Evolution of the Arbitrager
The beauty and curse of the internet, especially internet advertising, arises from the little to no barriers to entry. For many, this means the costs associated with doing business, e.g. a social network, have become negligible; for others this means that if suddenly jobless and moneyless, they could find a way to start earning money that same day. Within the bounds of legal methods for revenue generation, you simply don’t find another industry that can engender such confidence, especially one without the educational barrier to entry like medicine.
This belief by many internet entrepreneurs holds as true today as it did during the less than boom times of 2001 through 2005. The biggest difference between that period and today comes down the form it takes. to what they would do if needed to make the quick buck. In 2002, that meant brokering. In 2007, it’s called arbitrage. Each has allowed those doing it the potential for high returns with lesser upfront investment. With brokering, its luster and earning potential faded in time. The same will happen with today’s arbitragers. Like brokers, their value added diminishes, and the market corrects the inefficiencies that created it. Given this inevitability, let’s look at brokering and see how arbitrages can learn from those who went before them.
Those brokering earn money on the surface from the spread between the price they received the offer and the price they paid to the person who generated traffic on the offer. They really made money with information. As is with any business situation, certain factors increased or decreased their spread – exclusivity, the quality of the relationship, volume, etc. Let’s say that you had the exclusive on an offer. If anyone wants it, they had to come through you. As a result, you could make a heft amount on the difference between your price and others. Get too greedy though, word will spread, and you will lose the exclusivity as the company providing you the deal will start to question the value your brokering abilities really bring. Regardless of your margins on the offer, the natural cycle will have them demanding more and more in order for you to earn about the same. This lifecycle also means all will face margin compression. The factors that drive this though can differ. With brokering, it started to face pressure as transparency increased. People could find each other better than before, and as the industry grew, the number of connections also grew; the power of a single individual began to wane, the end result being a relatively fixed margin for brokering, little room for upside, and ever shrinking pool of people that can make money by simple connecting people to deals.
Brokers who wanted to stay relevant, evolved; and they evolved from a broker to network. A few years ago we wrote about the difference between them, one of the greatest being technology. A broker doesn’t have technology. At best they license simple tracking, but they don’t bring anything to the table that someone, namely the person paying them, couldn’t reasonably and easily get on their own. Ultimately, it’s less about technology per se than investment and risk. The broker doesn’t build an asset beyond their relationship, beyond the information they have and the other doesn’t. The exact same holds true for arbitragers. They too make their money on an information gap; except, instead of it being relationships, theirs tends to deal with traffic. They know, as the cliché goes how to buy low and sell how. Unlike most brokers, arbitragers tend to take risk. They tend to receive payment on one metric (for example cost per action) and pay out on a different metric (for example cost per click). Some people can perform arbitrage on the same metric – clicks to clicks, or impressions to impressions – but without the presence of some risk, it becomes brokering instead. Different from brokering too, in the case of those doing arbitrage, especially search arbitrage, they’ve often built sophisticated pieces of technology to assist. Unfortunately, even the risk taking and development of technology will not guarantee them a fate different than brokers – one big reason, Google.
As we’ve covered (lamented?) many times in the past, Google’s actions seem designed to cut out the middle man, and arbitragers like brokers are the middle men. They don’t own a piece of the value chain. In Google’s case, they disarm the arbitrager by cutting out a key competency, the risk. By enabling advertisers to pay only for actions, they in essence turn arbitragers into broker, decreasing their relevance, and taking away one of the tools to justify the upside. Google doesn’t do this maliciously, or so we think; they simply want the spread for themselves and like Dell with computing, they aim to rewrite the supply chain for advertising. Like brokering, arbitrage will never go away; it simply becomes and has already become harder, which translates into fewer people being able to do it successfully. For those currently in arbitrage, these changes signal an opportunity. They represent a signal to reevaluate the business. If for example, you perform search arbitrage, instead of that being your business, it becomes a tool for your business. The skills needed for successful search will never lose their value; being one of many to promote an offer does. Those doing this need leverage, and it can come in many forms, one of them that will sound very familiar – exclusivity. If you act as the single point of access to Google, it stands to reason that you will have a longer lifespan than one leveraging, dare we say, taking advantage of Google.
Exclusivity can entail acting similar to a search engine management firm, where you enable but don’t own the offer; or, it can mean taking the next step and becoming the offer. Here is where many doing arbitrage today will most likely go. They have already had experience with multiple steps of the product they promote, and if they’ve had success in a given area, they will have a superior understanding of the business dynamics driving the offer. Instead of driving traffic to a landing page for online education where someone else owns the relationships with the schools, they will start to form the relationships with the schools. It might start as a white label, but it will end, must end up transitioning into a truly unique brand. The arbitrager will end up bypassing layers they relied upon before not to circumvent but to survive. Build up a couple offers, and then we will see the arbitrager become what the email publishers did as well, networks. Not necessarily gone are the days of owning ones own traffic, but those doing arbitrage play a similar role as those who used to own email lists, and the best of those realized they could only scale by going outside their traffic circle. Arbitragers will most likely end up in the same place but take a different route. In any event, the landscape is changing; you can either change or be a casualty of it.
