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Investment drives fundamental change to the affiliate market: what are the underlying forces?

The affiliate marketing industry is seeing more and more investment from top tier firms, representing both the growth and evolution of the space and the interest and investment in its potential.

This investment is driving consolidation, which can simply be a phase in the maturation cycle of a growing industry, but other factors are driving the shift. The rise of ecommerce, combined with an increase in awareness and acceptance of the affiliate marketing channel have driven its expansion and innovation.

“The biggest driver is the secular rise of ecommerce as a bigger and bigger part of the global economy,”

said Marshall Phelps, a managing director and member of the Telecommunications, Media & Technology group at Lazard.

Low interest rates also have investors searching for returns in new places, including affiliate.

“The whole investment sector has been absolutely abuzz for the last few years because of the fact that interest rates are negative,” said Hanan Maayan, CEO of Trackonomics, which was recently acquired by Impact. “Return isn’t being found in the traditional channels so they say where do we see growth? Affiliate and the performance industry has shown incredibly consistent growth for a long time.”

The growing ubiquity and reduced friction in ecommerce (boosted recently by the Covid-19 pandemic) calls for marketing channels to more effectively be in front of customers online.

But the arbitrage opportunities are shrinking for once-effective channels like Google Adwords and Facebook ads,

said Blake Saunders, a managing director of investment banking at Methuselah Advisors.

The pandemic also caused CPM dollars to dry up, said Dave Yovanno, CEO at Impact. forcing publishers to turn to platforms like Impact, Rakuten and CJ. “They came looking for ways to monetize the content that they were already writing,” Yovanno said.“And they learned that there was a new channel to monetize content outside of traditional advertising.”

The rise of a direct-to-consumer mindset is impacting ad spend and increased scrutiny of digital ROI is consolidating ad budgets and forcing brands to better understand which channels produce a lower cost of acquisition.

“The rise of affiliate represents a way for companies to make sure they are getting their toes into the ecommerce river,” Phelps said.

Today’s consumer is also more empowered online, Yovanno said. Consumers are pushing back against some forms of advertising and reject the concept of “come at me and sell me something,” Yovanno said.

“People are not coming online to see ads,” Yovanno said. “They are looking for information.”

Ben Faw, cofounder of AdVon Commerce and also a cofounder of Best Reviews, which was acquired by Tribune Publishing in 2018 and Subsequently sold to Nextstar Media Group for $160 million, said the boom in ecommerce has led to a rapid rise of the review ecosystem. “We’re seeing more proliferation of reviews from major publishers,” he said. That provides a benefit to brands as well, because suddenly their ad spend is getting them mentions in top-tier publications.

Still, the challenge of affiliate marketing has been its limited ability to scale. But that may be changing as the wave of consolidation narrows the ecosystem. Private equity investment into affiliate agencies like LaSalle Capital's purchase of Gen3 Marketing and subsequent roll up of OPMPros and and Mountaingate Capital's purchase of Acceleration Partners and subsequent acquisition of Streamline Marketing suggests that holding companies believe affiliate relationships will soon share data with other channels. The channel itself will have to become much more programmatic, Maayan said.

As global media brands continue to implement and rely on affiliate marketing as a core channel, smaller and mid-size agencies will likely continue to get rolled up, particularly if they are sitting on valuable technology.

“I think it’s very tough to be a niche agency today in a world of bigger tech enabled agencies and bigger software platforms,”

said Jon Claydon, chief development officer at affiliate agency Acceleration Partners.

“A big brand looking to grow globally is not going to want to take the risk of working with a small firm with limited geographical coverage, technology and resources.” That’s one of the reasons Claydon went forward with the recent deal to have Acceleration Partners acquire Streamline Marketing, the performance marketing agency he founded in 2013. He said he didn’t want to be left in the position of being a 30-person operation competing against PE-backed enterprises with their own technologies. Still, he said the advancement of the industry will require those tech advancements in the publisher space, as well as innovation on both the network and service side. Claydon also predicts an expansion of the partner ecosystem and a focus on measuring and tracking the customer journey, rather than just focusing on last-click data.

The ongoing challenge for affiliate managers, said Parternize’s CEO Matthew Gilbert, will be to think about data—specifically measurement—in a new way. Diversified scale will depend on building out technology to allow partners to be found on an automated basis, he said.

Last-click attribution and return on ad spend can’t be the primary metrics of success if affiliate wants to continue to grow as a mainstream marketing channel, he said. “Lifetime value is the metric that matters and it is those numbers that unlock ad dollars,” he said. Sarah Bundy agreed. She’s the founder and CEO of All Inclusive Marketing, which recently sold to Vision7, a fully integrated marketing and communications firm. Bundy predicts the trend of consolidation will continue and networks will acquire brand protection technologies, analytics suites and partner recruitment systems. Affiliate marketing is no longer flying under the radar, she said. A surge in demand for performance marketing and a growing awareness of the channel has created an opportunity, one that industry leaders and investors have proven eager to seize.

Consolidation may represent an investor bet on the industry:

“This is what I would characterize as an incremental step toward the ultimate belief that holding companies will make a series of strategic acquisitions,” Gilbert said.

But holding companies don’t buy fragmented boutique agencies. Potential changes in data privacy regulation could also prove a challenge for smaller companies and publishers. As a publisher, first-party data will become more valuable. And larger ad agencies have more resources to take on such issues.

“The industry will have to adapt,” Gary Kibel, a lawyer specializing in digital media, technology and privacy. “With adaptation comes creativity. I’m excited to see what happens in the next three to five years because I think the models are going to change. Advertising is not going away but the way we do it is going to change.”

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