Shakeout Looms, Jeopardizing Online Miles & Points

In the World of Online Rewards Programs, Uncertainty Prevails.

February 16, 2001 - The web, it has been said, is potentially the perfect marketplace, allowing buyers and sellers to transact in an environment of ice-clear transparency. Buyers have access to complete pricing, service and availability information for all merchants, all products. Efficiency rules.

A corollary is that most online purveyors of non-luxury goods have been forced to compete on price, first and foremost, leaving them very little budget for the Old Economy-style brand advertising traditionally used to establish and perpetuate a company's unique identity in the mind of the buying public. And that has created a challenge for New Economy merchants: How does Discounter A differentiate itself from Discounter B (and C and D), when both offer the same Sony Walkman, for the same price?

Enter Online Loyalty Programs

The simple answer to the Differentiation Question was: Reward customers with _______ (insert 'miles,' 'points,' or 'rebates') if they purchase a Walkman from you. The reward strategy gives the merchant both an initial edge, as a tie-breaking incentive toward making that first purchase, as well as a long-term hold on the customer, as the reward currency accumulates and grows in value.

And so it was that, as online commerce has burgeoned over the past few years, online rewards programs went forth and multiplied in kind. Boy, did they multiply! A partial list:

AllAdvantage, AltaVista Rewards, AOL Rewards, Beenz, ClickRewards, CoolSavings, CyberGold, DeltaClick, e-Rewards, eTour, Freeairmiles.com, FreeRide, GiantRewards, Greenpoints.com, LookSmartLive, Milesbar.com, MileSpree, Milesource.com, Mypoints.com, Silverclicks, SmartMile, SuzyKats.com, TrocaMania, UPromise, WebMiles.com, Yahoo Points

Some were company-specific. Others boasted extensive earning and award networks. Some offered points or miles. Others were rebate-based. Many were clones of the airline frequent flyer programs. But they all, in some way, shape or form, rewarded consumers for performing one or more desired behaviors: purchasing products, viewing ads, reading e-mail, visiting websites, completing surveys.

And they all depended for their existence on two complementary factors--the merchants, which fund the programs; and the consumers, who participate in them. Absent either in sufficient strength, and a rewards program will soon become just another corporate has-been.

And in fact, some of the programs listed have already bowed out. And others are expected to follow their lead.

The Big Squeeze: Oversupply Meets Hard Times

Given the sheer number of programs, there was bound to be a shakeout, even in a best-economy scenario.

When the dot-com bubble burst in 2000, the oversupply situation was brought to a head, accelerating the winnowing-out of the economically unfit. Programs which were struggling to be among the survivors in an overpopulated industry segment were further hammered by a more demanding digital economy, characterized by:

- Fewer corporate sponsors as the universe of online merchants was reduced by bankruptcies;

- Reduced marketing budgets of the dot-com companies still in business;,

- And fewer venture capital dollars to help start-ups bridge the gap between launch and profitability.

Consider the following...

ITEM: AllAdvantage -- Not

As of February , AllAdvantage is gone, leaving in its wake stunned and angry program members, investors and customers.

At its zenith, AllAdvantage claimed more than 6 million members and was among the top 20 among PC Data's list of most-visited websites. Now it has no members, and its website is a "File not found."

Here's a typical AllAdvantage promo--

For a time, the money was indeed real. Members were paid $.50 per hour, up to 25 hours per month, to surf the web, during which they were exposed to banner ads from AllAdvantage corporate clients. But the real payoff was in its multi-level marketing (MLM) structure, which extended the payout to compensate members not only for their own surfing, but as well for the surfing of those they referred to the program, and for the surfing of their referrals' referrals.

That was in its heyday. All that now remains of AllAdvantage are the cries of "foul" posted on Internet chat sites by former members. E.g.:

"I have been accumulating time on Alladvantage for 10 months, they were supposed to send a check after the first $20.00, my account is over $50.00 and today they set it to ZERO with no explanation! What is even more of a problem, everyone I referred to AllAdvantage is now going to blame ME for sending them there! I now have to track down all those people and also some people who thought they could make some money by putting AllAdvantage on their web pages to stop wasting their time using the AllAdvantage ad banner."

And:

"Regarding AllAdvantage, they not only died, and not only are they refusing to pay anyone below the threshold, but they are refusing to pay what they owe me up to NOVEMBER, when the threshold was $40 - I'd earned over $50! They're STEALING *MY* money, and probably a lot of money owed to everyone else before November!!"

To be sure, there were signs of the trouble to come. The company went through several rounds of employee layoffs, reported sub-par earnings, and disenfranchised members by changing its compensation scheme. But greed trumped fear, as it so often does, and otherwise-savvy individuals and companies remained onboard until the bitter end.

