Why Sports Card Grading Companies Exist

They are relatively low tech businesses, but they would not really exist at any level of influence in the sports card without the development of the internet.  That’s the irony of the sports card grading business.

Why do we need card grading companies like Professional Sports Authenticator (PSA), Sports Card Guaranty Company (SGC) or Beckett Card Grading (BGS or BVG)?  It’s because sports collectors care about the various conditions of their cards and need a way to determine those conditions, especially for transactions that are done somewhat impersonally over the internet.

It wasn’t always this way….

Before the advent of the Internet (yes, thank you Al Gore for inventing it 8-) ), building a nice sports card collection was much more difficult than today.  Attaining particular cards, especially vintage cards, required going to shows, being part of card trading clubs, having a network of friends who were collectors or dealing with the local sports card hobby store.  There were a few mail order houses where one could acquire old sets or cards, but most trading occurred face-to-face, and you were limited by the “local inventory” of stores and other collectors.  If you were real serious, you could go to regional or national shows where the inventory of cards was greater but doing that required more money and time than most collectors had.

Because you mostly dealt “face-to-face” on purchases (or trades) with dealers or collectors, you could easily examine a card before buying it.  Also, it did not matter that much if traders or buyers had different condition beliefs about what was EX shape versus NRMT shape for a card because that could all be worked out in the barter or pricing system in negotiations. Also, it was hard to get ripped off by counterfeit cards if you knew what you were doing and carried a loupe or magnifying glass with you.  Also, because people negotiated with each other, there seemed to be fewer grades than we have today.  Yes, a poor looking, creased, and beat up 1954 Topps Al Kaline rookie card was worth less than a card that was in decent shape.  However, there certainly wasn’t the major price premium you would find today associated with a Mint (e.g., PSA 9) 1954 Topps Al Kaline rookie card versus one that was EX-Mint (e.g., PSA 6).  A good looking card without creases and without bent corners was generally considered top quality whereby maybe there might be a smaller price differential for a card that was a little more pristine.

The Internet changed everything…..

And largely for the better of sports card collectors.  While card collecting was hurt in some ways by the Internet, such as the Internet's role in driving the local card stores out of business (more on this in a future posting), it opened up a nation (or even a world) of card inventory to the collector who would no longer have to rely on “local inventory” or traveling to shows to build their collections.  Indeed, eBay emerged by the late 1990s as the main way that most collectors purchased and sold sports cards.  It allowed middle-class people like me to build a 1954 Topps Baseball set (the first vintage set I built in the late 1990s) in a relatively short period of time.  It also shifted some power to the buyer on pricing.  For example, at a show if you wanted to buy a 1954 Topps Ernie Banks rookie card, you were limited to whichever dealer or trader had the '54 Banks card in inventory at the show.  This might be just one or two sellers at a small show.  With eBay, you suddenly had a number of 1954 Topps Ernie Banks’ cards on which to bid.  As a buyer, you could be more disciplined on holding-the-line on your maximum price because you knew that if you didn’t get the particular card you were bidding on some Sunday night that another would be available within hours or days.  At a show, it might be months before you got another shot at that ’54 Banks rookie card, so you would likely cave in a little on price.  While the Internet also brought more buyers into the market to bid up the price of that ’54 Bank’s rookie card, you at least knew that you could figure out what the right price was over a few days or weeks of bidding and eventually get the card if you had enough money.

However, the shift of buying, selling and trading of sports cards to the Internet and particularly to eBay took the face-to-face element out of the transaction.  This created ‘economic opportunity’ for the sports card grading industry.  It was (and is) hard to see the conditions of cards on the Internet beyond the pictures and descriptions on eBay.  You could no longer hold the card in your hand and inspect it.  While most of my experiences buying on eBay have been great, problems can occur because collectors’ ideas of what, for example, is an EX or NRMT card can and will often honestly differ.  These are honest mistakes.  Also, what economists call “information asymmetry” exists in the transaction on the Internet.  The buyer is limited to the knowledge that is given to him or her by the seller in the picture and description on eBay.  This can give unscrupulous sellers great advantage.  They can sell counterfeit cards as real.  They can sell beat up cards as higher grade cards.  They can also sell altered cards (like trimmed cards) as unaltered.  These unscrupulous actions would be much harder in the pre-Internet world of face-to-face transactions.

While eBay does a pretty good job of trying to stop unscrupulous sellers through having feedback posted and trying to ban such sellers, their system is far from fault proof.  If somebody takes your money and disappears, you are sort of stuck and out of luck (I will have a post in the future about how to avoid eBay scams and get your money back from bad sellers).  Often, even if you can identify the person who defrauded you, in many cases your only course of action would be to file a claim in small claims court in the jurisdiction where the person lives, which is a pain in the rear end and usually is much more expensive than the money you lost in the first place.  Trading with people outside of eBay via the Internet is even more risky, unless they are a major seller like a retail store or site that has built up a reputation.  Also, the more expensive the card, the greater the risk created for the buyer by information asymmetry.

However, the “information asymmetry” on eBay or the Internet largely disappears if:

(1)    There is a standard system for grading sports cards.

(2)    This system is administered by a third party outside the trading transactions.

(3)    It is hard to fake the system (i.e., in this case, crack open the graded card cases        and insert other cards or build fake card cases)

(4)    Buyers pay a premium for the information gained by the standardized system.

And, of course, this reduction of “information asymmetry” is why the card grading companies exist at the level they do today.  We can buy a card graded PSA 7 from a stranger over eBay and pretty much know what the card will look like when it arrives.  If it is PSA 7, we know it has no creases, pretty sharp corners and is not counterfeit.  The PSA 7 grade is a signal of the card's condition and is sort of a warranty of what the card will look like when it arrives.

Indeed, without the Internet, there would probably be only a very few wealthy people that would use the grading services in trying to determine who has the best T206 Honus Wagner card.  The rest of us would still be buying cards face-to-face and also have much smaller collections.  However, do not just take my arguments as evidence, let us look at some real numbers.  While it is not clear which company actually invented professional grading of cards, PSA service started in the mid-1990s.  Here are some numbers for the end of that decade:

Year               Cards Graded by PSA (in year)        eBay Net Sales

1998                       168,000                                 $  86,129,000   

1999                       899,000                                 $224,724,000

2000                       1,800,000                              $431,424,000 (footnote 1)

As can be seen from these numbers, PSA’s number of cards graded took off with eBay’s initial establishment and growth in the late 1990s.  This correlation is not a coincidence and reflected the changing nature of how collector’s acquired cards after the establishment of the internet and eBay.

In my next post (in the works), I will discuss why so few legitimate card grading companies exist.  At the time of this writing in 2012, collectors really only have three legitimate options in my opinion for getting their cards graded: PSA, SGC and Beckett (This assumes collectors may want to resell their cards at some point in time).

1 The number of cards graded by PSA comes from the Collectors Universe 10K from 2000, which can be found here: http://clct.client.shareholder.com/sec.cfm?DocType=Annual&Year=&FormatFilter= .  The eBay sales data can be found in their 2000 10K filing here: http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001095811-01-001836%2Etxt&FilePath=%5C2001%5C03%5C28%5C&CoName=EBAY+INC&FormType=10-K&RcvdDate=3%2F28%2F2001&pdf= .