Conflicts of Interest in the Sports Card Ecosystem Post 1 - Card Companies and Collectors

A conflict of interest is a situation occurring when an individual or organization is involved in multiple economic interests with one of these interests possibly motivating them to act with impropriety in another interest. (footnote 1).  Conflicts of interest are why the President of the United States must put almost all of his or her wealth in a blind trust (e.g., The President does not know what investments he owns), so that economic decisions are not made to benefit their own wealth.  Without the blind trust, a President might be motivated to have defense contracts steered towards companies that they own.

Conflicts of interest occur in many industries or economic ecosystems because companies produce multiple products, but sometimes they can occur because of the fundamental economics of an industry create conflicts between buyers and sellers.

The conflict between card manufacturers and collectors.

As I have talked about in prior posts, it wasn’t really until the 1980s that Sports Card Collecting became a true collectors’ market, sometimes referred to by insiders as “The Hobby”.  Before the 1980s, the vast majority of sports cards were produced for the consumption of children who read their cards, played with them, tacked them on boards and eventually destroyed them.  Because nobody worried about the value of their cards, there was no conflict between card manufacturers and buyers.  Manufacturers tried to put out a product, usually with gum, tobacco or some confectionary product, and they would produce as many cards as customers would buy.  Long production runs were obviously good for the manufacturer because it meant that more gum, caramel, tobacco or eventually cards were being sold.  The business was obviously lucrative enough in the 1950s through 1970s for Topps, Bowman and Fleer to battle both legally and through signing players to contracts in an attempt to capture as much of the market as possible.  However, the customer was not poorly served, especially when these companies had competing sets at various times throughout the time period.  Competition just meant more and better cards for kids, as evidenced by the advances in both the physical size and quality of baseball cards in the 1950s.

As a side note, the only potential losers in the pre-collectible era were the players themselves, and they did not even know it.  As has been documented in a number of places, most players were dramatically underpaid for signing off on their photos for baseball cards.  While a few such as Ted Williams were able to profit more handsomely by selling their likeness to the highest bidders (e.g., the 1959 Fleer Ted Williams set), the average player in the 1960s was getting $125 From Topps for his annual license plus $75 every other year as a signing bonus until Marvin Miller became the head of the player’s union and realized how much Topps was profiting off the players (footnote 2).  Miller quickly fixed this problem.

However, once cards became part of “The Hobby” and had value as collectibles, a clear conflict emerged between card manufacturers and buyers who were now collectors and not kids who destroyed their cards.  The conflict comes from the value of any collectible being determined by the supply and demand for that collectible.  It’s basic economics, but the greater the relative demand for a particular card versus its supply will increase the amount collectors pay for the card.  It’s why we pay more money for Derek Jeter baseball cards than Bobby Meacham baseball cards.  Jeter will be in the Hall of Fame, and we want his cards, while Meacham had six undistinguished years with the Yankees.  We do not want his cards very much.

Where conflict emerged between card companies and collectors was in relative supply.  Long production runs where a card company sells as many cards as possible were still economically good for the manufacturer but not so good for the customer whose cards went down in value as production runs got longer.  Your 1989 Upper Deck Ken Griffey #1 Rookie Card was worth less as Upper Deck sold more of them.  This created the fundamental conflict between card companies and buyers.  The more cards that were printed reduced the average value of the card as a collectible if other factors were held constant such as the quality of the player on the card.  None of this mattered, of course, when cards were not collectibles, were destroyed by their owners and the value of your cards did not matter.

As I have talked about in previous posts, it was both faulty information and overly-euphoric assumptions about future supply and demand by collectors that created the Junk Wax or Junk Era from the mid-1980s to the mid-1990s (see this prior post: http://junkwaxandobservations.blogspot.com/2012/10/what-is-junk-wax-or-what-are-junk-era.html ) where there is so much supply of cards from that era still available today that the cards are almost worthless.  A major part of the information aspect of the building oversupply was that none of the companies during the junk wax era such as Upper Deck, Topps, Fleer, Donruss and Score ever published how many cards they were producing (footnote 3).  One has to believe that withholding production run numbers was purposeful.  At the start of the junk era, card companies usually had one mainstream brand of card at a single price point, as opposed to multiple brands and prices like in 2014, and they were going to sell as many of those cards as they could sell.  Collectors bought them by the case believing that they would sky-rocket in value just as vintage cards like 1950s Mickey Mantle cards had rocketed in value.  If they had known that Upper Deck printed over 4 Billion baseball cards in 1991 (footnote 3), they might have tempered their euphoric buying after thinking about how all these cards were being preserved by their owners.  Thus, publishing print run numbers only could have helped pop the sports card bubble earlier.

