Arguing Search Arbitrage, Part 1
In the movie “The Untouchables”, Al Capone philosophizes about rum-running and the circumstantial nature of ethics: “On the boat, it’s called bootlegging. On Lake Shore Drive, it’s hospitality.”
To Jake Baillie, founder and president of local search engine TrueLocal.com, the same can be said about search arbitrage, the practice of bringing inexpensive Web clicks to your site through search ads and driving a good number of them out again through more expensive clicks. When it’s done badly or abusively, search marketers and SEM firms complain that it produces low-grade clicks from their search ads and erodes their return on investment. But Baillie maintains that a lot of well-regarded Web sites, including his own, do it well, don’t give advertisers any cause for complaint—and don’t get any credit.
By itself, arbitrage is neither good nor bad. “[Search] arbitrage is just another tool in your arsenal,” he told an audience last month at the Search Engine Strategies conference in San Jose. “There’s a ton of new sites that use arbitrage to bootstrap themselves. You’ve got to create traffic and revenue somehow.” But the tactic isn’t just for start-ups looking to prime the pump, either with visitors or ad revenue. Sites like SuperPages.com, eBay, CNET and many of the comparison shopping engines employ it too, he told listeners.
Speaking a few weeks after the conference, Baillie points to a PPC ad that the BizRate.com comparison shopping site has bought on Google against searches for the Treo 650 wireless phone. The BizRate landing page for that ad contains nine category links for Treo phones and accessories; if clicked, they take users to the standard comparison-shopping pages with product specs, photos and prices. But the landing page also devotes about two thirds of its space to sponsored links delivered through Google AdSense, ads bought by retailers and online stores selling the phone and producing revenue for BizRate every time a user clicks through.
“That’s arbitrage,” Baillie says. “BizRate is obviously a legitimate site that doesn’t exist solely for arbitrage, but they’re trying to monetize the traffic coming to their site via these sponsored search ads. I’m sure they don’t make the majority of their money from arbitrage, but I’ll also bet that the amount they do make on it is not insignificant.”
Does it make any difference that the ad is for a comparison shopping site, and that users who click on it probably won’t expect to be taken directly to a site where they can buy a Treo?
Not really, Baillie says. He notes that the Google search ad copy doesn’t mention price comparisons but says merely, “Bargain prices. You want it, we got it!”
Obviously, arbitrage can be done abusively, as it often is with what are called “Made for AdSense” (MFA) Web pages. These pages are set up for the express purpose of flipping traffic from Google or Yahoo! search ads through costlier outgoing ads. Some of those operators don’t care whether the AdSense or Overture ads they display have any relevance at all for the visitors coming in to their sites through Google or Yahoo!; they’re focused solely on how much they can earn when visitors click through.
Search marketers have a right to grouse about the impact of this brand of arbitrage, Baillie says, as they do about the long strings of sites that offer ads that only link to other sites full of ads. Those practices frustrate users and make them less likely to convert, degrading click values and wasting marketers’ money.
“But smart arbitragers are not doing that,” he says. “Legitimate arbitragers are not trying to monetize traffic they buy at five cents a click.” Baillie is referring to a Google policy update this June that hoisted the minimum bid for keywords based on the quality of ads’ landing pages. Reportedly, many of the bidders who saw their bid floors raised were arbitragers. “If you buy crap traffic, you’re going to have crap conversions and you won’t make any money.”
Baillie outlines the arbitrage economics on his own site, TrueLocal.com. “We’re advertising on Google on the term ‘motorcycle parts’,” he says. “We’re paying pretty good money for that term, because we want to be up in the first set of search results. So I’ve got to earn enough from that traffic to make that bid worthwhile. If I’m showing irrelevant ads on my site, people are just going to get pissed of and hit the ‘Back’ button.”
And Baillie says his team monitors those clicks, both the ones coming in from Google and the ones going out through TrueLocal’s AdSense ads, to make sure that what they’re doing is working for them. In contrast, the five-cent arbitragers can disregard their metrics. “If they’re paying five cents in and getting $4 out, they can have a 3% clickthrough rate and still make money.”
So the same laws that apply in search marketing apply specifically to search arbitrage, Baillie says: You have to target your ads properly to make sure they’re relevant and valuable to the visitor. If not, marketers will lower their bids for placement on your site—along with all the other related site in the Google or Yahoo! networks—and your business model will crash and burn.
“We have a vested interest in sending advertisers quality traffic,” Baillie says. “That’s how we make our money, just like every other Web site.”
If arbitragers are winning out over direct search marketers in some parts of the Google/Yahoo! playing field, Baillie believes, it might be simply that they’re being more efficient about buying their media than either the marketers of the SEM firms handling their campaigns. And he thinks an argument could be made that many online advertisers benefit by having their traffic funneled through a conscientious arbitrage site. Just as most small law firms don’t haggle for TV airtime but leave media buying to the toll-free “Injury Helpline” referral service, Web sites might even benefit from the fact that the arbitraged pages where their ads appear are working to optimize keyword bids and traffic flow.
As for search engines’ efforts to stamp out search arbitrage, while they might have some success rooting out the really egregious offenders—the five-centers--Baillie thinks they’re ultimately doomed to failure. Search arbitrage exists because some Web operators are good at spotting areas of opportunity, he says. Those areas may shift, but they won’t go away.
In fact, Baillie says arbitrage might even grow more widespread if Yahoo! follows through on its planned changes to its keyword bidding system. Right now, Yahoo! search marketers can see competing bids on a term and know that they only have to spend a penny more than the highest bidder to get the top ad slot. But when Yahoo!’s Project Panama revamp of its search marketing interface takes place—and it’s still scheduled to start rolling out in the last quarter of this year—those bids will be concealed, and marketers won’t be sure where their ad in going to rank on Yahoo! search results pages until they check the Web.
That bid situation will call for the expertise and efficiency of the arbitrager to collect traffic from Yahoo! Search and drive it to the advertisers through an intervening Web site. “The reason arbitrage works on Google is largely because of the opacity of the advertising system,” Baillie says. “I have a very good idea how to get into a top slot on Google AdWords, but the normal small business or retailer doesn’t have the time of the energy to figure it out. Yahoo! going dark too will make their jobs even more difficult.”
As for the future of arbitrage on his own site, Baillie says it may play a reduced role. Right now, TrueLocal does arbitrage primarily for the traffic it brings in from Google. “We want to get people using our engine,” he says. “But it’s hard to do that if someone is not already searching locally. So we run ads for motorcycle parts and then offer a box at the bottom of the landing page where they can enter their ZIP code and get local results for motorcycle parts.”
It’s a somewhat cumbersome system. One of the ways TrueLocal hopes to make the process smoother is by detecting the IP addresses of incoming visitors and thus identifying their locations without any help. That will allow TrueLocal to ramp up sales of its own listings and send users out to merchants through its own content rather than through ads.
It might also eat into TrueLocal’s arbitrage revenue, Baillie admits. “But it will make for a better user experience, and that’s the main thing,” he says.