Whose customer is it, anyway?

This is a story of what can happen when good technology does bad things—good and bad being relative terms depending on where you’re camped among the different constituencies involved in online affiliate marketing.

Affiliate marketing, the practice by which sites that host links to online retailers receive a commission when someone clicks on the link and makes a purchase, is driving about $14 billion annually in online sales, according to Forrester Research Inc., and getting bigger every day. So is the competition among affiliates for commissions. “Smaller affiliate sites that were making it two years ago are finding it a lot more difficult. It’s gotten much more competitive,” says Wayne Porter, vice president of product development for Afftrack LLC., which tracks transactions for affiliate sites.

One reason is that technology developers have come up with new and now increasingly controversial software aimed at getting those affiliates who use it a bigger piece of the pie.

Not so simple

Affiliate marketing used to be simple: A site owner who wanted to earn commissions from retailers negotiated the commission, then put up a link at his site. Every time a visitor clicked on the link and made a purchase, the site owner—or affiliate partner, as they are known—earned a commission. But then things got complex.

Today, affiliate partners can take any number of forms. They’re still primarily web sites hosting visitors. But now, many are companies that offer awards or rebates and that load shopping tools into a consumer’s desktop or browser to make it easier for that shopper to buy from retailers that give the awards or rebates. Some companies take the use of these applications one step further. They offer consumers a browser enhancement that the consumer wants, such as the ability to download shared music files, for example. Attached to the browser enhancement in some cases is ad software set to activate when it recognizes designated words on pages viewed by the user. When that happens, the software may pop up competing offers, or even overwrite competing affiliates’ links on a page.

It’s the more aggressive uses of these applications that are causing the dust-up in e-retail marketing. The software, a broadly-drawn class called browser enhancements, adware and parasiteware, depending on how it’s used and who’s describing it, can distract and in some cases, even redirect online shoppers poised to purchase from a retailer through a link they’ve clicked at an affiliate site. As the consumer is considering the purchase, the software pops up a competing offer. That offer may direct the shopper back to the retailer the shopper intended to purchase from anyway, or to another retailer offering the same or another product. The bottom line is that it’s the sponsor of the link ultimately used who gets commission on any sale that results. The other affiliate site—where the shopper started—gets nothing, though the shopper clicked a link on that site first.

A summit

Michael Coley, founder and operator of Amazing-Bargains.com, a deal-hunting site that hosts affiliate links to a wide range of retail sites, including some big players such as Overstock.com and Eddie Bauer, estimates that he has experienced a 20% loss in commissions over the past year from affiliate sites that use the software. He himself does not employ it. “Imagine if there were software that automatically redirected TV ads. Everyone would be pretty upset,” he says.

Many affiliate sites are just that, and the issue already has sparked an unprecedented meeting of the four major affiliate services providers. In November, providers LinkShare Corp., ValueClick Inc.’s BeFree, Performics Inc. and Commission Junction Inc. came together in an attempt to hammer out uniform industry standards for use of the tools. Their hope was to create a level playing field among affiliates without stifling the appropriate use of new shopping and ad applications as they develop.

The outcome of what attendees termed an “emotionally charged” meeting, in which representatives of the providers’ affiliate sites and retailers participated, was a Code of Conduct backed by Performics, BeFree and Commission Junction. LinkShare chose another route: a more aggressive stance that puts affiliates under contractual obligation not to violate LinkShare’s code of behavior in their use of the shopping applications. LinkShare is asking its affiliate members to sign its Anti-Predatory Advertising Addendum.

The diversion of commissions seems unfair: Affiliate A spends time and resources to provide content that gets visitors to its site and to nudge them toward retail partners’ links, only to have Affiliate B swoop in, divert the sale at the last minute, and scoop up the commission without sharing any of it back.

Adding to complexity

But the issue isn’t quite that simple. The shopping applications have roots in CRM programs, typically rebate and loyalty programs. Those programs direct a percentage of each qualifying sale to the consumer’s chosen charity, cash back, awards program, or college fund, such as Upromise.

