The age old Cold War between retailers and original equipment manufacturers just ran head-first into affiliate marketing’s biggest success story—Amazon.com. 

Amazon is under attack by its own affiliates, reports 5Staraffiliateprograms.  In short, Amazon affiliates are accusing NetEnforcers of creating a hoax -- in an effort to shut them down by calling up hosting services and, in some cases, convincing them to shut off affiliate Web sites (for fear of legal reprisal). 

I say again: shutting off their Web sites.  I thought re-structuring link formats was a way to fight this fire.  That’s relatively child’s play.

At the center is a “brand protection” agency that has ties to marketplace-based sofware solutions providers which provide a relatively (versus affiliate marketing) controllable business environment.

In reality, this is absolutely not a hoax and based on a serious dose of mis-information, lack of understanding or both.

I (and others like Lauren Freedman) have discussed, for years now, the subject of this phenomenon: Major OEM (original equipment manufacturers) brands having problems with Web affiliate programs (operated by their retail distributors).  Many have suggested that I was wrong or over-focused on negative aspects.  Affiliates’ perceived impact on brand experience, largely through poorly executed Web sites, is quite real (out of date pricing and/or product information, non-conforming logos and images, etc.).  The phenomenon I warned of is bigger, meaner and more powerful than even I could have imagined.

Amazon Responds
The entire distribution system is stressed; retailers and affiliates are forever doing a silent (and occasionally direct) battle with each other as are OEMs and retailers.  Everyone wants the customer and the Web is finally proving to be a serious threat to retailers who, at one time, were able to aggregate demand through physical location—“location, location, location” remember?  The sooner everyone realizes this the better.  Clearly Amazon is not on the path of enlightenment as it is issuing statements to affiliates like this one:

“Associates - It has come to our attention that some participants in the Amazon.com Associates Program have received letters from an entity called ‘Net Enforcers’ or from a law firm working on behalf of Net Enforcers. In these letters, Net Enforcers alleges that certain product images or other web site content violates their clients intellectual property rights. Some of you have received these letters because of images or other content that you receive from Amazon.com as a result of your participation in our Associates Program. We believe these claims regarding Amazon Web Services are simply wrong, and we are committed to working with you and Net Enforcers to help resolve these issues. If you would like Amazon.com to respond to Net Enforcers on your behalf, please contact us at associates@amazon.com, and include a copy of any letters you have received from Net Enforcers regarding Amazon.com content.”

You know it’s getting good when you see Amazon flying in choppers loaded with big payloads of water to douse the flames.  They’re even going as far as suggesting they’ll complain to NetEnforcers who will, in turn, shuffle it up the chain to their client—likely on its way directly into the circular bin.

Can Retailers Catch a Break?
What’s worse than being an affiliate who gets squashed by search engines, retailers themselves or—lately—the likes of Sony and Crutchfield?  I say, being a retailer who can’t get e-mail delivered, is forced to play the price game (shopping comparison); challenged to re-create the stores experience online; forced to deal with transaction fraud and returns-and-cancels operations; forced to discount or compete with discounters; challenged to aggregate demand (as a shopping mall does) in a medium (the Web) that can’t support it; forced to deal with manufacturers increasingly selling direct… the odds are truly stacked against retailers.  Retailing sucks!

Lack of Perspective
Perspective is what we often lose in life and is of critical importance.  Affiliate marketing (as an industry) needs to first understand the long-standing, and yet evolving, dynamic that exists between OEMs and their retailers.  Lack of perspective is making things needlessly stressful and could lead affiliates who use the word “hoax” and make suggestions of illegal activity (aimed at NetEnforcers) into trouble.  While it’s easy (for affiliates) to type threats of class action lawsuits against NetEnforcers they, themselves, may risk legal action based on their own lack of perspective.  NetEnforcers is doing a job and is stuck in the middle of a Cold War that has been going on for years now.

Are you curious about these small performance advertising networks featuring sports car give-aways and huge cash prizes?  Today I aim to take the lid off of affiliate marketing’s secret underworld of “affiliates that are affiliates of affiliates” (read: layers of middle-men).  I’ll give you the real story behind so-called CPA (pay-for-performance Cost Per Acquisition) networks—what they are, how they operate and why advertisers lose when working with them. 

