Yahoo Kills Domain Arbitrage: Fallout for Google, Others
Yahoo will stop allowing arbitrage as of this Friday, will affect other major companies as well.
In a major move sure to have ramifications across the online advertising industry, Yahoo (YHOO) has told its advertising partners that it will no longer accept “arbitraged” traffic as of this Friday. Here’s a look at what this means for domainers and even the revenue of big online advertising companies.
Click arbitrage involves buying an ad click at a low price and the traffic to a page of ads with high-priced ads. For example, you may bid 5 cents for a click at Google and earn 25 cents per visitor clicking on your ads.
Who does (did) it?
Everyone from individual domainers to big companies such as Marchex (MCHX) and NameMedia. Individuals did it through parking companies such as Parked.com and HitFarm (sometimes using sneaky tricks on the latter). (Other parking companies, such as Sedo, expressly forbade arbitrage.) I’ve heard stories about people quitting their jobs because they were making so much money with arbitrage. Generally speaking, this arbitrage has been from traffic at Google and Microsoft sent to Yahoo ads.
Who will be hurt by Yahoo’s change
A lot of people, and some aren’t immediately obvious.
Let’s start with the obvious. People who have used Parked and Hitfarm to create arbitrage revenue will be hit hard. It’s hard to estimate how many people this is, but it’s substantial. Word on the street is that this rule may also apply to people using the Yahoo Publisher Network for ads.
Big companies will also take a hit. When Google (GOOG) changed its algorithms in an effort to decrease arbitrage, a number of big players took a hit. This time around it will be worse. After doing some sample searches today and talking to people in the industry, I think this may put NameMedia’s IPO on ice for now. Marchex also appears to be heavy in the arbitrage game and will feel the pinch. [Updated 2-13-08: I've heard now from two places that big companies like Marchex will still be able to do arbitrage. I'm looking into this.]
Don’t fall into any of those categories? This will still affect you if you are a Google shareholder, if you park domains on a Google feed, or if you have Google Adsense ads on your site…
Much of the arbitrage has been between ads on Google sent to landing pages with Yahoo ads. Although Google has eliminated some of the arbitrage, test searches today show a number of arbitrage sites showing up for most keywords. This has propped up click prices, which may tumble as a result. This will be especially prevalent on Adsense sites, since Google doesn’t filter out arbitrage ads as much on Adsense sites compared to its search results.
This could cause Google’s earnings to drop next quarter. Some sources suggest that Yahoo earns as much as $200 million a year in arbitraged traffic.
The first winner is legitimate advertisers on Google’s network that have fewer advertisers to compete against. (Of course, Google could just change its black box algorithm to increase minimum bid prices.)
Yahoo is making this move with the long term goal of boosting click prices on its own network because it believes click quality will be better. I don’t necessarily believe this, and I don’t think Yahoo’s advertisers really know what’s going on. I think arbitraged traffic might covert just as well as regular traffic.
The irony is that, by taking a short term hit to its own earnings, Yahoo has made a competive play against Google. But why now? Why when Yahoo is facing buyout offer(s)? Perhaps this decision wasn’t made with consideration to the buyout. Or maybe Yahoo thinks other sources of revenue will more than cover the arbitraged traffic.
Stay tuned, and remember that all is not well in the domain industry.