While the card companies had no legal obligation to publish print runs, it clearly shows the conflict of interest that existed between card companies and collectors.  Card companies made more money by selling more cards.  However, the more cards that exist hurts the value of their customers’ collections.

This conflict of interest was taken to the extreme by managers at Upper Deck in unethical fashion.  In his 1995 book Card Sharks, Pete Williams builds a very convincing case from interviews with former company executives and industry insiders that Upper Deck executives would have the plant managers reprint certain cards, even supposedly out-of-print cards, that were selling for large amounts on the secondary market.  The executives would then sell these extra cards for personal profit through dealers and other intermediaries.  Since these cards were the same as the originals and off the same presses, they went into the hobby and some probably into your collections.  They can never be known as counterfeits. (footnote 4)

What this scheme did was put big money into the pockets of Upper Deck insiders at the expense of their customers.  Their customers lost because the increased supply of high-value cards reduced the value of customers’ collections.  Such behavior is, of course, unethical because it is cheating your customers.

Today – The uneasy relationship between companies and customers.

Because cards are generally preserved by the collectors that purchase them today, it is hard to create scarcity.  Any form of scarcity is artificially created by the card companies by having certain high-end brands with limited production runs and various types of inserts that are often numbered.  I like the idea of numbered inserts (e.g., 004/125 on the back of the card) because it acts as sort of a warranty from the manufacturer of a card’s scarcity.  Any card manufacturer who printed many duplicate numbers on the backs of cards to increase supply would likely get caught due to the ability of eBay and the internet for card traders to share information.

Yet, because all scarcity is artificially created, the card companies are put in a tough position to try to deliver what collectors perceive as value (e.g., cards scarce enough to be worth their money) but still produce enough product to make a profit.  Because a card company’s input costs are high in terms of licensing fees (please see my earlier post: http://junkwaxandobservations.blogspot.com/2012/08/how-sports-card-royalties-work.html ), they are increasingly squeezed on their margins, which is why we have seen so many of them disappear in the past two decades.  Profit comes from either high volume with OK margins or very high margins with lesser volume.  The proliferation of brands at the major companies and the sky-rocketing costs of packs of higher-end brands indicates that the profits seem to come from the high-end of the market, which is consistent with a smaller, collectibles-based set of customers.  While Topps and Panini (with Score) have their high-volume, lower cost mainstream products, I suspect that the profit is more in the top-end of the market.

Whenever I read product reviews of new card sets that comes out each year on Cardboard Connection or other sites, the reviewers tend to focus quite a bit on the "value" they see in a new release.  Value obviously means bang-for-the-buck in terms of collectible value versus the price one pays for a pack or box of cards.  Sometimes, the reviewers make it seem like the card companies can produce value upon command, and the reviewers are disappointed when that value does not jump out of each pack.  The problem with this perspective is that creating value actually takes money.  Smaller print runs, great autographs and smaller-numbered inserts all increase production costs tremendously.  Therefore, creating value while making a profit is difficult.  This makes being a card company an difficult task because they must create enough value for collectors but the cost of generating that value must be less than its value to The Hobby.  This creates an uneasy relationship.

End Note

Like all other posts, please feel free to make comments.  I review all comments before they are posted in order to reduce spam and keep things on topic.  Also, it may take me a few days to review comments.

Footnotes:

1. Conflict of interest definition adapted from: http://en.wikipedia.org/wiki/Conflict_of_interest

2. Williams, P. 1995. Card Sharks: How Upper Deck Turned a Child's Hobby into a High-Stakes, Billion Dollar Business. Macmillan Publishing, New York. p. 24.

3. Williams, 1995, various pages.

4. Williams, 1995. Chapter 14 of the book is dedicated to the Upper Deck reprinting scandal.