I’ll also explain why every marketer with an affiliate program can learn a lesson from an affiliate-focused brawl between two affiliate solution vendors, aZoogleads and Valueclick’s Commission Junction, as it relates to eBay’s affiliate program (one of the largest).

Behind the scenes traditional affiliate networks are duking it out with their own affiliates who look to compete.  What does this translate to for marketers?  Whether you’re looking for sales or leads affiliate networks have become, in varying degrees, inefficient.  I endeavor to explain how:  Adware has played a role as has affiliate marketing’s intersection with search and, finally, CPA networks—miniature affiliate networks. 

CPA Networks Defined
In order to understand what a CPA network is one must understand, first, where they came from.  While this month’s Revenue Magazine discusses Cost Per Action networks and attempts to contrast them against “traditional” affiliate networks like Commission Junction and Linkshare, it fails to present the most interesting, useful perspectives that speak to why CPA networks are the work of the devil and what, exactly, they are. 

In order to understand what a CPA network is one needs to understand a few facts:

1) Affiliates have grown up to become affiliate networks
2) Many of your biggest affiliates aren’t affiliates; rather, they’re affiliates who have transformed into affiliate ("CPA") networks
3) These affiliates-now-networks are better at motivating affiliates than traditional affiliate networks

Confused?  Here’s an example.

An advertiser pays 10% to any affiliate (or “publisher") off the street through their CJ program.  It pays 15% to its very best or “super affiliates.” One day, a super affiliate realizes that it could use it’s privileged position and eliminate all the business risk associated with being an affiliate (buying advertising, conducting search optimization, managing product data feeds, testing creatives).  The affiliate simply approaches and motivates other affiliates to generate orders and/or leads for the advertiser… offering them 12%.  Hey, that’s better than the 10% “street” commission over at CJ.  The other 3%?  That’s profit for the super affiliate.  Indeed, it comes at the rate of 80-90% margin to the “super affiliate now turned network”—even after it has purchased 2 Porsche Boxters as contest prizes to their highest grossing affiliates.  Sure beats the little tchotckies advertisers themselves use as contest bait (you can keep your plane tickets Orbitz!). 

Dangers for Advertisers, Profits for CPA Networks
The result?  From the advertiser’s perspective, transparency is further clouded and affiliate accountability is diminished if not eliminated.  At this point advertisers are multiple arms length from the affiliates who present their brand—without access to their names, addresses basic company information, etc.  They literally have no idea who is presenting their brand, how or where.  Who does?  Their affiliate who has “gone network” on them.

Then again many big brands out there don’t care… “it’s a volume game”—the budget waste and lack of control (risk) is accepted as a cost of doing business.

Again, the “super affiliate turned network” takes its 15% and breaks it up.  It’s operational costs amount to an ISP / hosting bill as most of these cats are programmers and can easily create a tracking solution - or lease it from Digital River (who recently acquired DirecTrack’s tech solutions division).  In short, anyone can be an affiliate network today… so long as there are advertisers willing to pay the various layers.

Advertisers Waking Up
Increasingly, advertisers are being invited to understand the details of this rather scandalous shell game that translates to “serious financial waste” within their affiliate programs.  Of course, some marketers are more vulnerable than others based entirely on how much they choose to understand regarding how affiliates send visitors and rack up commissions.  Some are happy to not know the details, over-paying affiliates on occasion, while others are more frugal.

Increasingly, larger numbers of advertisers are troubled by this phenomenon and are making change by auditing affiliate programs.  As a result, affiliate rules, terms & conditions are being modified to reflect a more balanced financial arrangement. 

eBay Offering Retailers A Lesson
eBay knows how to run an affiliate program—paying affiliates based on customers acquired and percentage of actual profit (unlike retailers).  Also unlike retailers eBay has announced that it will not participate in Commission Junction’s (CJ) Link Management Initiative.  What’s good for the rest of Valueclick’s CJ unit isn’t good enough for eBay, a company that recently found itself in the middle of a spat between CJ and rival Azoogleads—an affiliate turned competitor; indeed, a CPA network that wanted to remain a CJ affiliate and have some direct relationships with advertisers. 

