Digital Thoughts – State of the Union
Arbitrage is a word that gets bandied about freely these days; it’s an activity that has transcended the financial world where it began to become the de-facto means for making money online. At its core, the activity describes the absorption of some level. The arbitrageurs are not affiliate marketers – they do not offer technology solutions or want to be online advertisers, nor are they ad networks – focusing on a particular grouping of ad units. So what, then, are they? Where did they come from; what do they really do, and how do they fit?
People and companies go from affiliate to arbitrageur when they realize that making money online is not about running a particular site, but about traffic. They realize that money comes from matching user’s interests to ads and doing that in scale, anywhere. Search arbitrageurs for example don’t create content about their interests but content based on what’s monetizable. The search arbitrageurs then link the pages together to create a large network of ad driven content sites and then focus their efforts on getting traffic. Some specialize in natural or organic search. Others, such as the famed eBay affiliates specialize in paid search, avoiding the whole content route all together, playing gap finders instead. They leverage eBay’s more than 19 million products, and thus keywords, and bid on non-competitive, inexpensive terms on the engines. Do a search on Google for Harvard or even Jane Austen to see what I mean. Both have little competition and are not inherently high value, but the arbitrageur can get enough of these $.10 cent words to earn an effective $.15 to $.20 return by generating enough sign-ups for eBay.
How big can search arbitrageurs get? The largest of them does upwards of $100 million annually, but the market doesn’t seem to support many search arbitragers of that size. That is where the other types of arbitragers fit – performance based ad networks, lead generation companies, and those doing a hybrid of the two. Advertising.com is a great example of the ad network arbitrage model. They have sites and they have advertisers, but they are not in the business of directly matching advertisers with sites and vice versa. They are in the business of acquiring media on one price point, e.g. CPM banners, and figuring out how to make double by showing the best rotation of CPA ads. Theirs is a business that relies heavily on buying enough volume to get media cheap enough, doing enough volume to get ads on a high enough CPA, and continuously working on maintaining and improving their optimization algorithm to cover the spread. Theirs is a game that is hard to enter because the success of the arbitrage depends less on the math driving the ad selection than the pricing benefits of the volume. They can buy enough to get a price from $.50 CPM to $.25 CPM on the media front and from $25 CPA to $40 CPA on the advertising front. It’s going to be hard for someone paying $.50 CPM and making $25 CPA to compete, no matter how good his or her technology is.
The pure lead generation companies are among the best examples of arbitrageurs. Their form of arbitrage involves more risk assumption than the ad network example above. They too buy media on a CPM, and measure performance to a CPA, but unlike the CPA they may pay to the networks, their internal CPA is not fixed. TheUseful and LowerMyBills are two good examples. The former might pay a $1.50 for an email address and the latter might pay $45 for a lead form, but what they make depends entirely on how the traffic responds. TheUseful doesn’t necessarily make $2.00 nor LowerMyBills $80 unless the traffic responds accordingly, i.e. fills out offers in the case of TheUseful and can be sold more than 3 times in the case of LowerMyBills. Like ad networks, media buying expertise is a key lever to lead generators, but they cover the spread not through ad rotation algorithms but by testing and tweaking the banners and landing pages per traffic source. They focus on making one ad, one site convert above and beyond the cost of the traffic.
The hybrids, like AzoogleAds, Adteractive, and Quinstreet, are next, they came after the affiliate programs, after the ad networks, and after the pure lead generation companies. Like an ad network they will indirectly buy for multiple clients, paying on a CPM and being paid on a CPA. Similar to a lead generation company, they will create many of the offers themselves – designing creatives and hosting the pages. The hybrids will run and/or create pages for anything and everything to fit a traffic gap. What they do is find a way to make money anywhere with any combination of tools, covering multiple segments without having to be the leader in each.
Predicting the evolution of arbitrage is another article in and of itself, but one that we will have to write. What is clear though is the role the arbitrageurs have played in Internet advertising. These are the companies who are first to test out new channels and new markets. They helped float Internet advertising during the bust and are driving some of the best innovations – from banner design to landing page optimization. They are consistent buyers and the unexpected symbol for the power of online advertising and its ability to directly translate into the offline world. And they will continue doing this, ultimately helping major brands and other typically brand-only businesses alter the way they spend money. Until they do, let’s just thank the arbitrageurs for showing everybody else how to make money online.
