Pyramid Schemes, Market Bubbles, E-Publishing and Me
When I was a freshman in High School, I was introduced to the concept of Amway. At the time I was young, naive, and also legally incapable of owning and running an Amway business thanks, mercifully, to various child labor laws But one-day soon, wouldn’t I like to be a part of an Amway business? The idea had a powerful allure: you put in “X” hours per week (where “X” is some number less than what you’d need for a part-time job) talking to “Y” contacts (where “Y” represents some seemingly-reasonable number of friends, family, and poor schlubs who you can rope into a marketing pitch session) and if only “Z” of them join (where “Z” is some number less than “Y”, but one which is nonetheless unachievably high because some number “Z-prime” of them, which assymptotically approaches 100% of “Y”, have already heard of Amway and aren’t interested) then you’ve got a solid foundation for a growing business. If each of your “Z” business associates goes out and does the same, and each of their associates the same again, why then, in like no time at all you’ll be raking in megabucks without any further committment of your own time and resources. You’ll be on easy street. That’s the way they sell it, anyway.
This is, classically, what we call a “Pyramid Scheme”. This post isn’t a dig on Amway – they make perfectly fine, if overpriced food, cleaning, and dietary supplement products – nor is this post even about Amway. Amway is just the starting point, an anecdote, a part of a story about how I developed a healthy skepticism of “get rich quick” schemes and grandiose claims. And it’s true you can defend Amway: their business is legal, and they do market and sell actual physical products. But with Amway the whole idea wasn’t so much that you made money by marketing and selling Amway products. The whole idea was that you got other people to market and sell Amway products for you, and then you make a cut of their profits. More recently, I read an exposé that told how the only people who ever got rich from Amway were the ones who made and sold the promotional materials and the motivational videos and books and went on the motivational talk circuit. No one ever made a mint selling overpriced Amway products.
I had loved ones inolved with Amway. One day, we anticipated, I would join their “organization” and get involved, too. And things would snowball from there and we’d all be rich. My loved ones never got rich. But they did spend overmuch, for a little while, on Amway products. Eventually, they parted ways with Amway, quietly. And with that, I was already better prepared for my next encounter with pyramid schemes and “multi-level marketing”.
Several years ago, before I met Dear Wife, I left Small Town, Southern State, USA to move to Big City, Southern State, USA. (I am not a Southerner, but the South became my home when my military father retired in the aforementioned Southern State.) I was hieing out for hopefully better job prospects and almost certainly better personal life prospects. Both turned out to be true, thankfully (I have my current job, for instance, and I met Dear Wife.) But upon arrival in the Big City and putting forth my resumé in various venues for the putting forth of resumés, I was contacted for an interview from an insurance and financial services company. Insurance and Financial Services weren’t my area of interest, but I was pretty desperate at this point. Of course, I did not turn down the interview. I don’t know why the fact that the interview took place late in the evening didn’t tip me off that something was amiss.
The interview, it turned out, was a group interview. No… in fact, not an interview at all. It was a marketing pitch. The financial services company in question? Primerica. The marketing pitch was eerily familiar. You put in part-time-job hours. You get others to join. They sell financial services. You make money. Easy. But my prior contact with Amway and the observed results wherein loved ones invested time and money and reaped no reward for their effort had left me jaded.
I wasn’t interested.
In college, when I was an undergrad in the business school earning a degree in Management, my business school buddies and I would joke about some of the more Liberal Arts majors: things like History or English. We called them “Pyramid Schemes” because the only practical thing you could do with a degree like that was to teach the subject, thereby raising up a new generation of Liberal Arts majors who are doomed to the same fate. It just didn’t seem practical, or sustainable. In retrospect, this was a pretty poor attempt at humor on the part of my college-age self and also more than a little hypocritical. Clearly, as a writer, even then I recognized the inherrent value of other worlds beyond the business world and other fields of study. In reality, even then, I would have found the world to be a poorer place without History majors and English majors and other Liberal Arts degrees. I was just bitter because I was practicing a form of self-denial by eschewing anything artistic, as per my writerly passions, in deference to something practical. It wasn’t a fair characterization. But even by then I was beginning to grow the components of a rudimentary BS-detector – to synthesize an operational theory of when someone is trying to rip me off or when something isn’t all it’s cracked up to be – and whatever the artistic, cultural, or other merits of a Liberal Arts degree there was a part of me – that practical part, that part that is afraid of failure - that knew I wouldn’t be able to make a safe, comfortable living in those fields. A college degree, I realized, was no gaurantee of future employability if you couldn’t convince someone (usually a business) willing to pay money that the degree was relevant to their interests.
