Advertising: affiliate marketing firm collapses owing small amounts to many

The case highlights one of the dangers of renting internet real-estate out on a purely contingency basis. For advertisers, the advertising networks provide a useful interface between their company and, often, thousands or even millions of websites, some of which get just few visitors each day. The website owners who would otherwise stand no chance of selling their space to large companies appear to visitors to be punching above their weight.

Payment follows a convoluted route: sometimes payment is made if a visitor clicks on an advert, whether or not a sale results. That's the model used by Google's AdSense scheme. But click rates are low and the amount paid per click is poor. Website owners need a lot of clicks to make even a small amount of money.

An alternative is that adverts are shown and no pay-per-click is made but, if a sale results, commission is paid. This works provided that there are many clicks and the conversion rate is high for it is not just speculative, but speculative to a multiple degree. It has been estimated that 0.1% of visitors click on an ad and of those just 0.1% actually buy something.

Website owners, therefore, can be expected to work on tight margins and, if advertising revenue is their only source of income, it is likely that most (excluding ad farms - sites with no content except advertisements and "keywords" designed to attract visitors) will not make a profit: that is certainly the experience of some of the world's biggest websites, for example The New York Times which has moved to a subscription fee model for its readers.

The affiliate marketing networks take a cut before passing on the commissions to the website owners. In some cases, they may receive a fee for managing the service but this is rare and fees are low.

The collapse of Affiliate Marketing Solutions will cost many website owners a few hundred Aussie dollars each - the kind of sums that most of them will be irritated by but which are not life-threatening to their own business.

The most likely reason for the collapse, Adminstrator John Vouris told website SmartCompany.Com, is simple: ""Bad management is to blame. It may have been that costs overran income, but it really points to bad management," he is quoted as saying.

But that might be over-simplification: it might be that the whole business model for affiliate advertising is flawed: there are too many variables in the financial chain, too much expenditure on technology with a very uncertain payback.

Growing an affiliate network business is also uncertain: it depends on the network's clients i.e. the merchants, referring website owners via their own websites to the network. And whether website owners sign up depends on the quality of the merchant's product and also the services offered by the network.

In short, there are far too many instances where a person may say "no - I don't want to buy" and even more where merchants and website owners choose another network - or none.

There has been considerable consolidation in the affiliate marketing area - and in click-through advertising.

Smaller networks (and there are many) struggle to collect clients and often those clients are picky about what websites they want their ads appearing in. And all the time, the infrastructure has to be developed and paid for.

Perhaps Vouris is correct: perhaps it was bad management. But there is a systemic problem with the business model that the network industry adopts.

While Affiliate Marketing Solutions has failed, it will not be the last in the sector to run into trouble.