After the dot-com bust I was on Grand Cayman trying build a new overseas gaming business.. We were having a lot of trouble and were seriously thinking about returning home to get back on our feet. As I tried to figure things out I simply parked some newly acquired names in first generation affiliate programs and to my surprise, watched some large, fairly steady revenue roll in .. I took my affiliate checks to the bank and my banker said, "I can't deposit this for you". I said, "Why"? He said, "We have to hold checks for 17 working days and I've had three Internet company checks returned this week. All three co's have gone broke! I can't risk depositing your check, and a teller giving you some cash before this company goes broke and the check gets returned to me." That day I closed my account and opened one at the bank across the street. I just recently passed that banker and went out of my way to flash him the biggest shit eating grin you have ever seen a man give from a $170k Mercedes. That's satisfaction folks.
I was on my way into town that day after having lunch with a friend who is heavily involved in Search Engine Arbitrage. I couldn't help but think to myself how these times in 2007 feel like a lot like "deja vu". Arbitrage involves buying and selling. You buy traffic at Google under keyword "hair accessories" and send that traffic to a made up website you created like hairstyling101.com, loaded with staged pseudo content and links to higher paying results at Yahoo. Because the visits from Google are highly targeted and land at pages that look like content (but with well disguised PPC listings), nearly everybody clicks through and the guy running the site simply arbitrages the cost of traffic at Google (plus bandwidth, staff salary and site creation/maintenance) against the amount he will earn from the click at Yahoo. Buy a click for 30 cents and sell it for $1.50. The whole thing happens seamlessly across tens of thousands of keywords; and moves millions and millions of eyeballs from Google over to Yahoo.
I often hear these arbitrage operators boast: "We get 30 million visits a month", "We get 50 million visits a month", "We get 100 million visits a month!" Com score and Nielson Net Ratings even help corroborate this. They confirm that sites like Biz rate, Shopzilla, and other arbitrageurs get all those visits. They don't of course. Arbitrageurs really get no visits. What they do is "buy" 30, 50, 100 million visits a month at Google for 6, 16, 29 million dollars a month and then they "sell" those visits to Yahoo for more than they paid. If they don't buy the traffic, or if the keyword market changes or if the people they are buying from get into trouble, the whole thing unravels like a bunch of plates spinning on the ends of pool cues, losing momentum and falling to the floor. It's not just the keyword marketplaces that can cause the house to cave. Key people getting sick, broken software, server outages, lack of funding to accounts, changes in algorithm, changes in keyword market rules, key people moving to competitors, regulators saying "no keyword to keyword misleading". All these things can unwind the game. There is no traffic behind the curtain. It is just buying and selling.
So here I am in 2007.. a domain guy with millions of real visits. These people can't be beaten away. Nearly 100% of the people type-in the names. They come in spite of search engine block and browser error page gaming by ISPs. The people who enter my network come by curiously and passionately typing in the keyword style domains we manage. It is the bare din-level 'type in traffic' that you just can't beat away. Homer Simpson could unplug my server for a month and then plug it back in and I would immediately get exactly the same number of visits I used to get.
I went home after running errands and that afternoon had a phone chat with an analyst who said he liked the risk proposition of arbitrage far more than generic defensible domains. I just couldn't believe it .. Here I have been making money after the .com bust, the arbitrage model owns no traffic of its own and the analyst is telling me my business while not risky, has a "less friendly risk profile" than a business based on moving people left or right without owning a thing. Something in which there is no burn-down value has more value than something you can't burn down?
As I hung up the phone with this analyst I replayed the last few years and evolution of this industry through my mind. How did we get here? How did we come to a point where people still don't value domains correctly. I was struck by the lack of vision and the lack of understanding on the part of investors as to how the Internet and the Internet businesses they invest in truly function. I was surprised about the naivete surrounding traffic and why traffic comes to certain sites. These analysts and investors prize the arbitrage model for its ability to dramatically scale.. The hockey-stick trajectory. "Buy 100 million to generate 300 million! We'll be bigger than Google!" As a guy who's parents own stock in the banks underwriting these 'business models' I wonder. The lack of being able to see how this game ends is surprising. Or perhaps its simple ambivalence coupled with greed? I know I've said it a lot lately, but even today in 2007 you still have the blind leading the blind.
Tonight before sharing this vignette I read this piece about AOL dropping out of the bidding for a Swedish Site called "TradeDoubler" that relies heavily on arbitrage to buy traffic for its web property. Only AOL didn't "drop out" because it suddenly came to its senses.. The shareholders of Tradedoubler rejected 900million dollars because 13 times trailing revenue wasn't enough money for this easily duplicable house of cards. What happens when TradeTrippler comes out and starts buying 20 million a month worth of traffic to make 22mil ?.. What happens when hairstyles102.com comes out to spend 29,9million a year to make 30mil ? See where this is going? Anybody can buy and sell. All you need is money and ambition. The effective ROI will always race to the bottom as latecommers pile on. The naivete of some analysts is unbelievable.
I joke to my friends that Web 3.0 will occur when Web 2.0 implodes and the only thing still delivering traffic will be the millions of generic keyword style domains that benignly and innocuously deliver millions of type-in visitors to the doors of businesses around the world. I will probably be old and gray by then, but you can bet I'll be hiring talent, renting offices and building a Web 4.0 arbitrage business powered in part by my very large network of domain names. Only I'll call it Search Engine Marketing so it sounds prettier to the analysts (who will probably still not "get" the pitfalls).