When I started college, the dot-com boom was in full swing. New, internet-based businesses were popping up all the time. Business cases on these new-economy paragons were already filtering into B-school coursework. By the time I graduated, the bubble had burst, and the first economic recession to directly impact my own wage-earning capabilities had begun.
Later, after I moved to the Big City – and after I turned down the “offer” from Primerica, I finally got a job – placed through a temp agency. I would be working in a business-support role at a law firm. The temp agency that placed me worked extensively with a number of law firms. “Working for Law Firms is great,” they told me, “Because Law is ‘recession-proof”. No matter what else happens in the economy, businesses will always need lawyers.” Today I have several acquaintances who have graduated recently or will soon graduate from Law School. They’re having trouble finding jobs. They tell me this is endemic in the Law field: recently-graduated JDs across the country are languishing without jobs. The Law-bubble had burst.
Around the same time, I got in touch with an old friend who had moved to Big City a couple years before me. He was studying to get his Real Estate license. His enthusiasm for Real Estate and house-flipping was palpable. He talked about being a Real Estate agent and flipping houses like it was easy money: a sure path to easy-street and early retirement. Heck, the major arteries of Big City were lined with billboards advertising seminars on buying and selling Real Estate and flipping houses. And there were a number of popular TV shows about house-flipping and other real-estate shenanigans. Those aren’t popular shows anymore. I bought into the hype myself, at least on a conceptual level: houses and real property, I believed, were the only asset that never declined in value. But by the time I was talking to my friend about his studies to become a Real Estate Agent, the Real Estate bubble had already burst – we just didn’t know it, yet, and the full impact wouldn’t be felt until the market melted down in 2008.
None of these things, you might say, have anything to do with writing – and isn’t that what I normally blog about around these parts? Stay with me. I’ll get to that.
All of these anecdotes are building to a central theme. They are the sign-posts that point toward my becoming a skeptic. Over the years, I’ve developed and refined that “BS-detector” I mentioned before. It’s probably still in need of fine-tuning, and sometimes I willfully disable the thing, but when I pay attention to it, it tends to serve me well, and keep me from making some stupid mistakes. The BS-detector has become increasingly effective at detecting Pyramid Schemes and Market Bubbles, thanks to these experiences. I conflate the two because they operate on largely similar principles.
In a pyramid scheme, the only one who gets rich is the guy at the top, who has effectively recruited layer upon layer of poor shmucks who are funneling wealth up the pyramid. But it’s unsustainable because one of two things with invariably happen: either eventually the entire population will have been initiated into the scheme: in which case there’s no one left for the poor schmuck at the bottom to recruit, and he’s out his investment… or, since this end-game is a known consequence of pyramid schemes, a sufficient percentage of the population will have been exposed to the ideas of the pyramid scheme already – and summarily rejected them – leaving theoretically tons of recruits for that poor schmuck at the bottom to try to recruit but in practice the effect is the same: he recruits no one, and is out his investment. There are certain laws against certain very specific forms of pyramid scheme which large organizations like Amway and Primerica manage to circumvent, but the effect is the same.
In a market bubble, the only folks who get rich are the ones who are on the leading edge of the bubble. They benefit from the initial fundamentals that gave rise to the bubble, and frequently they also benefit from the naiveté and the lack of sophistication of later speculators in the market, who drive up the interest and the price of whatever market. Some of those first-movers will also lack sophistication, and will get burned when the bubble bursts. But many of those who got the richest from the bubble tend to be the most sophisticated, and they’ll tend to hedge their bets, plan exit strategies, and will abandon the bubble market shortly before the bubble burst. (In fact, their exit from the market can be the trigger that pops the bubble.)
