THE MAD MEN SERIES - part 02
Which advertising companies do have it? A look at Affiliate Networks.
Earlier, Mr Mimetic argued that a lot of money goes around in advertising without a decent Return-on-Investment.
Only a very selected group of companies in the Advertising Industry delivers a service that is cost-effective or adds real value for their clients.
You can read up on those arguments here:
In the rest of the series, we will dive into those value-adding advertising companies and check whether or not they are investible. Can they overcome the 10-step hurdle, and be eligible for the Mr Mimetic Fox Fund?
Our first venture will be in the world of Affiliate Networks.
What are they? How do they make money? And why is a seemingly overcrowded, low-margin, competitive space still a great hunting ground?
NO CURE NO PAY
Suppose you have a product to sell, and an ad company gives you this pitch:
“You only pay us a % of the sales that we generate, through our online campaigns. Only when you make a sale through us, you pay us. No sales, no pay.”
Sounds great, no?
To Mr Mimetic it sounds like the only way any ad company should work.
As a commission on incremental (extra) sales.
Effective advertising is all about skin. Skin in the game.
Apart from reputational control, there is no risk involved. There is also no reason NOT to advertise.
Remember the introduction piece of this series?
In it Mr Mimetic put a picture of a Dyson Vacuum Robot and the following caption:
All Mr Mimetic needed to know was WHEN Dyson would come out with a robot cleaner.
Suppose Mr Mimetic would have made that caption a clickable link. A link that went straight to the Dyson Web Shop page of this Vacuum Robot. If one of you clicked on that link and subsequently made a purchase, Mr Mimetic would have earned a commission on that.
Mr Mimetic didn’t. But that’s how it works.
Such a link is called an Affiliate Link.
And it does work.
It is the most cost-effective way to advertise since you only pay for extra sales. No cure, no pay.
A few ad companies specialize in this so-called “partner marketing” :
“Partners receive a commission when their marketing efforts result in a transaction. On the other hand, advertisers (businesses who own the online store) receive high-quality traffic and pay only for results.” - from one Partner Marketing cie’s blog
Those partners can be all sorts of entities:
Influencers for sure, but also blog writers, loyalty programs, discount platforms, voucher websites, cashback portals, apps,…
Companies that connect Advertisers with Content Creators (or Partners) are called Affiliate Networks.
The job description of those “affiliation networks” is to make sure both the advertiser and the partner can get as rich as possible. That comes in the form of matchmaking: connecting the right advertiser with the right partners, but also working with partners to be as effective as possible.
And as you can suspect, the network effect plays a role here. If you have access to a lot of Content Creators, a lot of Brands will seek you out - and vice versa.
Being the biggest network in a market creates a moat.
The way to build that moat is to play the “niche” card: you can specialize in Financial Products, for example - or Sports Betting, Lifestyle Products, or Beauty Products.
Or you can specialize in a certain region or a certain language.
Knowing your Advertisers better than your competition, knowing your Partners better than your competition, and being trusted by both, are the makings of your moat.
Although most Affiliate Networks position themselves as an ad-tech company, where they simply provide a matchmaking platform, where algorithms match Partners to Advertisers, and have a payment service attached to it…
….Mr Mimetic thinks it is better treated as a People’s Business. Like a Sports Agent. Or Money Management.
Remember the basic rule of ad tech: it's 60% tech and 40% bullshit. - First Party Capital
Quality matters.
You can play the ad-tech card and you can play the size of your network card, but then your service becomes not more or less than a commodity. There is no exclusivity in signing up to a network. As a Content Creator, you can join 10 networks if you want to. Or you can sign up for the one that keeps its margins the lowest and its commissions to you the highest.
“94% of publishers join 2 or more affiliate programs, while 39% and 20% of publishers use 3 or more and 5 affiliate marketing programs” - influencermarketinghub.com
As a Content Creator or Publisher you obviously experience soon enough what kind of brands and products work best for you.
As for Advertisers: you want to make sure your product is pitched in the right places. You don’t care about the how, you care about the results: does it bring in sales, without long-term damage to the brand?
As a result, Operational Margins are razor-blade thin for Affiliate Networks. Between 2 and 4%.
