I encourage you to read through this article. My company is currently doing SEM as an affiliate for a major brand and the working relationship is fantastic. We share critical information to make sure that the brand is protected by their agency and that our campaign is a success with the end result being a big win for the client. Bottom line… it can be done.

Affiliate Marketing and SEM Revisited:

"In the first round of interviews, I discovered all my initial assumptions were wrong. My position was if you ran an affiliate marketing program, you should prohibit your affiliate network from engaging in any paid search advertising. It would drive up bid prices. You'd end up competing with yourself, effectively, for a finite number of paid search positions on a finite universe of keywords. What I learned convinced me I was wrong. To review, the merchants I interviewed taught me three things:

Affiliates extend your paid search advertising budget.

Competing with affiliates on the same keywords is valuable because they help you dominate the page.

If your affiliates are restricted from paid search advertising, they'll simply switch teams and bid for the same keywords on behalf of your competition."