Is The Media Business Just One Big Arbitrage?

A year ago, I wrote a piece asking, “are the most successful media companies just good at arbitrage?” And in it, I argued that the non-content creation side of media is just one big math problem. If you can acquire a user for $1 and earn more from that user than it costs, then it makes sense to invest the $1.

Why wouldn’t you? It’s the closest thing to making money appear out of nowhere. But as I argued in the piece, there was a wrong and right way to do it:

When most hear about this type of arbitrage, they immediately think about media companies that cram as many ads onto a page as possible or rely on slideshows to increase the number of total ad impressions. Then they buy traffic from chum boxes and any other possible source with the hope of eeking out a few cents margin. At scale, it can add up.

That’s not what I’m talking about here. Instead, I am referring to a long time frame arbitrage where an operator feels comfortable enough spending money to acquire a user because they know they’ll earn their return over a longer period of time. If I spend $1 in January, maybe I don’t make the $1.50 until May. In my mind, that’s still an arbitrage opportunity.

As I’ve written about in the past, I don’t see anything wrong with the second paragraph. If you are acquiring users and they are engaging with the content. Compare that to the first paragraph, where you’re buying traffic and hoping they are exposed to a bunch of banner ads.

But as I’ve thought more about it, I question whether the entire media business is just one extensive arbitrage.

Let me give you an example that I heard about this week. A media company, which shall remain nameless, sells a lead gen product. But because it has absolutely abused its audience, readers are not engaging with ads nearly as much as they used to. However, the media company still has to make money. And so, they have to find the leads elsewhere.

There are lead brokers out there that will help facilitate this. You tell them what you’re looking for and they give you leads against your lead gen content. Suddenly, you have enough leads for your partner. You go from underdelivering to overdelivering in a few days. It’s really quite incredible.

This is arbitrage. You pay one price for your leads and then sell them to a partner for another price. But is it right? I have mixed feelings about it, to be honest.

On the one hand, your partner cares about getting a certain number of leads against their content. If you can acquire them for cheaper and then provide them for your partner, who cares how you got them? As long as the partner got the leads they paid for, that should be all that matters.

But on the other hand, how high quality could these leads ever be? If they are part of some lead database, are they just being inundated with lead gen programs across many clients? Even if they are the right audience, will they be in the market for so many different products? So, you’re driving leads, but are you driving leads that will move the needle?

It reminds me of something that Tim Hartman, CEO of GovExec, said at the Omeda conference in May:

As you get more intelligence around the leads, the quantity of leads matters less. All lead generation markets have gone through this over the last five years where if you were in the lead generation game five years ago, there were all of these little lead generation agencies and lead generation data companies that were just throwing quantity out and you could go and hire this hip digital marketing agency and they would give you thousands of leads and they would tell you they were running through lead nurturing and it’s all working really well. And to some extent, it disrupted us and it was really hard for us to compete because it was a race to the bottom on lead pricing.

And I think lots of marketers were incentivized on quantity of leads to fuel their CRM systems. And, it was such a bad place for everybody to be. People were not getting quality leads, the pipeline wasn’t really moving for companies based on the quantity of leads and if it was, it was because you had all the names and your sales team was doing all the work.

As you got into account-based marketing in the past five years and as privacy laws have come into the fore and the market was totally saturated, the quality of the lead became much more important. The gap between sales and marketing started to narrow and they needed the intelligence around the lead to do more of the work for them.

The bolded parts are what stand out to me. One of the reasons I like advertising is that I believe we are helping businesses succeed by generating more revenue. But does this sort of arbitrage help companies to grow?

But I also get why it happens. If you are charging $100 for a lead and someone else is charging $50, marketers incentivized on quality will pick the $50/lead option. And so, you have to reduce your price as well. So now you’re only charging $50 for a lead, which means you’re making half as much money as you were before. To make up for that, you must sell programs with double the leads.

So, let’s say you needed to make $100k in revenue on leads in a month. That means, at $100 per lead, you needed 1,000 leads that month. At $50, you needed double the leads. So, you need to double down on your promotion to get these leads.

And this becomes the race to the bottom. Your audience becomes less interested in what you’re promoting (and archiving an email is more effortless than hitting unsubscribe), so you have to do more promotion. Before you know it, your audience is barely responding to anything you’re pushing to them, and you’re forced to rely on a lead gen arbitrage program. Even if the quality sucks, at least you’re hitting your numbers.

Boy, have we come a long way from trying to drive quality leads to our partners.

All this leaves me wondering if the entire media industry is just one giant arbitrage. Can no publisher drive the audience they say they will, so they’re forced to pay for it? Most media companies have a team that handles arbitrage. An advertiser pays to target your audience, but since you can’t deliver, you acquire viewers from other platforms. Is that what the advertiser chose?

Now, I want to return to a part of arbitrage that I do support. If you use paid traffic sources to acquire someone who will become an engaged reader, I think you should always do this, especially if you can do it profitably. But paying one price for leads or ad viewers that you will sell for more has always felt a little wrong to me. Does it matter? Does anyone care? Who knows?

Let me know your thoughts. Either join the AMO Slack channel or hit reply. I remain torn on this topic. Have a great weekend, and see you next week!