New York Times E-Commerce Report March 22, 1999 By BOB TEDESCHI Affiliate Referrals Generate Big Profits If 1998 was the Year of the Portal in electronic commerce, 1999 may be the Year of the Affiliate, as Web merchants realize that one way to balance the books is to recruit other sites to help sell their goods. The partnerships range from deals between companies with established brands to arrangements that retailers make with individuals who have built personal home pages. Members of the Geocities personal Web community, for instance, can earn commissions on purchases that result when they refer visitors to Internet retailers that participate in Geocities' Pages That Pay program. While the terms -- and success -- of such deals vary widely, some retailers say affiliate programs are becoming a crucial source of revenue, particularly as it becomes apparent that advertising revenue alone cannot sustain most Internet businesses. "The return is phenomenal," said Julie Wainwright, who until recently was chief executive of Reel.com, a video seller. The Reel.com affiliate program was so successful, she said, that it "generated more revenue than any of our portal deals." Ms. Wainwright left Reel.com last month to become chief executive of Pets.com, an online peddler of pet supplies, where she intends to develop an affiliate-referral network. The Internet bookseller Amazon.com is widely credited with pioneering the affiliate model. The company began its "associate" program in 1996, offering to pay Web sites that refer customers to Amazon a percentage of any resulting sale. Amazon's legion of affiliates now numbers 230,000 -- a figure that attests to Amazon's vaunted marketing prowess, of course, but also to the considerable buzz that surrounds affiliate programs. The music seller CDNow has the second-largest affiliate program on the Web, with 207,000 members, while other large retailers' programs are growing at a brisk pace. Why the buzz? The biggest draw of affiliate programs is that merchants do not have to spend marketing dollars to acquire a customer until a purchase is actually made. According to industry executives, top-tier Internet retailers currently spend between $20 and $40 to acquire a new customer -- an exorbitant amount compared with off-line retailers, and primarily a result of the high cost of advertising on Web portals like Yahoo and Lycos to develop brand name awareness. Often, merchants must then spend time working with the portals to find the best approach to delivering customers. "With affiliates, you pay for performance," Ms. Wainwright of Pets.com said. "You don't pay upfront and then work to get performance." The best proof of the increasing popularity of these programs is the fact that merchants are competing against each other to attract affiliates, said James McQuivey, an electronic commerce analyst with Forrester Research, a consulting group. For the last two years, the bounty paid by merchants has grown steadily, he said, "from 8, to 10, to 12, now as high as 20 percent." For some high-margin goods like toys, in fact, bounties can reach as much as 25 percent. For merchants, the real dollars flow from a small number of affiliated companies that bring in the bulk of customers. According to the research firm Jupiter Communications, 15 percent of affiliates account for 85 percent of sales. In many cases, these are high-traffic or highly focused sites like SCN Athlete Daily, which tracks the activities of 125 popular athletes. Even with high-performing sites, though, merchants must do more than simply post a link and wait for the registers to ring. The Sports Superstore Online site, for instance, has three full-time employees who work with more than 2,000 affiliates (including SCN Athlete Daily) on merchandising techniques meant to improve the chances of a sale. The payoff: one year after starting the program, the site gets 7.5 percent of its revenue from affiliate sales. Helio Fialho, the company's chief executive, said he hoped to push that to 18 percent by the end of the year. While some companies, including Sports Superstore or Amazon.com, run their affiliate programs in-house, others have chosen to use third-party services like Linkshare and Be Free to manage the relationships. These so-called affiliate networks provide services like sending small monthly checks to thousands of affiliates, policing affiliates' sites for possibly offensive material and dealing with the technical challenges that inevitably arise with such programs. For Internet companies that sign up to be a retailer's affiliate, one drawback is the risk of confusing viewers about the site's mission -- a particularly thorny issue for media companies. On the one hand, such sites do not want to risk appearing biased toward advertisers, by essentially selling goods that appear on news pages where they are mentioned. On the other hand, media sites are loath to give up affiliate earnings as a source of revenue, particularly since advertisers are paying less for banner ads. "It is absolutely a fine line, but every media company is drooling over the idea of getting involved in commerce," said Bill Bass, a media analyst with Forrester Research. "Of course, it causes editors to clutch their stomachs whenever it's mentioned." Such relationships do pose risks, Martin Nisenholtz, president of The New York Times Electronic Media Co., acknowledged. Under an agreement between The Times and Barnesandnoble.com, book reviews on The Times' Web site are accompanied by a "buy it online" link to the bookseller. "It boils down to the perception that something has changed," Nisenholtz said. "The reality is that there's absolutely no interaction between the editorial side of the book review and the advertising side. We handle commerce the same way we handle advertising." To address the issue, Nisenholtz said the company would soon "publish a very clear set of guidelines about these agreements and what they mean." Another risk, for merchants and publishers alike, is that as more sites go into the business of selling goods, the Web could start to resemble a billboard-laden highway. And if consumers become turned off by a constant barrage of sites trying to sell them something, they could lose their appetite for buying anything online.