Search Arbitrage: Good or Evil?

Skilled traders of bonds, commodities or other equities often leverage their bets using arbitrage to take advantage of price differences in the marketplace. With a bit of creativity, you can use arbitrage to profit from price differences in search engine advertising programs.

A special report from the Search Engine Strategies conference, August 7-10, 2006, San Jose, CA.

How does this arbitrage work? First, a publisher hosts ads on a web site or blog, from the Yahoo Publisher Network or Google's AdSense program. The search engines pay for clicks on the ads hosted on the site or blog—they're essentially giving the web publisher a commission from the click fees they collect from their advertisers.

Once a web publisher or blogger has hosted ads on their site, the next step is to drive traffic to the site using a pay-per-click (PPC) ads that are displayed in search results. If you pay less for buying clicks than what you receive for the ads hosted on the site, then you've made an easy profit. In a nutshell, that's the essence of search arbitrage.

But what about consumers? When they click on an ad in search engine results only to be directed to a page of more search engine ads, is that fair? Fair or not, PPC arbitrage is happening. Jeff Rohrs, president of Optiem, moderated a feisty session on this topic.

Jake Baillie, President of TrueLocal, said that arbitrageurs make the PPC space more competitive. According to Baillie, business marketers are bitter because arbitrageurs make easy money, plus they inflate their click fees or their clients' fees. He also showed how second-tier search engines, shopping engines, directories and Internet Yellow Pages are engaging in arbitrage. "Everybody's doing it," Baillie said.

What do the search engines think?

Kim Malone, Director of Online Sales & Operations for Google, gave the generic search engine response. "We're interested in a positive user experience," she said. She did share, however, that misleading users is not acceptable. For example, you cannot offer something for sale in a PPC ad and then direct consumers to a landing page full of ads instead.

Google is also attempting to force PPC advertisers to provide a positive user experience with its July updates to its landing page algorithm. The content of the landing page now contributes to a PPC advertiser's ad rank and minimum bid. PPC arbitrageurs are one group of PPC advertisers being targeted.

Frank Watson, Head of Search Marketing for FXCM, had no trouble voicing his opinion. "Arbitrageurs are a marketer's nightmare," he said. "They're destroying search with landing pages that offer no value to users who are going to stop clicking PPC ads. Business professionals are paying more to advertise in a channel that's going to become less effective." Watson has seen an increase in the number of arbitrageurs who are using another search results page as their destination URL.

"Who is to say what's good arbitrage and bad arbitrage?" asked Tim Daly, Senior Vice President of Marketing for Sendtec.

Daly believes it's the advertiser who is paying for clicks. He then used TrueLocal's arbitrage activity as an example of what he called a bad user experience. Daly showed that TrueLocal was bidding on "motorcycle parts" and promoting "Bargains in motorcycle parts here!" in their ad copy. TrueLocal's landing page wasn't a list of vendors, as consumers might expect. Instead, the landing page contained PPC ads. To access a list of vendors, consumers had to scroll below the fold and then type in their ZIP code. Is this a good or bad user experience?

Although Malone wouldn't comment on TrueLocal's tactics, she said users should get to the information you're promoting in your PPC ad in just one click. It sounds like bad news for TrueLocal. But at this time, over a month since the show, TrueLocal's ad and landing page for "motorcycle parts" are still running.

Kristopher Jones, President and CEO of pepperjamSEARCH.com, echoed Daly's position and called the recirculation of PPC ads bad. But, he also criticized Google's landing page algorithm crack-down. Jones said Google's latest update is unfairly penalizing some ad publishers. It's a huge problem for affiliates. And this concerns Jones, especially since he's the CEO of an affiliate marketing management agency.

David Szetela, CEO of Clix Marketing, coined the phrase "evil arbitrage" to describe "ads-only" search experiences that annoy search engine users. He theorized that evil arbitrage advertising will eventually be legislated out of existence, as the search engines modify their editorial rules to eliminate such irrelevant search results. It should be no surprise that Szetela represents a marketing agency.

Jones was more concerned about Google's algorithm change forcing PPC advertisers to pay ridiculously more money than necessary. Under the change, Google is drastically increasing advertisers' minimum bids if the landing pages don't meet Google's secret criteria. He expressed concern that Google's seemingly arbitrary enforcement leads to collateral damage for many innocent advertisers.

Malone replied by saying PPC advertisers can make an appeal to Google to review their sites if they feel that their landing pages were incorrectly evaluated. She also said that Google tunes their algorithms based on the feedback they get, and tries to maintain a healthy balance among advertiser, user, and publisher interests. "We aren't bullheaded about our algorithms," said Malone. "When our users and customers point out flaws, we have a human invest time in improving the code for the future to make sure that we are providing the best experience possible."

Then Baillie said, "If you're using their tracking products, I suppose Google could look at your conversion data and evaluate landing page quality based upon conversion metrics, but do you really want to share your conversion data with the folks who can increase your ad fees?"

There seems to be a sliding scale when it comes to search arbitrage. Generally speaking, business owners and marketing agencies see arbitrage as a detrimental practice, while those profiting as ad publishers and affiliates like the opportunity arbitrage presents. Time will tell what consumers think. Their response will certainly shape the search arbitrage space.

Catherine Seda is author of Search Engine Advertising and a new training course: Search Marketing Mastery.

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