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Wikipedia talk:Mediation Cabal/Cases/2006-06-27 Matrix Schemes

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Intro

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Cybertrax Version

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A matrix scheme is a business model involving the exchange of money for goods with a side bonus of being added to a waiting list for a product. Once a list receives enough new members, the person at the top of the list receives the product, and the next person in the list moves up. Matrix schemes are heavily promoted across the Internet, especially on sites such as eBay and craigslist. Matrix schemes have also been known as matrix sites. 


 Operation

The operation of matrix schemes varies. To move upward in the list, the person must wait for new members to join, or refer a certain number of people to the list. The rewards for those at the top of the matrix list are usually high-demand consumer electronics, such as portable digital audio players, plasma and high-definition television sets, laptop computers, and cellular phones. More people joining a list improve the likelihood of people near the top receiving the product, but the large number of newcomers decreases the likelihood that sufficient quantities of new people will join the list to assure all the more numerous recent joiners will reach the top. Since mathematically this process cannot continue, eventually the matrix must reach a point by which it will be nearly impossible for new people added to the list to reach the top. Supporters claim that additional revenue streams from advertising are used to keep the lists moving. There are other methods for keeping the lists moving, and each scheme employs different techniques.

However, without sufficient alternate streams of revenue, the process cannot work. If a list requires a mere 4 people to cycle 1, that means only 20% of the list can ever cycle without alternate revenue streams, however large the list gets. If the entire world were to join the list, 80% of the world would be unable to cycle if the site did not draw sufficient alternate revenue streams. Adding more people to the list does not change the fact that the majority would receive nothing without these streams.

Additionally, the amount of time needed before a given individual will receive the product in question is often mistaken. In a matrix in which 50 people are required before it will cycle, the first person to join only needs 50 sign ups, but the second person needs 99, 49 more for the person above him, and then 50 more for himself. The third person on the list likewise needs 148 more signups, 48 for the person on top of the list, 50 for the person directly above him, and then 50 for himself. And then number of people required continues to grow for each new person joining the list. Unless the matrix site in question has a means by which to "auto-cycle" members (such as diverting alternate streams of revenue into the lists), the lists will stagnate.

Unlike a pyramid scheme, a side product is delivered to each newcomer in the course of the enrollment purchase. Most matrix scheme owners sell electronic books or software CD-ROMs as the product, and then add the purchaser to the product list as a "bonus." In certain cases, the product alone could not be reasonably sold for the price listed, and so some legal experts claim that regardless of what is said, the real product being sold is the "bonus" in question in those situations. Steven A. Richards, a lawyer who represents multi-level marketing companies for Grimes & Reese in Idaho Falls, Idaho, said there often aren’t clear legal tests for Ponzi schemes. But if the product sold has no value or very little value, and consumers wouldn’t buy it without the attached free gift, the scheme probably runs afoul of federal and state laws.1. 


 Legality

While detractors of matrix schemes contend that the sites and business models are illegal, in America there are no laws naming the schemes as illegal, and no rulings stating that the business model operates outside of law. There are, however, some challenges currently in the court system. In addition, the U.S. Federal Trade Commission and the U.K. Trading Standards have issued warnings to the public about the sites, stating that due to the ease by which these models can be manipulated for fraudulent purposes, care should be taken and research done on the scheme in question prior to purchasing from them with the intent on receiving the list gift. 2 The rewards for entering into a successful matrix scheme are substantial. However, several matrix sites have shut down whilst defending lawsuits, such as the civil action taken against the grandfather of the matrix site, EZExpo.com. MSNBC have done a short interview with Kurt, the owner of another matrix site, which discusses legalities. 3.

The U.K. Office of Fair Trading, however, has determined some of the sites to have been operated illegally. On July 1st, 2005, the Office of Fair Trading in England declared that two matrix schemes were a form of illegal lottery 4, pulsematrix.com and phones4everyone (at themobilematrix.com). 5 In the UK some matrix sites may claim that they declare themselves to be a private lottery 6, and thus operate legally. 7. Other opponents of matrix schemes declare this not to be so. It is hard to prove either viewpoint as this arguement has not been tested either in a court, by the Office of Fair Trading or by the Department of Trade and Industry in England.

