Performance Creates Value

—ValueCommerce’s Brian Nelson tells how it is done

By Terrie Lloyd

With such a resounding endorsement from Yahoo! Japan, it was probably no wonder that the IPO was a stunning success. For a short time, the shares hit JPY631,000 (US$5,390), over double the IPO price of JPY310,000 (US$2,649), before settling back to an average range of the mid-JPY300,000’s (as of writing in late-November 2006). ValueCommerce’s business is results-based online marketing and as of June 2005 it was serving more than 400m ads a day on behalf of 400 large companies and 1,200 SMEs, which make up ValueCommerce’s 1,600 advertisers. Those numbers have jumped by about 50% to June 2006 and today ValueCommerce is Japan’s largest affiliate marketing company both in terms of sales and pages served.

What is affiliate marketing?
According to Wikipedia.com, affiliate marketing is “A popular method of promoting web businesses in which an affiliate [web site] is rewarded for every visitor, subscriber and/or customer provided through his efforts. It is a modern variation of the practice of paying finder’s-fees for the introduction of new clients to a business. Compensation may be made based on a certain value for each visit (pay per click), registrant (pay per lead), or a commission for each customer or sale (pay per sale), or any combination.”

Brian Nelson

For ValueCommerce affiliate marketing is a business model that has propelled the company past the incumbents in the traditional online banner ad marketing industry. Essentially the ecosystem consists of an engine which manages and reports the flow of ads and links placed on affiliate websites, a sales force that leverages the company’s more than 333,000 affiliate web and mobile sites into a highly effective segmented and targeted market place for advertisers, and sophisticated tools which offer the ability to track activity of certain kinds after an ad/link is clicked on, so that advertisers have the option to only pay for certain actions.

So what was the magic ingredient which has led to such explosive success? According to Nelson, it’s simple performance. By virtue of the company’s vast network, the result of years of hard and expensive sales efforts to win web site operators over, and reliable, highly functional manage-ment tools, ValueCommerce has become a leader in results-based advertising—or the Cost-per-Action model as it likes to call it. Money spent on ValueCommerce’s Cost-per-Action model is only spent once the user has taken that specific action. Thus the productivity of such marketing investment is 100%. This contrasts dramatically with response rates in the single digit or lower ratio of ad impressions to click-thru’s to actual purchases. Yes, Cost-per-Action is more expensive as a CPM number, but the results more than make up for it. Results-based is popular with small and medium-sized companies, because they are usually more targeted in their ad spend, but also works for larger firms seeking to launch new products or to intensify a campaign to a specific audience.

Affiliates are not just restricted to product/service ads and links. They can now also carry ads for auctions (for instance, ValueCommerce carries ads for Yahoo! Japan which dominates online auctions in Japan with a 90% share). As of August 2006, ValueCommerce and Yahoo! created a new service called Yahoo! Auction Affiliate, which allows a website or blog owner to promote auctions of items sold by both commercial shops and individuals. If a user successfully completes one of these auctions, then a commission is paid to the owner of the website or blog.

Competitive Landscape
ValueCommerce pioneered affiliate marketing here and today is the largest affiliate marketing company in Japan in terms of traffic, user reach, revenue and number of clients. It is Number Two in terms of registered websites, with 333,000 sites. The competition to ValueCommerce on the low-mid market are two other companies called ‘A8 Fan Commu-nications’ and ‘Adways’.

There are three reasons ValueCommerce has the advantage over its competitors. Being a pioneer of the affiliate marketing business in Japan enabled ValueCommerce to set the playing field, and competitors are relegated to second-guessing what ValueCommerce will do next. Another reason why ValueCommerce dominates the market is its high proportion of direct sales (90%), meaning tight relationships with their clients. Leveraging this is ValueCommerce’s strength, and this is highlighted by 47% of sales coming from consulting clients on how best to use their affiliate marketing budget. The third reason is ValueCommerce’s high level of quality. In order to protect advertisers and affiliates, customer brands and drive high quality results, ValueCommerce screens all new customers before they join the network. ValueCommerce pays a price for this, with higher labor costs, since customer service staff do all the screening. This is in contrast to ValueCommerce’s competitors, which use automated approval. This higher level of quality keeps ValueCommerce ahead of the competition and keeps ValueCommerce’s revenue position number one in the industry.

