largest agencies owns a network, plus countless smaller players also work on both the buy and sell side. (To untangle the web, see page 49 of the July/August 2007 issue.)

Consolidation, shakeout, maturation of the market: Whatever you want to call it, investment banker John Doyle of Peachtree Media Advisors says there are precedents in TV and print industries for large media companies doing a “land grab” to acquire related businesses. “It’s like getting a bigger bucket to stand under a waterfall,” he says. Advertisers are expected to greatly increase their online spend during the next few years, so it is not surprising that the top media companies attempt to expand their reach by buying companies offering related services, he says. Doyle expects the consolidation to continue as it adds value for buyers, and more midsize companies will likely want to increase their heft by scooping up smaller competitors. However, after the biggest deals are done, the largest players are unlikely to buy smaller shops, as it “won’t move the needle” in increasing their market share, according to Doyle.

Questions of Perception

The distinction between interactive/ creative agencies, advertising networks and media companies began to dissolve through smaller acquisitions during the past few years, but now the potential for conflicts of interest are as clear as they are abundant. That agencies, ad networks and publishers are owned by a single organization has many in the industry uncomfortable. “Most of the rules of online advertising are broken …” says Russ Mann, CEO of search marketing company SEMDirector.

By comparison, how would investors feel if one entity ran the stock market and owned an analyst firm and a brokerage? Not too comfortable, most agree. Not surprisingly, in May, the Federal Trade Commission began an antitrust investigation of Google’s purchase of DoubleClick to identify aspects of the deal that could limit competition.

Publishers might be reticent to partner with companies owned by a competitor, according to Dana Ghavami, CEO of CheckM8, which sells software to manage rich media campaigns. For example, ad networks could prioritize placement based on the needs of their corporate family of publishers. “My worry – if I am a media company such as Viacom or Fox [which have used DoubleClick’s ad network] – is who is looking after my interest?” says Ghavami.

Interactive agencies with ties to networks and media companies have the most at risk as they are likely to undergo the most scrutiny to remove any doubts that they are putting clients first. Trusting agencies to buy “in-house” is akin to “asking students to grade their own tests,” according to John Ardis, vice president of corporate strategy at ad network ValueClick.

Advertisers looking to optimize the return on investment from their media buys will want assurances that purchasing decisions aren’t compromised by a need to unload excess inventory from a sister company, CheckM8’s Ghavami says. That’s not a comfortable discussion for those sitting on either side of the table. These “umbrella” companies will have to institute internal safeguards to prevent the possibility or even the appearance that their actions are being influenced by other divisions of the company.

Advertisers may be unwilling to place their confidential and sacrosanct data about campaign performance in the hands of companies with divisions that are their direct competitors. For example, a liquor company might hesitate before signing on with a network that is part of the same company as an agency that represents a competing brand (see BT story on page 52 of the July/August 2007 issue).

Similarly, a media giant may not want its top advertisers’ performance data to be in the hands of a competing company. “Everyone has seen what Google is capable of when they have too much control – they start setting the rules,” says Ghavami. Giving the enemy the intelligence used to form your battle plan isn’t a strategy for success.

The Upside of Acquisitions

While organizations that span multiple aspects of advertising increase concerns about conflicts of interest, they should be able to increase efficiency and lower the cost of buying and selling. In theory, agencies would be able to buy from sister networks without the need for the sometimes lengthy approval process that slows insertion orders. Also, ad networks and their subsidiaries could combine campaign performance data with real-time analytics from their publisher properties with an ease and granularity not possible today.

“Microsoft [as one example] would be able to create bundled solutions that are more cost-effective and provide more value at the same price,” says Dema Zlotin, vice president of strategic services at SEMDirector. Advertisers would save time by working with one-stop shops and could better adjust campaigns by getting real-time site-by-site performance to complement their networkwide data.