It is worth noting that there have been no cases in criminal courts. One of the most infamous civil cases was started in 2003 by Timothy Schulz against the EZExpo matrix site, and has a complex history, with action still pending 3 years later. 8 9 10 All court cases to date have been in the civil court system in the USA, and so it is still unclear whether matrix schemes operate within the law worldwide. 


 References
  • "What is a lottery" (PDF). Colchester local council. Retrieved June 27, 2006.
  • "Private lottery rules". Department of Culture. Retrieved June 27, 2006.
  • "How do matrix sites operate within the law?". MatrixWatch Limited. Retrieved June 27, 2006.
  • "What is a Matrix". Matrix Watch. Retrieved May 27, 2005.
  • "How does a Matrix Site Work?". Matrix Watch. Retrieved May 27, 2005.
  • "Pyramid Schemes, Ponzi Schemes, and Other Frauds". Retrieved June 3, 2005.
  • "Top ten scams to look out for". UK Office of Fair Trading. Retrieved June 3, 2005.
  • "Website schemes offering 'free' electronic gadgets stopped by OFT". UK Office of Fair Trading. Retrieved July 1, 2005.
  • "(Pt 1, Sect.4) Private Lotteries". The Gaming Board for Great Britain. Retrieved July 5, 2005.
  • Office of Fair Trading press release
  • Schulz v. Neovi court case
  • Schulz v. Neovi court case - 2
  • Schulz v. Neovi court case - 3



 News articles



 External links

Arzel Version

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A matrix scheme (Elevator Scheme, Escalator Scheme, Ladder Scheme) is a non-sustainable business model involving the exchange of money for a product of questionable value to be put onto a Matrix list from which they may receive a "bonus" product of far greater value. The "bonus" item is usually a high-end consumer product, however some Matrix sites also would have cash as the bonus item. Customers purchase into these lists with the impression that they are actually buying the bonus item, unaware that most will not receive anything. Once a list receives a pre-determined number of purchases, the person at the top of the list receives the product, cycles off the list, and the next person in the list moves up. Matrix schemes are heavily promoted across the Internet, especially on sites such as eBay and craigslist.

History

Although their history is not clear, the primary starting point seems to be the site EZExpo that started sometime in 2002. The name “Matrix” seems to both play off the more traditional matrix associated with pyramid schemes as well as the movie “The Matrix” which was quite popular during the inception of these sites.

These sites drove most of their initial sales through Internet auction sites like Ebay and Craigslist. Either an existing member or owner of the web site would list a high-end electronic such as a Plasma television, or computer gaming device, like the PS2, for an incredibly low price, usually 5% to 10% of the actual retail price of the item. During their height it was not uncommon to have over half of all listings on Ebay for a given electronic item be that for a matrix site. Another common method of sales was through the sale of information by which to receive the item for an exceptionally low price. Another form of advertisement for these sites was through the use of Internet forums.

In 2003 EZExpo and several payment processors were sued for running an illegal lottery in the state of California, with the payment processors abetting the scam.1 2 3 Although there is some disagreement on what the actual result means, payment processors no longer will deal with any company running a matrix site

Operation

The typical operation of a matrix site is to sell an item of marginal value (usually e-books) for an inflated value and then putting the purchaser onto a list by which they would eventually receive the “bonus” item which brought them to the site. Other common items sold have been cell-phone boosters, screensavers, and CD’s with various e-books and shareware.

The “Matrix List” by which the sites receive their name would be what is known as a straight-line matrix, or 1 by X matrix. This is similar to many MLM’s that use X by Y matrix’s to fill a downline. It should also be noted that matrix sites almost universally used the incorrect spelling of “matrix’s” in place of the correct “matrices” when referring to the plural form of the word.

To understand the exact operation we can use a 1 by 10 matrix for a PS2 (which was quite common). In such a matrix the site would usually sell an e-book for $50 to be placed on the list. After 9 additional people purchased a spot the 1st person would receive either a PS2 or cash value equivalent and is removed from the list. The person who had been 2nd would move up to the first spot and an additional 10 people would have to purchase in order for this person to receive their PS2. It is this orderly movement which has also given the name “Elevator Scheme” to these sites as people would move up the elevator (escalator, ladder) to the top at which they would then “cycle” out of the matrix.

Example

P1 (Person 1) - Cycles off when P10 joins

P2 - Cycles off when P20 joins

P3 - Cycles when P30 joins

.....

