The Economics & Semantics of Traffic Arbitrage

Consumer-facing internet service business models can be boiled down into three simple steps – acquire users, add value, then monetize these users. In other words, buy traffic cheaply and then sell it for a richer price.

This traffic cycle continues from one ad-supported site to the next until it reaches a cash-point node in the chain, where the user either pays for a service outright or purchases an offline good. While paid advertising can constitute either or both “acquire”/”monetize” steps (i.e. you can buy ads to attract users or sell ads to monetize them), buying and selling can take other forms as well. For example, engaging in blogging and other PR activities which attract users takes time, and therefore money, to “buy” them.

I become frustrated when people use the term “arbitrage” to describe the types of business which buy traffic at a low price and sell it at a higher one. Isn’t that what all business do? Buy raw inputs, assemble them to create value, and then sell the end result? Wikipedia defines arbitrage as “the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices.” Sure, there are many examples of online arbitrage opportunities (for example, exploiting the differential in pricing among CPM, CPC, and CPA ad markets through affiliate programs). However, the majority of online services are creating real value for users, and, as such, aren’t arbitrage per se. Semantics, perhaps, but a clear and reasonable distinction in the conversation about the economics of traffic and online services.

David Beisel

David Beisel is a co-founder and Partner at NextView Ventures. He has been focused on early stage Internet startups his entire career, both as an entrepreneur and venture capitalist. As an investor in the digital media space, David was most recently a Vice President at Venrock and previously a Principal at Masthead Venture Partners. Prior to becoming a venture capitalist, David co-founded Sombasa Media, an e-mail marketing company best known for its flagship product BargainDog. Sombasa was successfully acquired by About.com where David served as Vice President of Marketing. David holds an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University. He also founded and leads the Boston Innovators Group, an organization which holds quarterly entrepreneur events drawing a thousand attendees.

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