So, to Mr Mimetic there seem two possible long-term winners in this space: whoever is the Costco of Affiliate Networks, or whoever has a bespoke boutique approach, with deep knowledge of the different nodes in the network.
Although almost 30 years old, the affiliate market is a mere 17 US$ Billion worldwide. (That 17B would be a small commission on a sale via an Affiliate Link)
Big, global Affiliate Networks have over 25,000 advertisers, over 300,000 active partners, and are present in over 180 countries.
Mind you, this is outside the so-called Walled Platforms like Amazon, Google- and the Meta-universe. For example, Amazon pays out over 11 billion US$ in gross commissions to Affiliates and has 900.000 Partners in its network.
It is estimated Amazon alone covers almost 50% of the overall Affiliates Market.
Apart from those big 3, there are…
“9,600 affiliate related services/companies worldwide in 2023” - influencermarketinghub.com
Big and small, who all work to some extent in the space.
A lot of those are professional Publishers or Affiliate Partners - firms that create content and use the Networks to make money. Those will be the subject op Part 3 of the Series.
Anyway, it’s a crowded place out there. That seems bad, at first sight. But it’s a splintered crowd, with none of the big “open” networks claiming more than 10% of the market - which creates opportunity.
The space hasn’t matured as of yet. There is no clear winner.
In other words: the ideal hunting ground for a Serial Acquirer
Although it is the absolute most effective form of advertising (Advertisers only pay when they earn), Affiliate Marketing is typically under 10% of the Marketing Budget.
The trend is on the rise, however. It is projected that the Affiliation Market space might double in the coming 5 years.
Now, which one of the Affiliate Networks is investable for the Mr Mimetic Fox Fund?
Quantitatively, but especially: in terms of quality?
CRITERIA
As a reminder, these are our 10 criteria:
MARKET CAP under 2 billion US$
REVENUE GROWTH of 15% CAGR
MARGINS, RETURNS, RATIO’S above 25% Compounding Rate and/or higher than revenue growth
INSIDER OWNERSHIP meaningful enough to influence decisions
FINANCIAL HEALTH to stay flexible in a tough environment
COMPETITIVE ADVANTAGE some special sauce
BARRIERS TO ENTRY tougher or niche industries are better
ACQUISITIONS & CAPITAL ALLOCATION be special and be epidemic about it
DISTANCE ANALYSIS 10x as a minimum
VALUATION under 15x EV/EBITDA or under 0.5 on the Mr Mimetic Score
How many Partner Management Firms of Affiliate Networks fit those criteria?
Barriers to entry are low. Consider the situation as similar to retail. Any donkey and his sister can start a grocery shop or restaurant, and any granny with a laptop can start an affiliate network from scratch. So, that’s problematic.
Making money with it, though? You need some scale for that. Some expertise.
Results.
It reminds Mr Mimetic of two female friends of his: one opened up a premium kid clothes shop, and one opened up a premium lingerie shop. One stayed open for 5 years and is now closing down, with hardly having made a penny, despite not having to pay rent (she inherited the building), the other one is just simply successful.
To make it in a very competitive landscape, you need a “competitive advantage”. You need to know who needs something, versus who wants something. You need to know where the distinction is between vanity and basic need.
For some women, a good quality set of lingerie is a physical necessity. Knowing that makes all the difference. The vanity purchases are just the cherry on top.
So, how many Partner Management Firms of Affiliate Networks fit the other 9 criteria?
From those Mr Mimetic knows about? Exactly one.
Let’s run it down.
THE RUNDOWN
The company IPO’d in 2021.
In terms of growth, we are looking for companies that can double sales every 5 years.
They are still rather small. Revenue came in at around 122 million US$ in 2023.
Some of the numbers:
Market Cap is a tiny 69 million US$
Revenue grew 26% CAGR since 2019.
EBITDA grew 31% CAGR since 2019 beating revenue CAGR.
The current Ratio is 1,30 and the Quick Ratio 1,29 - wich means they can pay the bills.
Insider Ownership by management is over 50%
Net debt is negative (more cash than debt), since there is no long term debt.
Return on Capital Employed is typically above 100%
Incremental Capital Invested is negative.