To get credit for purchases, participating consumers download an application to their desktops, then click on it when searching for an item. If the shopper types in “cell phone,” for example, the application sends the query to what is essentially a custom search engine that delivers results listing retail sites where the purchase would qualify for points or rebates under the program.

Trouble is, consumers who’d registered for the programs and downloaded the application kept forgetting to use it. “The CRM issue it creates when customers don’t get their rebates is very time-consuming,” Porter says. “They contact the merchant, then the incentive site, and you have to track down the transaction. It’s a big problem.”

The marketing sites set out to solve the problem with browser plug-ins that functioned as automatic reminder services. The plug-ins, voluntarily downloaded by shoppers, are set to recognize certain keywords. When the consumer sets out to shop online, the plug-in reviews all the words on pages the shopper is viewing, then automatically pops up offers at qualifying sites that sell the item the shopper is searching for, without the shopper having to take any action

“These applications started out as pretty straightforward,” says Sam Gerace, CTO and founder of affiliate provider BeFree. “They made use of affiliate marketing technology, but they inserted a useful rebate search engine. Then they evolved. Just like Internet ads went from banners to pop-ups to windows that now overwrite the whole page until you click to make them go away, they became more aggressive over time.”

How aggressive is too aggressive? That’s something the industry is still thrashing out. The answer revolves largely around whether use of the applications is permission-based, and whether the consumer fully realizes he’s granting that permission. Consumers have a right to want loyalty program rebates, and to download automated reminder services that make sure they get them. And it’s no surprise that affiliates who’ve worked hard to get shoppers to their site and engage them with the right offers once they are there feel robbed when competing offers pop up in the shopper’s browser, potentially drawing away sales and commissions, or when their links are overwritten outright.

A retailer’s dilemma

But there are affiliates and there are affiliates. A whole spectrum of companies that use the plug-ins, ranging from those with business models that provide consumers with added value such as loyalty points to those that redirect sales and collect commissions while seeming to offer little else—and many business models in between—participate in a variety of affiliate programs with retailers. Many different types of programs are capable of driving big numbers to retail sites, which leaves online retailers on the horns of a dilemma.

“It’s one of the more contentious issues,” says one retailer who declines to be named. “It touches ethics and the fact that you’ve got relationships in place — it’s a tough one.”

Though some retailers are laying low while they evaluate options and figure out a position, others have been much more vocal. With some 15,000 affiliates, for instance, Overstock.com makes big use of affiliate marketing, and Overstock’s affiliate manager Shawn Schwegman was an organizer of the industry meeting in November.

“If you are an uneducated merchant, or an affiliate manager that doesn’t understand the issues, affiliates that use parasiteware look like they do a phenomenal job because you’ll see revenue that’s higher than any of your other affiliates,” Schwegman says. “If you sort it out only by total sales, you’ll see a handful of places like Gator and WhenU have great numbers, and you might want to see how much more they can do. The reality is a large percentage of their sales would have been credited to other affiliates, but because of the way their software works, they get credit for it.”

Gator Corp. and WhenU.com Inc. take issue with such statements. Both say their software doesn’t overwrite other affiliates’ links when their own offers pop up on a page, and they differentiate themselves from programs that do. They say consumers choose to download their applications, and that the choice to act on any offers that appear as a result rest with the consumer.

“WhenU gets a commission only when the software displays a clearly-labeled WhenU offer, the consumer chooses to click on the offer, and then transacts at the partner site,” says CEO Avi Naider. “We’ve never engaged in the practice of automatically redirecting links. Our offers benefit consumers, send more traffic to merchant partners and increase conversions for them.”

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Gator chief marketing officer Scott Eagle says that consumers who download any of Gator’s free browser enhancements, such as an e-wallet that will fill out the consumer’s stored shipping and billing information at retail sites with one click, agree to view Gator’s pop-up ads in exchange for the enhancements. Eagle adds that Gator’s software does not direct consumers back to sites they’re already on to collect a commission, and that shoppers can uninstall the application if they want to.