Agencies, however, may have to rethink their fee structure if the purchase is made from elsewhere within the company. Charging a hefty commission when buying from its own network and properties won’t fly with some advertisers. Agencies that are part of other entities will have to work harder now to prove that their intellectual capital is worth paying the premium, according to ValueClick’s Ardis.

Greg Stuart, the former CEO of the Internet Advertising Bureau and co-author of the book, What Sticks, says online advertising was ripe for change. The buying and selling of interactive ads is costly and inefficient, according to Stuart, and consolidation and greater transparency will benefit advertisers. “Shame on the industry for letting it go for so long,” he says. “I am appalled at some of the things that go on,” says Stuart, stating that the failure rate (47 percent) of ad campaigns reflects poor performance by agencies.

While data sharing between organizations can simplify more “routine” buys, advertisers will continue to work with agencies for more complex purchases. The potential for conflict of interest could prove a boon to independent agencies. Some advertisers might be inclined to work with smaller but experienced shops whose allegiance can’t be questioned.

Though purchases through a single company might be more efficient, advertisers happy with an agency could go with networks from competitors, according to SEMDirector’s Mann. “Online is still best-of-breed world,” he says, adding that the various divisions of a one-stop shop might not be the best choice individually.

Rise of the Ad Exchanges

In this consolidated online environment, advertising exchanges that use auction bidding to sell ads and directly connect advertisers and publishers will see increased interest because of their transparency. Exchanges enable advertisers (either companies or networks working on their behalf) to bid for type of ad and the demographic that they would like to reach. Publishers set a minimum price for accepting the ads, and the exchange automatically matches buyer and seller.

Ad exchanges recently changing hands include Right Media, which was acquired by Yahoo, which previously owned 20 percent of the company, and an exchange being developed by DoubleClick that will become part of Google. Microsoft is said to be developing its own exchange, and independent exchanges include AdECN; Turn, Inc.; and ContextWeb.

Bill Urschel, the CEO of AdECN, says exchanges are differentiated from advertising networks because of the auction pricing, the transparency, and because the exchanges guarantee payment to the publishers. “[Exchanges] are taken from the stock exchange model,” says Urschel. AdECN’s exchange has signed up 28 ad networks since it launched in March of this year.

This transparency will attract publishers concerned about intertwined relationships since the services are (at least in theory) neutral to the source of the ad. While publishers and advertisers who compete with Google, Yahoo, etc., may not want to hire their agencies or networks, the exchanges can provide access to their sites.

Because of the negotiations involved in securing media buys, many large publishers such as The New York Times and The Washington Post often have 20 percent of their ad inventory unsold, according to CheckM8’s Ghavami. “Remnant inventory will be marketplace-driven,” he says.

Once they gain experience in using an exchange, some publishers and advertisers may bypass the ad networks and trade directly through the exchanges themselves. Ghavami estimates that 70 percent or more of major publishers’ inventories could be sold directly by exchanges. Ad exchanges will most directly compete with remnant networks such as Blue Lithium and Traffic Marketplace.

Exchanges may accelerate the shakeout of the weaker advertising networks, but they are unlikely to dominate the larger networks. Exchanges make sense for large publishers who have considerable unsold inventory, but publishers are likely to continue to get their highest CPMs through traditional sales channels.

Just as online stock trading didn’t cause brokerages to become extinct, the automated selling advertising is unlikely to replace networks. “There is a sliver of people who will be comfortable with the auction model, so auctions will have a place,” says ValueClick’s Ardis, whose company does not participate in an ad exchange, “but they won’t set the industry on its ear.”

The New Landscape

The current wave of industry consolidation will likely continue, enabling larger companies to become more powerful while at the same time providing opportunity for third-party auditing companies.

Google, Microsoft, Yahoo and Time Warner and their affiliated companies will have their hands in each step of the marketing chain, enabling them to increase the revenue generated from each client. The potential promise for advertisers is that these companies will be able to better target customers and increase by matching demographic and target data with real-time campaign analytics.

