File Sharing Debate Extends Into E-Commerce

Editor’s Note: This week’s article is authored by an Internet colleague, Jeff Molander, president of Molander & Associates Inc.

If you think that the peer-to-peer (P2P) file sharing debate that rages within the entertainment industry has nothing to do with e-commerce, guess again. Not surprisingly, companies that make file-sharing tools - allowing consumers to swap music and graphical images - are looking for sustainable revenue streams. Flying largely under the radar, P2P players like Morpheus, Limewire, Kazaa and others have begun offering shopping services to their users. In fact, they are making a big splash in the world of e-commerce, largely through leveraging affiliate programs - a strategy wherein marketers pay a commission or bounty to an affiliate partner for referred sales or desired consumer actions.

So where’s the problem for direct marketers? It has recently come to light (mostly due to the clammer of small business owners who run lesser-known affiliate sites) that tactics being used by some P2P - and other large affiliate players distributing downloadable “shopping assistant” applications - are questionable, perhaps unethical and absolutely troublesome for marketers. Even more concerning, these tactics may also be the source of potential headaches among a percentage of consumers who actively shop loyalty, philanthropic or cash-back properties such as uPromise.com, iGive.com, eBates.com and Northwest Airlines Online WorldPerks Mall. In total, such Web properties contain tens of millions of active online shoppers.

“P2P applications are providing new functionality for their users in hopes of maintaining loyalty for their core service. This is an evolutionary step,” says Greg Kerber, CEO of WURLD Media, an e-commerce technology provider to financial and P2P software companies. “P2P providers may be new entries into the e-commerce arena but online shopping is nothing new to the average P2P user.”

Companies like WURLD Media provide cutting-edge e-commerce technologies to their clients; however, once in place, these technologies are sometimes being used in a troubling way - such that it is forcing the otherwise highly competitive affiliate networks to hold joint discussions for the first time ever. Most recently, BeFree, Performics and Commission Junction went so far as to issue a joint affiliate “Code of Conduct” aimed at leveling the playing field and creating a fair working environment for all players.

Dissecting the Problem

Since generating revenue from their user base has been problematic thus far, P2P players are increasingly turning to affiliate programs that allow them to tap into e-commerce without actually becoming a seller of goods or services. This is being accomplished simply by adding an online shopping component to their popular file-swapping applications that reside on a consumer’s PC. A few clicks of the mouse and financial relationships can be established between a P2P company and large multi-channel retailers via their affiliate programs.

Many smaller players in the affiliate community contend that - in their efforts to cash in on affiliate programs - some larger affiliates are hijacking commissions that rightfully belong to others. Although many have been quick to direct words such as “thieves” or “crooks” at the P2P companies what has, in fact, been occurring is rather complex and extends beyond the world of file-swapping.

As consumers make their way from an affiliate’s site to a marketer’s Web site, links are used to track referrals - among other pieces of data. Each affiliate has its unique link ID and can, therefore, earn credit (commissions) for sales being referred. Essentially, a handful of the larger affiliates that distribute downloadable applications - such as P2P tools - have been accused of programming their software to inappropriately insert their affiliate link ID in place of other affiliate ID’s. In effect, the larger affiliates are being accused of over- writing the links of smaller Web sites, thereby, negating any actual referrals being made by the smaller affiliate sites and awarding any commissions earned to themselves.

Consumers Risk

As affiliates make a mad grab for marketers’ commission dollars, consumers are also at risk to a degree. As an example, these types of affiliate guerrilla tactics may be responsible for creating problems among consumers who use rewards shopping Web sites. Since rewards and cash-back Web sites use affiliate networks as their primary means to track and process rewards earned by consumers, it is critical that the true referring affiliate link is used for each consumer’s purchase - mainly as unique “member identifying” codes are passed along inside that link as a shopper clicks through to a marketer’s Web site. Passing along each member’s code number allows a purchase to be tied back to a particular consumer; hence, their account is credited with the proper reward.

A good number of cash-back and loyalty properties have begun to use downloadable applications in an effort to make shopping “through” their portal (clicking their affiliate link) to be more convenient. They have interest in making it easy for their members to earn a reward when shopping on the Web. Giving a consumer the option to download and install a shopping assistant makes sense. The trouble arises when some of these digital shopping assistants have been programmed to insert or over-write affiliate ID’s in a controversial manner - similar to how some of the P2P’s have operated.

Brand Risk

Let’s set aside the rewards portal’s headache for a moment and consider the damage to a marketer’s brand a when one affiliate steps on another’s toes. Consider a “family PC” scenario wherein a teenager downloads and installs a P2P program to share music files with friends. This P2P program has a resident shopping application that may or may not be overly evident to the user but is constantly running in the background. In our scenario, a parent decides to shop at a rewards portal - in an effort to send cash directly into his/her child’s college savings account or to fund a retirement portfolio. The parent surfs to the rewards portal, clicks though to shop at the merchant site, makes a purchase and logs off - assuming that all is well and that the purchase was tracked and recorded by the rewards portal; however, the P2P application has inserted its own link - overwriting the rewards portal’s link. The parent’s unique ID was not part of that link; hence the reward, which may be sizable, is not credited to the appropriate account. The consumer’s experience with the brand is now at risk.

Even more mind-bending, consider the possibilities of two customer-side applications going “toe-to-toe” in terms of making a grab for the affiliate links. Some have referred to this as the “battle of the bots.”