So, the behavior is the same: whether pyramid scheme or market bubble, someone at the top, or at the leading edge is getting rich, while the vast majority of later entrants – heady on the blaring messages of “sure thing” and “get rich quick”, and “easy street” – do all the heavy lifting and get left holding the bag when reality comes crashing down.
I’ve become very wary when I see someone talk about easy money, or get-rich-quick schemes, or anything that suggests there’s some magic path to fame and riches – or if not fame, then at least the riches. Messages like that set off my BS-detector like a hundred thousand Christmas trees condensed into a Christmas singularity. There is, I have learned, only one sure path to easy money: and that is to be born with it. Everything else, and someone’s trying to sell you something, and more often than not you’ll be left holding the bag.
And here’s the thing. When I read some of the things written by the Self-annointed Self-publishing Kings and various other Self-publishing Cheerleaders… when they aren’t busy trying to offend someone, they’re usually talking about how rich they’re getting from digital self-publishing. Their argument usually goes along the lines of how traditional publishers are screwing over authors and how we’ll all be rich if we would only digitally self-publish. (Go ahead, test the theory: try out any five posts on Konrath’s blog and see if you can’t two or more where he doesn’t brag about how rich he’s getting self-publishing ebooks.) This sets off my BS-detector. And understandably so, I think, given my long history with regular exposure to such BS.
So I’d been contemplating a post on this topic, already.
Then a couple weeks ago, I came across an article in the business section of Big City’s local daily newspaper. (Dear Wife and I buy the Sunday edition because, on average, we tend to make back more than the cost of the paper from the coupon savings in the Sunday inserts. We’re not high-rolling couponers, but we do tend to save a non-trivial amount from week to week, mostly on Dear Wife’s coupon-tracking efforts, which itself is non-trivial investment of time.) I’d link the article, but it’s on a dead-tree format. It was all about how business entrepreneurs needed to capitalize on the digital self-publishing revolution to churn out books related to the fields of their business, thus marking those entrepreneurs as subject-matter experts and prime candidates for lucrative speaking fees on said subject matters. It doesn’t even make a difference what the subject matter – any subject matter will do. Except, of course, avoid the popular ones, because there’s a lot of competition there. Best to stick to niche subjects. And yet… somehow… the self-publishing riches and lucrative speaking fees are still going to be there even for this niche topic.
Pardon me. My BS-detector is going off.
And then, more recently, I ran across this article.
See, I’ve had this hunch for a few months, now. I’d begun to suspect that the digital self-publishing revolution was, in fact, a market bubble. It had many of the signs I’ve come to associate with bubbles and pyramid schemes. That last link, for those who didn’t click, is an article by someone named Ewan Morrison, who previously wrote an article about the doom-and-gloom fate that faced the publishing industry, book-sellers, and authors. His previous article was, perhaps, a bit over-the-top in that doom-and-gloom department. But there’s some some sound logic underlying both his previous and current articles, even when his conclusions take that logic to its dystopic extreme. He gets some things wrong, of course. His criticism of Amanda Hocking, for instance, is off-base because she’s not selling anybody on her model, and actually tries to point out that her path to success isn’t easily replicable. And yet, the logic that her success isn’t easily replicable, which is what he’s trying to demonstrate in his criticism, can’t be shaken, and the fact that Hocking herself points this out adds to what Morrison is trying to say even as he says it wrong. And his point about Amazon’s business model (i.e. the “long tail”) is likewise wrong, I think. They don’t really care about the small potatoes of pushing ultra-niche products and ultra-niche books on ultra-niche buyers. They’re “You might also like” algorithms are all about calculating the odds on creating a best-seller phenomenon with minimal creative input. That’s not a long tail. The only long tail in Amazon’s business plan is in their attempt to generate a massive pool of content with which those algorithms can do their job of culling the most probable hits. Still, those misses aside, the truths of those particular mistakes actually supports his basic argument.
