Monday, August 23, 2004

Free iPods: Worth the Cost?

Some time ago, I read a science fiction story—I can't remember the exact title or author—predicated on the "perfect" multi-level marketing scheme. The exact nature of the scheme was never revealed, but apparently the plan was so perfect that it was totally irresistable, both to join and to market—but to reap the benefits, you had to get more members to join. The narrator of the story remarked that the way things were going, they would have a world government before long—for a few minutes, until such time as the whole thing fell apart due to there being no new prospects to sell on the plan. I always wondered what would happen if aliens landed and made first contact right at that point...

Multi-level marketing schemes, like Amway, are the more-handsome fraternal twin of the "pyramid scheme" con. You know how pyramid schemes work; back in the early days of Internet spam, those would often be found in your mailbox. Before that, you would occasionally find them in your snail mailbox. "Send $5, put your name at the bottom of the list, and send it on to ten more people; you'll be rich before you know it!" (Nowadays, their niche in the ecology of spam seems to have been co-opted by Nigerian scam-spammers; I can't remember the last time I saw a "send $5" pyramid scheme mail in my inbox.)

Pyramid schemes are, of course, a con, and illegal for that reason. The only winners are the people at the top or middle of the pyramid; the losers are the ones at or near the bottom, who send their money and then discover there's nobody else left to pay money to them. Multi-level marketing schemes like Amway are not much better; they manage to stay within the law by actually selling products instead of just demanding money, but still the only ones who really get rich are the ones at the top of the heap.

But now along comes a brand new form of pyramid scheme: multi-level advertising, in the form of FreeiPods.com and FreeFlatscreens.com. These sites are run by a marketing firm called Gratis Internet as a method of customer acquisition for companies such as AoL or BMG Records. The idea is simple: if you complete a free-or-cheap trial offer, and get a number of your friends (or acquaintances or complete strangers) to do the same, they send you a gift (but not your friends, until they get enough of their own friends to do the same thing). They are able to afford this expense by using the new-customer-acquisition bounty that the businesses putting forward the trial offer pay them for each new customer who commits to the trial.

The idea is elegant, subtle, and one might even say insidious, on so many levels (pun not—oh, heck, who am I fooling, pun fully intended). First of all, it bypasses the reluctance of the average consumer to deal with advertisements. The same consumer who blocks pop-up ads and spam-protects his mailboxes, who TiVos past or tunes out TV commercials, will sign up for a trial offer in a heartbeat if by doing so he can get a $300 or $400 freebie.

Next, it co-opts the consumer, turning him into his own personal marketer for the site in order to get those vital referrals. All of a sudden, people start telling their friends about this neat new promotion they're taking part in, advertisements start appearing in .signature files on email and message boards, and people find clever ways to get other people to register referrals for them. For example, last night I happened to see that a fellow had bought a Google Ad-Words ad relating to freeflatscreens.com, and was offering to paypal $5 to anyone who would sign up for a flatscreen TV referral for him. Paying at most $40 for eight $5 referrals (plus the cost of the Google advertisement) for a $400 TV set doesn't seem like a bad deal at all, does it? Blog entries, webpages, and "conga lines" (lists of referral links) are popping up all over the place as people explain that this is "not a scam" and try to get referrals for themselves and for the people they referred.

This is a classic example of the viral marketing methods that Seth Godin proposed in Unleashing the Ideavirus—create a product (or an advertising method) in which an individual markets to his friends and neighbors as part and parcel of participating, and the world will beat a path to your door. It's marketing as an infection that spreads by powers of five (or eight for the TV).

But even with advertiser bounties, how is Gratis able to make a profit by doing this? The advertiser bounties can't be all that large, after all, and they still have to buy an iPod for everyone who manages to get five referrals—and as rapidly as word is spreading, they'll be needing to send out more and more iPods as more and more people get referrals in. The answer is simple enough: not everyone who signs up for a free iPod will be able to get five referrals—thus, Gratis gets to pocket the money for the bounties those people do get. Likewise, some people will get many more than five referrals, just from advertising in a high-volume area; that's more extra money Gratis gets to pocket. And finally, it's likely that they sell your information to other marketers—which means you may receive more junk snailmail (easy enough to deal with) and email (which is why you should use a disposable address such as the ones offered by SpamGourmet).

Even though FreeiPods is not a con game like the iPod matrix scams that infest eBay, it has the same central shortfall: the exponential nature of the referral expansion. The Skeptic's Dictionary illustrates this in its section on pyramid scams with a pyramid of numbers showing that, by the 10th level of a 10-referral pyramid, substantially more people than comprise the total population of the Earth would be needed to kick in. Though FreeiPods requires only 5 referrals and FreeFlatscreen requires only 8, that just means it would take longer to reach its limit but the central point remains valid: there are only so many people out there who are available to be sucked into this thing. Sooner or later, everyone who was eligible for and cared to sign up for a free iPod will have one, and the people at the bottom of the pyramid will have no way to get more referrals. Unlike with financial pyramid scams, they won't be out actual money—just the time and inconvenience it took them to go through with the trial offer—but they will still be frustrated. And Gratis will get to rake in the dough from that final level—the largest level, the flat base of the pyramid—without having to pay a cent for iPods to send.

Of course, that isn't necessarily an argument against participating in the program, if you acknowledge and accept going in that you may not be able to get enough referrals. Ever a sucker for free stuff, and still mourning the collapse of the tzotzke-laden dot-com era, I went ahead and took the plunge. I signed up for the iPod, using a disposable email address to prevent more spam accumulating in my main box, and within a day (thanks to a fortuitously early post on an appropriate Slashdot story) had gotten enough would-be referrals that even if only some of them actually complete the trial offer, it will be enough. (I'm still going to have to wait about a week to find out, though, as most of the offers seem to take that long to show completion.) I have also signed up for a free flatscreen TV, but don't anticipate as much success with that one (at least until the next appropriate Slashdot story comes along). And I've set up a "conga line" of my own to try to snag some referrals for the folks who helped me.

As pyramid schemes go, this seems like a relatively benign one; the only risk to the participant if he fails to reach his referral goal is being signed up for an online service or program which can be easily cancelled, and the reward seems to justify the risk. It is hard to see a downside, except possibly in the case of someone geting in too late—but then, I'm not exactly the most impartial observer, am I?
As a postscript, aside from FreeiPods and FreeFlatscreens, Gratis Internet runs a network of other "free stuff" sites, using a non-pyramidal "complete multiple trial programs to earn points toward free stuff" scheme. (You can also refer friends, but each referral only earns a measly 10 points.) It amuses me how the domain names of these sites show how well they have the desires of the younger generation pegged: aside from freegiftplanet.com, they have freecds.com, freedvds.com, freevideogames.com...and freecondoms.com.