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Affiliate Marketing’s Dirty Secret

I wrote this article a bit over two years ago. I just re-read it and realized that most of what was said came true. Read this article and think about companies like Epic Media Group aka Kinetic Social or COPEAC that have closed since this article was written. Some bloggers have said that my articles are negative, one “famous” blogger took me on for saying this in 2010. Who was right?

I had quite a bit of mails regarding my last article and the changes the industry is going through.  Many people were interested in knowing exactly what was going on in the industry, especially which companies are probably going to go out of business and which companies are having problems. I’m not going to play the name game, but needless to say there is a reason right now for the enormous changes that are happening in the industry. Companies are announcing mergers, putting themselves on the block to be sold, and many are in the final stages of shutting their doors. There is a little dirty secret that is only being talked about behind closed doors in the industry and more a lot people need to pay attention.

Last year, several major and no-so-major affiliate networks grew in leaps and bounds from nowhere.  Many of these companies were making millions of dollars off of continuity programs, often with backend “flogs” and other questionable methods of promoting their programs. 2009 was a very, very good year for them, and some of them were reporting upwards of $20-30 million extra for the last quarter of 2009 in revenue from those programs lone. They went out bought other companies left and right for ridiculous amounts of money and invested in having dozens of high paid executives.

However, something bad happened at the end of 2009 – both the FTC and the Credit Card Merchant companies announced that they would start cracking down on continuity programs from Dieting, Teeth Whitening and the similar. The FTC was investigating these offers, and in turn the Credit Card Merchant processors were seeing enormous charge backs after 3-6 months, and starting to question the integrity of the companies behind this.  Many companies were offering continuity programs, with no customer service and little fulfillment abilities; customers were not getting their products, and when they did complain could never find someone on the phone.

Combine this with the continued complaints about fake news sites, credit card merchant processors decided to make a significant change in 2010. They suddenly cut off a dozen major continuity companies, refusing to process new orders. These companies came back from the holiday vacation, with no ability to charge new customers and suddenly found themselves without a business model. Most of the companies were somewhat virtual – they had outsources their own distribution (when a product was actually delivered) and often were being run in business suites in places like Boca Raton. The owners seeing that their days were numbered, shut down, took what profits that there were and left the affiliate networks holding the bag.

Several major companies that had seen huge profits over the previous quarter were now faced with not being paid by multiple companies.  I’ve heard that some of the major affiliate networks suddenly were owed as much as $15-20 million – much of it they could never collect because it was from companies that were basically non-existent, with no assets, no guarantees.

Here’s the dirty secret, no one is talking about. It’s now April, four months after all of this happened — most companies only have 60-90 days cash flow (some less). Companies that had announced in 2010 great expansion, possibly going public, perhaps buying other companies are faced with the real dilemma that they have a huge loss that they can no longer afford.

What is going to happen in the next few months? I honestly don’t know – I know as I mentioned in a previous article, we will see significant changes. These changes will often be promoted as positive steps, but be rest assured that many companies are making changed in order to save their ass as their investors, the boards, and the banks start to look at this enormous loss.

Read the announcements you get from various companies about their future – notice a lack of actual numbers. Companies are being sold right now, without any announcements of the amount, or marketed with terms like a “Deal worth $100 million” but not naming the cash amount of the deal. Since they are private companies they are allowed to do this, without actually mentioning the real amounts. The reason is simple – many of them are taking a way out to ensure they don’t go out of business, selling for almost nothing, selling to get rid of the enormous debt that they are about the encounter.

Credit right now to affiliate companies should be given sparingly. Consider who you do business with, how they made their money and more importantly if they can really pay. A company in a good position will often stick with what they are doing best, focus on their company growth – a company with a bad position will be out there looking for ways to save themselves from being shut down.

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Pace Lattin

Pace Lattin is one of the top experts in interactive advertising, affiliate marketing. Pace Lattin is known for his dedication to ethics in marketing, and focus on compliance and fraud in the industry, and has written numerous articles for publications from MediaPost, ClickZ, ADOTAS and his own blogs.

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  1. This was a good article in 2010 and a good article now. There are still a lot of little dirty secrets in the affiliate industry that I am sure will be exposed in the coming months. To be honest there is very little ethics in business anymore and especially in the online marketing business.

  2. “…many of them are taking a way out to ensure they don’t go out of business, selling for almost nothing, selling to get rid of the enormous debt that they are about the encounter.”

    This assumes M&A is done without any due diligence. No organization in the M&A equation is going to blindly assume the “enormous debt” referenced. No matter how and M&A deal is financed (cash, stock, warrants, etc)there is a regimented, widely used process for vetting designed specifically for these reasons. If “their investors, the boards, and the banks start to look at this enormous loss” doesn’t it extend to potential buyers? Of course it does. “Accretive” rules.

  3. I give it 2-3 months before Ryan eagles networks go down in flames guy hasn’t paid publishers for months unless they complain on a forum sure sign the end is near for the eagle

    1. >I give it 2-3 months before Ryan eagles networks go >down in flames guy hasn’t paid publishers for months >unless they complain on a forum sure sign the end is >near for the eagle
      you betcha +1

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