In summary, Azoogleads built its business on CJ’s back (as a super affiliate), got funded and then sat up and proclaimed itself a competitor (a CPA network). 

If I were eBay I’d be mid-stream on a seven year itch considering the circumstances.  Could the AzoogleAds - Commission Junction spat signal eBay’s love affair with Valueclick’s Commission Junction is waning?  Might eBay tell them both to kiss off?  While some might label this wild speculation I believe that eBay’s technical prowess is significant (read: they could easily build and implement their own tracking and reporting) and affiliate loyalty strong (affiliates are more likely to do what eBay suggests than take orders from a network).  Does the third party (network) really play a valued role?

How Super Affiliates Beat Networks
Indeed, the battle is over and in some ways affiliates that are now CPA networks have beaten the networks that helped create them.  They maintain much higher profit margins and are flush with cash to the point where they pay their affiliates in advance.

AzoogleAds’ funding, I thought, was remarkable.  I suggested in a blog at Revenews that VCLK had better pay it some attention.  To summarize, a few years ago large affiliates figured out that they could create a business much more lucrative than being an advertisers’ affiliate… even if they were receiving an elevated commission/bounty from you (the advertiser).  In fact, this “super affiliate” level commission would allow them to beat the affiliate network at their own game. 

Could Affiliate Networks Implode?
Almost like a cherry on top of a poison-laced sundae, the realization of this shell game might just send retail-based advertisers over the top.  Realization of the above described economics could be the straw that breaks their back and forces large, multi-channel advertisers - and even some smaller brands - to bring affiliate marketing in house—out of the hands of affiliate networks that have, in many ways, failed them.  Retailers have already realized:

- Affiliate marketing doesn’t scale well
- The promise of a “virtual sales force of teeming thousands” offers little value and increased risks
- As their own search efforts increase, affiliates offer decreased value (as affiliate search marketing tactics clash with the advertisers’ tactics)

When you realize how simple affiliate marketing tracking and reporting technology really is you start to see how a techno-Goliath like eBay (who should already formed tight bonds with its affiliates) might just take a pass on not only the shell game but the inflated costs that come with it.  I’m left wondering if the entire affiliate services industry loses here. 

As a side note, in September 2002 “auctions” made up 15% of CJ’s business according to publicly circulated documents defining “Vertical Market Strength.”

Advertisers are tired of paying Commission Junction for Google-supplied visitors through affiliates. 

Valueclick is tired of operating Commission Junction, allowing Google to pocket the big money.

The operational aspects of Commission Junction’s (CJ) recently announced Link Management Initiative draws attention and concern but there’s more afoot.  Valueclick (NASDAQ: VCLK) has already told us what they intend on doing with their Commission Junction unit and, in fact, where the affiliate marketing segment of Web marketing is heading—cost-per-click (CPC).  One need simply put things in perspective; hence, I posit, they’ve announced their intentions.  They’ve declared war with Google and will now run like hell from affiliate marketing—a novel idea but a colossal missed-opportunity that Google has cashed in on.

Google Envy
In short, I see this as all about VCLK (a company with many direct relationships with advertisers) realizing that Google (GOOG) has it easy.  Think about it this way: At Google, advertisers require no transparency on where visitors come from (upon clicking ads).  Affiliates?  Advertisers increasingly want more transparency on who the affiliate is, where they get their visitors (do they have a loyalty or affinity to the affiliate site or just passing through a link—a.k.a. “affiliate arbitrage”?).  Sure click fraud is discussed but has the fear of getting ripped-off held advertisers back from throwing billions at Google AdWords and that poor excuse for a contextual advertising network, AdSense?  Has it stopped affiliates from successfully reviving the get-rich-quick-in-your-undies-without-leaving-home dream?  No again.  Affiliates have profited wildly forcing some affiliate networks (i.e. the one I helped found in 1999) to become affiliates themselves.  How?  Affiliate-style arbitrage called “search services.”

Buh Bye CPA, Hello CPC
So… what’s Valueclick’s answer?  Their own existing click network?  Not a chance as it’s frozen “TV dinners” compared to Google’s surf & turf (in the eyes of advertisers).  But what about CJ’s network—there are a few diamonds in the rough here. 

