Profile: The future of affiliates

Ory Weihs, CEO at XLMedia, discusses technology, why the old-school days are over and what the performance marketing model of the future looks like

Online gambling is almost unrecognisable from its early days in the late 1990s, with mobile placing desktop on life support and the combined might of regulation and consolidation slowly squeezing out start-ups. Yet in many ways the egaming affiliate world remains an extremely familiar sight. While it’s unfair to say it hasn’t moved with the times it’s been more of a brisk walk than a sprint.

SERPs for some of the biggest gambling terms still return plenty of old-school homepages stuffed with low-content links and it’s still a rarity to find affiliates with a strong mobile product. But there are signs we’re entering an inflection point with a similar focus on tech and content that led the operator revolution about it hit the wider performance marketing sector.

And one firm trying to place itself at the centre of this is XLMedia. “One of the dangers of being successful is the comfort zone,” Ory Weihs, CEO of XLMedia, says. “You’ve seen so many operators and affiliates who were making good money and didn’t invest in technology that are now struggling to play catch-up.”

XLMedia came seemingly from nowhere to position itself as the future of egaming performance marketing. As the only listed affiliate business in the sector it quickly began to ramp up a long-existing strategy of acquiring high-performing websites and integrating them into the business. Websites in the Danish, US and UK market were snapped up while it increased its investment in a Finnish-facing joint venture.

Revenues at the firm grew 47% to $50.7m in 2014 and EBITDA grew 28% to $17m. Almost half of this came through the firms publishing division, which comprises over 2,000 websites in a number of verticals. Publishing revenues grew 27% to $24m in the period through a mixture of organic and bolt-on growth. But arguably it’s the other side of the business that is the most interesting and is the clearest sign of the development of both XLMedia and the wider affiliate industry. It’s what XL describes as its media division, and comprises a tech-driven automated and manual media buying machine funnelling high value players through to its network of 150+ gambling operator clients.

Media revenues grew 105% to $20.6m during 2014 with a large part of that coming through social gaming acquisition EDM which contributed $6m. But Weihs says the core business is in rude health and sees strong growth in digital advertising during the year to come, not just for XLMedia but also the wider market.

“Those affiliates doing media have to throw away the excel spreadsheet and embrace technology as this is the only way forward,” Weihs warns.

Technology-led approach
This technology-led approach has its roots in the early days of XLMedia around eight years ago. At the time Weihs was running what would become XL’s publishing business after growing his third-party affiliate programme into a mini-empire by buying out some of his more profitable affiliates. His partners on the other hand were focused more on the media buying side of the industry.

From then it grew rapidly from “a few guys in a basement” via two private equity rounds to a huge organisation employing hundreds of developers, content executives, analysts and media buyers. “I think what happened the combination of skills was a very powerful one and we were lucky to recruit some very good people at the right time to help us in the process. The key element of this business is very early on we saw we needed to build a tech platform to help us be sustainable going forward. That was a pivotal point for the business, that we took the technological path.”

This focus on technology is a huge part of the XLMedia story, and something that Weihs says sets it apart from most of the other affiliates in the market. “Both in our publishing and media division we took an approach that is not based on intuition. We developed tools to automate a significant part of the process and our employees are able to manage a much larger workload in a more efficient manner. In our media team we’ve developed a lot of algorithms to buy and trade efficiently.”

“Where we can buy programmatic we will do so, where we can use RTB we will do so, but if there is a publisher we feel is very good value for us and will only work on traditional methods we will do that. The technology is just a tool. We are a performance marketing company and our goal is to buy high value users at the lowest cost and if I can use programmatic to do that I will.”

Where he feels the technology comes into its own is in regulated markets where increased inventory and competition creates as many problems as it does solutions for marketing partners. When you have markets such as the UK with £100+ PPC costs and operators looking to squeeze every bit of value they can from their marketing spend, it’s not an attractive scenario for a more traditional affiliate.

“The reach is much bigger, but the challenge is the margins are not going to be the same and you have to work on bigger volumes,” Weihs says. “But if you can manage to do it with auto-bidding and real time analysis you can have a very profitable business model. And we are active in PPC where can be.”

But can any affiliate really afford to be active in PPC any more? “PPC is still a very valid acquisition method and we have the technology in place to do it very efficiently. PPC margins in regulated environments are lower than before regulation, but they are still a valid business model. Like everything in the regulated environment, those who succeed need strong tech and experience behind them.

“The easy times of building some terrible looking front page and making 60% gross profit margins without putting in any effort are gone. Traditional SEO from five or six years ago is definitely not the way to go and you have to have sites that give real value and have engaging content and that is something we’ve worked hard on.”

Bolting on growth
But while technology may be the core of XLMedia’s proposition, it’s not what has attracted all the interest. The firm’s acquisitive nature has seen it spend $29.5m on a variety of social and real-money performance marketing targets, while in February it was linked with a $25m move for an Israeli-based ad-tech platform.

One of the more intriguing aspects of the XLMedia is how shrouded in secrecy some of these deals have been. Since listing in July 2014 it has announced two deals worth $9m between them to acquire firms described solely as a “Danish network of websites” and a UK-focused “sports betting information” website. No further details on URLs have been forthcoming and Weihs says that’s unlikely to change.

“I don’t see any point of that for both sides. I don’t think it benefits the potential seller at the time. Nobody wants to know their company to be exposed at a later date, so out of common courtesy to the potential seller, we’re not going to do that,” he says.

But that hasn’t stopped the industry speculating about various acquisition targets, both past and present. And the composition of XLMedia’s publishing portfolio of over 2,000 sites is one the most hotly discussed topics within the performance marketing sector.

