VC Money + Arbitrage + Paid Search = Bubble

from the so-that's-how-it-works dept

During the last bubble, many people suggested that it was entirely self-created by over-zealous venture funding. The idea was that there were a ton of startups with huge bank accounts thanks to VCs who went out and bought hardware, software and services from other companies... also funded by those VCs. The companies that did okay were mostly the second generation firms that were selling to all these newly minted dot coms. Now, some are noticing a somewhat similar pattern in the internet/paid search space. VCs are funding lots of companies, many of whom are getting into vertical search areas with the plan of trying to pull an arbitrage trick on Google and Yahoo. The idea is simple: buy up keywords on those sites, driving traffic to their own sites, which can then be sold at a higher price to more targeted companies. For example, a shopping search engine would buy up a bunch of keywords having to do with chairs, and then sell spots on the resulting page to a furniture company. The theory, then, is that the big companies (Google, Yahoo) are getting all of this VC money from all of these startups trying to pull this arbitrage trick. Of course, as most folks know, arbitrage opportunities don't last long, and the stories we've been hearing suggest that the spread on paid search arbitrage has been shrinking fast lately. First of all, there's plenty of competition in the market, and many companies are realizing it's not hard to go direct to the source rather than buying through a middleman. That doesn't mean companies won't keep buying ads at Google and Yahoo -- but it may suggest that those vertical search engines won't find much to smile about from their arbitrage business plans.