Media Futures, Part 5/5: ARBITRAGE: I. Etymology

The simultaneous purchase and sale of similar instruments in different markets to take advantage of price discrepancies. Wikipedia
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FOREWARD TO PART 5: ARBITRAGE

Arbitrage is the fifth and final part of the Media Futures series.  It has taken me a full month to establish enough contexts for the word so as not to reduce its meaning.  In March I was moving through a fog of Walter Benjamin quotes on categorization.  In April and May I have been wading through a stream of Ludwig Wittgenstein aphorisms on language and meaning.  How do you take an accurate picture of something evolving as fast as arbitrage occurrences on the Internet?  LW asks, "Is an indistinct photograph a picture of a person at all? Is it even always an advantage to replace an indistinct picture by a sharp one? Isn't the indistinct one often exactly what we need?"   (LW, Philosophical Investigations, #71) For those that are not familiar with his work, do not be concerned.  Despite his severe Austrian name, LW is the most accessible important thinker of the 20th Century.  When he wasn't thinking out loud in his Cambridge classroom he was sitting in the front row of a movie theatre watching B pulp fiction films.  Although he did not publish much at all, his great late thinking on language and meaning remains of enormous utility to us as we try to describe what we are experiencing on the Internet in real-time. 

About 50 years ago, he tried to once and for all dispel the notion that there was any such thing as a single meaning for a concept.  Instead, he argued that meaning was largely based on its use.  Somewhat famously, he compared descriptions to games in which each one is played slightly differently but still remains a game: 

Consider for example the proceedings that we call "games". I mean board-games, card-games, ball-games, Olympic games, and so on. What is common to them all? -- Don't say: "There must be something common, or they would not be called 'games' "-but look and see whether there is anything common to all. -- For if you look at them you will not see something that is common to all, but similarities, relationships, and a whole series of them at that.  And we can go through the many, many other groups of games in the same way; can see how similarities crop up and disappear.  And the result of this examination is: we see a complicated network of similarities overlapping and cries-crossing: sometimes overall similarities.  How should we explain to someone what a game is?  I imagine that we should describe games to him, and we might add: "This and similar things are called 'games'  (LW, PI, #65-69)

And so as it relates to arbitrage online, there is no single emblematic example to point to and say "this is it."  Instead, there are a variety of examples and structural dynamics that exhibit arbitrage-ness on the Internet.  You can just as accurately describe Google's $50 billion market capitalization as a function of arbitrage as you can the textbook money a college student earns redirecting misspelled traffic through a domain she owns and operates.  I have worked through a number of ideas in the past month and so rather than lay them all out in a too-long post, I have decided to post a section at a time.  In the next week or so, I hope to bring the Media Futures series to a reasonably satisfying conclusion.  Here is the lineup:

• Etymology of Arbitrage
• The US Internet Crisis of Summer 2005
• Attention-Backed Securities
• New Media Marketplaces
• Arbitrage as Therapy

I.  ETYMOLOGY OF ARBITRAGE

I like dirty words.  Arbitrage is one of them.  It is a scam, actually.  Buying something over here and selling it over there- for more.  Selling something over there before you have bought it here, but more cheaply.  Nobody likes arbitrage, other than those performing it, and those that are doing so tend to be rather quiet about what they are doing so as not to attract competitors.

The fact is that arbitrage is everywhere online.  The largest beneficiary of online arbitrage is Google, which continues to leverage the basic behavior of people searching for things to drive ever more valuable commercial services; in fact, each Google application which leverages their core algorithmic platform effectively buys low and sells hi.  This is probably why Google refuses to disclose much to investors, or why it provides far less information to advertisers than virtually any other online media network.  Google does not want anybody to know how it arbs search behavior for increasing returns.

To this point, Majestic Research is hosting a small workshop in SF at the end of June focused specifically on understanding Google.  We are not inviting representatives from the company  and will instead encourage advertisers, publishers and investors who are similarly frustrated by Google's lack of transparency to compare notes in a confidential environment.  Please email me if you have something unique to bring to the table and wish to participate.
 
There is clearly a correlation between arbitrage and opacity, since if the trades were entirely clear the spreads would disappear and no money would be made.  On Friday I was heading up the elevator in the Time Warner Center with my friend Evan, himself a former Wall Street broker turned email marketer - online lead generator.  We went down before we went up, and in walked a group of three guys.  One was taller than the others, nicely tanned, clearly charismatic.  The other two hovered around him, their backs to me.  Evan fidgeted for a moment before reaching out to shake the hand of the guy in the middle, Jay.  One of the others turned to me and asked what I did.  After I introduced myself, and then asked him to reciprocate, he told me flatly that I likely would not have heard of his company before.  End of conversation.  When the elevator reached four, they rushed Jay off to hold court at Stone Rose.  Evan and I sat at another table while he educated me on the economics of auto lead generation and how important it was for lead brokers to pay on a regular monthly schedule to maintain a steady supply of leads.  Unprompted, he turned to me, pointed over to Jay's table and said "If I could be anybody in this business, I'd be him.  He is the king." 