The firm noted in its annual results it spent $11.5m during 2014 on buying websites and domains and would continue to do so during 2015. “We’ve positioned ourselves to be the natural consolidator, not just because we have a lot of money in the bank, but we have the platforms to integrate digitally, and with publishing, we can normally run them more efficiently than they were run before,” Weihs says.

A big part of this publishing efficiency is the content management system, Palcon, XLMedia brought in during the latter half of last year. Developed in-house, the CMS is designed to improve both mobile and social reach and includes a number of tracking and analytical tools which Weihs says will be a crucial differentiator within the increasingly competitive world of affiliate publishing.

“A significant part of our business is yield management, which is something affiliates didn’t traditionally focus on,” Weihs says. “They would place a certain ad in the top position, but not really consider the reasons why or the consequences of that. So using yield management tools is a big area for us.”

A growing threat?
Perhaps a bigger concern for XL is the threat it potentially poses to operators. At its current scale there is little to concern the major operators, but XL retains ambitious growth plans with Weihs suggesting it only has a small share of the potential market at the current time. Within bingo and poker we’ve seen major operators begin to acquire affiliate operators, bringing their expertise and databases in-house. Could the same fate befall XLMedia? Or worse, could they see operators starting to pull back from existing deals at the risk of creating too powerful a marketing competitor?

“Operators are happy to work with us because they get high value customers and we have very good relationships with them. They don’t see us as a threat, and the proof is that with the exception of a couple of operators six or seven years ago I can’t remember any churn, ever. I do not see operators wanting to leave us. If they want to buy us that’s up to them.”

However, XL made a big effort to diversify its sources of revenues during 2014 with growth outside of its core casino vertical and Scandinavian region. At the time of the IPO the firm said it planned on moving into new areas, reducing its reliance on key clients in potentially regulatory complex countries such as Sweden, Norway and Finland.

According to Weihs its largest client moved from 35% to 17% of revenues during the year and the current run rate is 12.3%. And at the current time 73% of XL’s revenue comes from clients that represent no more than 6% of revenues. “This doesn’t come in exchange for a loss of revenue as we are still growing monthon-month and quarter-on-quarter with our biggest clients,” Weihs adds.

He adds another key move was reducing its reliance on Scandinavia and increasing its share of revenues from regulated markets not least the UK, which he says has moved from a modest to a significant number, and Denmark where the firm has made key acquisitions.

“We’ve seen more growth in regulated markets, and we’ve invested a lot of time and money in the infrastructure to get the business to a place where it is able to accept new products and geographies and I feel we’ve done a good job with that.

Social gaming is seen as a key vertical for growth, with Weihs saying they are only at the “tip of the iceberg” with 40-50 social gaming studios on the books and the UK, Germany and Asia all believed to be areas of focus. The firm is also looking to make inroads into the growing daily fantasy sports market in the US, although admits that’s still an emerging vertical.

In real-money gambling casino remains the bedrock of the business, and Weihs says there is still “plenty of room” for growth in the vertical, although he is more cautious on poker and bingo. Mobile, however, is an area he sees a great deal of potential in.

“I think affiliates really need to get their heads around how to do mobile advertising, how to do tracking, how to do optimisation. Mobile platforms have made it significantly more interesting. We’re now able to reach customers 24/7 and have a lot of data on what they are interested in. It is native advertising within apps, it is mobile web advertising, it is conceptual advertising.”

And he adds the biggest growth will come from regulated markets, not least the UK. “Regardless of PoC we still see it as a market with plenty of potential for us and the UK will definitely be a focus for us. Generally for RMG the fully regulated markets are key growth opportunities. There has been a bit of turmoil in Greece, but I see that as a high value potential market. Spain and Italy definitely,” he adds.

“The main issue for us is bad regulation, and by that I mean something similar to what happened in France. In France, nobody made money, the regulator didn’t make money, the operators didn’t make money, the marketing departments didn’t make money. Bad regulation is a big risk for us.”

Those days are over
Speaking to Weihs it’s obvious he feels the old days of affiliates is, if not at an end then certainly heading that way. “These kind of operations still exist and they still make money,” he admits. “But if they want to stay what they are, they might have to accept they are going to be making less money,” he says.

He isn’t suggesting performance marketing has done a sudden about face, but he is certain we’re in the middle of a war of attrition and those firms who don’t embrace his model of large scale consolidated networks backed with deep analysis, content management and a mix of RTB, programmatic and that crucial human touch will begin to struggle.

“You have to have some technological tools. It doesn’t come easy, and we’ve spent a lot of time and money and brought in a lot of people to help us do it. We have about 200 staff on the books and more than 30 programmers developing our systems. These affiliates need to either find a very good vertical or start adding technology, but it will be hard for them.”

The question is how will this leave the affiliate sector looking in the future? Will all major performance marketing firms eventually look like XLMedia and are we set for a period of significant consolidation? Weihs won’t be drawn on this, although he says he doesn’t know of any direct competitors at the current time. And when asked if he can see any competition closing in, he adds he’s not particularly concerned.

“Publishing took us 10 years, a lot of money and a lot of time to reach the volume we have and with media we spent years building technology tools. It is something that even if you had a large group and significant amounts of money it would take years to try and replicate.”

But if he’s right, and this is the future of performance marketing, then it won’t be long until people begin to take on XLMedia at its own game. The rules might have changed, but the competition has only got more fierce and it’s unlikely to find the rest of the industry allowing it an easy ride. But Weihs welcomes the challenge.

“To be honest we’re looking forward towards a similar company possibly listing. It would be nice to have a comparable peer group. We still have a small market share in comparison to where we could be so there is room for everyone to make money.”