I’ve always been fascinated with telecom business plans in tech built around arbitrage. I define arbitrage as any telecom or technology business plan that relies on the use of a platform that is not controlled by the entity that is selling retail products. What I find most intriguing about arbitrage is that the business opportunity inevitably comes to an end, and yet the people selling arbitrage services almost universally seem shocked when their business crumbles.

The earliest arbitrage business I remember is resold paging. Paging became the rage in the 1980s when a belt-clipped pager was a status symbol for millions of users. I recall meeting salespeople at big telecom shows in the 80s who were offering branded paging services to telcos and corporations. I could have the name wrong, but I recall the underlying network was PageNet. I recall joking with a coworker that it was easy to find the pager salespeople because they were the only ones at the conventions in sharkskin suits. Like other arbitrage opportunities, companies that resold paging folded when blackberries and other early cellular devices killed the paging industry.

The first really giant arbitrage business was reselling long-distance. After the AT&T divestiture in 1984, it became possible for companies to buy large volumes of long distance minutes from AT&T and other telcos. The arbitrage opportunity came when the bulk buyers of minutes would rebrand long-distance for anybody willing to peddle minutes. You may remember the standing joke from the late 1980s when half of the calls that came to your home was from somebody trying to get you to buy cheaper long-distance. Related to selling long-distance was an arbitrage opportunity to resell prepaid long-distance calling cards. Everybody making a call in an airport whipped out a card before making a call.

The next big opportunity came from the Telecommunications Act of 1996 when the FCC deregulated local telephone service. A lot of companies purchased unbundled network lines and collocated equipment in telco central offices. That wasn’t entirely arbitrage since the seller had to make a significant capital investment. The real arbitrage opportunity came from reselling local telephone lines from the big telcos. By 1997, State Commissions had mandating big discounts and low rates for reselling local service, and resellers sprung up instantly. I recall the biggest reseller was Talk America with over 1 million resold telephone lines. Like all arbitrage opportunities, local line resale died as quickly as it had started when telcos were allowed to raise wholesale rates.

The other big arbitrage opportunity has been reselling cellular minutes, which created the MVNO industry. Some really large MVNOs were created and T-Mobile and other cell companies bought back the largest resellers. But there were large numbers of small MVNOs created by companies and organizations who thought they could sell a lot of cellphones. A few MVNO arrangements have lasted many years, but the industry is littered with smaller MVNOs that didn’t make it because the underlying cell carrier either raised rates or changed the terms and made resale unprofitable.

The primary characteristic of arbitrage opportunities is that the business opportunity eventually evaporates, either from changes in the overall market, or more normally because the underlying network owner decides to charge more or end the business. The percentage of telco arbitrage businesses that eventually folded has to be in the 99% range, with only a handful that somehow made it.

There were smaller, yet still significant arbitrage opportunities. For example, most of the companies that sold cellular ACP plans were arbitrage companies that sprung up because of the federal subsidy and quickly died when ACP was cancelled.

I’ve been watching a new arbitrage situation. This isn’t in telecom, but in AI. It seems that there are 100,000 or more businesses that have sprung up by building wrappers – an app or software that relies on the systems of one of the handful of AI providers. If the history of arbitrage tells us anything, it’s that most of these businesses won’t make it. I already see the inklings of a big shakeout since AI firms are being pressed by shareholder to raise rates to curtail large monthly losses. If AI providers start charging the real cost of using their data centers, it’s likely that most of the wrapper companies will quickly die. I would hope the companies engaged in these business are realistic about it, because over the years I recall many resellers of arbitrage businesses seemed shocked when the opportunity died.