I put two and two together and realized that this was the Jay who had started at least three very successful direct response Internet media companies.  The last one, of which he remains Chairman, recently sold more than $50M of founders shares to a reputable VC, putting a chunk of that into his own pocket.  He was working now on a new concept, which made it even easier for consumers to find offers and purchase services almost telepathically.  Jay is the quintessential media arbitrageur.  His friendly presence puts both publishers and advertisers at ease, and they are happy to provide him with valuable information flow.  This charisma belies a dispassionate logic for understanding how to use cheap media to generate expensive transactions.  It is this strange combination of the extremely human (ie ability to scale and maintain relationships with other people) and the extremely technical (ie ability to establish fully accountable performance based advertising networks) that exemplifies arbitrage today on the Internet.

All one has to do is search for arbitrage on Google and you can see exactly where it comes from, based on who is advertising: 

* No Rules Against Shorting - Arbitrage
Try commission-free currency trading on a free practice account from Refco FX and see how Forex offers up to 200: 1 margins.
www.refcofx.com
* Racing Calculators - Arbitrage
Racing calculators including laying - arbitrage - dutching - permutation - odds and more. Free trial download. Horse racing.
www.racingcalc.com
* Arbitrage on eBay
Find arbitrage items at low prices. With over 5 million items for sale every day, you'll find all kinds of unique things on eBay - the World's Online Marketplace.
www.ebay.com
( What's this? )

Indeed, what's this?  What is this strange marketplace for arbitrage?  REFCO FX trading brokerage services, Horse Racing predictive analytics and my favorite "Find arbitrage items at low prices" on EBay.  If you found arbitrage items at high prices, well now that wouldn't be arbitrage would it?  Now that is strange; particularly if you appreciate how EBay likely pays no more than $.10 for a click on that sponsored link.   What a small price to pay for precious arbitrage!

Every new search that emerges on the Internet creates its own ecology of algorithmic and sponsored results.  The more obscure the search, typically, the less experience the engines have with covering the results smoothly with a common group of relevant advertisers.  This creates the volatile, almost Dadaist results we see above.  Wittgenstein claims that "to imagine a language means to imagine a form of life." (LW, PI, #19) and so despite the curious assortment of sponsors, there is a certain vitality that emerges from their unique combination.  While Internet companies and their investors consider a query that returns no products or advertisers to be "dead" space, these moments are in fact the most life-affirming of all.  This is precisely the genius of Amazon's indication of SIP (Statistically Improbably Phrases) next to its searchable books.  These SIPs are combinations of words found in a certain book that are unlikely to exist in any other book. 

In the case of Joyce's famously apocryphal Ulysses, here are the SIPs:

ute ute ute
tooraloom tooraloom tooraloom
matrimonial gift
base barreltone
quaker librarian
absentminded beggar
pensive bosom
met him pike hoses
charming soubrette
editor cried
brown macintosh
retrospective arrangement
learning knight
seaside girls
croppy boy
old sweet song
(full link) 

Suffice it to say that Joyce's vital language is unlikely to serve as anybody's Search Engine Marketing (SEM) keyword campaign.  And yet, it should come as no surprise that when you do search for "Ute" on Google, the first commercial link is:

Ute
Great deals on Ute
Shop on eBay and Save!
www.eBay.com

Go figure.

Comments

[ellen]

Thank heaven someone has put into words the frustrations of Google. Show us a better way.

[Noah]

Arbitrage isn't inherently bad. Every business that makes profit is doing arbitrage on some level. Google could (and should) be more transparent but they enbable an entire online marketplace that wouldn't otherwise exist.

[Ozzboy]

Don't forget that Ute is what they call flatbed trucks in Australia. :)

[fred]

arbitrage is not bad, its good.

efficient markets benefit both the buyer and the seller

and you must have arbitrage to force markets to be efficient

[Mike D.]

I'm just now making it through this series of really great articles. Some of the best writing I've read all year really. Excellent work.

With regards to the eBay text ads though, I'm pretty sure eBay has an arrangement whereby they pick up "dead space" on the supercheap by inserting whatever the dead word is into a standardized passage of text. Or maybe you already knew that and my brain was too dull to pick up the irony. :)