The online advertising industry has changed dramatically from CPM (impression based) to click–based, with the focus now being on acquisition based advertising. It is this results-based model that ValueCommerce excels in. Recent articles in the Nikkei have highlighted how ValueCommerce is the number one affiliate marketing company leading the industry.

The sheer power of the results coming out of affiliate marketers versus the banner ad companies is having a major impact on the incumbents. The Nikkei newspaper said in November 2006 that the online ad agency leaders, ‘Cyber Communications’ and ‘D.A. Consortium’ will experience single digit or even negative growth this year. Cyber Communications pre-tax income will be up 1% over FY2005, at JPY1.75bn, while DAC will be down 16% to a pre-tax profit of JPY550m. Meanwhile, the affiliate marketers are expecting triple digit growth this year. Indeed, ValueCommerce has stated that it expects group pre-tax profit to jump 2.4 times the previous year to JPY550m (US$4.7m) on sales of JPY5.42bn (US$46m), up 34% year-on-year. Clearly the industry is going through a shake-up and it’s the business model and quality of execution that count.

The man behind the founder
ValueCommerce was founded in 1996 as ‘TransPacific’ by New Zealander Tim Williams. He is the only foreigner in Japan to have two companies he has founded go public. The first being a company called ‘ValueClick’ that went public in May 2001. However, this story is really about the man behind the founder, the person who has shepherded the company from a 10-person start-up to a major player in the online space. That person is 39-year old Brian Nelson, the company’s CEO for almost six years.

A tall 2 meters, Nelson not only possesses a powerful physical presence but a strong personal one as well. Armed with fluent Japanese and more than 17 years work experience in Japan, he has provided the natural leadership, tenacity and a great personal network of well-placed friends in large consumer products companies to get ValueCommerce much further along the evolutionary scale than it might have otherwise been. In particular, Nelson’s presence meant the survival of the company in its early days through the challenges of the post dotcom bust and the 9/11 rout.

Nelson hails from Newport Beach California halfway between San Diego and Los Angeles. He has entre-preneurship in his bones and although he worked for a number of major companies and thus understands corporations and how they think, his life theme has been to create something that is of his own making. Nelson credits his Dad for helping him understand the benefit of working from a young age. His first business venture was when he was still in grade school, when with some friends he started a food service business. The three partners did so well that within just a few weeks they’d made $200 and used the proceeds to buy skateboards. With that experience under his belt, Nelson went on to start trading stocks at the age of 14, through a custodian account at Dean Witter. Buying IBM, Marriott Hotels, and California Edison, he learned about stock splits, dividends and so on.

Nelson’s first experience of Japan was at the age of 15, when his father told him that they were being relocated to Tokyo. His Dad worked for IBM as the Vice President of Asia Pacific and being transferred was the first overseas move for the family. Nelson subsequently spent the next 2 years of high school at the American School of Japan (ASIJ), where he fitted right in. Going to ASIJ and simply hanging out with his Dad turned out to provide an excellent foundation for Nelson’s future career. Among the people from that time who have since become friends include internet visionary Joi Ito (of ASIJ) and ex-IBM Japan Chairman Takeo Shiina.

Graduating from the American School in 1985, Nelson left Japan to attend college at the University of Southern California (USC), where he studied Business Administration with a specific focus on entrepreneurship. Entrepreneurship was still a new thing to study back then, and a lot of his friends asked why he wasn’t targeting a real job, such as with IBM or someone similar.

The studies went well, and he worked his summer holidays in Tokyo by interning with Andersen & Co., which ironically was located in the same building that ValueCommerce occupies today. At Andersen & Co. he got to work with many talented people, including the external audit committee member of the International Monetary Fund (IMF) for Japan, Mr. Satoshi Itoh. He is also a professor of Chuo Graduate School of Accounting.

On graduating from USC, Nelson returned to Japan to apply for his first job. In typically self-directed fashion, his initial contact list was the American Chamber of Commerce members’ directory, where he created a letter and phone campaign to get in and see the CEO of each of his target companies. He did quite well, getting over 50% of his targets to agree to meet.

