Profitable Until Deemed Illegal

http://www.codinghorror.com/blog/archives/001196.html

by imgabe • 18 years ago

174 130 18 years ago

tialys• 18 years ago

Wow. This is both genius, and despicable. It's amazing what kind of profit they drive, yet it seems like they're really taking advantage of people with gambling addictions, or poor money management skills.

gnaritas5• 18 years ago

Isn't that what most businesses do?

steveplace3• 18 years ago

Generalisation.

Making money and creating value are independent of one another.

Good businesses do both.

run4yourlives8• 18 years ago

That shouldn't be downmodded. The guy is technically correct.

mynameishere• 18 years ago

An annoying attitude. I spend 2 dollars on a box of crackers. Here's the rough process:

1. Farmer takes out a loan at Wells Fargo.

2. Loan clears, Farmer buys seed, etc.

3. Farmer grows 2000 acres of wheat.

4. Summer passes, farmer harvests wheat, and it travels 1000 miles to be processed.

5. Nabisco (Altria) buys wheat for a pre-agreed price (determined months ago by the Chicago futures exchange--a bunch of speculators who took risk on themselves so Nabisco and Joe Farmer could get to business.)

6. Nabisco puts the wheat (plus 10 other commodities) into its industrial mixers, ovens, packaging machines, fleet, etc, until it winds up at Walmart.

7. Walmart (which did 1001 separate things in order to make the deal go down) puts a $2.00 electronic price on the crackers.

8. I show up, put some plastic through a device, some digital numbers go through 2 thousand miles of wire to 5 different financial institutions, and then I get a box of crackers. Game over.

I've participated in 500 billion dollars worth of business without even realizing it, getting a day's worth of calories for a tiny percentage of my daily income. That's "evil" somehow?

stcredzero5• 18 years ago

Fred Allen's dictum: "No one ever went broke underestimating the intelligence of the American Public."

http://www.bewilderingstories.com/issue147/ed.html

run4yourlives8• 18 years ago

So does the government and many charities, the entire city of Las Vegas and churches on Saturday nights across the country, every major sports league (not often directly), etc etc etc.

Pretty much every business takes advantage of the fact that the consumer is lacking something, whether that's knowledge, time, money or material. It's the way capitalism works.

fallentimes4• 18 years ago

Good point; it's like a stupid people tax.

Unfortunately it's tricky for even smart people to avoid some of them.

fauigerzigerk4• 18 years ago

No. Capitalism is a system of decentralised decision making on resource allocation, ultimately leading to increased productivity and innovation.

I have no idea how a ponzi scheme that makes "simple" people overpay fits this description as it leads to incredibly bad resource allocation.

You could argue that such failures are part of capitalism and I would agree. But they are still failures. Capitalism depends on such failures being fewer than those cases where funds go where value is being created.

andreyf• 18 years ago

It's amazing what kind of profit they drive...

I wonder how one could estimate their income...

vaksel• 18 years ago

the wiki page lists revenue: 20 million Euro in 2008 ($28.3 million USD)

mattmaroon19• 18 years ago

I don't see why it's despicable. The format of the auction seems to be clearly available to all participants. It's all consenting adults, who have all of the information needed to make their own informed decision as to whether or not to participate.

If people want to gamble, why not let them? How is this any different than operating a casino? It's not wrong to provide a service that many people deem enjoyable just because a small portion of them can't exert the self-control to use it responsibly.

axod2• 18 years ago

"How is this any different than operating a casino?"

Operating a casino requires a license for a start afaik, and there are checks to ensure things are fair.

How do we know the winning bidders actually exist? I agree people should be able to make their own minds up in the main, but they should be doing that safe in the knowledge that they are being treated fairly.

fauigerzigerk4• 18 years ago

I'm not sure it's despicable, but the difference to gambling is that gambling is sold as purely entertainment. The fun _is_ the product. Swoopo mentions entertainment as well, but they also make people believe that they are buying a product for a good price, which is clearly not the case.

So as a (potential) customer I'm taking note that this company is using deceptive tactics, claiming one thing and structuring their system to do something else. Yes they do it openly, so it's up to everyone to not buy from them and to remember not to buy from this company and the people behind it ever again.

staunch• 18 years ago

"Entertainment Shopping" is their slogan. I wonder if that's going to be their legal defense. "You're paying for the entertainment..not the item"

tlrobinson• 18 years ago

Sounds like gambling...

fallentimes4• 18 years ago

Even if it's gambling it still should be legal.

time_management3• 18 years ago

Reminds me of the old party game, Dollar Auction. Bidding's in 10-cent increments, and the prize is $1. The twist is that the top two bidders pay their bids, but only #1 gets the prize.

