Q&A's are valuable not least because people love to talk about what they know. So we thought it would be a good idea to try and put together a free-form Q&A, otherwise known as a Webmaster Roundtable. We chose "Webmaster Fraud" as a topic to jump-start the discussion because it has been a recurring theme in recent interviews, and used the occasion of the West Coast Webmaster Conference in Vancouver as an opportunity to invite several experienced, knowledgeable and influential Webmasters to participate.
The following conversation was moderated by AVN Online Senior Editor Tom Hymes and videotaped by AVN Live producer Nikki Fritz in her suite at the Pacific Palisades Hotel on the afternoon of April 14, 2001. Video highlights of this Roundtable will be available for viewing at AVNOnline.com.
David Schlesinger (DS): So what do you want, my name and occupation? David Schlesinger. Been doing this for about two years now. Hope to be able to stay with it. I'm trying to do my old AA routine. Oh yes, Vivid, Vivid Video.
Scott Schalin (SS): Scott Schalin, iGallery. Interactive Gallery, IGI Inc., New Frontier, subsidiary of Nasdaq, NOOF. iGallery provides content, programs for Webmasters. We also have some of the biggest domains on the Internet - Pussy.com, Blowjobs.com, Tits.com. And Holly Moss... VP of sales and marketing, iGallery.
Holly Moss (HM): That's what I was going to say. You took the words right out of my mouth. V.P. of sales and marketing, iGallery.
Lee Noga (LN): Hi there. My name is Lee Noga, Vice President of marketing, gay division, for Cybererotica. (points to Cybererotica logo on shirt). Post breast-reduction.
Jonathan Silverstein (JS): I'm Jonathan Silverstein, part owner in Elite Cash. I'm doing some consulting with JTS Enterprises, LLC, and I'm just happy to be in Vancouver.
Darren Blatt (DB): Hi. My name is Darren. I like long walks, wet kisses. Is this a dating thing? I run Marketing Firm.com, The PlayersBall.com and the D-Moneyshow.com. I'm a nobody.
Chris Rodger (CR): My name is Chris Rodger, Wild Rose Productions. I'm the VP of Operations and Marketing. Hopefully, I'm here representing the amateur world.
Fabian Bay (FB): My name is Fabian. I represent several clients that do pretty big casinos on the Internet. I'm dealing with two adult companies. One of those adult companies is the publicly traded Private. My clients represent them on the Net with running their casinos. That's about it.
DS: All right, relax. Okay, so, fraud, huh?
LN: We all now where this started. We are all aware that Cybererotica released a very humbling press release about cutting back [affiliate payouts by] ten percent. There are two ways you can handle situations in the industry when you've incurred increased costs that were not associated with the business model, even as early as the quarter before. We're seeing those in the areas of Webmaster fraud, e-processing charges, excessive chargebacks, those types of things. So, actually, to be in the long-term picture, we wish to be here five years from now. It's almost like the stock market. We did a correction, an adjustment. By no means is this a doom and gloom situation. And having done this, ten percent, it allows us to continue forward with our program and enjoy some appreciable growth in other areas. But also, if you didn't know, this dates back to about a year prior to [the recent Webmaster gathering in] Jamaica, where several of the players said, "Hey, we have the same situations, but we really don't know how to handle this with our Webmasters without causing a panic, a doom and gloom. The clouds are falling.
So there was some indication as late as one year ago that other big companies were looking at doing adjustments as well, but again nothing happened. And Ron [Levi, owner of Cybererotica] had his crew spend some time running some numbers, and actually the adjustments that were made were really kind of benign. Those areas where 90% of the Webmasters make their money were not affected. So he just basically trimmed some of the fringes. A lot people say, that means you're not going to do the Webmaster shows, or maybe if you don't give away Vipers or Hummers or stop grandstanding out there you could pay the Webmasters more. But what I don't think they understand is that we started our business model at $40. Like any good company, we really tried to pay $45, in some instances $50. We came clean and said, hey, it just didn't work. We tried. That's all it is. So basically, we just adjusted back down to $40.