“The move away from AdSense to networks that are better at interpreting content” and matching it with advertisers makes sense, according to author Stuart. Advertisers would have greater control in distributing content to their target audience, such as being able to launch a campaign that is instantly delivered to a specific demographic (e.g., males between 18 and 35).

Though many of the sizable agencies and networks have been swallowed, the consolidation will likely continue. Networks such as ValueClick and smaller competitors could also be acquired. But analytics firms such as Visual Sciences (formerly WebSideStory) and Omniture are likely to be at the top of the media moguls’ shopping lists because of the additional insight they provide in maximizing revenue, according to Stuart.

Media companies are also likely to continue acquiring search and mobile properties (such as the recent acquisitions of Third Screen Media by AOL and ScreenTonic by Microsoft) during this continued consolidation, according to AdECN’s Urschel.

Advertisers and publishers may pressure multiservice companies to allow third-party auditing and oversight to ensure that ad buying, selling and placement are all completed without prejudice. Independent auditing firms could verify transactions between related organizations, or advertisers could request that purchases be made from outside networks and publishers. Industry groups will likely establish voluntarily privacy rules or codes of conduct to limit potential conflicts.

Exactly how companies will adapt with new services and systems to increase the efficiency of online advertising is uncertain today. But we can be sure that now that the rules have been changed, there is no going back.

John Gartner is a Portland, Ore.-based freelance writer who contributes to Wired News, Inc., MarketingShift and is the Editor of Matter-mag.com.

Look Out!

Last night you read on your local newspaper’s website about how gas prices could reach $4 a gallon this summer, so you went to a car site to check out some reviews about hybrid vehicles and then visited an automaker site to learn about the car prices. This morning when you checked your email, you saw two ads for hybrid cars.

Did you think – wow, this relevant ad sure is handy or, yikes, Big Brother is watching my every move?

This question is at the crux of an issue that has ignited privacy advocates, who fear that recent acquisitions in the online advertising space will make profiles of consumers more complete and enable behavioral targeting (BT) to become more extensive.

In April, Google announced plans to purchase DoubleClick, an ad-serving service and owner of affiliate marketing network Performics. Following on Google’s heels, Yahoo announced it would complete its purchase of RightMedia, which operates an exchange for trading digital media. Then in May, Microsoft said it would buy aQuantive, which operates a variety of online advertising businesses, and the marketing services company WPP announced its intention to buy ad network 24/7 Real Media (see cover story page 44).

These deals, which vastly increase the amount of knowledge that Google, Microsoft and Yahoo have about their users’ behaviors, validate the speculation that widespread BT is just around the corner.

BT is not new. Microsoft added BT to its AdCenter in 2006, AOL has been using BT technology from Revenue Science, and Yahoo has its own proprietary BT solution. Ad networks have thousands of website clients, and segment the audiences into categories such as car buyers and health food buyers, based on anonymous user activity.

Privacy advocates are concerned that the recent acquisitions will enable Google, Yahoo and Microsoft to construct a full profile of a user’s online behavior, from their initial search all the way through to the time they close their browser. Advertisers that want to discriminate among customers could use these records of user behavior improperly.

Google and DoubleClick

Most of the hullabaloo about privacy concerns is focused on the DoubleClick acquisition because Google, which tracks user search queries and history via user IP addresses, has the lion’s share of the search market. Meanwhile, DoubleClick, which tracks users via cookies associated with graphical ads it serves, has a similar advantage in ad trafficking.

Mark Ward, software engineer for RevCube, a provider for multichannel online ad campaigns, explains that before the acquisition, Google’s behavioral data essentially stopped when the user left the search result page. “Now, if a user stays on major sites [assuming DoubleClick is on the site the user browses] and uses Google to search, it’s conceivable that Google/DC would know what page the user was on, when the user was on it, where the user was coming from, etc., for every page the user ever browses.