I suggest Valueclick is, already, slowly weaning advertisers off of paying a pure cost per acquisition (CPA) / commission structure.  Here’s how: They are boiling all CPA advertising (the “pure revenue sharing” arrangement that powers all affiliate programs) down to an effective cost-per-click (CPC) and, slowly, “moving over” all the affiliates.  This includes their existing Valueclick network (the “old” network + Webclients + Fastclick) which will work on a CPC or a CPM (cost per thousand impressions).

Affiliates & Publishers Are Already Dumping CPA
Why will affiliates change to a CPC model?  Are you kidding?  It’s the dream of all moderately successful affiliates.  Ever wonder what separates a Web publisher from an affiliate?  Visitor traffic, of course, and when an affiliate gets enough traffic they tend to shun “pure commission” deals (money on the come) for the sure bet (cash for every click they send).

More evidence: Affiliates have rushed head-first into the domain industry and the “domain tasting” realm.  The domain industry?  Indeed, there is such a thing and if you’re unaware of companies like Marchex (publicly held, no less) it’s time to pay attention to the hands-down hottest sector in the interactive media realm.  A good place to start learning is DomainNameWire.com or hit the industry’s trade show T.R.A.F.F.I.C. 

My point: affiliates created the domain sector.  How?  By buying domains.  Why?  Take a look at Marchex’s books (and strategy - they buy domain-savvy affiliates!) and you’ll see a clear answer: AdSense and Yahoo! Search/Overture ads.  In short, ”forgotten about“ and/or abandoned or just plain available but not owned Web URL’s (domains) can receive a lot of visitors—all looking for somewhere to go (click).  Let’s not forget everyone’s favorite—mis-spelled URLS for companies or products.  Yes… affiliates know that game well but the game is changing from shuttling visitors through an affiliate link (when they leave the “s” off of 1800flower.com) and on to the URL they were looking for to providing them with a page filled with adds (AdSense and Yahoo Search ads). 

Affiliates want the money not a promise of money IF the visitor converts.

VCLK’s History of Hating CPA
But I said that VCLK is dumping CPA for CPC as if it’s been formally announced.  Indeed… I offer more evidence:

At the end of the day “traditional affiliates” get paid a commission or bounty on the desired action (sale, lead, subscription, registration).  That “pure performance” payment can be boiled down to an effective earnings per click using simple math.  Commission Junction itself calls it (for years now!) EPC (earnings per click).  Hell, they measure the value of their entire network with the EPC metric and have used it as a point of differentiation for years.  Hello!

The Quiet Revolution
Was CJ’s Todd Crawford’s departure a surprise?  Why would it have been.  A look at what CJ has become now should be no surprise considering how they positioned themselves (EPC, refusing to call affiliates anything but “publishers” and marketers “advertisers") prior to the Valueclick acquisition.  In fact, CJ “dressed itself up” for someone like VCLK to come along and buy them, did they not?

In the end VCLK wants to sell clicks, folks.  It’s a much bigger and EASIER (more fluid) business to be in.  Affiliate marketing is, by definition, a project that involves partnerships. 

What’s been the biggest mantra the last few years inside the space?  “Know your affiliates.” Check AffiliateManager.net, Affiliatetip.com, MarketingSherpa and on and on… the message has been loud and clear for a good half decade now—AFFILIATE MARKETING IS WORK!!!

Google Adwords?  Just like the “auto pilot” days of affiliate marketing we’ve seen Google capitalize on advertisers desire to 1) pay on performance and 2) set it and forget it.

Advertisers Want to Set It & Forget It
Advertisers love ‘em and hate ‘em.  Affiliates.  So why are affiliate programs the darling and, as MarketingSherpa and others have documented, concurrently the most under-funded marketing channel? 

In my experience, a majority of advertisers don’t want to know affiliates at varying degrees—they’d just assume look past them (especially those using adware and spam).  Marketing teams are paid to move the needle and blow through ad budget.  As Wayne Porter points out in my interview with him, this does not include detecting what amounts to be ad fraud.  Again—it’s a lot of work to know your affiliates (build relationships) let alone run investigative campaigns on them each week.