HM: I don't understand what that has to do with Webmaster fraud. That's just the cost of business. It was inflated. I don't think that has anything to do with fraud.
SS: Fraud has nothing to do with somebody who's paying this much, with people who don't convert from trial. That's not really the Webmaster's fault.
LN: A lot of people say, just stop the free trials, go into a paid $1.95 trial. Just think of the amount of work that charges the cost for the $1.95 trial. Look at the work that you're creating.
DS: The chargeback after you go over your percentage is still going to be the same number, whether it was $2, $7 or $40.
LN: So why bother?
HM: But I think the term fraud that we're talking about here doesn't mean...
SS: If the topic is fraud, then it's not active members so much, so I understand what you're saying.
HM: Let's first define what we mean by fraud. Are we talking about Webmaster fraud?
SS: Well, what is Webmaster fraud?
HM: You guys say it.
SS: Is it a Webmaster who moonlights as a waiter and steals a credit card and bangs it into everyone's programs?
HM: That could be one.
LN: One example of fraud is, some Webmasters go out there and get, through whatever mechanism, this heinous amount of signups that cancel under the radar.
DS: ...They auto-generate the credit card...
LN: Thank you. That's one situation.
CR: Why don't we establish some definitions here. I suppose there's three different types of people involved here. Sponsors who run programs, there's one; maybe we'll call them sponsors. Webmasters, people using those programs, and then the surfers, because there's potential fraud at all three levels, and different kinds of fraud. So, just to save us some confusion.
HM: So let's look at the first one. The first one is Webmaster fraud...
HM: One could be spamming; that's a form of fraud. Then credit card. And then...
CR: The middleman, the Webmaster, can fraud out his surfers quite easily, and usually gets away with it. Or he can try to pull a fast one on the sponsor running the program. I mean, how many accounts have been deactivated since the old YNOT days? Thousands.
SS: We found that the biggest fraud was in our e-mail program, Sex Files, because people would just write scripts, and just bang, bang, bang, and apply them to the letters automatically, and get paid for every opt-in. So we have a whole department that just manages our e-mail department for fraud, and just checks over every single account looking for something fishy.
I haven't seen so much, though, on signups to our site, unless it's something that I'm missing. I've never seen someone write a program that enables you to sign up and then cancel right away.
DS: Oh yeah. I've seen that a ton of times.
LN: Isn't that just auto-generating and banging out the credit cards; you'll never see somebody coming to your site.
DS: It's a red flag; it's easy to see. I mean, the guy could sneak maybe three, four, six in a day. Who's looking at a bread and butter Webmaster, and you might even let a few go through and actually pay for them, you know what I mean? Actually try to create a pattern that you wouldn't be able to follow.
LN: How about this? Let's just break it down. Even if you take fraud on the smallest level, and take that a hundred "X" over your Webmaster base, it adds up. For example, a little Webmaster, how many times have they busted your balls about, "you owe me eighty dollars and you booted me out of the program, and I want my eighty dollars." Now, eighty dollars is very benign and insignificant, but take that a hundred X or a thousand X, do the math. But chances are it's the neighbor and a friend of the neighbor. They want the eighty bucks because they have their friend sign up, they get paid the $25 on the free trial case, so they try to stake $50 out of Cybererotica. Take that a thousand X? Okay?
Even better, as long as you fly under the radar, our radar is 66%. If you keep the cancellations under 66%, and I think we're being very generous, we'll pay you. So that's our radar. But these Webmasters want to fly above that radar, and we can't bankroll that. It's breaking our backs. That doesn't mean we're not solvent; we're very solvent, I'm sorry to say, or happy to say! I'm sorry to say to the rumor control out there, to pick something else, but we're extremely solvent, that's not an issue. This is not an issue of our strength or our solvency; that's not the issue. The issue is, the industry is growing by leaps and bounds. Through your time, and your time, you all have seen it. It got to the point where even I said to myself, you know, at some point these shows can't get any bigger than what they're getting, and sponsors can't possibly pay any more, because it does not work on a spread sheet.
