Evolution Of The Arbitrager

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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.

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