Direct Response Sold
When it comes to affiliate marketing solutions, two pairs of companies get mentioned more often than any others. One is Commission Junction and Linkshare, the other Direct Response and KowaBunga. ValueClick snapped up Commission Junction in 2003, Think Partnership took KowaBunga in March of last year with Rakuten buying LinkShare six months later in September 2005. That left Direct Response as the odd-man out in the performance-based advertising solutions provider category, up until yesterday anyway. That was when word of the companies acquisition by billion-dollar Digital River spread.
While best known for its Direct Track product, the $15 million (plus an undisclosed earn out) acquisition also included several other Direct Response Technology products – KeywordMax, DNEList, and DirectLeads. Interestingly, the acquisition excludes two of Direct Response’s earliest products, MyCoupons and GiftCards.com, the latter having as much value in the domain name as the business built on it. Speaking of price, it’s not obvious whether $15 million paid by Digital River was a lot or little. Compared to Commission Junction’s $58 million cash and stock price tag it doesn’t seem that bad, but when compared to the $425 million paid for LinkShare by Rakuten, though, it pails in comparison.
The picture becomes even murkier when benchmarking the $15 million acquisition price on its clients’ performance. One of them sold for $15 million (including earn out) last year. And, were Direct Response’s largest client to sell today, it would go for several hundred million dollars. With numbers like that, the knee jerk reaction is that any company which can power those types of companies should have a higher value. Yet, it’s in the “powering them” where the company differs most from its affiliate solution providing cousins, Commission Junction and LinkShare. Unlike those two companies, Direct Response’s chief product, Direct Track, focuses on helping others create mini-marketplaces where advertisers and affiliates can interact. Commission Junction and LinkShare, on the other hand, are the marketplaces.
Take for example a merchant like CitiCards, a client of Commission Junction. A publisher who wishes to promote CitiCards must become a member of a central CJ marketplace, even if they only will run CitiCards. Were CitiCards to have multiple offers such as Gold Cards, Platinum Cards, and Debit Cards, each would appear as a separate offer from CitiCards on CJ. With Direct Track on the other hand, a company like CitiCards could create their own self-contained affiliate environment. They still communicate with the affiliates directly as they do with Commission Junction, but its affiliates do not belong to a potentially larger network.
Courting companies such as Wal-Mart, CitiCards, Macy’s, and Buy.com takes a strong sales force and an enterprise software approach. It is most likely one of the reasons that Direct Track found its legs with smaller merchants and ultimately the arbitrageurs’ cousin, burgeoning ad networks. Those who run such networks are in many ways brokers to the next level. Rather than promote one or two offers to a handful of traffic outlets, they put in place the infrastructure, in this case Direct Track, to handle hundreds of offers to an equally large number of publishers.
By not being the gatekeeper, though, Direct Response has no control over the traffic, and no ability to materially impact it. And, it’s for that reason the company is priced correctly. Digital River will be able to leverage Direct Response’s cross-network publishing technology to get its own offers in front of all the network operators. But this decentralized network approach won’t guarantee the billion-dollar e-commerce outsourced provider that any operator actually picks it up and makes it available to their traffic sources. So, while Commission Junction and LinkShare don’t directly control traffic, as opposed to Direct Track, they are only one step removed, not two.
That Direct Response sold is nothing short of a huge win. The ASP software world is not only an incredibly tough market to make money in, but it’s also a thankless one. When times are good, no one knows you exist. When things go wrong, you have clients you never knew you had complaining loudly. You facilitate massive amounts of business but get none of the value you help create. It’s all of the heartache and none of the glory…until yesterday that is.