Now I'm not going to name names, but the initials are A-R-S. (laughter)
HM: I'm having a hard time digesting this.
LN: Now I'm not saying - please don't misunderstand me - I am not insinuating anything. I'm saying I am curious and would love to see their spreadsheets. I want to see this business model work.
JS: Everybody wants to see everybody's spreadsheet. (laughter)
LN: So am I asking something outrageous?
HM: So I think what you're saying is that the market adjusted.
LN: It has to.
HM: Just like the stock market, it was too high, it adjusted. But some of the big players are still having the lavish parties and events, and really controlling the events that are going on.
LN: Can anybody say "opportunists"? Let me tell you, as soon as Cybererotica announced the adjustments, which was spoken of a year ago - as a matter of fact, some representatives of some of those companies are still in this room; I'm not going to name names; not this time. But the point of the matter is that after we did it, I believe it was Click Media, Click Cash - if I'm wrong I apologize, it was something with a "Click" in it - they announced an adjustment, and another huge player applauded Ron. Why? Because they are going to adjust down.
So really the consensus among the top two percent is, we've already led the way and you know what, there was no retaliation; our business went up. So go figure this out: We expected backlash, we expected people to say, what's up with you? What are you doing? And everybody is saying, thank you for doing it, because we didn't want to be the first. And that's fine. Business is stronger than ever.
HM: But I guess, getting back to the topic, with respect for AVN. You had said, Chris, you had said that...
JS: Is this Webmaster Confessions? (laughter)
HM: Exactly. It's a great topic, it's a hot topic, and we're all interested in this, and that's great, but I want to respect AVN.
Tom Hymes (TH): It can go wherever you want; this can segue. But it's either affecting the industry or it isn't. So to what extent are these types of fraud affecting your companies, affecting your business models?
JS: I think the biggest fraud is something Scott and I were discussing yesterday, and it's "friendly fraud," which you can't do anything about.
CR: Friendly fraud?
DB: Surfers have become so aware of how to surf the Net...
CR: ...and manipulate these programs...
DB: ...and that's the biggest killer, because all these programs have been paying on trials, it greatly affects the bottom line. When 40% of the people out there know that they can be in and out in a week and you've paid a Webmaster $40, and that's out of our control.
HM: Right. The surfers are getting smarter, so we, with our programs, have to get smarter and active, and that's where the active member is coming.
SS: I think everybody will be paying on actives probably by this time next year for sure.
JS: See, everybody needs to go to 50-50; it's a partnership.
CR: I'm very much for that.
HM: But retention is still an issue.
JS: Imagine if it was 50-50. If you didn't retain, you weren't going to get any traffic.
DB: It makes it worse.
HM: And the surfers are getting smarter...
DS: ...and Webmasters are getting smarter too...
HM: ...and you can give them everything from A to Z and they'll still cancel within two months.
DS: That's because you're giving them everything A to Z that everybody else is giving them too.
HM: That is true.
JS: It goes back to being a little bit creative and showing some exclusive material.
DS: Yeah, but still it's skin, and people just want to get their rocks off for the most part, you know what I mean? If they know there's that many sites out there they can take advantage of, why not hop around?
SS: We all can see fisting for free, you know. Maybe not today, but... Which is kind of good, if they can clean up the portals. That's our biggest competition. If you can furnish it for free, why are you going to pay 30 bucks a month?
LN: Do you all accept the responsibility for not educating your affiliates to tone down the hardcore, to stop trying to gratify the surfer?
CR: I don't think that's an issue.
LN: You don't?
CR: No. The only issue there might be... who was it that asked me? One of our tours, which is very hardcore, and - was it you? (pointing to Silverstein) You asked me, "how do you feel about that...?"
JS: Are you comfortable with it?
CR: "...comfortable with your tour being so hardcore," and
I had to ask you what you meant by that, and you elaborated and said, "well, morally speaking..." And I thought about it a second and I went, well, could minors access it? Yeah, they sure could, but they could access just about anything anyway.