Advertisers Leave CPA, VCLK Ready to Help
Search + Incentives = The Affiliate Marketing Sector

CJ has told us that this is true and one need only do simple math to figure out who’s benefited most from affiliate marketing since its inception—GOOGLE.  If most of affiliate marketing is search, incentive shopping and coupon sites then isn’t the need to dump CPA for CPC fairly obvious?  VCLK is simply removing the middle-man… namely Google in a colossal cash-grab.  The implications for Google here are quite serious in my estimation.  Moreover, advertisers:

- Struggle with having to discount themselves (work with coupon and “cash back” sites)
- Hate “sharing loyalty” (partnering with the likes of uPromise)
- Are clashing with affiliates in paid and natural search engines
- Are taking calls from Google reps asking “tired of paying your affiliates a premium for our visitors?”

VCLK’s success has, for years now, been limited AND tied way too close to that of the affiliates in their network—who use PPC search (Adwords) and “natural” search optimization techniques to drive visitors to their sites.  The optimization affiliates are getting whacked by Google (systematically taken out of the index faster and faster).

Are advertisers ready?  VCLK thinks so.  I think so.

Affiliate marketing’s future looks bright but a lot different than the current landscape.  Careful observation of trends indicates dramatic change is on the horizon.

Valueclick / CJ
Consider Valueclick’s (NASDAQ: VCLK) recent shift within its Commission Junction unit—toward a more “media” centric world when it decided to change the most fundamental of all operational tasks (linking).  In the end, the move gives more power to the network and, perhaps, the advertiser.  When it comes to understanding the data-driven economics of affiliate marketing Valueclick will hold the power position moving forward.  Sound Google-like?  You betcha.  In fact Commission Junction goes as far as suggesting, today, that the company is henceforward part of a “significant move in the industry towards javascript links” by other companies such as Google Adsense (via Monetize).

This lead this particular affiliate to suggest…

“Everything about this initiative indicates that you are switching to a contextual advertising model and away from traditional affiliate advertising.”

Buzz, Viral & Word of Mouth
Consider the myriad of highly experienced, respected industry veterans who see a future for “traditional” affiliate marketing that looks a lot more like word-of-mouth / viral and buzz marketing.

Emerging Product Data Goliaths
While most of the “product data feed management” discussion in affiliate marketing is focused on Feedshare, GoldenCAN and similar technologies affiliate managers would be wise to research companies like ChannelAdvisor, Channel Intelligence, Mercent and Truition.  I recommend reading up on companies like eToys (PDF) and take note of how affiliate marketing is becoming a cog in a multifaceted, highly automated wheel—less of a stand alone marketing strategy.

Last week, Seattle-based Mercent (a company founded by the same team who originally developed the Amazon Services unit) rolled out the retail industry’s first search engine solution to quantify keyword performance by client-identified business metrics—metrics like return on advertising spend.  Quite literally this allows marketers to “pre-set” business rules that allow them to automatically adjust keyword bids within a range that results in results in a ROI metric such as return on ad spend.

As an example, when working with pay-per-click search engines or comparison engines, Buy.com may set a rule that it will only pay $1.50 - $1.90 for the term “Toshiba Flat Screen” providing that ROI works out to an ad spend of $0.35 for every $1 in revenue produced.  Buy.com can also factor in how fast a particular keyword produces (turns inventory) and raise its budget assuming that the keyword can produce a volume threshold.

An Automated Future?
What does this mean for affiliate marketing?  Mercent suggests that it can automate similarly and has named Linkshare and Commission Junction as partners.  I say again as partners. 

The Future: Affiliate Managers
Such a future could signal a re-writing of the typical affiliate managers’ job descriptions given the “freeing” aspect of such tech tools.  Less time may be spent fussing with newsletters and more time with analyzing data to create better business rules that enhance a more important metric (versus sales and conversion).  In the future, affiliate managers may very well require a background in analytics much like search managers do today.

Will affiliate managers be automated out of existence?  Allow me to cut off the critics and suggest absolutely not.  I’m suggesting that they may, however, require a new skill set in a more “performance media” dominated world.

That’s right, Anne Holland says affiliate marketing spending is taking a marked downturn… print it!

