Startup Review

Linkshare Case Study: Not about the long tail

written by Nisan Gabbay, posted on September 4th, 2006

Why profiled on Startup-Review.com

LinkShare is a leading provider of affiliate marketing solutions which enable online merchants to offer commission for sales driven by other websites, called affiliates. LinkShare provides the technology for a merchant like Dell to partner with and track transactions originated by affiliates. The LinkShare network of merchants and affiliates make it easy for both parties to locate and partner with each other.

LinkShare was acquired in September 2005 for $425M in cash by the largest Japanese e-commerce company, Rakuten. The size of the transaction surprised many industry observers given the much smaller multiples paid for other affiliate marketing companies like Commission Junction, BeFree, and Performics. Hopefully this case study can shed some light on what Linkshare did right and the reasons for the premium paid by Rakuten.

Interviews Conducted: I interviewed two early employees of LinkShare who are no longer with the company and one early employee who is still currently at LinkShare. I also interviewed Jeff Molander, who was a co-founder at LinkShare competitor Performics. I also spoke to several LinkShare customers.

Key success factors

Focus on attracting top-tier merchants.

LinkShare’s strategy was to target the top-tier merchants: F500 companies like Dell and American Express, and leading online brands like Match.com and Hotwire. LinkShare built a solution that catered to these customers better than competitors did. A key aspect to the LinkShare solution is the service and business process expertise they provide for large merchants. While there were four to ten other competitors who could provide a technology similar to LinkShare’s at a lower cost, the top tier merchants valued a solution-oriented approach. LinkShare’s first mover advantage helped to build a knowledge base of experience in implementing affiliate programs that could be leveraged for new clients. LinkShare had a more focused sales strategy and product than Commission Junction (CJ) for the F500. CJ’s merchant product was built more to help get up and running quickly, perfectly suited to merchants that didn’t need much customization. LinkShare would take two weeks to a month to deploy and provide a higher level of customization and service.

Signing the large, brand name merchants was a winning strategy in the early days of the web because they were able to attract the top affiliates. Affiliates preferred to sell these merchants because they got higher conversion rates. Having a large install base of established F500 merchants also lessened the impact of the dotcom crash on LinkShare’s revenue base. Other competitors were much more dependent on start-ups for their revenue, which caused many to fold during the downturn.

Focus on building (and marketing) the size of the LinkShare affiliate network

Linkshare’s main competitor for attracting the large, branded merchants was BeFree, and in 2000, BeFree had more revenue than LinkShare. LinkShare was able to overtake BeFree by focusing on the value that the LinkShare affiliate network brought to merchants, rather than competing on a technology differentiation basis with BeFree. LinkShare was able to establish its position in the market as the only true network-based affiliate model for top branded merchants.

LinkShare was able to attract affiliates by having the branded merchants and a technology solution that appealed to affiliates. LinkShare tracked affiliate transactions using a non-cookie based approach, while other providers used cookie based tracking that affiliates perceived as being less reliable (with the effect of short changing the affiliate). LinkShare’s approach, whether more effective or not, built greater trust between the affiliate and merchant so that the affiliate felt they were being fairly compensated.

Launch strategy

LinkShare had no marketing budget in their first two years of existence as a bootstrapped company. They focused on signing up merchants for the program with the promise that the affiliates would follow suit. Given the early stage of the market, adding a new brand name merchant had the effect of attracting affiliates because there wasn’t the saturation that there is today.

Exit analysis

The LinkShare acquisition price was a surprise to industry observers given the precedent transactions in the affiliate marketing space: CJ bought for $58M by ValueClick in October 2003, BeFree for $128M by ValueClick in March 2002, and Performics for $58M by DoubleClick in May 2004.

Unfortunately I don’t have any view into the revenues or profitability of LinkShare at the time of sale, but here are some thoughts on why the premium price. For one, LinkShare signed exclusive 1-year to 3-year contracts with its merchants and enjoyed a strong renewal rate. LinkShare did an excellent job of leveraging its market position to get such strict, exclusive contracts with its customers. These types of contracts provide an acquirer with more confidence in the projected revenues of an acquisition target, as well as confidence in the long term defensibility of the business. Secondly, having Mitsui as an investor in LinkShare was instrumental given Mitsui’s relationship with Rakuten. Lastly, market timing was clearly in LinkShare’s favor as awareness of the online advertising space has clearly grown since the last affiliate marketing acquisition (Performics in May 2004). CJ sold to ValueClick right before the inflection point in its growth according to those close to the company, as a result, ValueClick probably got a great deal in that transaction.

Reference Articles

There is quite a bit of information about the affiliate marketing industry available online and the LinkShare acquisition did spark a number of interesting discussions. However, there is not a whole lot analyzing LinkShare itself. Below is a list of references I found most useful.

The following interview with LinkShare CEO Stephen Messer from nPost.com I found most useful. It was conducted in June 2001, so it is quite dated, but does have a lot of useful information around how the company got started.

Here are some interesting blog posts regarding the acquisition:

LinkShare’s Messer Comments on Rakuten Deal, ReveNews, October 2005

Shock Over LinkShare’s Price Tag Widely Overblown, ReveNews, September 2005

Marketing Provider: LinkShare, CJ, Performics, and BeFree, ReveNews, September 2005

Some interesting facts on Rakuten.

For some general background on affiliate marketing, check out this useful guide from Squidoo. This article speaks to the challenges of the affiliate network business model.

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