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.

Arbitrage Explained
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.

Who wins?
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.

Comments

  1. says

    Parked announced it in an email and a forum post-

    —–

    Dear Parked.com customers,

    We were notified today by Yahoo that all Yahoo based parking companies, including Parked.com, must begin enforcing the no arbitrage/no paid traffic general provision. As a reminder, Section 2 Subsection g. in the Parked.com Terms of Service states:

    “All other types of traffic including bought traffic, traffic driven by PPC campaigns, traffic directed from hyperlinks are not permitted. If your traffic originates from any sources other than type-in and search engine traffic, you will not be entitled to payment as per this Agreement. Regular checks are carried out and we reserve the right to suspend any domain from our Service at any time, on our sole discretion, if we reasonably believe that you have violated this Agreement; for example, if we suspect that the traffic on your domain is bought, generated or redirected in any way that contravenes these terms and conditions.”

    For more information please see http://www.parked.com/tos/.

    Accordingly, all arbitrage must stop effective 1pm PST on Thursday, February 14, 2008. Even though arbitrage will no longer be allowed, all accounts will still be paid.

    If you have any questions please do not hesitate to contact your account manager.

    We thank you for your business and continued support.

    Parked.com

  2. says

    Time to contact an antitrust lawyers. If Yahoo! think’s it’s okay for eBay, ASK and every other major player to be able to use arbitrage but the small business can’t their WRONG!

  3. says

    Did y! layoff 1000 people today? Interesting, and ICANN is in India! Do I hear offshoring? Not again… I can imagine millions of people on keyboards in foriegn lands setting it up so the big brothers can do all the arbitraging of thier own. They’re not stupid. They just want ALL of the market. I’m sure they keep repeating to themselves…how much did we payout? Holy Shit. WE need that money.

    Do I hear class action?

  4. Col says

    Cmon guys. Who here is surprised that arbitrage to Yahoo (or Google) is on the way out to make way for legitimate advertisers. Cowards, get a real job. This is my field too — time to RETHINK what you know.

    • says

      “legitimate advertisers” ? If you pay per click you should be able to do it for any purpose, advertise your business, arbitrage or whatever else you can come up with.

  5. says

    Very nice post, I fully agree and confirm this. But I think that it will end up with an positive impact to yahoo because I beleive that Google advertisers which might not get any more enough clicks might search for an alternative on Yahoo. This of course very thin ice on the lake, but I hope for an alternative to google, because Miva and Yahoo is not any more a real alternative in Europe.

  6. Andrew says

    @ Freddy – didn’t Miva buy out the leading European PPC company? That’s sad that it’s no longer strong over there.

  7. says

    @ Andrew
    Google has in Germany approx 95% marketshare.
    the quantity of Ads in Yahoo is very low, and in Miva Advertisers for a lot of Categories even do not exist.
    I this so too, its very sad. I signed a Miva Contract in Germany and will see how it works for me, but the low quantity of advertisers is really an issue.

  8. Sean says

    The traffic quality from domain arbitrage is much worse than Yahoo’s own site. There are a few bad seeds in the domain arbitrage game that have ruined it for everyone. As a Yahoo! advertiser, I see these bad seeds who feed traffic through clickbots and other garbage traffic sources.

    Still, it would have been much easier for Yahoo! to allow advertisers to block it on their own. Those who want the traffic can get it, those who don’t can block it.

  9. Ouchi says

    Arbitrage is not dead… it’s just time for the pendulum to swing the other way, that’s all.

    Yahoo is taking proactive steps to clean it up in an attempt to stop the bleeding and retain their advertiser base. Of course they should have handled this better, earlier.

    Anyone out there feeding junk traffic (and you know who you are) is being served notice.

    The other issue is that there is simply too much of it out there, cluttering the net.

    Arbitrage will simply evolve to a more refined level, under the leadership of a much smaller trusted group of players.

  10. Andrew says

    @ Ouchi – you’re right. It looks like the big companies will still be allowed to arbitrage. However, over time I think Google will weed them out. Just look what happened to GeoSign.

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