In the past, Google, whose famous mantra is “don’t be evil,” has indicated that it would not track its users’ behavior to develop powerful targeting capabilities for display ads because it doesn’t want to snoop on its users. But some believe Google will embrace BT because they are under pressure to find revenues beyond text-based search ads; others say Google bought DoubleClick so they can compete in the display game; and others say it was simply to prevent Microsoft from buying DoubleClick (and still others say it was a combination of several factors).

Google has denied claims of any intent to do wrong. At Google’s annual stockholder meeting in May, Google co-founder Larry Page said, “Our actions over the next 10 years will make it clear we’re not the same kind of companies as you are worried about.” And CEO Eric Schmidt added that the company has “made a commitment not to track user data.” Some point out that if Google wanted to focus on BT, they would have bought Revenue Science or Tacoda, which specialize in it.

But Jeff Chester, executive director of the Center for Digital Democracy (CDD) in Washington, D.C., says that, “Google’s entire business is about personal data acquisition and use.” As it increasingly provides an array of third-party [rich media and interactive] ads, especially for major advertisers [which it is seeking], it will use our data in sophisticated ways to market to us. Google – no matter how high-minded its mission – is ultimately a digital marketing company.”

Publisher of AffiliateFortuneCookies.com Sam Harrelson agrees that Google is already doing BT in an oblique way that ascertains the end user’s browsing habits, click choices and attention data. He says programs such as GMail and Google Reader are giving Google a great deal of quantifiable data on individual (or generic) user habits and how those users browse. “The addition of DoubleClick’s data only solidifies that ability to measure beyond the click or the impression,” says Harrelson.

Privacy advocates are not the only ones considering the profound impact the DoubleClick acquisition will have on the industry as a whole. Chester says that in addition to threats to privacy, “GoogleClick” will become the most powerful media company online, able to handpick the winners and losers of e-commerce. “Instead of robust competition, we will have dot-consolidation.”

RevCube’s Ward agrees and says that the DoubleClick acquisition should make people nervous because Google could become a monopoly that can do every part of online marketing.

The DoubleClick acquisition would give Google a network of publishers and advertisers that provides a vast amount of visitor behavior data to use to target ads across its network. This makes other ad networks worried because Google would be their direct competitor.

Some believe that the DoubleClick acquisition would reduce competition by giving Google 80 percent of the marketing for serving ads to third-party Web publishers.

Harrelson says that ad networks need to continually adapt to the marketplace and not become obsolete in their business model or place in the food chain. “If ad networks are not fastidious in their outlook, this could very well happen as Google, Microsoft and Yahoo continue to chip away at the once-separate performance marketing space.” Ali Mirian, product manager of publisher solutions at 24/7 Real Media, says there are publishers who consider Google to be a major threat to their advertising business – the data that they would run through the DoubleClick system would now be in the hands of Google.

Another disadvantage for affiliates and search marketers is the potential of increased cost per click (CPC). Affiliate Colin McDougall speculates that if Google acquires a lot of information about visitor behavior from initial search through to the shopping cart checkout, it could have an impact on CPC. “Rather than the competition setting the price in the open market bidding system that currently exists [i.e., AdWords], the base bidding price algorithm might get tied more to conversion rates than what the marketplace is bidding.” Harrelson points out that a benefit for affiliates will be a streamlined and automated process for dealing with agencies. He explains that affiliate marketing works best when the ease-of-use factor is higher than the time commitment factor. He sees the DoubleClick acquisition and others opening up the playing field of “affiliate marketing” to many more nontraditional affiliates in the social media and blogging spheres.

Consumer Pros and Cons

Critics say that consumers should be concerned that more complete user profiles will mean that relatively anonymous usage data could be leveraged to link a pattern of behavior to a consumer’s identity and that cross-campaign learning could be used to infer private information, such as sensitive health data.

CDD’s Chester says consumers’ privacy will be further at risk because Google will be in the position to track the majority of consumer actions online including through cell phones. “Such data mining will enable Google to have unprecedented insights into consumer behaviors and expenditures.”