Bidding will go far past $1 because, even though it's a loss to pay $1.10 for $1, the 90-cent bidder would rather lose 10 cents than 90. I've heard of bidding going up into the $20 range.

run4yourlives8• 18 years ago

Wow. I need to play poker with those people.

dfranke2• 18 years ago

After hearing about the outcome of this game you'd think that you'd have to be an idiot to get sucked in, but you'd be mistaken. We once did a dollar auction in an auditorium at Canada/USA Mathcamp -- not exactly a dimwitted group -- and bidding went up to $5.

ig1• 18 years ago

It's not just a party game, some auctions are actually run with those rules.

eru5• 18 years ago

Design competitions for example.

Tichy• 18 years ago

I suppose most businesses face the same problem, at least if they are in a "winner takes all" market? You invest to outperform the competition, and if they win, you basically lose your investments.

Shamiq• 18 years ago

Pardon my ignorance...

Why does the author call this website illegal? I'm not sure what laws they are violating.

potatolicious2• 18 years ago

Not sure, but I'm pretty sure these guys are not licensed by any state gaming boards to operate as a legal gambling establishment.

So I guess the author thinks this qualifies as gambling (and it probably does) and therefore these guys are in violation of said laws. Remember, when you're a legal gaming establishment there is a mountain of red tape and paperwork to stay legal... and this company is probably engaged in enough shenanigans that it would be considered a Bad Thing.

imgabe• 18 years ago

He doesn't say that it is illegal, only that it's so shady that it's likely someone will make a law against it. It could fall under gambling laws, since you're basically buying chances to win the opportunity to buy something at a low price.

patio113• 18 years ago

Oh, I don't think they'll need a new law in most jurisdictions as soon as they find out about the "Auctions for money".

"Wait, so let me get this straight, people routinely 'buy' $100 for $20 on your service, and you profit $300 from the transaction from selling the 'bidding rights' to 'non-winning bidders'?"

"Yes."

"Oh, thanks. What determines who wins?"

"Final bid price."

"But paying $20 for $100, why, anybody should offer to pay $21.15 right?"

"Yep, you have to pick when to make your bid though, so you are not outbid."

"That sounds totally random, like a lottery."

"No, it takes some skill."

"Ah, thank you for clearing that up. Now, in your copy of the state code, look up 'games of skill' which offer a monetary prize."

noonespecial• 18 years ago

It will likely be called a raffle because buying the "tickets" costs money and you will very likely get nothing for it.

In almost all states in the USA, raffles are illegal as part of the private lottery statutes. In practice, enforcement agents usually look the other way for small non-profit raffles like the kind held in church basements for pies and such.

They are extremely unlikely to look the other way in this case!

stcredzero5• 18 years ago

If they reduce the charge per-bid enough, then it does become an auction site. (And if it's large enough by that point, they'll still be raking it in.) They could also invite others with goods to sell and share the per-bid fee. If both of those things happen in a timely fashion, then it will be difficult for the authorities to argue that it's not an auction site.

run4yourlives8• 18 years ago

If they were smart they'd be selling "memberships".

owkaye5• 18 years ago

"It will likely be called a raffle because buying the "tickets" costs money and you will very likely get nothing for it."

It is NOT a raffle because a raffle winner is selected 100% by chance whereas at swoopo the winner is the person who bids the highest price -- and bidding the highest price is not based on chance.

mattmaroon19• 18 years ago

You're wrong on both accounts. For one, it's clearly not a raffle because there is no random selection method. It's most definitely an auction. Exact laws on raffles and other forms of sweepstakes vary from state to state, but all require some sort of random selection method. Some merely require any randomness to exist, some require it to be primarily random (more luck than skill) and many fall in between. But none would consider something a sweepstakes that has no randomness at all.

For another, state Attorneys General are hesitant to try internet-related cases that violate sweepstakes laws unless it's more or less in the bag. It's a giant legal gray area and they don't want to set an unfavorable precedent.

serhei• 18 years ago

The expression "profitable until deemed illegal" is used when what the business is doing is so obviously despicable and evil that if it continues the government will probably pass a law against it. (This is basically an offshore gambling site we're talking about, though, no more and no less. Therefore, I'm not sure how apt the expression is to what's actually going to happen.)

