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The ValueCommerce IPO and affiliate advertising in general August 23, 2006

Posted by fukumimi in Economy & Business, Internet, IPO, IT, Japan.

I guess it is better late than never (me, not the IPO), so here are my 2 yen about the ValueCommerce IPO, with some general thoughts on the affiliate advertising market.

Part of the reason why it has taken so long for me to commit this post to paper was because I believe that this company would make a good case study (at least in terms of positive advertising for the Japanese markets who could do with a lot more aspiring entrepreneurs to test their luck and skill here in Japan) of how the Japanese market isn’t a xenophobic clique closed off to foreigners and I didn’t want to burst that feel good bubble.

I also didn’t want to single out ValueCommerce for taking advantage of what is undoubtedly a good time to IPO for this type of stock, nor single out its post-IPO performance as an example of the craziness which surrounds the IPO markets, as the stock’s behaviour is just par for the course.

ValueCommerce is a leading affiliate advertising network, connecting advertisers and web property owners (websites and blogs), and their advertising model is based on the affiliate model, which basically means that advertisers pay for performance, ie a cut of revenues generated by a user referred to the advertiser’s site by a particular ad displayed on a particular web property is paid to the property owner. (they also do some SEO/SEM and business/marketing/technology consulting as well)

I would have thought that having a foreigner founder and a foreigner CEO would have made the ValueCommerce IPO an easy story for the press, but I didn’t see that much in the press, especially compared to the Drecom IPO. (Caveat: I was overseas for about a week after the IPO)

OK, so these guys have been in Japan for longer than I have, so they aren’t exactly new kids on the block. But wouldn’t that make for an even more interesting story? The CFO is Japanese by the way. I don’t think it would be impossible to have a long term resident ex-pat CFO, but if there was a listed company with a management team where all but one post was filled by a foreigner, that sole Japanese person is likely to be the CFO, because the CFO of a listed company is most likely to deal with those pesky people at the stock exchange, and the bankers, and the bureaucrats, and having a sombre Japanese face and native language skills and a familiarity with Japanese accounting rules help. I think. (Say, I’ve never met a foreigner who practices as a Japanese accountant, I know a few that work for one of the big global firms here in Tokyo, but they all have multi-nationals as clients or are not in the accounting or audit practices. Of course, I can’t understand what possesses someone to studying accounting in the first place, let alone in a foreign language….)

Anyway, some people referred me to Terrie Lloyd’s piece on the ValueCommerce IPO, which was extremely positive.

My enthusiasm is a little bit more tempered. Make no mistake, it is no mean feat to create a company and take it to IPO. The IPO was a success, too. (But I disagree with Terrie who says IPO pricings are down recently – seeing the IPO reports which are circulated at our firm shows no such trend, the post-IPO market has also been strong this month, after perhaps a fitful first half of the year – but even 1H 2006 was extremely strong in parts)

ValueCommerce’s IPO was priced at a lower valuation than F@N Communications (which operates the A8.net affiliate network), which listed on JASDAQ at the end of last year and which was a little ahead in sales (JPY4.3B vs JPY4.0B) for the last FY. The reason? F@N’s pre-tax profit was more than 3 times that of ValueCommerce (JPY765M vs 231M). The #3 player in this area, Adways (last FY sales of JPY3.5B, pre-tax profits of JPY465M) also had its IPO in June of this year.

The way the emerging markets IPOs tend to work is that the first of a kind IPOs do tend to attract a premium. Being the 3rd IPO of its peers meant that the market appetite wasn’t as big as its numbers might have suggested. F@N’s stock peaked at nearly triple its IPO price. I can’t see ValueCommerce hitting such a big high. Whilst Terrie argues that a 60% rise in price immediately after IPO is impressive, it is actually not uncommon. Adways hit double its IPO price at its peak, too. Many emerging markets stocks all seem to follow a similar post-IPO trend in stock price, with prices rising to a peak days or weeks after IPO, and then trending downwards back towards the IPO price. So I thought it was a little unfair to compare the market cap of ValueCommerce and F@N when ValueCommerce was still riding the post-IPO buzz.

Compared to its peers, ValueCommerce is just a little weaker on fundamentals; on growth compared to Adways, which is projecting 7B in sales this year compared to VC’s 5.4B, or in profit margins (VC’s projected 10.1% compared to F@N’s 16.4%). Whilst ValueCommerce’s growth is no doubt impressive, a comparison to its competitors puts a slightly different perspective on things.

Historical performance has been a bit more haphazard for ValueCommerce too, which tempered the enthusiasm of analysts. (although the relative lack of enthusiasm amongst financial professionals during the roadshow was generally more of the “oh, another affiliate advertising network” nature, according to an analyst who attended an event)

Yahoo Japan having a big stake in the company is no doubt a strong point in its favour, although contrary to what Terrie says, Rakuten are unlikely to have been interested in picking up another affiliate advertiser, seeing they have had a stake in Trafficgate, a currently unlisted company, since 2001. It was indeed Yahoo who was playing catchup as Rakuten and Livedoor were on the scene before Yahoo. Having said that, Yahoo seems to have made a good profit on their investment.

Indeed because of the crazy multiples that are being achieved at IPO, it becomes more attractive and profitable for major players to invest in companies and send revenue dollars to their portfolio companies and make some capital gains on the IPO than to go into competition.

There are more than one or two companies (I’m speaking in general terms here of internet IPOs on the Japanese emerging markets) where a big chunk of sales rely on major strategic shareholders. Because the listing requirements aren’t that strict, many of startups which affiliate themselves to a major internet player can IPO on their partners’ coattails. Hopefully by then they have built up enough brand recognition and know-how to become less reliant on their big brother.

I suspect that Trafficgate is another such vehicle, it is owned by Rakuten (50%) and Cyberagent(47.5%, 27.5% actually owned by an investment fund run by CA, a sure sign if ever there was one that this is an IPO play).

In September, another affiliate advertiser, Interspace, is listing on MOTHERS.

The segment is getting pretty crowded, and PERs in the 80-100 range for the top 3 players doesn’t seem to be sustainable. Admittedly the growth in blogs is good for these players, as micropublishing hits the big time. However, there are concerns that conversion rates for affiliate advertising on personal blogs. And I don’t think we want the blogosphere to be dominated by sites which are run with too much emphasis on driving advertising revenue. Don’t expect to see shill articles and accompanying adverts pasted all over the page from me anytime soon.

I also don’t feel there is much chance of affiliate marketing taking over from CPM/CPC advertising on high traffic properties, where property owners have much more power to strike a fairer bargain, whereas there might be a little more invasion of the space by CPC advertising courtesy of you know who.

The Big G hasn’t even started trying that hard to sell its advertising programs to the mass market. One acquaintance who has done comparison tests of advertising revenue generated by various advertising mechanisms on his network of Japanese language information sites (which actually do provide useful information on specific technology issues and gadgets (mobile phones, TVs, etc)), stated that Google’s ad services were definitely his most profitable ad revenue streams.

In a sense, getting this far may just be the beginning of the story for the players in this market. Good luck to all involved, it’ll be interesting to see how the market shakes out.


1. Gen Kanai - August 23, 2006

Awesome, awesome! Thank you. I really appreciate your perspective on this particular IPO and on this market in general.

“commit this post to paper” lol 🙂

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