Is Epinions the ultimate Ponzi scheme?
Nov 03 '00 (Updated Nov 30 '00)
Dear Reader - As with any editorial or review on this site, please rate this on the basis of its content, and not whether you agree with its message. I am putting forth this hypothesis because I am concerned about the future of Epinions.com. If you don't agree, I encourage comments below. Thanks in advance for reading this...
I fear that Epinions is starting to crack under the weight of its own increasing membership. Is Epinions the ultimate Ponzi Scheme? Or, to put it another way, if you take a step back and look at how the site is organized, do you see that there is the framework for a pyramid scheme?
As much as I love Epinions, I have recently started to notice certain cracks in its rock-solid foundation. I will get to certain observations I have made in a moment. However, let me digress for a bit...
Pon·zi scheme
Pronunciation: 'pän-zE-
: an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.
Merriam-Webster Collegiate Dictionary
I originally wanted to write this as an editorial regarding the slow degredation in service that Epinions has been providing recently. I have been spending a lot of time on the site, and I have started to notice an increasing number of bugs, glitches and outright failures on the part of the company. As I sat down to write this, however, I found myself wondering what had led to this recent rash of bugs. That's where my Ponzi hypothesis came in. I do not in any way mean to insinuate, imply or infer that Epinions is illegal in any way like a Ponzi or pyramid scheme, but the framework looks awfully familiar.
To be honest, I had not really considered Epinions an inverted pyramid scheme until I started to write this editorial, but in a way it is true. In a Ponzi Scheme, investors are swindled into putting up money with the promise of high rewards later on. However, the originator of the scheme starts out with very little money, and relies on future investors to put in money to pay off the first investors, and so on. In the end, the pyramid scheme always collapses. Here on Epinions, we are not asked to put in any money, but we are asked invest our time and energy. The more members Epinions has, the greater the company's revenue stream becomes, since they can leverage their large membership base into receiving greater advertising streams in exchange for providing ready-made reviews and opinions of products.
Are you still with me? :)
The top of the pyramid comprises the original members of Epinions who referred their friends, who referred their friends, and so on. In the end, the bottom of the pyramid is ultimately the manufacturers and service providers who are looking to be richly rewarded with well-written product reviews in exchange for their investment in Epinions. In addition, I believe that if a company pays advertising revenues, a category is created on Epinions, which then is (hopefully) filled with glowing reviews that will (hopefully) increase sales of their product (don't quote me on this one, I read it on an Advisor's review of something.) This reliance on advertising revenues as a result of an increasing membership base, "click-throughs", and "parking" (time spent on a site) is the set-up for most Internet sites.
But look what has been happening to dot-coms recently.
Since April 17th, 2000, dot-com companies have been collapsing like stars. On that date, the investing world finally woke up to the fact that these websites were not really making any money (except for Yahoo and eBay), and they were experiencing obscenely high multiples in the stock market. In other words, whereas companies are traditionally priced in the market based on their earnings (profitability), dot-coms are valued on multiples of revenues. But these dot-coms weren't making consistent money, and the private equity world realized that they had just invested billions of dollars in unprofitable ventures. So they pulled out. (Trust me, I'm an investment banker. I have seen the aftermath of all this first-hand).
Back to the story.... Epinions had to have received private equity to start up operations. After that initial push (and perhaps additional rounds of private-equity financing), Epinions had to rely on advertising revenues. However, because they were promising us money in addition to their staff and accounts payables, their revenue stream had to remain high.
What if the recent explosion in membership and reviews/editorials has outstripped the increase in advertising revenues?
This became a very scary thought to me. Every time we write an Epinion (or, more precisely, every time we cash one of their checks), we are costing them a heck of a lot of money. Multiply your Epinion earnings, your partner royalties and your referral royalties and your income share by the number of (estimated) members on this site. Then double it (for the especially prolific -- and lucky -- writers here).
How can they continue to pay all us of as much as they have as their membership is exploding? The longer I am on Epinions, the more people I refer who are then paid, the more my old reviews make, and the more reviews I write going forward. If they are unable to get private equity financing (as is the case for most dot-coms these days), how can they support this growth?
The answer is, I am afraid, that they can't.
Don't get me wrong. I have always received a check when I have asked for one, and they have always cleared (unlike my own, personal checks!). But has anyone else noticed all of the things that have gone wrong recently?
1) The failure of the notification system;
2) The delay of the new advisor system;
3) The non-response of the abuse team;
4) The fact that the page-hits count on the "Most Popular Reviews" have not changed in a month (at least in the Education area);
5) Bizarre fluctuations in earnings overnight (I have head several complaints about this, but have not experienced it myself);
6) The non-updating of the "Products Seeking Opinions" page (the "featured school" in the Education section has been Brown University for the past month);
7) The week-long delay between a new member joining and their name appearing on a search;
8) Numerous page errors, such as not being able to write a review in a category (such as "Would I visit Epinions.com?");
9) The disappearance of the product suggestion mechanism in most categories;
10) The slow development of fresh content (beyond additional products);
11) The abolition of the recipies and Family and Kids Editorials categories (admittedly controversial, but why were they pulled?);
12) The ineffectiveness of most search attempts and the haphazard placement of products in random categories (diaper bags in Health and Hygiene?)
This is just the beginning of a very long list of complaints that have been developing in the past few weeks. Some may seem trivial, but I am sure that you could think of some more that I have not noticed or forgotten. Until recently, I never had any problems or complaints with the site. However, it seems that every day something new has cropped up.
Could this be the beginning of the end for Epinions?
I certainly hope not. This is one addiction that I am proud to say I have (unlike smoking), and I would hate to see my newfound community disbanded by the bankruptcy of the village.
However, as I stated above, I fear that the recent explosion in membership and reviews written has outstripped the growth in revenues. If so, the pyramid could collapse without warning.
If you were living in a house that was starting to show cracks in its foundation, would you trust your equity in the house? I wouldn't, which is why I have cashed out each time I have hit $15 or so. I would rather drive Epinions (and my bank) nuts than lose what I have earned through hard work.
What are your thoughts? Please share them in the comments section, and thank you for listening to my paranoid rant.
- Jen
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Epinions.com ID:
BunnyJav
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Location: Minneapolos, MN
Reviews written: 34
Trusted by: 59 members
About Me:
"You're the true Lord of the Dance, no matter what those idiots at work say"
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