HM: But two wrongs don't make a right.
JS: But imagine if everybody sending you traffic only had softcore stuff on their sites. If you spoke to everybody that sent you traffic, and they finally came to you and saw the hardcore, how much more...
CR: No, what Lee was saying was - her initial point about hardcore being in a tour and free - was that the surfers are getting their rocks off in the tour and they're not going to join.
LN: No, I didn't say the tour.
CR: Or in a free area.
LN: I'm talking about the affiliates in the sponsor's program. This is the question right now. I'm not talking about your tour; I'm talking about the Webmasters that might join Rose Cash. If you take a moment and educate them about, "Hey, don't tease them, send to us and we'll please them." Do you pass this on to your affiliates? Do you want your affiliates gratifying...
JS: ... and showing twenty hardcore so the guy can finish off before he's even to you?
LN: So how much responsibility should sponsors accept for this emerging pattern that's going to our bottom line?
CR: That kind of strategy does work for me, with my affiliates.
DB: but there's always going to be free sites out there anyway that give the hardcore, so...
CR: Not what I'm giving out. What I give out of free content, for example - and we're getting off fraud here totally - but what I'm giving out as free content for people is not cookie-cutter content. It's original exclusive stuff that we shot ourselves that you can't see anywhere else. Do you want to see more of it? Then go here, and it does work for the way I'm doing it. But anyway...
FB: So, in other words, what I hear here is that - let's say the sponsors, they surf around and they go on The Hun and they click on link number one, and they see a guy sending fifty signups a day, and he has twenty hardcore pictures that all the sponsors have. They'll say, I cancel his account?
JS: We're saying, try to throw some softcore and get seventy signups out of them.
DS: Or is this guy going to just go back and think those shots are going to get updated, and maybe just use that as his source of content. Maybe take the trial for a few days and join that, and know that he can go back and get an updated site?
JS: It's all those people that didn't join that you're concerned with. You know, what would they have done if it wasn't hardcore material on the site? Would they have possibly clicked through and actually joined your site? Would those fifty signups be seventy signups?
FB: But look at the core of the traffic. The core of the traffic is coming from free sites.
FB: So, these days, if you look at - it's the perfect example, the pic-post sites. The guys with high traffic, that are most of the time non-U.S. people - the guys in Holland, Europe, wherever - they drive a lot of traffic because the surfers know that they can find the stuff there. There's no way to regulate that.
DB: That's what I was saying.
FB: That's very important, because what happens is that the U.S. companies can do it. But what you see right now is, for example, some smaller Russian companies, they go in there with alternative billing, which is taking away a lot of our business, a lot of our business.
HM: Why do you think the e-processors have put the reserves on that they have, and how do you think that affects you as a sponsor?
DS: That's money you're never going to see, for the most part.
LN: Just go back over the years, just following the evolution of e-processing, what have you noticed?
JS: This is a quiz, David.
DS: Are they taking more and more and more?
LN: Why do you think that is?
DS: Because the numbers are getting worse and worse.
LN: Exactly, and that all rolls on top of the sponsors. That's what I'm saying. And some of that is, again, the fraud. Having an e-processor in here could probably be more point-specific. (Note: CCBill was invited and agreed to participate, but their representative was unable to make it at the appointed time.)
DS: We also don't get a lot of support from VISA, either. It's not like they're out there going to bat for us. They're making a shit load of money off our chargeback problems. And that's not really fair. I think that if VISA worked with us a lot more closely and helped us curb the problem and actually looked into if we had IP tracking, or whatever it is that you're using to protect against Webmaster and surfer fraud. If they really took a look at it and really just listened to us and realized that we're in it for the long haul. We're not interested in putting up some sex sites to just get some guys rocks off, make some bucks and be out of it in five years. It's a real business.
SS: Some people are, though.
DS: Right, but it is a real business that has legs. The sex industry's been around forever and this is the evolution, this is the now.