P10 - P1 Cycles, P10 Cycles off when P100 joins.

.....and so on.


When this list reaches 100 people you would have

P1 - Cycled

P2 - Cycled

.....

P10 - Cycled

P11 - Waiting (Needs 10 more people)

P12 - Waiting (Needs 20 more people)

.....

P100 - Waiting (Needs 900 more People, 1,000 total)

For future people on the list.

P1000 - Waiting (Needs 9,900 more People, 10,000 total)


If 10 people a day are buying into the list it would have taken:

1 day for P1 to cycle from purchase into the matrix.

2 days for P2 to cycle from purchase into the matrix.

...

10 days for P10 to cycle from purchase into the matrix.

10 days for P11 to cycle from purchase into the matrix.

11 days for P12 to cycle from purchase into the matrix.

...

90 days for P100 to cycle from purchase into the matrix.

...

900 days for P1000 to cycle from purchase into the matrix.


From this operation it is quite clear that the length of the list becomes quite long very quickly, and with a constant purchase rate into the matrix the wait time becomes increasingly greater. In the previous example the 1st person had to wait only one day, but the 100th person would have to wait almost 3 months and the 1,000th person over 2.5 years.

The only way to combat this problem is to have an increasing purchase rate.

If the goal was to have a constant wait time of 30 days you would have the following:

10 purchases through day 30 to cycle person 1 (P1).

100 purchases through day 60 to cycle P2 - P10.

1,000 purchases through day 90 to cycle P11 - P100.

10,000 through day 120 for P101 - P1000.

100,000 through day 150 for P1001 - P10000.

1,000,000 through day 180 for P10001 - P100000.

10,000,000 through day 210 for P100001 - P1000000.

100,000,000 through day 240 for P1000001 - P10000000.

1,000,000,000 through day 270 for P10000001 - P100000000.

10,000,000,000 through day 300 for P100000001 - P1000000000.

In under a year the number of people required to sustain a constant cycle time, for this example, exceeds the population of the world. This can also be viewed as similar to a Pyramid Scheme or Ponzi scheme in the way the size of the list grows.

Any constant time rate and/or cycle length can be used, but the end result is always the same. Eventually there is not enough people to propagate the list any further. 45

Because of this factor, and the increasing dismissal by customers regarding cycle length, many sites began to use “Autocycles” or other outside revenue to drive the matrix list. The “Autocycle” was nothing more than play on words, and did nothing to the deficit nature of the matrix list. However, the outside revenue angle has continued to be played by matrix promoters to this day.

Outside Revenue

There is a belief among some promoters that they can somehow use outside revenue to move the matrix lists forward, thus making the matrix site a viable business. However, you can see by the previous example that you soon run into other problems. In the 10 person cycle length matrix by day 300 you have exceeded the number of people in the world and would require outside funding to move the remaining 4 billion people off the list. To do so in even a modest matrix would require billions of dollars of outside revenue. And if one had a business, which could infuse enough outside revenue into a matrix site, there would be no purpose to even have a matrix site.

Legality

The legality of matrix sites is still in question. Because of their nature they closely resemble Ponzi and Pyramid Schemes. The primary difference between the Ponzi Scheme and the Matrix Scheme is that the Matrix Scheme sells an item and returns back an item of greater value. The primary difference between the Pyramid Scheme and the Matrix scheme is the person at the top of the pyramid does not get removed from the list. The Ponzi Scheme is also more obvious in that it sells no item but offers a huge return on investment in a short time. Mathematically the Ponzi and the Matrix are the same as they both require customers to fully pay those at the top of the list.

A couple of sites have claimed that they can legally be run as a private lottery in the UK.6 However, on July 1st, 2005, the Office of Fair Trading in England declared that two matrix schemes were a form of illegal lottery 7, pulsematrix.com and phones4everyone (at themobilematrix.com). 8 Additionally, the EZExpo case focused on a lottery aspect of the Matrix Scheme.

The final ruling on these types of schemes has yet to be determined, however there have been several news articles warning the public of these operations.9 10 11 12 13


In any case, customers of these sites should be aware that their odds of actually receiving the "bonus" item are quite small.


References


News articles

External links

Arzel 20:32, 19 July 2006 (UTC)[reply]

Work space

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Final Article

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