Or, to put it another way, it's so fiendish that no one though to ban it before.

mattmaroon19• 18 years ago

Legally I suspect it's quite distinctly not a gambling site. I would guess this to be legal in at least 44 states here, and I think it's fine in the other 6 too, though their contest laws are fairly convoluted.

alfredp• 18 years ago

I was in a game theory class and we were learning about auctions. Just don't ask me how much I paid for his $5 bill in his "all-pay" auction - it would have been evil if it didn't go to charity. (http://en.wikipedia.org/wiki/All-pay_auction)

Alex3917• 18 years ago

I've always thought this would make a great game show.

brianr• 18 years ago

This is awesome. They must be raking it in.

bd• 18 years ago

Here somebody who claims to be the CEO of Swoopo tells:

"We are currently shipping items totaling about $1.5 million to our winners every month."

http://www.crunchgear.com/2008/09/24/swoopo-entertainment-sh...

(Sorry for no permalink to comment, couldn't find one)

Also Wikipedia entry on Swoopo has unsourced revenue 20 million Euro in 2008.

http://en.wikipedia.org/wiki/Swoopo

bemmu• 18 years ago

There are tons of sites with this concept, or at least the variant of "least unique bid wins". The most evil part is how they manage to get so much media attention, now even our beloved Coding Horror has been reeled in.

axod2• 18 years ago

Sounds very similar to pyramid reward schemes to me.

newt0311• 18 years ago

Well... Both rely on their customers being complete fools...

steveplace3• 18 years ago

Very evil, but I'd love to see the data that comes out of it.

qqq• 18 years ago

What's despicable about offering a service people want to use?

Isn't this just like offering poker games and other gambling, or selling beer (you pay for something that harms your health, and the only saving grace is that people enjoy it)?

Dilpil5• 18 years ago

In many (popular) moral systems, nothing is wrong with this business model.

In our legal system however, something is probably wrong with it.

paulgb3• 18 years ago

Nothing is inherently despicable about the model. What is despicable is that it is advertised as an auction site, not a gambling game. Also, a lot of these sites (there are many like it) don't have very much transparency, and it would be easy for them to not award a prize at all while still collecting the bidding fees.

owkaye5• 18 years ago

"What is despicable is that it is advertised as an auction site, not a gambling game."

If the winner becomes the winner because he bid the highest price, then it's an auction. Since when are auctions considered to be games? Sure, it's an auction in which bidders must pay to bid, but are there laws that ban the charging of fees for participation in an auction?

sachinag3• 18 years ago

What they're doing is most probably not illegal. What they are doing is leveraging a lot of little things to make themselves good cash.

Let's be very clear - they use auctions. This is not a lottery. At the end of the day, the high bidder "wins" and pays the amount of the high bid to win the auction. Then Swoopo adds the (.75 * number of bids placed) to that figure. It's not inconceivable that that sum is less than MSRP.

At the end of the day, you can ensure that you win by placing the last (and highest) bid. Because there's certainty of winning - it's not random - it's not a lottery, and as such, doesn't need to be state-sponsored (as is the case with lotteries in most jurisdictions).

What's fascinating about that is that very few retailers use auctions to sell goods that they own/control/are obligated to ship. Auctions historically have only really been done by venues - eBay doesn't sell their own goods on the site; neither does eBid; and neither did Yahoo Auctions or Amazon Auctions (remember those?).

So Swoopo reinforces online marketplace psychology and eBay-style dynamics by having auctions. This is even though Swoopo is the retailer and has to ship the good (whether Swoopo's dropshipping or not is irrelevant; they still make sure the high bidder gets the item or its nearest equivalent).

On Dawdle, we initially launched with a structure that eliminates the "sniping" problem that you have with eBay. We had a structure where you could name your own price and any seller that had what you wanted could sell to you. However, your offer was blind to the seller and the seller's minimum price was blind to the buyer. It was very similar to the Priceline model, except that on Dawdle, the selling price was limited to the amount of the next highest offer + a bid increment. So when the listing ended, the price that the item sold for was the 2nd highest amount + bid increment. (On Priceline, whatever the offer is is the selling price; we wanted to give the impression to the buyer that they were getting a deal as they were paying less than what they had offered.)

I bring this up only to show the difference between having a different kind of auction structure (like Dawdle did, and we retain in a limited fashion with our StandingOffer technology) and what Swoopo is doing. All Swoopo is doing is charging people to bid, setting the bid increment, and being a retailer disgused as a venue.

The question is, can this last? Given the limited amount of differences between Swoopo and eBay, my guess is probably. They'll have a branding issue if people keep attacking them, but at the end of the day, it's transparent.