A career being forged
As it turned out, and perhaps a reflection of how life deals to even our best intentions, his first job came from an unexpected source—an alumni of his alma mater, Bill Totten, who’d attended USC some years earlier. Totten first came to Japan in August 1969 and later started what was to become a highly successful software import and support business called ‘Ashisuto’ (“Assist”). Totten advised Nelson to “go local” and get a job in a hard core technology company outside Tokyo. So, that is how, at the ripe old age of 21, Nelson started working for Ashisuto’s Osaka office. His first position was as a route salesman, convincing store owners to give his company and its products more shelf space. Of course, at his height, Nelson was able to find shelf space the stores didn’t even know they had!

Nelson left Ashisuto in November 1991 and spent several years finding a job that he could be satisfied with. There was a sports management company in Kobe, then a major Japanese insurance company in Tokyo. In reverse of many career searching job-hoppers, Nelson actually spent more time at each company he moved to, with ValueCommerce being by far the longest at seven years.

This philosophy of hard work at bedrock Japanese companies served Nelson well, and in 1995 he took his considerable language and organi-zational skills to Gallup, the global consulting and research company. Gallup had recently set up a joint venture with the Japan Management Research Association (JMRA) and Nelson’s first job was to do sales and help multinational customers get bilingual service in Japan. Within a short time, his sales and organizational successes started to speak for themselves. As a result, he was quickly promoted to Director of Sales and Marketing, and ended his career with Gallup on a high note by being appointed to the board of Gallup Singapore, to provide management input to that operation as well.

Nelson reckons that Gallup and its corporate values taught him the importance of hiring good people and how to manage them. Gallup has a concept called the “Gallup Path” which celebrates the importance of middle managers and helps to grow them. The concept must have worked, in Japan at least, as by the time he left the company in 1999, it was one of the fastest growing offices in the expansive 40-country Gallup global network.

Taking the next step
Mission achieved, Nelson came back to his life purpose, which was to start his own company. He sold off his stock in Gallup and set about establishing the company of his dreams. The journey started very simply, with a visit to the local book store. While most people might go hire a “gyosei shoshi” administrative scrivener (a paralegal), he went and paid JPY4,950 for a package on how to start a company (Yugen Kaisha) for yourself. This may not sound like a big deal, but in Japan, the land of bureaucracy, the whole idea of dealing with scores of forms in obscure Japanese is a challenge even for native Japanese. After many learning experiences over a three month period, including reverse-educating some very surprised bureaucrats at the govern-ment office who refused to accept his six-character hanko, he finally became the proud owner of his own Yugen Kaisha, registered as an Internet adver-tising business, in September 1999.

Then fate stepped in
In early 1999, as Nelson was signing up yet more major clients for Gallup, a New Zealander named Tim Williams had just left an Internet company he’d helped found, ValueClick—now a Livedoor company known as ‘Media Innovation’, and repositioned his other company called ‘TransPacific’ that he’d started some years earlier from hosting to incubate a new business in the field of affiliate marketing. Williams contracted the first software development out and started operations with the newly restored business in late 1999. He renamed the company in November of that year to ValueCommerce Company Limited.

Nelson met Williams through Mark Saft of Ingenium fame, who knew Nelson’s friend, Tomas Gistren at Temple University. While he was emotionally committed to starting his own company, he quickly realized that Williams’ concept was powerful enough to change online marketing in Japan. Williams offered Nelson an eventual CEO position, and after some discussion Nelson accepted that if he was able to come on board as a shareholder, with the company being so early on in its development, there was still a good chance for him to be a core player and to consider the resulting business as being partly of his own making. And that’s pretty much how it turned out.

Thus in December 1999, Nelson signed up with the Kiwi founder, and started work as COO on January 22, 2000, with the chance to become CEO within five years. He was one of ten employees in the new venture, ValueCommerce. Just 6 months later they had 50 employees and could barely stay up with the flood of new business. With its innovative business model and ground-breaking software, the company easily raised Venture Capital funds on a valuation of JPY18bn that many in the advertising industry found hard to believe. On the back of the company’s success and future expectations, it was decided Nelson would become the CEO of ValueCommerce in March of 2001.

Key members
Like all good leaders, Nelson is always quick to point out that the company has not grown by his efforts alone. Indeed, it is the cast of players: staff, managers, the board of directors, shareholders, and the board of advisors that makes ValueCommerce such a unique company.

