Thoughts on Tech, Deals, and Markets

To Arbitrage or Not to Arbitrage

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The word ‘arbitrage’ is commonly misused in online marketing circles.  Arbitrage, as Wikipedia defines it, is “a risk-free profit.”

Many refer to buying traffic from one place and then running it through another with a simple monetization engine as arbitrage.  It’s not.  For a number of reasons.  Here are three.  First, there’s the risk that paid traffic won’t convert.  For example, many in the mortgage space made traffic buys that became disastrous when the market began to implode.  Second, there’s the negative cash flow.   Few traffic buyers are paid before they have to pay their traffic sources.  Third, there are all the overhead costs associated with the infrastructure necessary to make the traffic buy work.   True, when a company is at scale those costs can be relatively small.  But for the average Joe who wants to get into ‘arbitrage,’ that cost is a significant barrier to entry.

In many markets, arbitrage connotes an elegant execution of a market imperfection.  But in the context of online marketing, it’s usually a negative.  It trivializes the risks and challenges to execution of the business.  It’s used by many who believe online marketing businesses lack differentiation and barriers to entry.  Surely some categories have fewer barriers than others, but the dominating fact is that many in the space consistently make tons of money.  It it were simply arbitrage, those profits would have been competed out of the industry long ago.

In the next few days, I’ll be putting out a number of posts on the keys to establishing competitive advantage in the space.

Written by sandykory

January 21, 2009 at 3:29 pm

Posted in Uncategorized

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