Those are numbers almost none of the Affiliate Networks can match. Most of them have a negative Operating Income (investing in scale, hoping to be profitable when that scale is reached), yet don’t have those growth numbers. Others are debt-ridden (besides being unprofitable).
Now, a gazillion Affiliate Networks are private, or part of a larger group. We are only talking about public, pure-play Affiliate Networks here.
GOING THE DISTANCE
The Total Addressable Market is quite bigger than the current revenue…
“The channel is now more than 25 years old and worth an estimated £3bn across Europe.” - the cie’s blog
…but also expanding, because of the cost-effectiveness of affiliate and partner-marketing vis-à-vis traditional advertising.
In 2023 they connected 7500 “partners” with 1800 “advertisers”, in 12 countries.
In theory, there is a path to grow 10x.
The countries they are in right now are rather small: Denmark, Sweden, Finland, Norway, Poland, the Netherlands, Switzerland,…
Expanding to bigger countries should have a big effect on revenue. Right?
You rather be the one-eyed king in the land of the blinds, than a strong handsome knight in a luxurious court with plenty of strong, handsome knights.
Language is a competitive advantage.
Deep knowledge of the local market, certainly is.
Since what makes a successful Partner Marketing Firm?
It’s knowledge of the local market. Effective matchmaking between content creators and advertisers. Effective postings.
It’s making partners and advertisers…rich. Effortlessly.
Obviously, there is a network effect: when you have the most advertisers and the most partners, in any given market - you have obvious advantages to find the most effective connections. Partners and Advertisers alike are more likely to join you. And you can figure out how tech can make that ideal match for you.
Or you can have a more qualitative approach. The boutique approach, where people know each other’s strengths and wishes through more personal connections. In-house coaching.
This is the approach this company takes. They are hoping this human touch makes them more effective.
Instead of building those positions from scratch, they acquire market share in any new market.
Revenue growth is almost exclusively the result of Acquisitions.
“The organic growth amounted to 4.0 percent and the remaining sales were attributable to acquisitions. (We) increased organic sales in nine out of twelve geographic markets and the total organic growth showed that the company continued to gain market share in a weak market.” - Kalqyl Research
Is the market weak, or are the local markets they play in already mature?
Margins are rather lowish.
There is a lot of depreciation and amortization going on, which is a non-cash item. In this case, EBITDA is the way to gauge if margins are profiting from efficiencies of scale.
Those seem to trend in the right direction.
All in all, Mr Mimetic thinks they have an edge over their competitors in terms of the depth of their approach. The CEO is very adamant about getting the acquisitions to adopt the same approach and working methods, instead of the usual (Nordic) approach of decentralization.
He is also very adamant that growth is in their DNA.
For the short and medium term, that is something Mr Mimetic can agree on.
VALUATION
When a company has a negative Net Income, and is trading under 1x sales, but is printing Cash-from-Operations you are in the sweet spot in terms of discovery.
The market doesn’t fully realize the profitability of the company, yet:
It’s a sign you can get in early, in terms of multiple expansion.
ROUNDING IT UP
All in all, Affiliate Marketing is a tough market to be in. It is, however, one of the only effective ways to advertise. Mr Mimetic suspects there is a long-term trend where Affiliate Marketing will be an increasingly bigger part of the Global Advertising Budget.
“Overcrowded”, “commodity-like”, “low margin” and “very competitive” seems like an industry you want to stay away from. But again, history teaches us this environment is exactly the perfect hunting ground for Serial Acquirers, who do it right.
Meaning: they have a system in place that gives them an edge.
When added to that strong insider ownership as the steward of the ship and reasonable valuation? You are at an ideal crossroads.
Mr Mimitec thinks it pays to jump on the train, in that situation.
So, what Affiliate Network are we talking about?
They are Swedish.
And they are called: Adtraction Group AB.
They will, indeed, be part of the Mr Mimetic Fox Fund.
Thank you for reading.
Kind regards,
Mr Mimetic.
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SOME SOURCES
Members of the The Affiliate & Partner Marketing Association (APMA)
Kalqyl Research about Adtraction
Review of Adtraction and others.