Apart from Tim Williams the company founder, other key members of the board and management team are COO Ben Clark, who joined ValueCommerce in February 2000, just after Nelson did, after leaving his previous employer—can you guess? – IBM Asia Pacific. There is CFO Keiichi Takahashi, an ex-DoCoMo-AOL and Ernst & Young man, and CTO Clarke Robertson previously with NewsCorp then a large European ISP. Nelson has worked hard to put together a decent board of advisors as well, lining up such luminaries as Takeo Shiina (IBM Chief Advisor), Yukiharu Kodama (JIPDEC Chairman and ex-METI), and Hideyuki Tokuda (Professor of Environmental Information at Keio University).

The IPO
The idea of a bunch of Western managers doing an IPO in Japan is somewhat preposterous, and pre-IPO detractors were no doubt betting that a foreigner-weighted management team would not be able to handle the strictures of structuring their business to comply with the stock exchange conditions, since compliance require-ments have been stepped up in recent years due to Sarbanes-Oxley Act and now J-SOX. ValueCommerce’s mission statement “To Provide High Quality Service and Results,” backed up by the management team and manager’s work ethic had made the company ready to swiftly carry out IPO preparations.

And so it was that in March 2006, Nelson received the all-clear from the underwriter, Mitsubishi-UFJ Securities, to submit the application to the Tokyo Stock Exchange. They didn’t have long, barely 3 months, to IPO. Nelson and CFO, Takahashi created a 10-person team which got the applications, company reporting, and compliance issues all settled for the IPO in July.

The IPO took place on July 31, 2006. The lead underwriter was Mitsubishi-UFJ Securities, with co-underwriters
e-Trade, Nomura, and Daiwa. The company sold 9,100 shares to the market through their underwriters, who then sold shares to the market through institutional investors and individuals.

Perhaps the biggest challenge of the IPO has been managing the business and the expectations of the employee-shareholders since it occurred. While every business school teaches the fact that doing an IPO is really only second base (the first is reaching sustainable profit), nevertheless, when you’re worth millions of yen on paper, it is hard not to keep peeking at the stock price. From time to time Nelson reminds his colleagues that prices go up, down and up again and what matters is staying focused on company results so that the market and the stock price will naturally respond. Sounds like Nelson really did learn something from his teenage stock trading days….

What lies ahead
Nelson and his colleagues have worked hard to not only make money out of the ValueCommerce business model, but also by honing a highly professional organization which is very cost conscious yet won’t compromise on quality. This value was what brought him to creating a 50-person develop-ment team in Russia. As Nelson points out, you can hire high quality Russian development staff even now for reasonable wages, an excellent deal when compared to equivalent prices here in Tokyo.

Brian Nelson

Nelson is also pushing ahead with tie-ups and acquisitions that naturally fit the ValueCommerce user base and business model. One of these has been Search Engine Optimization (SEO). In November 2005, ValueCommerce acquired shares of Sozon KK, a leading local SEO tools company, and its very talented founder, management and engineering teams. Sozon’s SEOSpy featured a breakthrough real-time web page performance monitoring tool that we covered in Japan Inc. magazine,
in the June 2004 issue (www.japaninc.com/mgz_jun_2004_issue). Today, SEO already accounts for about 7% of ValueCommerce’s overall revenue.

Activity outside the affiliate business does not mean that any of the management team considers the sector saturated yet. Rather, affiliate marketing budgets are still just 1% of many companies advertising (which includes print, TV, and other media.) budgets and Nelson reckons that with the performance guarantees that they are offering, they can lift the affiliate slice of the pie to at least 15-20% of companies’ budgets. This means that he is assessing the affiliate industry alone as being around JPY80bn (US$684m) annually, which means he currently has around 10-20% of the market.

International expansion
Lastly, and perhaps rather uniquely for a Japanese firm, which is usually language-challenged, ValueCommerce’s senior management team is very at home in dealing with foreigners and foreign firms. The company is now exploring potential tie-ups around the Asia-Pacific region, including Korea, China, Taiwan, and Australia. Nelson and the management of ValueCommerce plan to expand overseas through strategic relationships with established players in each market.
JI

Contact details
ValueCommerce Co., Ltd.

Nihonseimei Akasaka Building 5F
8-1-19 Akasaka, Minato-ku
Tokyo, 107-0052 Japan

Tel: 03-4590-3600
www.valuecommerce.co.jp