For the
uninitiated, the practice of search engine arbitrage refers
to a particular type of internet advertising risk taking
activity. The practice falls in the category of affiliate
marketing, meaning in the broadest sense it still involves
an affiliate driving conversions to an advertiser’s web
page. With search engine arbitrage, instead of placing
potential revenue generating ads on web pages or
newsletters, affiliates buy keywords on the major search
engines, such as Google. These affiliates pay out to the search
engine on a cost per click basis but receive payment on a
cost per lead, cost per sale, or percentage of sale basis.
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. If these affiliates choose words that
generate clicks but no conversions, only they lose money,
thus leading to the term search affiliate arbitrage.
Prior to the January 7th
policy change, 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. The “aff’” signified that the person placing
the bid is not the company directly. It’s the ‘aff’iliate.”
To the end user, the ad promotes the advertiser’s product;
however, when a sale occurs, the affiliate shares in a
portion of the revenue. If one were to perform the same
query now, only one listing could appear at any time, and if
an affiliate, it wouldn’t need to carry the “aff”
designation.
The email sent out to
affiliate advertisers states that Google will “only display
one ad per search query for affiliates and parent companies
sharing the same URL. This way, users will have a more
diverse sampling of advertisements to choose from.” They go
on by saying, “As always, your ad will be displayed based on
its Ad Rank for given searches, which is determined by a
combination of your ad's maximum cost-per-click (price) and
clickthrough rate (performance).” If Google finds that two
or more ads compete under the same URL, they will display
the ad with the highest Ad Rank. Important to note,
“Affiliates or advertisers using unique URLs in their ads
will not be affected by this change. Please note that your
Display URL must match the URL of your landing page, and you
may not simply frame another site.”
As mentioned in our last
article discussing affiliate arbitrage, the business needs
to make sense for two main parties – the advertisers (and by
extension the affiliate hubs) and the engines. For the most
part, 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 would suggest it well
worth the commission paid out on and the time spent
regulating their activity.
Regarding the engines, whether
affiliate arbitrage makes sense was never so clear. The
reasoning Google provides for making its change is to
provide a better “user and advertiser experience.” The price
of this better user and advertiser experience does not come
cheaply. Google earns millions of dollars monthly on this
activity. Google no doubt understands the financial impact
of the change and presumably has taken measures to limit the
financial impact on their end. That Google considered this
policy change and ultimately implemented it suggests that
while profitable, affiliate arbitrage might only represent a
short-term opportunity for the engines.
After the change, the world of
affiliate arbitrage will most likely not change drastically.
As is the case with most markets, 20% or fewer people make
up 80% or more of the revenues. The 20% in this case will be
impacted some, but it is the other 80% of the people making
up less revenue that will be hurt the greatest. Much like
Freshman Chemistry, this change will weed out many of those
not fully committed to search engine arbitrage and those
without as much ability. This change puts Google more on par
with Overture in terms of doing affiliate arbitrage but
it is still easier to get ads live with Google. What we see happening is
natural maturation of the market and while disappointing in
an egalitarian sense, it is still closer to two steps forward
than one step back.
Jay Weintraub