Dilpil5• 18 years ago

Except you CANT guarantee yourself a win, and you certainly can't guarantee yourself a win at any price. It IS essentially random what the bidders competing with you do in response to your "last" bid.

sachinag3• 18 years ago

I'm not sure how this is different from any auction at eBay, Christie's, Philips, or your local car auction.

stcredzero5• 18 years ago

Why is guaranteeing a win a requisite for being an auction site?

run4yourlives8• 18 years ago

>Except you CANT guarantee yourself a win, and you certainly can't guarantee yourself a win at any price.

Of course you can. Every time you bid you extend the auction, therefore if you're willing to pay the most you will win. (Now, that amount may be worth more than buying the item in a store somewhere, but that's beside the point really)

utnick• 18 years ago

Its not an auction if bidding costs money regardless if you win or not. Its more of a raffle.

run4yourlives8• 18 years ago

But you are buying the right to bid. One could argue that it's a separate service altogether, like a costco membership that's graded on how much you buy.

helveticaman• 18 years ago

But it's no more stochastic than chess.

owkaye5• 18 years ago

"Its not an auction if bidding costs money regardless if you win or not. Its more of a raffle."

Show me the law that says this and I might begin to believe that you have a point here ... but right now I do not. I don't know much about auction laws, but I've never heard of it being illegal to charge for participation, and if it is in fact illegal then there must be someone online who has complained about it or files a case somewhere ...

Angostura• 18 years ago

The interesting question is - how many of those bids are actually being placed by Swoopo?

arockwell• 18 years ago

That would almost certainly be illegal. That's basically a shill bid. Although, I'm inclined to believe the whole service is illegal.

paulgb3• 18 years ago

I've always been fascinated with the game theory, math, and psychology behind these schemes. There's a bunch of variations of the auction model that can guarantee or nearly guarantee a profit. One of the more popular auction models is to make the winner the person with the lowest unique bid, but it costs to place bids.

Dilpil5• 18 years ago

The lowest bid game is equivalent to simply giving it to the last person who bid isn't it?

paulgb3• 18 years ago

Good point, I forgot to mention that it is a timed silent auction.

mmcelhinney3• 18 years ago

Actually, no. In those games, its the lowest unique bid. check out http://www.bidster.com/ . This way, if more than one person choose the lowest bid, then those cancel eachother out, and the next lowest, but non-duplicated bid wins. There's a large number of these sites out there actually, but none-the-less a very profitable business. Might be less of a lottery though, because one could claim its a game of skill.

sgman• 18 years ago

I don't see the difference between this and playing the slots in Vegas. In both cases the house has the advantage; in both cases more is paid for the final prize than what it's worth; in both cases the winner likely gets a good deal on the prize and the losers lose their investment.

mattmaroon19• 18 years ago

There's nothing random involved in this, whereas there is with slot machines. Legally that makes a world of difference.

asdflkj2• 18 years ago

Someone who can see the slot machine's internals and understands how it works will be able to predict the outcome, so in that sense it's not "truly" random. The reason it's still legally random is that it's as good as random from the point of view of the player. Same applies here. No?

ComputerGuru• 18 years ago

It's a really well-written and well-researched article.... been a while since I've been this impressed by a Coding Horror article's fleshing out the details and stuff! :)

Very interesting read... and ingenious idea.

sdurkin• 18 years ago

This is online gambling. Isn't that already legally problematic?

flavio87• 18 years ago

This is like running a casino. People that play know the odds are against them. They still play. It's about the fun/excitment, the possibility that YOU could beat the odds.

trading the stock market has negative expectancy as well, if you count in trading costs (against just owning the index like the S&P 500 or the MSCI world, with almost no trading costs) Is running the NYSE immoral?

Sam_Odio• 18 years ago

Good article, but the author is a little rusty on his behavioral economics. The anomaly he refers to is not the endowment effect but the sunk cost fallacy:

http://en.wikipedia.org/wiki/Sunk_cost#Loss_aversion_and_the...

http://en.wikipedia.org/wiki/Endowment_effect

eyudkowsky• 18 years ago

It's both. You're told you own the item, then suddenly that you don't own it any more.

fallentimes4• 18 years ago

I wonder if there's a correlation between using Swoopo and winning one of these awards:

http://www.darwinawards.com/

mattmaroon19• 18 years ago

This won't last long. Eventually people will realize they'll have more fun buying the iPod and playing craps instead.

byrneseyeview2• 18 years ago

I can't believe this company is offering a scenario where you pay an upfront cost to try to get something for less than it usually sells for.

I haven't seen anybody get away with that since basically every retail outlet in America charged an upfront cost -- time and inconvenience -- for the chance to buy stuff at a discount, on Black Friday. Unprecedented.

