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).
This is an excellent post Franky with lots of good points. I honestly don't know which is a better business model. I like arbitrage scalability while I like domain sustainability.
Can I choose both? :)
***FS*** I think that is the answer Sahar.. just have what they're having.
Posted by: Sahar Sarid | March 16, 2007 at 01:30 AM
Frank,
Very interesting story. I understand your point that investors are looking for business opportunities that can scale and that traffic arbitrage can potentially be one such opportunity. However, historically arbitrage opportunities have not lasted long. In addition margins can compress rather quickly as you pointed out.
When looking down the road, do you see the domain industry being a stand alone industry or do you think we’ll merge into other areas and ultimately be in the “online media” category?
***FS*** I think it will merge. We all need to evelve in technology .. embrace it.. But build a fallback position in case the mania unwinds. Thats what the names are.. They are the burndown. Have them and you get a re-do.
Posted by: Omar | March 16, 2007 at 01:52 AM
Ouch! – Et Tu Brut!
I hear ya and I agree with you – Arbitrage is a model that can be replicated and thereby others can come in without a strategic domain. Nothing beats a great domain name for type in traffic – if you own it and its paid for then it is just like prime real estate. What I find interesting is I am pretty sure I know who you were meeting with and he is a friend of yours, (starts with a [X]), so you definitely call it as you see it – even with friends.
Cheers,
Eric
P.S. You have been posting so many great posts in the past week – thank you so much – you have inspired me to with my own completely unrelated business and I am sure you are giving countless others the extra drive to follow their dreams as well – so Thanks you are a breath of fresh entrepreneurial air.
**FS*** Thanks for your kind words Eric, I read this twice and really don't see the OUCH.. what's so bad about accurately illustrating what's going on around us. I've got to say my statement is no judgement on an individuals biz.. This is me taking a giant step back - looking at where we are now. Thinking about where we came from and pointing out the 5000 lb elephant in the room that nobody seems to want to talk about. I asked a friend of mine who recently attended TRAFFIC what was the undercurrent of the show. He said: "Arbitrage..Everybody is getting into arbitrage". I do not think arbitrage is going away. I do not think the big arbitrageurs are going away. And if arbitrage is what WallStreet wants, I can guarantee you that this time next year I am going to be spending 10 million a month buying traffic. :)
Posted by: Eric D | March 16, 2007 at 03:01 AM
12 years into the game and they are still jumping on windmills. They would rather buy a bag of smoke than STOP and THINK. Like you said, you can pull the plug out of a domain for any amount of time you like and plug it back in and those visitors will still be there. A gushing oil well with no end regardless of what you do and what others say.
I feel the frustration building Franky. How is it possible for them to not see, understand and embrace something so simple?? Simple with a 12 year track record. That has given birth to a multi-billion dollar industry. Yet embrace a house of cards that can come crashing down at any moment for a multitude of reasons and not in their control? How is this possible? And folks still trust the stock market?? Are you kidding? LOOK WHO is in charge and making the decisions. Their short term gain is our long term loss.
The best revenge is doing well and letting them know they are clueless. Their breed will die and be washed away and when their carcasses show up on the beach, their replacement will just be shaking their heads and say.... "MORONS!"
***FS*** You and I have great lives Rick .. We don't need somebody to stroke us and tell us we're good.. This is not so much frustration as incredulousness. I am just struck by the kookyness of it. It feels so hollow. Well, I'm a big boy: . If you can't beatem joinem. Wanna start an arbitage business? :)
Posted by: Rick Schwartz | March 16, 2007 at 05:57 AM
Frank – I guess the “OUCH” part comes from I know how hard your friend worked to get where he is at and the risk he took - at 2 a.m. it seemed as if you were minimizing that part of his success. That being said, you are right on second read your post is not criticizing him or taking anything away from him at all - more calling a spade a spade about how dim witted investors can be when it comes to something as obvious as owning a portfolio of awesome domains.
I think the biggest hurdle that people have is that they do not see how a great domain is exactly the same as a great piece of land. For many the .com extension seems like an arbitrary TLD and when a new TLD comes along land value will go down. But as you mentioned there have been Billions spent advertising the .com phenomenon – and so “Shoes.com” will always get highly targeted traffic – today – tomorrow and for years to come.
This is what fascinates me the most about the Internet – I got involved when Marc Andreessen was pumping out a new version of Mosaic once a week – at that time I was blown away by the opportunity. The amazing thing is that the market of users keeps getting bigger and bigger and opportunities are growing as well. When I read that you do not sell your domains, at first I was shocked and then it hit me – why would you sell an acre of downtown Manhattan if you did not need to? A great domain is a money making machine and as long as you own that machine you will continue to make money.