ITEM: AltaVista Rewards -- No More Rewards

Another example, albeit with a less horrendous outcome, was the shutdown of AltaVista's Rewards program.

Late last year, the company announced that, as of November 15, 2000, members of AltaVista Rewards would no longer earn points for purchases made on AltaVista Shopping.

In this case, program members were given two options: transfer their accounts to ClickRewards at a rate of 1,000 AltaVista points to 40 ClickMiles; or spend their AltaVista points on items from the Rewards catalog. And they were given plenty of time (until the end of February) to do so.

ITEM: MyPoints -- Underperforming Now

Another previous high flyer, MyPoints (dubbed "Best Rewards Program Online" by Yahoo Internet Life) is still walking, but wounded.

In October, the San Francisco-based company shed more than 100 jobs. Two MyPoints senior executives, the company's founder and its COO, recently left "to pursue other interests." MyPoints' share price has fallen from a high of $97.69 to as low as $.81. And profitability is nowhere in sight.

Bear in mind that for every company of the size and stature of MyPoints--which is NASDAQ-listed, and must therefore report its earnings performance and other materially relevant events--there are probably many smaller rewards programs which are closer to the edge than Mypoints, but whose difficulties go unreported because we have no access to behind-the-scenes information.

ITEM: CompuBank & LookSmartLive Discontinue ClickMiles

In addition to the prospect of wholesale program shutdowns, we are also likely to see more companies opt out of network rewards programs. Two cases in point: online bank CompuBank, and the LookSmartLive information portal.

Until recently, both rewarded users with ClickMiles (the reward currency of the ClickRewards program) for performing selected activities. Now, neither do. CompuBank, in its official statement, claimed the change was due to "lack of interest." More likely, the company was simply forced to shift into a more prudent spending mode, and ClickMiles were deemed non-essential.

ITEM: TWA -- Whither Aviators Miles?

And lest you think these problems are confined to shadowy corners of the digital netherworld, consider TWA.

Members of TWA's Aviators program know all too well the sinking feeling that accompanies the news that the company which hosts their program has declared bankruptcy. Even in an industry as regulated as commercial aviation, your miles are no more protected than savings squirreled away under a mattress. There is no FDIC for frequent flyer miles.

(Luckily for Aviators members, it appears that American will acquire TWA's assets, and convert Aviators miles into AAdvantage miles. So in this case, miles in a weak program might be transformed into the same number of miles in a very strong program. Such alchemy-for-the-better is anything but the rule.)

Looking Ahead

We've already seen some fallout from the collision of the overabundance of rewards programs with the implosion of the dot-coms. And that was before Mr. Greenspan began using 'economy' and 'recession' in the same sentence. Where that leaves us, I suspect, is at the beginning of a long, painful shakeout among the programs, with only a hale handful left standing.

And, putting a human face on the shakeout, the next 12 months promise to be a rough ride for consumers who, in addition to some gut-churning uncertainty, will suffer loss of points or, at the very least, nasty disruptions as their programs change terms, partners or payout rates.

So What's a Point-Loving Consumer to Do?

Proceed with caution.

Very much as an investment advisor might recommend sticking with Blue Chip stocks during uncertain economic times, I would suggest confining your rewards-earning activities to programs which have a fighting chance of surviving the current shakeout. Which begs the question: How can we separate the survivors from the road-kill-to-be?

We'll stop short of handicapping the contenders and picking winners and losers. For one thing, as mentioned earlier, in many cases there's simply not enough information publicly available to make informed judgements. In place of pro and con lists, here are some factors which are likely to be key determinants of survival--

- A sustainable business model. AllAdvantage paid its members more than its advertisers paid AllAdvantage. That's the opposite of a sustainable model.

- Good management. Easier said than done.

- Robust partnerships. In addition to being revenue-generators and investors, an extended partner network confers credibility on the company at its center. (The underlying assumption: the partners subjected the company in question to due diligence review, and it passed muster.)

- Deep pockets. All things being equal, the best funded will survive.

Even with all the above in place, there remains plenty of uncertainty. So cash out your earned miles or points regularly, rather than allowing your account to grow unchecked. That way, if the program folds, and there's no provision for converting your earnings to another rewards currency, you will have minimized your loss.

And keep your finger on the pulse of your programs. As a starting point, run a search on your preferred search engine using the name of your program as the keyword. Look for recent postings on online forums and newsgroups. If, for example, there's a recurring theme of member complaints, disappearing points, late payments, and the like, consider yourself forewarned.

And, speaking of fingers, keep 'em crossed.