I have no idea why measuring certain things in dollars rather than hours or oranges or whatever else throws people off so. If this business freaks you out, and regular retail stores don't, you haven't been thinking hard enough about the latter.

nazgulnarsil• 18 years ago

I agree 100%. this is essentially a sucker tax. why does everyone spend so much time worrying about suckers? Oh right, because we all subsidize suckers with taxpayer dollars in socialism. poor people are good at wasting money, that's why they're poor. giving them the money of non-suckers fixes NOTHING.

cousin_it• 18 years ago

That's a great argument that I haven't heard before. Thanks.

natch• 18 years ago

They are passing some of their earnings on to Google in the form of advertising buys. I just saw an ad for them in my Gmail account.

So one step that could be taken would be for Google to ban them from their advertising network. Would Google do this? I don't know, but the answer would be revealing.

c1sc0• 18 years ago

I was contacted last week by a headhunter for this company. At first I was very uncomfortable about their business plan. But I talked to them and they seemed on the legit side of the law, at least over here in Germany. To sum it up: pure Faustian brilliance. I guess they're still looking for devs, so if you want an inside look, get yourself invited to an interview.

mattmaroon19• 18 years ago

It's actually humorous to me how many people here are expressing firm opinions about whether or not this is legal despite the fact that they clearly have no understanding of the complexities of gaming law in the United States. This is why I always tell people "ask a lawyer". Non-lawyers think they know far more than they really do.

As someone whose startup has spent huge amounts of time and money on online gaming legal advice, my guess is that this is legal in at least 44 states, and possibly the other 6 as well. It's certainly not gambling, since there appears to be no random selection of the winner, but it may fall under the sweepstakes header. It may merely be an auction (legally, though maybe not morally).

sachinag3• 18 years ago

Yeah, it's been a while since I've boned up on my online gaming/online poker stuff, but I would consider myself an expert on marketplace dynamics and structures (as we invented our own structure for Dawdle.com). This meets all the requirements of an auction site, and by a country mile.

mattmaroon19• 18 years ago

Are auctions universally legal?

froo• 18 years ago

Just did some napkin math for this site (please bare with me, there are a few assumptions based off the figures I could actually find)

They say they have 50k users, and in 2008 their revenue was $28.3 million USD (from wikipedia).

Theres also a comment on a related Crunchgear article from the "CEO of the company" (linked at the end), which states he is shipping about $1.5 million (presumably) USD in value of goods each month which totals $18 mil for the year.

So thats around $10.3 mil a year profit (roughly) making around $26 per user.

Although, I'm wondering how many of their users are actual active users.

so they're making about $26 per user (roughly)

http://www.crunchgear.com/2008/09/24/swoopo-entertainment-sh...

EDIT - actually on quick reflection, I wonder if the value the CEO stated was retail or wholesale value of the goods (I expect retail) and if the value listed on Wikipedia is correct (which it might not be) then that number may be higher.

These also don't take into account their advertising budget, but I wouldn't think they'd spend close to $10 mil a year in advertising.

These guys are definitely making a tidy profit thats for sure.

mmcelhinney3• 18 years ago

So I have a personal experience with this idea. I was living in Finland for the past year and a half, and came across this same idea with a site called fiksuhuuto.fi. I didn't have any moral opposition to the idea, because I believe that its no different than any other sort of lottery or game of chance. Adults should have the right to risk their money for the possibility of reward.

I was working remotely for a company at the time, so gave them 2 months notice and started developing, with the intention of launching a similar company in Canada in 6 months time. I had another Canadian partner, and started looking into all facets of the idea. The site development went fairly straight forward and allowed me the chance to return to web development after 5 years of Mac and Windows application development.

We had contacted the best law firm we could find with experience in gaming and intellectual property. After spending a fairly large sum of money to get a risk assessment, it was clear that the idea was definitely illegal. Because many people were paying for the chance to win a product, it was online gaming and illegal in Canada. We had a few options, none of which were very reassuring.

I am rambling now, but I just wanted to mention that I paid nearly $10K to have this looked into by lawyers, quit my job to implement it, and moved back to Canada from Finland to go ahead with the project. I am stunned that this is being done in the US, and am no going to be surprised at all when it goes bad for them. If it doesn't, then I made the wrong bet of calling it quits.

On a side note, if anyone wants to buy a nearly completed site with the same idea as this, feel free to contact me.

mcdowall• 18 years ago

feel free to email me - jameskmcdowall at gmail dot com

mmcelhinney3• 18 years ago

I realised that my email wasn't in my hacker news account, so if you want to email, its markelhinney at gmail dot com.

Profitable Until Deemed Illegal

Related Stories