Conflict of Interest?
And Beyond the current environment
To Affiliate Marketing and Beyond
Affiliate marketing has spring-boarded with the advent of the internet and the digital economy. E-commerce relies on affiliates to drive traffic, customers and revenues. This environment is no more evident than in its application to the betting and gaming space. Affiliates work with gaming operators around the world and given the nature of zero-sum markets, it often raises some interesting dynamics that may not apply to your everyday Amazon or eBay affiliate programs.
Affiliate marketing is a type of marketing where a third-party website or person is compensated for driving traffic, app downloads or new players to betting and gaming operators. The type of affiliate businesses that drive traffic have evolved to include things like industry news services (i.e. regulation and legal updates), betting technology or software services (i.e. data tools and bet tracking), operator reviews and ratings (i.e. sportsbook reviews) and odds comparison (i.e. display of multiple bookmaker odds in one place).
The commercial model used by the affiliate industry in betting and gaming varies. Some of the more common options can be seen in the below graphic.
A typical approach across many industries is a sponsorship arrangement whereby the affiliate’s brand has value to the operator or business and they wish to associate with that brand. Since 1928, Coca Cola has been a sponsor of the Olympic Games, Harley Davidson recently agreed to become the jersey sponsor of the Milwaukee Bucks and since 2017 Betfair Australia has been the proud sponsor of the Business of Betting Podcast.
A common approach is a fixed fee compensation structure based on certain actions by a potential player. These include click through links or banner ads on the affiliate site or properties through to the operator website, downloading the operator’s application or a player depositing funds with the operator.
The life cycle of the transaction for the affiliate when it comes to fixed fees is relatively short given that the compensation is often based on a single event or action by a potential player. Once that action is complete (i.e. deposit funds or download the app) the compensation is triggered and that transaction is complete.
Revenue Share on Winnings
Largely missing from the discourse in affiliate marketing discussions is a revenue share on player winnings or commissions. This type of arrangement is facilitated by a betting exchange, where the referred player places a wager on the exchange against another player on the exchange, and any winnings are subject to commissions (paid to the exchange). Given the peer to peer nature of the exchange, i.e. the exchange itself is not accepting (only facilitating) the bet, their revenues come from winning players. In turn, the affiliate who was responsible for driving the winning player to the exchange will share in the commissions or winnings from the exchange.
Affiliates with an audience of aspiring and/or sophisticated players or those providing betting education to players can find many overlapping incentives with this model. For instance, if you promote successful betting and provide information or concepts with the intent for your audience to win or improve their chances to do so, this model can align with the affiliate compensation you receive from the exchange for directing those players to bet or trade on the exchange. If a player you refer is net negative and no resultant winnings are to be shared, you will not have any affiliate revenues to collect.
Revenue Share on Losses
Another common compensation model for affiliates in the betting and gaming space is to share in the revenues obtained by the operator from the player’s losses. This option is variable in nature based on the player’s losses for the lifetime (or initial period) of that account at the operator and can vary significantly to the upside as compared with a fixed fee model. This model is more accurate at splitting the overall ‘value’ of a player (i.e. total spend/losses) between the affiliate and the operator compared with the fixed fee options.
For example, a new player may deposit $50 and (a) lose the $50 and not bet further with the operator or (b) lose the initial amount and continue to gamble and lose $5,000 in total over the next 2 years with the operator. If it was a fixed fee arrangement at a rate of $400 per depositing player, both scenarios would net the affiliate $400 as compared with a revenue share of 40% of player losses, which would net the affiliate $2,000 over the extended period.
The concern expressed by opponents of the revenue share on losses is that the incentive structure for the affiliate is not aligned with that of the player. In other words, the affiliate relies on the player gambling and losing to be compensated. This is heightened in situations where the affiliate is providing products, services or content intended to help the player win while their compensation is based on the player losing.
Conflict of Interest?
There is often discussion and debate about the role and position of an affiliate in the betting and gaming ecosystem. Given that many affiliates engage in the betting content space, it might be worthwhile to revisit The Inherent Conflict of Betting Content article. A simple diagnosis of a betting or gaming operator is that they are incentivized to maximize the lifetime value of a player’s account (i.e. losses) within the sphere of responsible gambling. The shorthand diagnosis for an affiliate is not as simple or easy due to varying compensation structures, which may alter the incentives at play. For example, a tout or pick seller (who is also participating in affiliate activities) is quite different to an odds comparison website (more on this further below).
The Player Outcome Spectrum graphic (i.e. a player winning to losing) directly below is an illustration of an affiliate business selling picks (and associated expectation of their subscribers) and engaging in affiliate marketing on a revenue share of losses basis (and associated incentives for their business).
You can see the obvious juxtaposition on the spectrum, which may be observed as a conflict of interest. When contrasting the revenue streams some may describe it as smart diversification and others may feel more uncomfortable with the possible conflict of interest. Other activities (i.e. odds comparison) and other incentives from compensation structures (i.e. fixed fees) could be plotted along the spectrum, however, this is not always a definitive or simple exercise (but have a think about where they might sit).
It is pertinent to note that not all businesses engage in pick selling and affiliate banner ads on their site that generate revenues on player loses. Further, not all incentives are contrasted in such a stark manner. You may even find certain scenarios where the incentives align quite well, although this is more of an edge case than the norm. Also, worth noting is that many affiliate websites and offerings add value to the players, which needs to be factored in. For example, an odds comparison website may be useful to avoid manual searching across multiple operator websites or forums, communities and betting groups may provide entertainment and social value that should be considered.
There is little doubt that the nature of gambling poses a significant hurdle to adjusting the current compensation structure and incentives that result. The reality remains that you can rarely, if ever, align the interests of players, affiliates and operators in zero sum markets. There is no doubt that large (and small) affiliates have considered some of these issues and nothing in this article is necessarily new or groundbreaking (for example – RAIG).
From here, the central question worth asking is does the affiliate space need reimagining? If you think the answer is yes, how can we improve affiliate marketing, especially in light of more gambling shifting from retail and traditional methods to online and mobile destinations, which rely heavily on affiliates to drive traffic and revenues?
We know the centuries long challenge that the human brain has with gambling games and the implicit disadvantage when betting into markets that contain a house edge. Are the current incentives for affiliates, based on compensation models with operators, worth revisiting given the potential impact on players or is it solely up to the players to understand the dynamics and make sensible choices?
Are there any obvious adjustments that could be made or can we take approaches from other industries and apply it in this space to achieve an outcome that is more utilitarian? What other compensation models or structures exist to move away from possible conflicts of interests and address misaligned incentives or at least to limit their prevalence?
If nothing else, it is worth thinking about how we ameliorate the current state of affiliate marketing and the impact on players, especially in zero sum markets.