Analysis: The great affiliate quandary

Digital marketing is probably the single most misunderstood aspect of the online gambling industry by regulators, the media and the wider public. And the most misunderstood part of digital gambling is the affiliate sector. So it’s perhaps not surprising that this large, sprawling business that has been allowed to operate without significant oversight is beginning to find the new regulated environment both a threat and an opportunity.

The launch of the new trade association for the affiliate sector, Responsible Affiliates in Gambling (RAIG), feels like a watershed moment for the business. The affiliate industry has been quietly transforming itself from the “man with laptop” image of the 2000s to the large corporate mega-affiliate sector we find today with the large public entities such as Catena Media, XLMedia and Raketech the norm rather than the exception. What was once called a super-affiliate is small time these days and the one-man-band is an anachronism, but there is still the sense it lives somewhat in the shadows.

Most of this is due to a lack of knowledge of how the affiliate industry operates, but some of it is problems of its own making. The sector found itself in the headlines two years ago back in May 2017 when BGO was the first operator to be fined by the Gambling Commission over misleading advertising on its own and its affiliate’s websites. It was the first of a number of actions and eventually the Gambling Commission released new rules in August 2018 that placed the responsibility of the actions of affiliates at the hands of the operators. But this was far from the end of the story.

Whose fault is it anyway?

One of the best summaries of the affiliate sector it that it’s an industry that can do things operators are either unable or unwilling to do for themselves. This for a long time was aspects of digital marketing such as SEO, PPC and programmatic ad buying, the industry was slow to skill-up on, alongside gambling-focused content as well as media buying on an industrial scale. It reaches the parts gambling brands can’t always reach but does sometimes leave a bit of a hangover for those who overindulge.

With plausible deniability stripped away operators are having to be ever more rigorous about the affiliate partners they work with, and equally the affiliate industry in turn is having to position itself as responsibly as possible in order to keep the relationships. Except, of course, those relationships and the affiliate’s value isn’t always the same in every market. In markets where normal channels aren’t available or are heavily restricted, operators may look for a different service from their affiliates than simply broadening the acquisition net.

So how does the wider egaming industry balance this relationship? The answer is it probably can’t. Much as there remains a duality with regards to regulated and grey markets in the operator side of the egaming sector generally then it’s even more existent in the affiliate market. And while mega-affiliates have major clients and revenues, and indeed shares for sale, in regulated markets both they and their smaller peers will also generate revenues from grey markets where their reach is higher than the operators themselves can manage.

Change is coming…

For regulated markets, however, there is no doubt things need to change and are already changing. Any mid-sized affiliates not prepared to make the sorts of adjustments required, likely needs to fundamentally rethink their business model. The direction of trend is towards more responsible marketing in nearly every major European market and operators increasingly simply won’t be prepared to work with any affiliates bending the rules and a trade body stamp of approval might be a minimum standard in future.

So far the affiliate sector has managed to avoid awkward questions asked about it by regulators, who seemingly find it too hard to navigate from a regulatory perspective, and the media who see it as both a threat and a puzzle. The revenue share model is perhaps the most vulnerable to bad press and tighter regulation, and we’ve already seen in New Jersey affiliates opting for this model need a different category of license to operate. We could see it sliding out of favour even more and it is certainly less common than it was in the past with CPAs or hybrids becoming the default for most deals, as they suit the business needs of both sides better.

But in essence a CPA is just a front-loaded revenue share averaged out at scale. You expect a £600 lifetime value so you pay £200 for the customer, and the affiliate gets effectively 33% revenue share. It’s the same model, it just has better optics. And this is the big issue for the affiliate sector. It can’t escape what it is. Its value is its ability to provide a healthy source of acquisitions to gambling operators, and it has been constructed solely to do this for the most part. And this feels like an area that will face increasing regulatory pressure as the clamour for responsible marketing gets ever more intense in markets across the regulated European landscape.

The end game?

And so this becomes a wider issue for those affiliates looking to reshape the industry as a mainstream responsible marketing sector. Can they get enough affiliates onside that this becomes the norm and the remainder of the sector are simply rogue outliers? Or is it too little too late? It’s probably incorrect to say the affiliate model is broken for regulated markets as it’s too broad, too creative and frankly too useful an industry to dismiss out of hand, but there are signs it needs to quickly change. The banning of affiliates from PPC in Sweden is an interesting move and could signal a new direction of trend among regulators.

The key questions around the new move to responsible marketing around affiliates raises the question of to whose benefit is this really? And the answer, much as with regulatory changes in the wider operator sector, is for the big firms who can operate at scale. In regulated markets it seems like an inexorable move towards large businesses dealing with large businesses who more resemble mainstream media and ad-tech firms. It’s not really the affiliate business as we know it, but maybe that’s how it needs to be to survive.