Thursday, March 01, 2007

Domain resale as arbitrage?

Two weeks ago, I didn't know what arbitrage meant. It's a really fancy word for a simple concept that makes my boy parts go up and down:

When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, a risk-free profit.

The classic example of arbitrage is the invention of strips by Merrill Lynch. In the olden days, there were simple treasury securities (like a savings bond, where you held the instrument until maturity then were repaid your principle plus interest), and there were coupon bonds (where a bond had tear-off pieces of paper on it that you turned in periodically to get your interest paid, then at the end your principle was repaid). What ML realized about coupon bonds was that one instrument could be turned into two: zero coupon bonds and strips. They could buy a coupon bond, sell the interest repayments to one type of customer, and sell the future principle repayment to another type of customer. By turning one financial instrument into two, they were able to make a profit with no chance of loss (after all, if nobody buys the bond, you still get the coupon repayments and the principle repayment).

Literally risk free profit.

I was reading an article on Rateladder that referred to this post, where he discusses domain resale:

I read an article in a leading national magazine on buying domains for use as AdSense sites (arbitrage between the cheap misspelled AdWords and the expensive correctly spelled AdSense ads.) As I dug deeper I discovered domain parking and resale. I briefly looked into this business, but decided it was way too much ongoing work and that all the best domains are snapped up by expert resellers with automatic scripts. Still this experiment lasted about 2 weeks and I ended up with some domains (like 10 when you combine with my other inactive domains.)

None of the domains generate a huge amount of traffic or revenue but one or two were better than the rest. Cut to yesterday. My 3rd best domain (by traffic) was purchased for the asking price of $250. Sweet!!! I paid $25 in commission to Sedo where I have my domains parked and suddenly this 2 week experiment was profitable. I just transferred $225 from paypal to my bank and initiated a $225 transfer to prosper. Next week the money will be in play.

I don’t know if I will sell any more domains or make any money from the parking, but it was an interesting experiment.

I think it's an interesting market that many people take advantage of, but is it really risk-free profit? Does it meet the criteria for arbitrage without hind sight being 20-20?

His post doesn't include a reference to the original article, but the only way I see arbitage is if the company redirects the advertising dollars they would otherwise use for misspelled Adsense keywords to the purchase of those domains. But arbitage is about a no risk investment, and my example shifts money away from a marketing expense (Adsense ads) to investment in an asset (and really, does GAAP consider domains an intangible asset or a prepaid, since you have to re-buy those fuckers every 1-10 years?).

I'm glad Rateladder made some money, but I'm sure George could introduce him to someone whose luck hasn't fared so well.

1 comment: said...

The arbitrage was to buy penny adwords and "sell" dollar adsense ads (or overture or ...). To me the hard part was 2 fold. One, you have to have content. Two, if it isn't original content then you have to trick google into thinking that it is. I decided I didnt
want trick google.

The domain parking and expired domains was something I found in reasearching the abitrage.

Neither are for me... too much work. I like Prosper Loans.