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Evolution Of The Arbitrager

Written on
December 7th 2007
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by DM Confidential  |
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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 one’s 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.

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DM Confidential
www.dmconfidential.com

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