JS: But what you're saying about VISA is what I was saying before about the enlightened surfer and the "friendly fraud." How many people call your customer service department and say, "My husband never made these charges, my husband would never surf a site like this," and you end up having to give a credit back. But what if they don't listen and they don't believe that you're going to do that. They'll call the credit card company and you've already given them a credit, and now you've got a chargeback on top of it.
DS: Hopefully, you're hoping to get that worked out, but there are times when you're not. It's not a perfect system.
JS: It's a waste of time and money.
SS: That's why you have to really be good on the scrubbing up front, and maybe not take a credit card that a lot people might take. Some people are so loose with their parameters they'll just let everything in.
JS: But you can never tell that his wife is going to call and say...
SS: That's for sure.
LN: Look at the credit cards. Their number-one marketing hook: surf and shop the Net safely. What does that mean? If I say dispute credit, they don't sweat these people, so people know they can get over, because that's the new thing.
SS: Right. And once you do it once you might as well keep doing it every time.
HM: Right, but I think that was done by the FTC to protect the consumer.
JS: But the merchants are the ones that now need protecting.
HM: Right, so now they're taking advantage of it, and there's a loophole there, and that's what's happening.
JS: Think about it. You're out $40 for the signup, then the time and the energy, and the chargeback fee.
SS: You're really behind the ball, yeah.
CR: I think it's safe to say that VISA, MC, American Express Blue, Discover - they have us all by the necks right here. They have a little lever and raise it up higher, and we all choke; they lower it down, things get a little better, we get all confident and stuff and might start playing a little game, and then the lever goes back up again.
SS: That's why bringing in an alternative form of billing without being so beholden to the credit cards would ultimately be the answer.
DS: That's changing the world.
SS: For sure, but I think that if...
DS: That hasn't come around yet.
JS: But then again, what are you going to do, have a guy send a check, and a copy of his credit card, and a copy of his driver's license...
SS: A thumb print. A sample of his DNA.
LN: That's coming, though. That will be our salvation, if we hold on.
FB: What is going to happen, if I look at the casino business - one of my clients today got hit with $18,000 in chargebacks on one customer. It was one customer actually that dropped over $20,000, cashed out $12,000 and $18,000 was charged back, so do the math. That's $18,000 that comes back plus $12,000 you already paid out...
JS: And that's just one crazy account.
FB: That's one crazy account. So that was a little over $30,000, one customer.
SS: What is the chargeback rate in the casino game versus the sex game?
FB: In percentage to the transaction, it's way below 1%, because what happens on the cash out, or on the bonus structure, is that you ask for a faxed-back form, a signature and a copy of the credit card, so it's a little bit different.
SS: But the individual chargeback has to be heftier in that case, obviously.
FB: In actual money, of course, it's very, very big.
DS: But in scale I think it all works itself out.
FB: It works itself out.
LN: But how many casinos are online? What do they say, that by the end of the year there'll be ten million adult sites online?
FB: Ten million?
DS: What is a site? Is it one page?
FB: Where does this figure come from?
LN: I read some analyst's report.
FB: Yeah, but a million are from AgeCheck.
LN: Formerly AgeCheck; now CyberAge.
TH: So, let me ask you a question. With that many sites and with more newbies coming in, and with the affiliate structure, does that lead to spamming? Does that lead inexorably to Webmaster spamming? Is CEN the only company that had a problem with Webmaster spamming? Or are other companies having that problem. And is there any solution to that? I mean, if you read the AOL complaint, one of the things they want is that CEN will have nothing to do with affiliate programs any more. That's what they're asking the court to give them. I mean, if that happens that would obviously...
JS: That would crush their business.
LN: No, it would not crush their business.
JS: It would crush their business.
LN: No, it would not crush their business.
JS: If they couldn't be associates with affiliates?
LN: No, it would not, because let me tell you one of the next possible scenarios of the landscape. If any of your guys fell out, you guys would go business to business. Because, come on you guys, we're the top two percent. We swap spit amongst each other. Go business to business, you will survive not having a Webmaster affiliate program... eventually.
In part two, the panel will continue their discussion of the future of affiliate programs.