For those
unfamiliar with search affiliate arbitrage, it refers to a particular type of
internet advertising risk taking activity. Instead of placing affiliate links to
companies’ sites on their webpages or newsletters, affiliates buy keywords on
the major search engines, such as Google. They use the clicks on their paid
links as the source of traffic to the advertisers’ sites. These affiliates pay
the search engine on a CPC basis but receive payment on a cost per lead, cost
per sale, or percentage of sale basis. If these affiliates choose words that
generate clicks but no conversions, only they lose money, thus leading to the
term search affiliate arbitrage.
A
practical example of search affiliate arbitrage is as follows. Were one to go to
Google and type in “spyware scan” as a search query, the paid results on the
right will contain at least one listing with “aff” in the ad description. As I
mentioned in the August 5. 2004 Trends, “For the uninitiated, the ‘aff’
signifies that the person placing the bid is not the company directly. It’s an ‘aff’iliate.”
The ad promotes the advertiser’s product; however, when a sale occurs, the
affiliate shares in a portion of the revenue. Assume if you will, that an
affiliate earns $20 per sale and spends an average of $.10 per click. If this
affiliate can convert one click out of 200, they break even. If they can convert
one click out of 100, they earn a 100% return on advertising spend.
Affiliate programs and other ad networks earn in aggregate upwards of $15
million dollars monthly off of search affiliate arbitragers. Were this channel
of distribution to go away, it would leave a significant void. Even more
interesting given the size of the market is the lack of information available on
the potential barring of affiliate arbitrage on Google. The affiliate boards
have had many discussions on this ranging from frightened to unconcerned.
Similarly many opinions exist on what Google’s ban will consist of – will it ban
all affiliate ads or simply limit the number of affiliates to one per term, or
will it place some new restriction for those sending affiliate traffic. The
current press suggests that the changes will not completely exclude search
affiliate arbitrage. Rather, it will limit to one the number of affiliates being
seen on any given term.
One
common thread among the affiliates is the perceived cost of implementation on
Google’s part. Considering that search affiliates bid on millions of keywords,
to effectively block them would require significant effort. Google has the
brains to disable a strong number of links fairly easy due to the relatively
predictable structure of affiliate links. In addition, Google has had over a
year to analyze the patterns of affiliate arbitrage traffic. For a company that
plans on digitizing entire libraries, stopping a few hundred affiliate
arbitragers doesn’t represent that significant an investment. Affiliates though
tend to be smart at dodging bullets. Similar to CAN-SPAM, Google’s actions
wouldn’t prevent the activities from happening, they would simply limit the
amount, creating a continuing cat and mouse game similar to email and natural
search engine optimization.
Overall, the business of search affiliate arbitrage needs to make sense for two
main parties – the advertisers (and by extension the affiliate hubs) and the
engines. So far the business makes sense from the advertiser perspective so long
as affiliates adhere to certain overarching desires of the advertiser.
Progressive advertisers, including some big brands, have found simple guidelines
that allow these companies to leverage the power of the affiliates without
damaging their brand or internal efforts. The scale affiliates provide has shown
to be well worth the commission paid out on and the time spent regulating their
activity. Regarding the engines, whether affiliate arbitrage makes sense is not
so clear. The speed with which a person can create an account and Google’s quick
realization of the affiliate arbitrage influence means that they understand the
markets better than many might think. That they simply required the use of “aff”
speaks directly to their mission of organizing information and not trying to
limit it.
Ultimately though, Google is in the business of organizing the world’s
information. Their business practices suggest they feel that giving consumers
what they want even when not the easiest path to riches will ultimately lead to
riches. In that regard, the results speak for themselves. If Google plans on
scaling back arbitrage they do so because they have data suggesting the
abundance of “aff” ads reduces the user experience, i.e. it they fail at their
mission of organizing the world’s information. It is simply too bad that doing
so means in the short term more competition for clever individuals in their
pursuit to make money.
Jay Weintraub