Fraud Risk

Additionally, and more disturbing to marketers themselves, some large affiliates have been accused of distributing consumer-side applications that insert affiliate links when no referral was made - as in the case of a consumer surfing directly to a marketer’s Web site. If affiliates take a percentage of each and every sale made at a marketer’s Web site without having made a referral, the marketer is at significant risk. The ramifications of working with affiliates that play such “behind the scenes” games are obvious and could be very costly. A marketer could literally end up paying an affiliate on sales resulting directly from a completely unrelated vehicle - a catalog, e-mail promotion or perhaps a broadcast advertisement.

“A handful of marketers are exposed to what is going on through their affiliate managers but only a few are beginning to grasp how important this is to their bottom line… at the executive level,” explains Wayne Porter, VP Product Development at AffTrack LLC.

Porter’s view on the industry is unique as AffTrack sits in the middle of the fray - helping large affiliates to automate the aggregation of ROI and revenue data across the various public and private affiliate networks. In November 2002, he moderated a series of meetings that resulted in the recently released affiliate “Code of Conduct” published by the affiliate networks.

The code was heralded by Porter as “a major step forward in the industry’s maturation” and is intended to ensure equity and fairness across all affiliates by setting standards and guidance that were previously unavailable. Furthermore, the code strives to provide a fair and balanced solution to the entire downloadable shopping application issue, while setting the stage for the development of additional structure and standards.

The Maturation Process

Porter believes that recent focus within the industry on this so-called “parasiteware” issue has cast light on other, equally important economic and strategic issues for marketers to consider. He feels strongly that marketers must step up to the plate and pro-actively understand more about those who they affiliate or partner with prior to becoming involved. This will help to eliminate what he calls “drive-by performance marketing strategies” - or affiliate programs that are run purely on auto pilot (without much hands-on management).

“Historically speaking, most affiliate program managers have invited anyone and everyone to participate - having performed little if any due diligence on their affiliate partners,” Porter explains. “This is dangerous yet alarmingly common. It’s time for the industry to grow up.”

According to Patrick Toland, Vice President of Sales & Marketing at shopping application software developer TopMoxie, the growth and maturity of the online performance marketing segment has resulted in a strange dichotomy - especially as it relates to the world of downloadable applications and affiliates’ quest to keep close with their members/users.

“Merchants and their affiliate partners are suddenly at odds over their respective marketing practices because their goals are completely different. Most merchants want a consumer to travel through an affiliate link only once - returning directly to the merchant site from that day forward,” stated Toland. “Affiliate partners want to retain their customers and have them continually travel through their affiliate-tracked links. As a result of this polar opposite perspective, marketing by either party is constantly questioned and the use of software-based direct marketing tools is simply an extension of this ongoing conflict.”

Porter also sees a disconnect between marketers and their partners. “What we are seeing is clear - many marketers have approached affiliate marketing purely with a customer acquisition mindset,” he explains. “However, affiliate relationships that have risen to the top have done so because they have effectively driven sales, or desired actions, on a large scale. Essentially, these affiliate partners send repeat customers to marketers on a frequent basis and expect to be rewarded for this. They go beyond acquisition by helping marketers retain customers and increase purchase frequency - oftentimes through the use of customer-side shopping applications.”

Indeed, marketers are reporting that loyalty, cash back and comparison Web sites are producing most of the sales action now that the industry has matured. At the same time, P2P players have made strides as well, yet not all downloadable applications - or their distributors - are alike.

“The affiliate landscape is a growing and quickly evolving ecosystem of many players of differing sizes, functions and trustworthiness,” said Farhad Mohit, Chairman and Chief Product Officer of BizRate.com, an affiliate concerned with proliferation of consumer-side shopping applications. “At each layer there exists an opportunity for fraud and deception; and, at each layer there are many legitimate players pursuing honorable business goals.”

Taking Action

While a few of the file sharing tools have become top referring affiliates for many marketers, a closer look at how some are operating currently - or in the past - has caused some markers to opt out of such relationships. A handful of marketers have gone as far as eliminating relationships that have been in place for years - extending beyond P2P affiliates and into loyalty and cash-back shopping partnerships.

“We have pro-actively decided to discontinue our relationships with all affiliates employing downloadable applications that currently - or in their past versions - over-write other affiliates’ links and/or inappropriately insert their own affiliate links,” said Rick McGrath, Partner Marketing Manager at JC Whitney, the dominant automotive aftermarket part and accessories direct marketer. “We strongly desire to work with partners who can send us quality customers but we have a difficult time partnering with those affiliates who force us to work within the constraints of their customer-side application. When presented with an ‘all or nothing’ deal we have chosen to part company.”

While some are walking away, other marketers continue to try and find common ground with key affiliates.

“With 50 million consumers presently using these applications, retailers now have the opportunity to reach a huge, focused Web audience quickly and easily. But most importantly, we have to keep in mind that it’s the consumer who drives the application and the purchase,” said Kerber.

So far, the industry’s new Code of Conduct is being widely adopted. Will the days of “drive-by” affiliate marketing fade away? Hopefully, yes. Should marketers begin to think in terms that serve to move them beyond the limitations of affiliate models - applying traditional concepts that bring them toward more mature, multi-faceted performance marketing strategies? Absolutely.

>>Jeff Molander is president of Molander & Associates Inc., a provider of strategy and business development services for multi-channel marketers and catalog companies. The company is focused on developing and executing performance-based customer acquisition & retention strategies for its clients. Jeff can be reached at jeff@molanderassoc.com.

Related WebAdvantage.net articles:

News & Information on Affiliate Marketing (6/14/2001)

Related Links:

AffTrack LLC.
TopMoxie
BizRate.com
JC Whitney

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