“I disagree that I’m at fault for offering the consumer a different retailer, a different deal, that he found more value in,” says Eagle. “I understand that someone is angry if they feel they’ve lost a sale, but that’s competition. It doesn’t make it illegal or immoral.”

So how much should a retailer care which affiliate gets credit for it as long as the retailer gets the sale? According to Schwegman and others on various sides of the issue, plenty.

Anything that upsets the balance of the affiliate marketplace could eventually backfire on retailers that depend on affiliate marketing to acquire new customers, they contend. For many retailers, affiliate relationships are an entrenched part of the marketing program.

“Any marketer would tell you that the largest share of their margin contribution comes from affiliate marketing,” says Steve Messer, CEO of LinkShare, the largest of the four major affiliate services providers. “They may make 10% to 30% of sales through the affiliate channel. But from a margin perspective it’s the most cost-effective thing they do because it’s pay-for-performance. Because of that, you will see retailers that have up to 50% of their margin come through affiliate programs.”

A rich base

Retailers’ successful affiliate programs usually have a rich base that ranges from smaller niche sites to content sites to shopping aggregators, says Porter, who adds that it’s risky for retailers to concentrate affiliate relationships only among a smaller number of larger affiliates.

But aggressive shopping applications could alter the diversity of that mix, because affiliates that don’t use the applications could drop retailers who are working with affiliate sites that do use them. The applications depend on other affiliate sites to generate traffic where they can pop up. If enough affiliates drop a retailer, overall traffic can diminish over time, and so would the numbers delivered by other affiliates that use the applications to feed on them.

Then there’s the issue of fair play. “I don’t want the affiliates that are out there working hard for us to have their commissions stolen by somebody else. I don’t want them to have bad feelings,” Schwegman says.

Indeed, the applications can generate negative fallout even for retailers that don’t depend to a great extent on affiliate marketing. At Tower Records, for instance, director of Internet operations Kevin Ertell says he gets frequent complaints from customers annoyed by large pop-up ads for other products that they see on Tower’s site. But the reality is Tower and others don’t place the ads on their sites. The ads are created by triggering software, keyed to recognize specific words or URLs, that resides on the user’s browser. How did it get there? The user downloaded the application, sometimes without realizing it, to get a utility he or she wanted.

“We have to explain to them that we didn’t put the pops-up there and that they downloaded something somewhere along the line that is causing it to happen,” says Ertell. “It becomes a customer issue because they blame us.”

Dropping affiliates

The debate on PR and ethical grounds goes on, but beyond that, the bottom line in retail is sales. Michael Zaya, founder and CEO of 123Inkjets.com, which sells reconditioned printer cartridges, has 60,000 affiliates through several affiliate service providers, which drive 50% or more of his sales. Concerned about the impact of the use of aggressive shopping technologies by some of his affiliates on others, he recently dropped affiliates that use it in ways he believes are unfair. That decision has cost him $200,000 in sales from those affiliates in a single month, he says—not to mention sales lost when browser plug-ins pop up competing offers on the screens of shoppers visiting his site. “This doesn’t make perfect business sense, but I did it for other reasons. We are being strong-armed by these companies,” he says.

Each marketer will have to weigh the pros and cons of any potential market advantage including technology. Meanwhile, with both upside and downside at stake, the industry isn’t speaking with one voice about how to handle this Hydra-headed problem.

While there’s agreement that the outright theft of commissions is wrong, LinkShare’s contract addendum and the Code of Conduct backed by the other three major affiliate service providers represent different approaches to enforcement. LinkShare’s effort, the more aggressive, stems from research on the issues that Messer says stretches back more than a year. An internal procedure at LinkShare that flags unusual patterns of inquiries noticed a shift in traffic that LinkShare eventually tracked to the new browser plug-ins.

