It seems that at almost every trade show I run into an old colleague that I’d known during my time working for a network before launching Oasis.  Most of the time when they ask what I’m doing now and I say I own an affiliate network, the response is generally along the lines of, “There’s still money to be made as a network?”  People think of the “crash” of 2010 that left a string of victims for dead like eAds, Copeac and Azoogle and think that the network side of the industry is no longer lucrative or sustainable, but that couldn’t be further from the truth.  The key is to understand the cyclical nature of the business, and to understand that the business has its peaks and its valleys, and that those who thrive are the ones that not only enjoy the peaks, but also survive the valleys.

Even though it seems like a strange comparison, the affiliate marketing business in some ways mirrors an industry that is dear to my heart – the professional wrestling business.  And a wrestling analogy can be made that explains why some in affiliate marketing succeed, and others fail.  Much like affiliate marketing, wrestling is also a cyclical business.  And much like affiliate marketing, those who survive in wrestling do so because they’re able to survive the valleys as much as they’re able to enjoy the peaks.

In the mid-1990s there were two wrestling companies that ruled the industry in terms of a worldwide presence.  World Wrestling Entertainment (WWE) had been the king of the mountain for years, owned and operated by renowned promoter Vince McMahon.  And World Championship Wrestling  (WCW), though predominantly operating in the southern United States, had national coverage thanks to its parent company Turner Broadcasting and its cable powerhouse station, TBS.   In an effort to compete with McMahon for market share, a young and wily executive named Eric Bischoff got his boss Ted Turner to open up the purse strings and offer guaranteed contracts to talent.  Up until then, wrestlers mostly worked with incentive-based contracts meaning the more dates you worked and the better the numbers were, the more you made.  But conversely if you were injured or didn’t work for some other reason, you made next to nothing.  Bischoff’s guaranteed contracts meant the talent got paid whether they worked or not, and so he was able to lure a lot of McMahon’s talent away, and helped turn the “ratings war” in favor of WCW.

Time went on, and WCW continued to thrive and lead the business generating millions in revenue and profit despite the heavy talent costs.  But then it happened – the same mistake we’ve seen time and again in affiliate marketing.  The Turner executives decided, “if we’re doing this well with two hours of TV a week, what if we add a third hour?  What if we create a second show?”  That’s what they did, and at first it worked great.  But having to fill several new hours of original content a week meant they needed more talent, which meant they gave out more hefty guaranteed contracts.  Eventually the company peaked, and for a variety of reasons the numbers started to decline.  The fixed costs brought on by those contracts became like an albatross around Bischoff’s neck and when they eventually caused the company to start bleeding money, the higher-ups at Turner started to pay better attention to the books and Bischoff was booted out.  By 2001, WCW was losing millions a month, AOL merged with Turner and decided to shut WCW down, and McMahon bought its trademark and video library rights for next to nothing.

The moral of that story and how it pertains to affiliate marketing is this – when the numbers are good, it doesn’t mean that you should go out, hire a bunch of new people, open new offices, and take on a bunch of new fixed costs, because in all likelihood your numbers will dip at some point and when that happens, you might find yourself being smothered by those fixed costs.  Some networks continue to follow this pattern today; one quarter, they’re on a hiring frenzy.  The next quarter they lose a major advertiser or there’s a Facebook sweep or something, and suddenly they’re laying off dozens of people, closing offices, and maybe even shutting down altogether.

So is running an affiliate network a sustainable business?  Absolutely.  But if you don’t understand the cyclical nature of the business; if you used to be an affiliate or an Affiliate Manager before starting your own company but never actually saw the inner-workings of a network before; or if you’re an “outsider” with no experience thinking this is going to be a profitable new venture for you,  good luck.  It’s more complicated and more elaborate than it appears to be on the surface.  And so odds are, the young “network entrepreneur” idiots that post pictures of themselves on Facebook wearing fancy watches or smoking big cigars will be casualties of the business while those of us that actually know what we’re doing will still be here, still working, still thriving.

As always, your feedback is welcome!

james(at)oasisads(dot)com