As a result of a complaint filed in April to the FTC by privacy groups including the CDD, the FTC created a special task force and opened a preliminary antitrust investigation at the end of May. Chester says, “The building pressure will result in some policy change ” BT is inevitable – but policy safeguards will be a part of it in some area.”

But not all consumers are worried about giving up their privacy. According to the results of a ChoiceStream Personalization Survey conducted in 2006, the number of consumers willing to allow websites to track their clicks and purchases increased 34 percent from the previous year.

However, the results show no significant decline in the number of consumers concerned about the security of their personal data online, with 62 percent expressing concern in 2006 versus 63 percent in 2005.

“Consumers are starting to become more open to the idea of giving up some privacy in return for a more customized search experience,” says Marketing Pilgrim’s Andy Beal.

However, there must be a tipping point on the curve where the average consumer will start to feel as if their privacy is being disproportionately traded for personalization, “but we are nowhere close to that yet … even with platforms such as Google’s Web History,” AffiliateFortuneCookies’ Harrelson says.

Of course many online marketers are quick to point out that consumers benefit most from an increase in BT. Kevin Lee, executive chairman and cofounder of Did-it.com, a search and auction media agency, says that as targeting improves there will be less untargeted advertising and more advertising that is truly relevant to the consumer, be it text links, banners or video.

And many believe that Google will use the “if you are going to see ads, they might as well be relevant” approach because the customer-centric message complements Google’s brand.

The Ick Factor

But even if consumers do want more relevant ads, it doesn’t mean that they won’t find it disconcerting if the same ad for an MP3 player follows them from site to site. The creepy factor could risk consumer trust – which would tarnish a brand’s reputation – and therefore be a substantial risk for merchants.

Because a privacy incident could damage everyone in the advertising food chain, publishers, ad networks and advertisers are going to have to be clear to consumers that their privacy concerns are absolutely valid and that steps are taken to build safeguards into their systems. Lee says that a controversy could ensue if an ad network doesn’t adequately disclose that ads are being targeted behaviorally.

Ad networks insist they only collect anonymous data, which then is aggregated and analyzed to segment the user into one or more Internet archetypes, such as “car shopper” or “dog lover.” And ad networks are explicit in explaining what data is collected and how it is used and that they give users the option of opting out.

DoubleClick and aQuantive say they give users the ability to opt out of having data collected about them, though privacy experts argue that few people know they have that option.

In an effort to come up with a solution, the NAI, which is a cooperative of online marketing, analytics, advertising and email companies, developed the site at NetworkAdvertising.org. It is a centralized tool that allows users to verify which ad networks have placed a cookie on their hard drive and then users can submit opt-out requests for each network they prefer not to be targeted by.

It’s possible that government regulation could halt BT, at least temporarily. If that doesn’t happen, Marketing Pilgrim’s Beal says that BT implementation will likely be slow and steady to avoid any missteps that could impact the trust built up by the search engines.

Some experts believe there will be a fundamental shift from contextual targeting to BT. Revenue Science’s Basem Nayfeh says behavioral targeting changes the discussion from whether an advertisement is relevant to the content to whether an advertisement is relevant to the person reading the content.

ValueClick, an online advertising behemoth rumored to be an acquisition target, is advocating the adoption of 3D-BT, which would deliver a personalized message across multiple channels. John Ardis, vice president of corporate strategy at ValueClick, explains that 3D-BT is needed because current BT focuses only on display advertising so targets are sent messages that are relevant in display, but appear depersonalized and generic in email and on the marketer’s website.

Regardless of privacy issues and government intervention, there is too much money to be made by targeting consumer’s habits for BT not to evolve – even if those involved need to tread very carefully.

Linkshare Shuffle

In early February, just six months after LinkShare agreed to be acquired by Japan-based e-commerce portal giant Rakuten for $425 million, the founders of the affiliate network have decided to step aside.