Messer’s first concern was that LinkShare merchants were complaining that the technology was stealing sales off their sites; the second was that the problem had the potential to grow much worse. “This software was doing things inside the browser,” he says. “What if, for example, you typed in Dell.com on your browser and it never let you go there, but always sent you to Gateway, or IBM, or somewhere else instead?”

Messer says he spent months investigating the new phenomenon including meetings with makers and users of the shopping applications to understand their business models. He also set LinkShare’s attorneys the task of finding a body of law that covered these instances. They determined that while the activity had more to do with copyright law than anything else, laws written to cover the print medium could prove challenging to enforce when applied to Internet communication.

Contract vs. law

And so rather than attempt to weed out misuse of the applications initially via the legal route, LinkShare early last year created an addendum to its affiliate contracts that spells out how browser plug-ins cannot be used by affiliate members. “We don’t want to stifle the technology because there are some valuable uses. We just want to be covered against the bad uses,” Messer says. Affiliates found to be in violation can be dropped from the network and if necessary, LinkShare believes legal claims could be more easily pursued on the basis of contractual violations than copyright violation. LinkShare’s addendum “commits affiliates to terms that prohibit them from activities such as blocking, altering, substituting, redirecting, etc. any click-through that originates from any LinkShare Network affiliate site,” the company says.

Performics, BeFree and Commission Junction have come to the issue more recently, saying they became aware of the problem last year. The three providers’ published Code of Conduct spells out guidelines on use of the shopping applications. “When these tools started to appear we wanted to make our retailers aware they could enhance the conversion process for the merchant, but we wanted to make sure the use of these shopping applications was fair,” says Performics’ senior vice president of sales and marketing Chris Henger. But, he adds, “Some of these technologies are taking a pretty aggressive position, especially in terms of how the applications ended up on software that the consumer was really downloading for another use.”

The Code, adds Henger, seeks to balance the aggressive stance taken by some of the makers and users of the applications against legitimate use of a utility the consumer clearly wants and fully realizes he or she has downloaded. The Code bars interfering with and “improperly influencing” customer referrals and altering software in any way that will reduce commissions earned by another affiliate. It also bans software that modifies the content or appearance of another affiliate’s pages and prohibits the bundling of downloadable software shopping applications that can’t easily be recognized and uninstalled by the consumer.

While the Code addresses the misuse of plug-ins in this way, it doesn’t prohibit other uses of the applications by affiliates. And while the three providers say they will drop affiliates found to be in violation from their programs, they are not asking affiliate members to sign the Code. That in essence leaves it up to retailers to decide whether, beyond the provisions on misuse stated in the Code, they see benefit in working with affiliates who use the applications in other ways. “It’s important for retailers to understand these marketing techniques for the purposes of understanding who they want to do business with,” says Jeff Pullen, CEO of Commission Junction. “Ultimately, a retailer’s willingness to do business with affiliate A, who may be using a technique that is not in the eyes of others on a level playing field, may mean that he is not in a position to do business with others who don’t want to drive traffic to his site precisely because he is doing business with affiliate A. Understanding the business practices of his affiliates will help the retailer maximize the benefit of the affiliate marketing channel.”

The coming evolution

Messer reports that most affiliate users of the technology in the LinkShare network have signed LinkShare’s addendum and modified their software accordingly. But at the end of the day, the effectiveness of either the Code or addendum approach depends on whether affiliates who use adware and plug-ins actually toe the line and the extent to which violations have consequences.

The industry has taken steps to guide the use of the new shopping applications in a way it believes will protect the overall integrity of the affiliate marketplace, which has become a highly valued marketing channel for e-retailers. But the marketplace has its own voice. If retailers and consumers ultimately experience more benefits than drawbacks in using any of the current generation of tools, they’ll likely do so; if not, they won’t. And that experience will shape the evolution of future such applications.

“We do expect this to evolve,” says Gerace. “And we’ve said, conduct yourself in a fair and ethical way in your business practices, whatever the underlying technology is.”

mary@verticalwebmedia.com