CNet Jacks Up Charges for Affiliate Partners

As online shopping takes off, so do CNet's profits from it.
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CNet

(CNET) - Get Report

has made a lot of money from its referral program -- charging online retailers to deliver potential buyers to their sites -- since last fall. But it can expect to make a lot more with an imminent price increase.

The online technology information network has been charging Internet computer stores as much as 50 cents each time a customer jumps from its

Shopper.com buyer's guide to their retail site. Now CNet is raising its price to as much as a dollar per referral, according to people familiar with the program. Not only that, it's adding to the number of retailers who pay top prices for prominent placement. The result could be millions of more dollars in revenue for CNet not previously anticipated by investors.

CNet, which has positioned itself as an online and broadcast network that can connect technology buyers and sellers, started explicitly charging online advertisers for this referral function last September. At that time, the company launched a merchant program for its Shopper.com site, an online product listing of more than 100,000 computers and other high-tech gear.

Each time an Internet user investigates a particular product in the listing, Shopper.com generates a list of online retailers who sell that product, complete with price and other information, such as whether the item is in stock. Clicking on a retailer in that listing transports the viewer to a page selling the product on that retailer's Web site. CNet collects a referral fee from the retailer for that click.

CNet is set to announce the new phase on Monday. Under the new deal, in addition to the rate hike for prominent advertisers, the rates for advertisers who aren't paying for prominent placement will go from 25 cents per lead to 35 cents, says one retailer, who spoke on condition of anonymity.

Martin Green, vice president of strategic development for CNet, confirms the company is raising prices for its referrals but won't discuss specifics. He also says that deals are negotiated with each company individually in conjunction with traditional Web advertising based on ad impressions, not click-throughs.

Although these clicks may be worth as little as a quarter apiece to CNet, they do add up. In December, CNet disclosed that it was referring buyers to online stores at the rate of 90,000 leads per day. The company hasn't yet disclosed its daily referral rate for the first quarter, but Green says it has risen since December -- not fallen back.

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As much as 65% to 70% of leads, CNet told the anonymous retailer, end up going to what CNet calls its premier merchants -- the ones who are listed first -- if they stock that particular product. These listings each feature a tiny banner with the company's logo. (A second tier of merchants, called preferred partners, are listed next with no logo but with bold-typed names. They're followed by the lowest level of merchants, called general partners, whose entries are presented in normal type.) After the initial listing, buyers can re-sort the entries by price or certain other criteria.

Based on December levels, CNet generates about 8 million referrals per quarter. Assuming that two-thirds of leads end up at premier merchants and the remainder head to the generic listings, the price increase means that CNet revenue from this particular program would double to $6 million from $3.1 million.

Raising prices "would make a huge difference," says Daniel King, an analyst at

LaSalle St. Securities

, who estimates that the referral program, at its original rates, was worth $3.2 million, or 18% of CNet's fourth-quarter 1998 revenue. "I think it'll be an important component of revenues going forward," King says.

But CNet has other revenue streams from this program. Merchants in the top tier of the referral program have to commit not only to the cost-per-click payments, but also to running additional advertisements across CNet's various sites. Starting in April, CNet is beefing up its revenue by increasing the number of advertisers in the top tier from three to five, the company says. Each of these advertisers is committed to spending between $200,000 to $300,000 per month, sources say.

That range translates into $2.4 million to $3.6 million, roughly corresponding to what one of the new entrants to the premier level says it will be spending on CNet. Greg Appelhof, president and CEO of

Virtual Technology

(VTCO:OTC BB) says he'll be spending $1.5 to $2.5 million on an annual basis as a result of upgrading his company's commitment from the second-string preferred level. Meanwhile, one ad that used to be part of the premier rotation, appearing prominently just above product listings, is no longer being included in the premier package, acknowledges a source.

Advertisers certainly aren't happy about paying the higher prices. "Nobody is more aggressive than they are in charging for advertising placements," says one. In statements at a recent investment conference, CEO Halsey Minor implied that prices for the revised program were being set in an auction process (CNet did look at bids for different positions last year). But the advertiser says that wasn't the case this time around: "There was very little wiggle room. There was some shouting -- even a little arm-waving -- but it wasn't because it was an auction."

Another advertiser pointed out that the program could prove too expensive a customer-acquisition tool for many retailers because only 2% to 3% of click-throughs result in actual purchases -- a figure that varies from retailer to retailer, though other advertisers said their conversions were similar.

But CNet, which estimates the program drove $80 million in merchandise sales in the fourth quarter of 1998, has the wide audience of technology users that merchants crave, and its Shopper.com product listing, advertisers say, delivers people who are in a frame of mind for buying. So they're not deserting CNet just yet. In fact, the program has grown from about 50 merchants at launch last year to more than 80.

"How can you not afford to be with a leader like that in our business?" says Oak Atkinson, director of advertising for

Shopping4SURE.com which has been a preferred partner on Shopper.com.

"They do a terrific job of aggregating an audience and introducing us to qualified buyers," adds Keith Halloran, director of marketing for

NECX Direct. The Peabody, Mass., operator -- one of the three original premier merchants -- says it will continue at the premier level and start promoting SpotShop.com, a new site it's establishing with partner

Gateway

(GTW)

.

Says Michael Alexander, vice president of advertising sales for

HardwareStreet.com

, another current premier merchant (along with

Egghead.com

(EGGS)

), "The fundamental building block of our business is CNet."

CNet's Green says the merchant program should be viewed in light of recently announced transaction in which CNet is acquiring comparison-shopping service

KillerApp

, computer-auction site

AuctionGate Interactive

and

NetVentures

, operator of an online-store-creation system. "These are all services that help create more ways to connect a buyer and a seller," he says. "We couldn't overstate the importance of doing that right for both parties."

Nor CNet's ability to extract money from the process.