
Profitable Until Deemed Illegal - imgabe
http://www.codinghorror.com/blog/archives/001196.html
======
sachinag
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.

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

~~~
owkaye
"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 ...

~~~
newsycaccount
Demonstrate how it is different from a raffle.

------
mmcelhinney
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.

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

------
tialys
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.

~~~
gnaritas
Isn't that what most businesses do?

~~~
mynameishere
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?

~~~
gnaritas
Where exactly did I say anything about evil? The goal of business is to fleece
its customers of their money. Some do it in nicer ways than others but they
all do it, poor money management skills on the customers part is always good
for business. Our entire consumer economy is based on that fact; we spend all
of our excess money rather than saving it like we should.

~~~
pg
How do you explain machine tools?

~~~
gnaritas
I don't follow, can you rephrase the question?

------
mattmaroon
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).

~~~
sachinag
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.

~~~
mattmaroon
Are auctions universally legal?

------
sgman
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.

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

~~~
asdflkj
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?

~~~
mattmaroon
No. This auction system is no more random than chess. In chess, your opponent
can just blunder and give you a win. Bobby Fisher once lost to a newspaper
reporter. But just as in chess, this auction system determines a result based
solely on the actions of the participant. There is no roll of a die, turn of a
card, or reading of a number from an RNG. Legally you need something like that
to be considered gambling.

You're right of course that slot machines aren't truly random in the sense
that they use a pseudo random number generator. I don't think they have any
hardware in them that reads thermal noise or anything like that. But that's
sufficiently close to the roll of a die to qualify.

Philosophically I tend to agree with you since I believe the universe is
deterministic, and nothing is truly random. But I'm pretty sure that legally
this would not be gambling or sweepstakes in at least most states.

~~~
asdflkj
So if the outcome of the slot machine is determined by the outcomes of other
slot machines in the casino, then the slot machine ceases to be a game of
chance?

It seems to me that if you define randomness in any way besides "involves no
skill, or almost no skill", but instead by explicitly describing the mechanism
of "randomness", then all sorts of loopholes open up.

In any case, big kudos to these guys for coming up with it. My day was
completely ruined by envy.

~~~
mattmaroon
Each slot machine has its own independent RNG. Even if they shared one, it's
still an RNG. Many forms of gambling involve skill. For instance, I can
achieve a higher return (though still negative) at a craps table than your
average Vegas gambler because I know which bets pay the best odds. That
doesn't make them any less gambling.

How much skill vs. chance constitutes gambling varies from state to state. But
no state would define a system in which there is no random element as
gambling. If the outcome is 100% the result of the actions of the "betters"
it's clearly a game of skill. (If it's based on the actions of third party
humans and contests, it's usually illegal, such as betting on sports or
elections).

Interestingly, in many states instant bingo machines are legal games of skill
due to that very reason. They look and feel just like a slot machine, but the
payouts are predetermined, just like a box of instant bingo cards, so there's
no element of chance, even though the person playing them has no idea what the
next payout will be. States have been/are closing that loophole fast.

~~~
mattmaroon
On a related note, I've been interviewed a number of times about poker and am
always asked whether it's a game of chance or skill. I always tell them both,
which people just don't want to accept as an answer. I don't know why people
think all games are one or the other.

Sure, some games you can be +EV, some you can't without cheating, but that
doesn't mean it's binary.

------
Shamiq
Pardon my ignorance...

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

~~~
noonespecial
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!

~~~
owkaye
"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.

~~~
mattmaroon
Right, it's clearly not a raffle or a lottery. It's an auction. I don't think
it would violate the sweepstakes laws of any state, though there are 6 I
wouldn't push it in if I were running it.

~~~
owkaye
Matt, you seem to know more about the legal framework than most other posters
here. Which 6 states would you avoid? I have an important reason for asking
since I'm working on a startup that uses a similar system -- very different in
some respects, but certainly similar enough in others that your insights are
valuable to me. You can email me privately if you prefer, my email is owkaye
at gmail dot com.

~~~
mattmaroon
Arizona, Iowa, Louisiana, Maryland, Montana, and Vermont all have very
restrictive gaming/sweepstakes laws. You'll notice nobody who does fantasy
sports or skill games for money (cbssportsline.com, worldwinner.com, etc.)
allows customers from those states.

I'm really not sure if this auction system would qualify. I would really check
with a lawyer versed in online gaming and sweepstakes if I were doing
something like this. If you need, I can recommend the firm that almost every
American who runs a casino or poker site uses.

------
Sam_Odio
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/Sunk_cost#Loss_aversion_and_the_sunk_cost_fallacy)

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

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

------
staunch
"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
Sounds like gambling...

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

------
froo
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...](http://www.crunchgear.com/2008/09/24/swoopo-entertainment-shopping-or-
scam/)

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.

------
c1sc0
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.

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

------
bemmu
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.

------
ComputerGuru
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.

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

------
paulgb
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.

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

~~~
mmcelhinney
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.

------
brianr
This is _awesome_. They must be raking it in.

~~~
bd
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...](http://www.crunchgear.com/2008/09/24/swoopo-entertainment-shopping-or-
scam/)

(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>

------
flavio87
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?

------
natch
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.

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

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

------
axod
Sounds very similar to pyramid reward schemes to me.

~~~
newt0311
Well... Both rely on their customers being complete fools...

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

<http://www.darwinawards.com/>

------
time_management
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.

~~~
run4yourlives
Wow. I need to play poker with those people.

~~~
dfranke
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.

~~~
time_management
Canada/USA Mathcamp: What year?

~~~
dfranke
2002 and 2003.

~~~
time_management
Cool. I was 1998 (Toronto) and '99 (Seattle).

------
qqq
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)?

~~~
paulgb
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.

~~~
owkaye
"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?