I’ve been taking quite a beating by industry colleagues—even the affiliate marketing’s biggest name, Shawn Collins, for years now based on my repeatedly insisting that retailers are pro-actively shrinking their affiliate marketing programs while concurrently ratcheting up search marketing spending.  I’ve been accused of everything from making things up to consulting with a minority of clients that aren’t representative of the industry as a whole.  It even got so ugly (truthful?) at Revenews that they deleted all the comments!

I’ve had an occasional opportunity to bring forward people like Jeff Nienaber, Lisa Papageras and John Hoge to back up my statements but that’s not been enough for the likes of Shawn Collins or David Lewis. Even InternetStockBlog.com’s David Jackson has suggested that affiliate marketing audits aren’t *really* becoming widespread since I’m not providing “any data to back up the claim.”

Suggesting that ValueClick’s Commission Junction numbers aren’t being boosted… “enhanced”... “massaged”... by VCLK’s purchase of inkjet retailers isn’t enough?

Even bigger than Sendtec CEO’s acknowledgment of the clash between affiliates and marketers inside search MarketingSherpa’s Anne Holland and Stefan Tornquist are jumping on the bandwagon. 

According to Holland… one of the biggest, most respected names in marketing research… solutions like (surprise surprise!) Mercent and ChannelAdvisor are quickly capturing marketer’s dollars as they embrace SKU-level, rules-based PPC management.  Big whoop right?  Wrong.

While thumbing through her entire set of 2005 research and data, Holland noticed…

“... folks that were super, super heavy search marketers… tended to be spending a lot less on affiliate marketing. In fact, they were spending about half what the average marketer was spending on affiliate marketing.

So it seemed like if you ratcheted up your search marketing it sort meant you were taking away affiliate marketing from the affiliates.  You were in a way taking it in-house. So that has real implications for the future of affiliate marketing.”

Tornquist responds…

“That’s absolutely right. And we’ve seen other data to corroborate that. That retail marketers, especially while the model of a few years a go might have been to use their affiliates essentially as an outsourced search provider because so many affiliates are quite advanced in using search marketing so retailers were willing to allow them to use trademarked and branded terms.

And really with the incredible growth in search and so much research coming out on the efficacy. I think a lot of marketers saw those sales as really being redundant.”

Anne may have shown up at Affiliate Summit to give a rosy keynote… complete with with hugs, kisses and a not so subtle recognition of the industry’s feeling relatively under-appreciated (not so sexy since search marketing showed up)... but she’s not going to publish research that doesn’t reflect truths about what’s going on. 

For the retail segment, affiliate marketing IS, in fact, shrinking.

Hosted by: Jeff Molander

Guests:
Wayne Porter, Sr. Dir. Greynet Networks
Chris Boyd (PaperGhost), Dir. Malware Research
Facetime Communications

In part two, Wayne Porter begins to discuss how and why major name advertisers (and advertising networks they work with) unknowingly get caught funding criminal activity.  Where he ends up, though, is remarkable. 

Porter actually predicts that the realm of click fraud is bound to get a lot more ugly as massive, criminal-operated networks of “zombie” PC’s ("botnets") turn their guns in a new direction.  Detecting them may, as it turns out, not be easy for Google, Yahoo Search or even sophisticated operations like Porter’s team of researchers. 

Press PLAY button to listen now or download as MP3.

DOWNLOAD

0:00 - Introduction
1:02 - How and why would major advertisers fund criminals?
2:04 - The Problem: brokers of ad brokers of ad brokers
2:34 - The connection between performance advertising and botnets, fraud
4:58 - Risk levels of cost per sale vs. cost per click vs. impression/CPM
6:28 - How brands are affected
7:16 - A new form of cost per click fraud?
9:19 - Small but widely distributed click fraud botnets may prove highly problematic
11:30 - Enterprise risks to botnets
11:48 - The potential for a new form of click fraud
13:44 - Web marketing, becoming less efficient and dangerous for brands
14:52 - “Botnets can be used for pay per click fraud” (Porter)
15:10 - Learn from the Past: AllAdvantage “Get Paid to Sleep”
17:05 - New SpywareGuide.com blog
19:15 - Funny story: “Mr. Bean” movies among badguys
21:31 - Closing remarks

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