Cheers,
Eric
***FS*** That is a great point Eric (you too are a pretty clever guy).. And you're right. Folks have worked very very hard building their businesses. Then again there are Countries witrh poeople working very hard in coal mines for twenty cents a day.. we're all going to the same place one day -- and for the record I have several friends who engage in SEarbitrage for a majority of their income. Here's what troubles me. When I talk to these guys and others about the space, nobody 'really' wants me to use the word 'arbitrage'. One said to me: " I call it traffic marketing" .. another said.. "we're calling it SEM" and none of them (not a one) wants to talk about it publicly. To the public it's only about the domains which miraculously get all this traffic because they are 'good' names or because of their 'excellent content'.. that's just not true. Sometimes they are not good. The content is often regurgitated or made up fast specifically for getting past the SE's sniff test.. They get 'traffic' because that traffic is bought and paid for. I can stomach anybody generating more revenue than me. But when they say they are in the "same business as me" and they are really not (but the analysts believe it to be so).. And then they don't want to tell anybody their 'little secret' That's when I think its incumbent on me to 'call a spade a spade'.
Posted by: Eric D | March 16, 2007 at 11:35 AM
There is no doubt in my mind whatsoever that the "domain industry" will end up being blended into “online media”. It absolutely will happen. In fact I believe that it's only a year or two away from a consolidation point of view. The fact that the vast majority of the industry's income comes from a media company (Yahoo/Google - it is what they are) really says that we are already there.
Posted by: Michael Feeley | March 16, 2007 at 01:31 PM
What about generic typos? Obviously typos of trademarked and branded names eventually die off, but what about typos of generics?
***FS*** Typos of generics and typos of tm are the same .. Yahooo.com <-- three o's will get traffic as long as the correct spelling does.
Posted by: Tia Wood | March 16, 2007 at 01:52 PM
First off Frank I think your article here is the best written for anyone interested in Domains,Seo,Traffic that I have read in a long time. Everyone should read it or they are behind in this game. Excellent job.
Do you see arbitrage going way with spreads like your example buy .30 sell $1.50 that is a great spread. My background is the financial markets and have played some small arbitrage on announced takeovers. But you would not be getting this type of spread % wise.
Secondly why wouldn't "You" do this too you could certainly make alot and you have the domains to fall back on.
I think the biggest thing you talked about with regard to the manin calming down is you have the domains to fall back on like your RUMCAKES.com example if the metrics get screwy, ppc lags and valuations get tighter you just develop businesses from these generic .com domains and evolve to a new entrepreneur
Lastly do you think Arbitrage can work for the little guy who cannot afford $$,$$$ .coms? I mean it may be lower than your interest level but for someone to be able to make $3,000 to $5,000 a month is better than working in a coal mine IMO
Maybe the next T.R.A.F.F.I.C. should do a session on Arbitrage the plusses and minuses of this type of traffic strategy
***FS*** Thanks for the compliment.. In spite of the fact that anyone can do arbitrage, it thrives because not everyone does.. people are copmplacent or lazy or have no interest, so spreads are not as compact as they should be. I think the TRAFFIC conference brainstorm idea is great. I am going to gingerly start with arbitrage (although it runs counter to my instincts). I think anyone who can build/host a website can begin in arbitrage. At the risk of sounding like Don Lapree .. this is just buying and selling. Anyone can do that. Domainers make the best arbitrageurs because they have 50-75% of the arbitrage network anyway. By our nature, we own a network of names and have websites and we have a deal to sell traffic. Now all I need to do is buy the traffic cheaper than we can sell it and add content. Some of the spreads are more compacted than that but hey.. who cares.. If you can make even 5% a month that's free money!! I do think this would be a great way for smaller domainers to get a toehold.. take a name that gets type-in traffic, recreate the page to add content and then start buying traffic. Its not that easy.. there are rules you will run into on the buy/sell side.. but this is a good opportunity for folks.
Posted by: Raymond Hackney | March 16, 2007 at 06:30 PM
Frank,
Isn't the only real difference between natural type-in traffic and bought arbitrage traffic is the level of ignorance in the person searching?
William
***FS*** nope.. not all ignorant people are created equal. Type in a name.. bam you get paid-listings. That's the user experience. Arbitrageurs often buy traffic on less potent keywords so the user experience is: Type: "free psychic readings" at google, click on listing taking you to arbitrageurs psychic website, where you get 'more paid search listings', this time for the more valuable term "Psychic" .. what happened is the cheaper traffic for "free psychic readings" got laundered into "psychic" and [stands to reason] the 'extra layer' of paid search listings on top of another layer of search listings, dilutes user potency. Now if the keyword markets say this is okay, I'm all for it.. in fact you should set up a site. The rules are the rules and I'm not going to gripe about them.
Posted by: William Brister | March 21, 2007 at 02:09 PM
Frank, I see your points and yes many people are not 'getting it'. At the same time, for those of us who cannot afford to purchase a network of typins (or even a single killer generic domain) what are they to do?
Yes I agree for companies that spend millions on advertising already, they should seriously consider a nice generic domain, but for the majority online marketings/arbi's/seo's etc they have no other choice but to buycars101.com it!
***FS*** More power to them I guess.. I have some great acquaintances who make a pretty good living doing that. I just think it's important to understand the downside before putting grandma's life savings in their stock.
Posted by: Salman | April 11, 2007 at 04:42 PM