The fact is, the digital self-publishing revolution is exhibiting many of the characteristics of a market bubble. The key difference – and the one that’s relevant to authors thinking about this move – is that normal market bubbles are based on inflated asset values: stocks that are trading on the market for more than the business they represent is actually worth, or mortgages being sold for more than the houses they represent are actually worth. But this bubble is more like the aforementioned Law School bubble: there is a perceived income stream associated with a certain course of action (i.e. obtaining a JD, or self-publishing an ebook): it’s lucrative, and it’s sure-fire. Except, when too many people enter the field, the supply of that thing (i.e. the supply of feshly-minted Law School grads (or, for that matter, the supply of MBAs, another possible bubble of which I was a part) or the supply of hot new ebooks) reaches the point where it exceeds the demand for the thing, and the market value (i.e. the income associated with it) plummets. The result? JDs with no job and uncounted numbers of recently published ebooks selling at rock-bottom prices but sputtering along with one or two or, in many cases, no sales.
I’ve been following a number of folks who’ve started e-publishing recently. Very few of those that I follow who’ve started this in the past 6-8 months who didn’t already have a pre-existing “traditionally published” platform have made anything substantial from their digital self-publishing efforts so far. Heck, even most of the traditionally-published authors who are trying their hand at digital self-publishing aren’t making much more than what amounts to a few date-nights per month in profits. Most of the neophytes seem to be taking a long-view. This is, after all, the advice of the self-publishing gurus. Just keep putting up new stories, and your base will grow, they say, and they will feed each other. So these folks I follow just stay positive, and regard every sale, though they number in the single or low-double digits, as a milemarker on the road to success.
The thing is. I don’t think it’s going to happen. I really and truly wish these self-publishing authors all the best and all success. Because if they take off, it proves me wrong – and that means that if traditional publishing avenues continue to contract, I still have a viable avenue to getting my work out to the public. I really want to make a comfortable income writing stories – and if self-publishing turns out to be sustainable, then the added option can only be good for me. Considering the news and buzz about belt-tightening at traditional publishers, self-publishing might end up being my only option for getting my material published.
But I can’t seem to silence the BS-detector. It’s telling me: yeah, someone like Amanda Hocking made a mint digitally self-publishing. But she was at the leading edge of this thing, benefiting from circumstances (like the Twilight phenomenon) that are difficult or impossible to replicate. And now, I fear, the market is flooded. If you weren’t on the leading edge, I suspect, it’s already too late – because the flood has driven the price of e-books so low that it’s unsustainable. A few people can make a lot of money when they’re selling thousands of ebooks at $2.99 or $3.99 or $4.99 a pop. Nobody’s making money when thousands of people are selling 1 or 2 ebooks apiece at $0.99 a pop.
At the end of the day, I do think that Morrison’s worst predictions will not come to pass: because whatever else happens, there is an undeniable human need for story. And there will be people that want to read stories – and they will want to read quality stories (for whatever values of quality are relevant to them). The desire and need for story is finite in purely temporal terms, but it is also infinitely renewable. The current free-for-all is unsustainable in the same way that a Pyramid Scheme or a Bubble is unsustainable. But in some form or fashion, after the market retracts, we will still have authors writing books and people reading books. What else that future will entail is anybody’s guess: but it won’t be a literary wasteland devoid of anything to read at all. S0 his conclusions take the analogy of a market bubble to a point where the logic doesn’t quite hold up.
But for the aspiring authors who, right now, just want to get their voices heard… the parallels to bubbles past are striking – and frightening.
The good news? Markets have a tendency to stabilize and then grow once the “irrational exuberance” wears off and the bubble bursts. The stock market survived the dot-com boom. Eventually we’ll dig out of the housing mess. And eventually the world of e-books – and the world of authors who publish ebooks – will start to make sense again. But what it looks like today – while the bubble is still rising – is not what it will look like after the market corrects. And frankly, I don’t have the foresight to say what that might be…