The resignations of Chairman and CEO Stephen Messer and President and COO Heidi Messer, who founded LinkShare in 1996, were not surprising according to industry watchers, but definitely signaled changing times in the performance marketing and affiliate marketing space.

Beth Kirsch, a long-time affiliate manager, who is now group manager of affiliate programs at LowerMyBills.com, called it “the end of an era.”

LinkShare was one of the last big affiliate and performance marketing networks to finally be swallowed up by a big conglomerate. LinkShare rival Commission Junction was bought for $58 million in cash and stock by ValueClick in October 2003; ValueClick previously purchased affiliate network BeFree in March 2002 for $128 million in stock. Performics was acquired by DoubleClick in a cash deal estimated at $58 million (plus an earn-out of up to $7 million) in May 2004; DoubleClick was acquired in July 2005 by Click Holding Corp. in a deal valued at $1.1 billion. The new era of performance marketing will feature Steve Denton, most recently LinkShare’s senior vice president of client development and distribution services, who has been tapped to head LinkShare. As president, Denton, a six-year LinkShare veteran, will lead all day-to-day operations. As part of those duties he will continue to oversee all sales efforts, as well as affiliate services and support. His new duties will include responsibility for account services, the search team, marketing and technical sales consultants.

Denton will report to John J-H Kim, CEO of Rakuten USA and executive vice president of international business headquarters, who will handle LinkShare’s legal, technical and finance functions.

“It’s very much like how Heidi and Steve split up their duties within the organization,” Denton says.

With the departure of the company’s founders, LinkShare faces some new challenges. The biggest, according to Denton, is to “move from an organization that was a privately-held New York-based affiliate network into a global role that it was intended to play, while still being the leader in affiliate and performance marketing.”

Rakuten, a public company with a market capitalization of $10 billion, bought LinkShare because it was looking to break into the U.S. market and wanted to establish an immediate presence. Founded in 1997, Rakuten has several divisions and is involved in e-commerce, media, travel and financial services, and owns a baseball team in Japan (the Tohoku Rakuten Golden Eagles).

“Heidi and I have taken LinkShare to a great place, but now it needs to become a Rakuten company. This is the best timing – the fourth quarter is over; Valentine’s is almost over and now LinkShare has all summer to beat Google and Yahoo,” Steve Messer says.

Timing is everything. Denton says that by putting all the pieces in place during the spring time frame gives LinkShare “a runway to get on track with new initiatives, new leadership teams and the company’s continued global expansion efforts, in time for the critical back-toschool period and the hectic fourth quarter” – a time when LinkShare historically generates a hefty chunk of its revenue.

LinkShare is on track, according to Denton, to expand into the U.K. and China sometime in 2006. However, he declined to disclose specifics.

LinkShare and Rakuten also have an integration team of executives, including Denton and Kim, to deal with the merger of the two companies, which includes establishing best practices, as well as streamlining financial reporting and human resource services such as employee benefits.

Denton is vehement that integration is not a euphemism for “consolidation,” which is then often translated to “elimination” as in downsizing when a smaller company is acquired by a huge conglomerate. “Rakuten bought LinkShare for its leadership in technology and the affiliate marketing space, not to rip the company apart,” Denton says.

But there is plenty of change happening. Steve Messer says that he and Heidi needed to move on in order to facilitate that growth. Consultant Shawn Collins says the transition should be smooth.

“It might affect the culture. Denton has a different personality, but it’s not like bringing in a stranger. Everyone is familiar and comfortable with him. And people are really excited.” Messer called his departure a continuation of the global expansion plan that he and Heidi had envisioned when they sold the company to Rakuten.

Messer says that during his tenure, he increasingly saw LinkShare’s main competitors less as the other affiliate networks (Commission Junction and Performics) and more like the major search and portal players such as Google and Yahoo.

