We now understand the basics of markets, we have a high level understanding of arbitrage and how arbitrage works in the context of a market, and we have begun to dive into some concepts specific to the online advertising market. With this knowledge we can begin to get into the core of advertising arbitrage, which is obtaining a diverse website traffic base.

Earlier I likened the website owner to a real estate owner who charges a company to display a message on his land. The mall and a Town Square were examples of places where people frequent. What the example was meant to portray is the idea of having eyeballs. What I mean by having eyeballs is that people see your space. Whether it is a building, office, your home, or a plot of land on the side of the road, it is your space and people focus their eyeballs on it for at least some moment in time. Each instance of someone looking at your space is website traffic. In a sense, we can describe website traffic more specifically as "eyeball website traffic." Let’s face it, that is what it all comes down to. If nobody looked at the real estate owner's space, the space would be worth nothing to the advertiser since she could be assured no one would read her message she has paid to display in the space. The more eyeballs looking at a particular space, the higher the value of that space, all else held constant.

In terms of web sites, the eyeball analogy obviously equates to site visitors. Generally speaking, more visitors equal more value. So, a natural question may be how to get website traffic when starting from scratch? First, and most obvious, you need a website. I will discuss different methods of obtaining websites and then touch on the Portfolio Theory of Website Ownership, then finish up with how the website traffic we try to obtain applies to the previous chapters.

There are two primary methods for obtaining a website. First, you can go out and outright buy an existing site. Second, you can develop a site. The market for buying and selling existing websites is not very robust at this point, but it does exist. If you did a web search on "buying web sites" or "web sites for sale" you would certainly come across at least a few individual sellers as well as some brokers. The broker sites will have a variety of sites to choose from at various prices. The biggest dilemma when it comes to buying a website is understanding what to pay for it. The next section of this book deals with website valuation in a very detailed manner. Specific techniques, examples, and a spreadsheet template are included so that anyone can value a website so long as they have some key information and sound assumptions. The models are based on standard business practices used by accounting firms, investment banks, acquisition consultants or anyone else who is involved with valuing a business. As this market progresses I would expect the methods taught in this book would be applied across the market for those both looking to buy and sell a website.

Some of the key information needed when purchasing a website should be obvious by now since we have already touched on some main value drivers of websites. First and foremost there is website traffic. Verifiable website traffic data is absolutely necessary to have when considering the purchase of a website. The topic of the site is also very important for it will play a key role in the value of the website traffic. Next would be its search engine rank status or penetration. If the site you are looking to buy sells Stereo Speakers, where does the site show up when you do a web search for Stereo Speakers? Is the link to the site on the first page? In the first spot? Is it an organic ranking or paid? Better yet, how many search engines does it rank high in?

At first you may think that the more search engines the site is in the better, right?

Not necessarily. If you want to buy a website, you need to be able to see value in it. By that I mean you think the site is worth more, or will be worth more, than the current asking price. The basis for valuing any business is its future income stream, not its current income stream or assets. If the site is ranked well in some of the major engines, there is probably no reason it shouldn't be ranking well in all of the engines or at least more of the major engines. By 'well' here I mean a respectable spot in the first 100 results that gains some website traffic but not necessarily a top 20 spot....although that’s always welcomed. Search engines can be quirky and much attention must be given to a site to get it to rank well. This field is known as Search Engine Optimization (SEO) and the details of it are beyond the scope of this book. However, it should be noted that optimizing your site to rank well is a key part of obtaining organic website traffic. In turn, all website traffic is a key part in increasing the value of a web site. The value of a website is a key part of capturing profits via advertising arbitrage. See how this all ties together? A simple web search on 'seo' or 'optimize web sites' should yield you more than enough results to research some basic optimization techniques. There is also plenty of software available to help with the task; you will see many offers in the search results. So, why is not being in all of the engines a good thing to the buyer? Simple: because this fact is probably not 'priced' into the asking price of the site. In many cases, the seller will just use some multiple of historical website traffic growth to predict the future website traffic growth of a site. Factoring in a new search engine to be ranked in is a big jump in value as opposed to some natural growth rate. This jump, in turn, is a jump in future value and hence a jump in the present value, or the price, of the website. This topic is covered in much more detail in the Website Valuation section and you will learn many techniques that will help you value a site for purchase or sale purposes.

Website Traffic Valuation Continued...

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