Web companies take sales into their own hands

Affiliate programs--the popular practice by some content sites of linking customers to Web stores--are under attack. A crop of e-commerce service providers such as Vitessa, Escalate and Iconomy are telling some content providers that they are losing money by sending customers to another site.

The answer, according to these companies, is to keep customers on content providers' sites by selling goods themselves instead of sending customers "out the side door." Come May, Turner Broadcasting System will shut links on its site to Barnesandnoble.com and Reel.com and begin selling goods directly to users, according to Vitessa chief executive David Mullin.

"I think the (e-commerce service providers) are a seamless way for content companies to provide commerce services without making huge investments to support Web stores," said Gomez Advisors analyst Alan Alper.

The service providers create Web stores for companies that don't want to worry about--or to pay for--warehouses, customer service representatives or inventory. Most of the companies share profits with the host site or charge an "infrastructure fee," as does Escalate.

Other companies that are adopting the ready-made Web store approach include Egreetings and Quokka, which have signed with Escalate, and American Greetings and Excite@Home, which have penned deals with Iconomy.

The thinking is that companies with heavy traffic, such as the online greeting card companies, should have access to consumers' wallets.

Many content providers have relied on selling advertising space, but Internet users aren't clicking on banner ads like they once did. As a result, companies are seeking new revenue streams.

"We got into this because we saw that the affiliate model didn't make sense," said Iconomy chief executive Aaron Day. "You're essentially selling your customer. So if you send your customer to, say, Amazon, they essentially now own your customer."

Amazon.com helped popularize affiliate programs in 1996. Although some affiliate models differ, most follow its lead. The giant bookseller pays other companies to post links to its site and send customers its way. According to a Nielsen report last January, Amazon derives half of its traffic from companies that are members of its "Associates Program."

Barnesandnoble.com attracts 51 percent of its customers from affiliate partnerships; Reel.com draws 46 percent, according to Nielsen.

Following Amazon's success, affiliate programs have grown popular with Net start-ups, which pay larger sites to post links to their firms. While it is a way to draw some of the larger companies' traffic, it also is expensive.

"Investors don't care about traffic numbers as much as they used to," Alper said. "They care about companies that can make money. The costs make affiliate programs prohibitive to some companies now."

Last month, eToys said it is scaling back its affiliate program.

But the costs of doing e-commerce as a side business can be high. Vitessa's Mullin said that because it has gathered several different wholesale firms to provide goods for its customers, the company must divide earnings among the wholesaler, itself and the host site.

He acknowledged that Amazon, which buys in bulk and can negotiate discounts, often offers a better price.

Additionally, there is risk in hiring an outsider to sell goods in your name, said Gomez's Alper. If an outsource company delivers the wrong items or offers poor customer service, it can hurt business and reputation.

"They don't have control," Alper said. "What that means is because your name is on the store, when customers get annoyed, they blame you."