Apollo and Advertising.com enter strategic partnership.
While not quite new news, the partnership represents potentially one of the most significant changes to take place in the lead generation space. I did not write about the deal when it first happened because my primary duty is to my employer and its clients, one of whom is University of Phoenix. Being the person to break a story does not benefit me, especially if it could mean straining a valuable relationship. Having already made one mistake involving writing about a client, I wasn’t going to do it again, and certainly not with the 800 lb. gorilla of for-profit education. Unfortunately, the past two weeks has not shed any more information on the deal, but the announcement has reached all stakeholders, which makes now an appropriate time to discuss the deal and its implications.
I first heard about the Apollo-Advertising.com arrangement February 28, 2006 when a sales person spoke to a school that had just been given notice by Advertising.com. Later in the day, someone found an article in MSN Moneythat, like most that day, talked not of the deal but Apollo’s conference call with analysts where the company announced it will miss second-quarter Wall Street estimates earnings. Apollo Group has a history of impressive growth, but its stock has taken a beating recently, having gone from the high 70’s to the low 50’s in the past six months.
In addition to announcing the revenue shortfall, the call outlined the strategies being implemented to continue their dominant growth. One of those strategies involves “an agreement with Advertising.com which operates the largest interactive advertising network in the world.” University of Phoenix has “entered into a highly strategic relationship with this wholly-owned subsidiary of America Online in order to gain an even greater advantage in the highly competitive education space.” And, that, “The combination of Advertising.com’s world-class optimization technology and front-end combined with our capital resources, qualifying center and sales force will give us the potential to continue to lead the industry.”
Partnerships such as these don’t get mentioned in analyst calls by billion dollar companies unless it means something, and here are the two key takeaways:
- Advertising.com will in many respects become not just the agency of record for University of Phoenix but an extension of their marketing department. All leads will go through Advertising.com – even companies that considered themselves competitors, such as Quinstreet and Nextag, must now work through Advertising.com. They will be the point of entry for leads and provide the reporting for other vendors.
- Advertising.com will work only with University of Phoenix and no other education clients for the duration of this deal.
With
respect to the first point, all leads flowing through Advertising.com,
the ad network now enters the lead management space currently occupied
by companies such as Datamark, Compass Knowledge, and CUNet. Lead
management is a tricky space for someone with traffic to enter.
Companies that play both roles – technology and traffic, can, if they
are not careful, send the wrong message about their intentions. Will
they allocate leads fairly (given that they have their own quotas they
want to hit)? Will they try to poach affiliates? Those are just two of
the common questions in such scenarios. The good news is this
relationship has the potential to do the right thing as well as let the
good guys make more. Nothing is ever perfect, so there will be some
hiccups along the way, but the team at University of Phoenix wouldn’t
have entered into the deal if it were going to undo years of trust in
the vendor marketplace. Some affiliates might leave heir current
network to go to Advertising.com - they will want to work closer to the source and get paid what they feel they are worth - something that other affiliate companies have not always embraced, but I would expect University of
Phoenix to have discouraged the company from any direct recruitment.
Interestingly, Advertising.com was not the only company that was courted for a closer relationship. Phoenix had hinted to several other companies that it was looking for a company willing to dedicate itself more fully to them. It seems that many companies would have fought for the position that Advertising will soon occupy; yet, that wasn’t the case. And I think understanding why is best done by looking at the types of companies that have been able to drive the largest number of leads for Phoenix – lead generation companies and ad networks. Lead generation companies are ones like World Class Strategy and LowerMyBills. These are firms that own the entire pipeline – they design creatives, host landing pages, and manage media buys for those creatives and landing pages. They are experts in their vertical, and in the case of education, doing it right means the company tends to only serve that market. Were one of these companies to accept the deal that Advertising.com did, it would dramatically alter who they are as a company and most likely end in failure.
Ad networks on the other hand focus on just one piece of the pipeline. Their core competencies are not designing and testing creatives and landing pages. They sit in between advertisers and publishers, focusing on the very specific problem of matching ads to placements. Instead of finding placements that work for a particular type of ad (which is what lead generation companies do); they act agnostically – a client is a client is a client, and an ad spot is an spot is an ad spot. For an ad network to do an exclusive for a category does not dramatically change their business; they just have a different ad mix from which to optimize.
I can’t say I would have guessed either to happen – that Phoenix would chose an exclusive gatekeeper or that Advertising.com would be that company, but now that it’s done, it makes a lot of sense for both. From the media side, success in lead generation requires the ability to reach a lot consumers, which Advertising.com has, but, more and more, it requires specialization – creating the best ads, landing pages, and combination of the two. That is something Advertising.com does to some degree, but it's not a core competency and lever to success. With the continuing influx of brand dollars, it doesn’t necessarily make sense for them to shift their business model and enter the vertical lead generation space. Also, their volume for University of Phoenix has stayed flat or gone down over the past two years, not increased. And that has probably been the case for their other education clients as well. They still make up a significant number of leads, and high quality leads at that, but maintaining a position of leadership would only get harder and harder. Advertising.com is, at its core, an analytics and process-driven media company. They understand how to handle a large number of relationships and extract the most from these variables. It was this that allowed them to carve out a position of leadership in the messy and complex ad space. And, it makes them well suited for this task.
University of Phoenix is not a media company. They are the most efficient and advanced post-secondary education company. That efficiency allowed them to carve out a significant piece of the media world by creating an offer that outperformed so many others. As the world of Internet advertising has become more competitive, and more fragmented, it has became harder for them to stay as profitable. University of Phoenix could in theory hire more Internet marketing talent – both in operations and technology. Or, they could just outsource those aspects and continue to focus on their expertise – running the nation’s largest university. And, that’s just what they did. Granted, Advertising.com takes a big risk with this deal, they essentially close the door on several long-time clients, but now they get some upside on all of Phoenix’s leads rather than on just a small percentage of those leads. And, chances are that the other leads they just inherited more than makes up for the combined leads of the other schools.
Most importantly though, the University of Phoenix-Advertising.com deal sends education head first into right pricing, something that had been sorely missing and a topic I’ve written about previously. It also focuses on strengths including those of the other lead generation companies. They will still get to do banner and landing page design, branded media buys and search arbitrage. Affiliate marketing companies can still recruit and arbitrage. So, while this could turn out to be a disruptive force in lead generation, i.e. do others follow suit, it also signals incredible opportunity – not just for Phoenix and Advertising.com but all players, including the other institutions.
Overall, I hope other institutions let this play out before making any major decisions, such as forming a similar alliance in a purely reactionary move rather than market driven one.
Jay, great analysis. It seems like this would have a negative impact on EDU-focused lead gen companies like Quinstreet, or am I missing something?
Posted by: DavidZHawk | March 21, 2006 at 09:54 PM