Companies with significant affiliate marketing revenue streams (where money is made by referring people to e-commerce sites to make purchases) took a beating this past quarter.
Scripps Networks announced this morning that revenue at its Interactive Services segment, the majority of which comes from referral sites Shopzilla and BizRate, was down nearly 30% in Q209 versus last year. Valueclick announced on Tuesday that its affiliate marketing revenue had dropped 13% in Q2 ’09, following a 10% drop in Q1 ’09.
We think there are significant risks that the affiliate marketing market could not return to growth levels seen in previous years. Here is why:
Demand for consumer products may take years to recover. By now most people, from the sophisticated investor to the average Joe, are realising that the economic recovery may consist of several years of modest growth, not necessarily the V-shaped recovery we have seen in years past. This likely means that consumers will continue to be careful what they spend their money on (retail sales have declined year-over-year each month since November 2008 according to the US Census Bureau). This in turn should lead to less purchases both at brick and mortar shops and e-commerce sites. The fact that Shopzilla’s leads were up 14% in Q2 ’09, but revenues were down at the Interactive Services segments appears to support this (consumers are doing a lot of window shopping, but not a lot of actual purchasing).
If more states adopt the internet sales tax, e-commerce sites could decrease affiliate relationships. The movement on the part of states to collect sales tax from internet companies that do not have facilities within their borders is gaining steam. New York adopted the tax despite significant opposition (its attempt to tax music was shot down though) and North carolina recently followed Florida, Texas, Illinois, Massachusetts, Connecticut, and California are also considering charging internet sales tax. As e-commerce companies see their margins erode even further they may pull the plug on sharing some of their revenue with affiliate marketing companies. Citi analyst Mark Mahaney pointed to this risk when he downgraded the VCLK shares to “Sell” from “Neutral” yesterday.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.