“We think that Rakuten is doing a whole lot more to be competitive in the U.S. and we can help them go head-to-head with Google and Yahoo, while the partnership with Rakuten is going to help LinkShare’s presence in markets outside the U.S,” Messer says. “Rakuten has a huge appetite going forward. I think in a few years people will be talking about how they own the whole market. The strategy we put in place will prove itself out.”

Still, Messer says leaving is not easy. “I imagine it’s like the bittersweet feeling a parent has when their children go to college. You’re proud you’ve given them the skills to survive and do well, but you’re sort of sad that they no longer need you to get along.”

He claims his first taste of this occurred when he and Heidi spent most of 2005 in Japan negotiating a deal with Rakuten and he realized that “we had built such a great company and we were gone for nearly a year and the company did phenomenally well. They really didn’t need us.”

As for what’s next for Messer, he says that after 10 years in the bustling performance marketing space, he’s looking forward to a little “breather” and anticipates being “back in the game in the summer.” He declined to disclose any specific plans, noting he’s “still thinking about what I want to do.”

However, during his time off, he says he plans to more fully formulate some new business ideas – all while sitting at the beach and doing some kite boarding. And of course, any new venture will include LinkShare co-founder Heidi Messer. “We are a team,” he says.

Sources close to LinkShare claim it’s no surprise that Steve and Heidi are leaving the company after each received a hefty payout from the September 2005 all-cash sale to Rakuten. Although LinkShare had investors at the time of the sale (including Mitsui & Co, Ltd., Mitsui & Co. (U.S.A); Internet Capital Group; and Comcast Interactive Capital, an affiliate of Comcast Corp.), Steve Messer reportedly owned 20 percent of LinkShare, while Heidi owned 11 percent. Steve’s proceeds from the sale were said to be approximately $100 million, while Heidi got over $51 million, according to sources close to the company.

“I think it’s obviously a good transaction for Heidi and I and the team,” Messer says.

“Steve and Heidi should be proud of the wonderful company they built, the leadership position they established and the vision they had,” Denton says. “All of us feel fortunate to have worked with them and we look forward to all the new challenges.”

Stand By Me

The last of the big independent affiliate and performance marketing networks was finally swallowed up by another large international conglomerate.

In early September, Japanese e-commerce portal Rakuten took its first step into the U.S. market by agreeing to acquire privately held New York-based performance marketing network LinkShare for approximately $425 million in cash.

Speculation was swirling around the online marketing community for several months that LinkShare, which has investors including Mitsui & Co. Ltd., Mitsui & Co. (U.S.A); Internet Capital Group, and Comcast Interactive Capital, an affiliate of Comcast Corp., was looking for a buyer.

Enter Rakuten. The public company, with a market capitalization of $9.7 billion (as of September 5) was looking to break into the U.S. market and wanted to establish an immediate presence. Founded in 1997, Rakuten has several divisions and is involved in e-commerce, media, travel and financial services and owns a professional baseball team in Japan (the Tohoku Rakuten Golden Eagles).

“LinkShare’s performance-based marketing expertise across affiliate, search and email capabilities provides Rakuten with an excellent first step to launch our U.S. operations and continue our international expansion,” said Hiroshi Mikitani, chairman and CEO of Rakuten. “We can leverage LinkShare’s client relationships and technology advantages worldwide, so that LinkShare will be able to achieve significant growth in the future.”

For many big players in online marketing, pairing up with larger, more diversified companies that provide additional financial resources is nothing new.

LinkShare rival Commission Junction was bought for $58 million in cash and stock by ValueClick in October 2003; ValueClick previously purchased affiliate network BeFree in March 2002 for $128 million in stock; Performics was acquired by DoubleClick in a cash deal estimated at $58 million (plus an earn-out of up to $7 million) in May 2004; DoubleClick was acquired in July 2005 by Click Holding Corp. in a deal valued at $1.1 billion.

There are conflicting views on why LinkShare sold for so much more than its competitors.

One poster on affiliate marketing forum AbestWeb.com called the sale price “An insane amount of money!!” while another wrote, “I was actually surprised they got it for as little as $425 million. Especially considering MySpace was purchased for around $580 million and Shopzilla.com went for around $560 million. I guess the going price for big sites like these is between $400 million and $600 million I can’t believe ValueClick paid so little for CJ; they certainly got a deal there.”

Other industry watchers claim that the high selling price is a combination of a better economic climate and the growing popularity and desirability of performance marketing.

“The price – especially compared to their competitors – is startling,” says Shawn Collins, a consultant. “But the economy is in better shape than a year ago. Affiliate marketing is more respected and on firmer ground. It’s a real testament that affiliate marketing is going well.”

Haiko de Poel Jr., president of online affiliate community AbestWeb.com, says that affiliate marketing is only a little hotter than when CJ was purchased two years ago.

“Even though the climate is better and affiliate marketing is a little hotter, it’s not enough to justify $425 million. There is no way you can tell me that LinkShare is worth twice what was paid for CJ and BeFree combined. There’s just something wrong with that. In fact, there are just too many things wrong with this whole deal.”

LinkShare, which was established in 1996, has a network of more than 500 merchants including J.C. Penney, 1-800-Flowers .com, American Express, Avon Products and Dell. It has more than 10,000 affiliates in its network and claims that for 2004, approximately 2 percent of U.S. retail e-commerce, or $1.4 billion, passed through the LinkShare network.

LinkShare’s chairman and CEO, Steve Messer, says, “By partnering with a successful portal with global aspirations, LinkShare has positioned itself to take advantage of the increasingly universal nature of the Internet and e-commerce.”

Messer goes on to say, “Our merchants and our affiliates will benefit because taking the network worldwide can only increase volume, which means growth for everyone.” Messer, along with the rest of LinkShare’s senior management team, including President and COO Heidi Messer, will remain with the company.

Affiliate Alan Townsend, marketing manager for PersonalizationMall.com, says the sale of LinkShare is bittersweet.

“I can tell you that Steve Messer is passionate about affiliate marketing and LinkShare. I don’t think this deal is just about money. I think if anyone wants LinkShare to succeed, it’s him. I’m confident that he’ll help make decisions for LinkShare that will allow them to grow well into the future,” Townsend says. “With that being said, I think it’s always bittersweet to see a great company that you love get sold. It’s much easier to buy a company than it is to build one.”

In the short term, affiliates are questioning everything. When will they be paid? How will they be paid? Who will pay them? What changes are going to be made? What improvements are going to be made? How will current issues be resolved?

Townsend notes that continued communication with affiliates will be key for LinkShare’s future success.

“I think LinkShare has to keep the affiliate community informed throughout this entire process. Affiliates deserve to know how this is going to impact their livelihoods,” Townsend says. “In the long term, affiliates are going to benefit. The new owners will want to see growth. LinkShare will be trying to expand into new markets quickly. Eventually LinkShare will have a global presence that will attract more affiliates and more merchants. As a result, LinkShare services, such as check processing, affiliate support, etc., will have to improve to meet the growing needs of these affiliates and merchants.”

Land Rush

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Driving Forces

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

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

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

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

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

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

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

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

The Limitations

Aligning expectations with realities is a challenge following any merger and, without exception, there are surprises on both sides. Integration is always tricky. Perhaps the cultures don’t mesh, or the technologies prove problematic or the talents fall short of expectations. Quite often, the acquiring company will expect to save money by scrapping redundant operations, or by cutting back unprofitable lines of business. Other times, the acquiring company will invest more capital to grow certain capabilities faster than the smaller company could have grown on its own. Crouthamel says that is what’s happening now at Performics.

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

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

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

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

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

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

Beyond Affiliates

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

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

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

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

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

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

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

Who’s Next?

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

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

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

Tom Murphy is Editor in Chief of Revenue.

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.