Introduction
In
a past post, I wrote about how GAI grading (Global Authentication
Incorporated) went bankrupt in 2008-2009 as the
sports card grading market went from four mainstream competitors to three (e.g.,
PSA, SGC & Beckett). That
description was not fully adequate as the bankruptcy process in the United
States is very complex. While GAI did
file for bankruptcy in December of 2008 (footnote 1), its bankruptcy petition
was later dismissed by the courts when the company failed to notify all
creditors about an upcoming creditors meeting and also failed to file a number of
required legal documents. (footnote 2).
How
GAI actually disappeared was through a "split up" after their bankruptcy petition was denied. Mike Baker, who was head of the card grading
division at GAI and a former grader at PSA, purchased the rights to grade cards
under a slightly altered brand name, Global Authority, along with the pressing
machines, supplies and other items needed to physically grade both cards and unopened packs of cards. Global Authority was
relocated from Southern California to Bettendorf, Iowa (footnote 3). One can assume that rent was less expensive
in that location. The rest of the
company’s assets, what little were left, remained in California in the form of Global
Authentics, which was mainly an autograph grading company.
It is not clear how much
creditors received for their outstanding debts, which totaled between $1 and
$10 million (footnote 1). Mike Baker, the new part-owner of Global Authority, was listed on the bankruptcy petition as the second of the
unsecured creditors, so I suspect that his purchase of the card grading assets
satisfied his claim and created cash for some other creditors.
Why did the original GAI fail as
a business?
Without
inside knowledge, it is hard to specify the exact reasons the original GAI
failed as a company in California (more on its Iowa step-child later). GAI was started in 2001 or 2002 by Steve Rocchi,
who was its President and Chief Executive Officer. He had been either pushed out or voluntarily
left Professional Sports Authenticator (PSA) in 2001 after having founded PSA
and had served as its President for over a decade. However, PSA was part of a larger firm,
Collectors Universe, so he was not head of the entire company. Rocchi was the first employee of PCGS, the
predecessor of Collectors Universe (parent of PSA) and served as its Operations
Manager from 1988 to 1991 (footnote 4). There
was a clear brewha between Collector’s Universe and Rochi (for example, he is
listed as a key employee on the prospectus filed for Collectors Universe to go
public in 1999, but is missing from the 2000 Collectors Universe annual report),
and he left to form GAI as a competitor.
From my recollection of the
industry, GAI received good market acceptance upon starting operations. Their grading standards were very similar to
PSA’s standards, using a similar ten point scale for card grading. All graded cards were also serial numbered
and slabbed in tamper-resistant cases. A
card buyer could also check the certification number of any card sold on
eBay. Where GAI made their biggest
splash was in introducing pack grading.
As the first unopened card pack grader, they were able to capture the
market initially for grading packs. In
some senses, that made GAI an innovator in the market.
GAI falling into filing a
bankruptcy petition, likely had to do with three events. Again, I have no inside information of the
company.
1. As
the smallest of the four major grading companies, they were at a distinct
disadvantage. As I have discussed in
other posts, the card grading market provides significant advantages to the
firms that have the highest market share or have high market share within a card
niche. (see: http://junkwaxandobservations.blogspot.com/2012/09/why-are-there-so-few-legitimate-card.html). Other than in graded
unopened packs, GAI was the smallest player in the industry. This meant that GAI had less set builders
trying to compile sets of GAI-graded cards and your cards were more marketable
on eBay with the PSA or Beckett brand name.
The one market that they dominated for a while, pack grading, did not
have set builders (e.g., you cannot build a set of graded packs). Thus, no “pack registry” competition could
exist among collectors to lock them into GAI pack grading. Thus, any lock-in advantage from being the
first-mover in pack grading did not exist.
Indeed, I think the only reason
that GAI Grading even got off the ground is because many of their personnel
were former PSA people. That gave the
company instant credibility, along with early cards being graded by GAI seeming
to have high standards. With low
standards, they would have just become another one of the low-end grading
companies whose graded cards are always more suspect.
Caption: This photo shows two labels or "flips" from graded cards. The top label is the old GAI grading company that was based in California. The bottom flip represents the subsequent Global Authority company based in Iowa. While both companies are out of business, collectors have more faith in grades assigned by the older company (e.g., top label)
Also, in the early years of the
2000s, the card grading business was booming as many vintage cards still had
not been graded and some junk era cards were still worth grading at that time. This boom in grading may have masked the underlying
weakness of GAI’s market position until the later part of the decade.
2. In 2006, PSA introduced pack grading. This service introduction must have cut
dramatically into GAI’s unopened pack grading business where they had been the only
show. Without a registry to keep
customers locked into grading their unopened packs through GAI, it made sense
for many customers to switch to the biggest and most well known grading firm. My guess is that PSA cut heavily into GAI’s
volume with this service offering. It
also probably capped the price that GAI could offer for pack grading.
3. The 2008 financial and real
estate market collapse shrank the demand for grading. For example, PSA’s number of cards graded
annually declined about 12 percent in the year between June 2008 and June 2009
(source: Collectors Universe 2009 Annual Report). Because sports card grading and collecting
are not necessities but rather luxuries in the economy, they decline when economic
times get tough and people have less money.
The grading firms that were smaller than PSA likely suffered even worse percentage
declines in sales or cards graded during the crisis.
The combination of these three
events likely clobbered GAI grading.
They must have been walking a thin line of staying in business before
the financial crisis since they filed for bankruptcy in December 2008, and the
bellwether of the crisis, Lehman Brothers Bankruptcy, occurred only several
months earlier in September 2008. This
hypothesis is supported by the fact that almost a year earlier GAI was evicted
from their office space in Southern California and was also cited for operating
without a business license (footnote 5).
My guess is that money was always tight at GAI. The large decline of revenue caused by the financial crisis was likely the last straw as it would have been likely that they could not have covered their fixed costs of rent and utilities. The fact that GAI employees were some of the creditors listed in the Chapter 11 filing indicates that they could not make payroll at the end.
My guess is that money was always tight at GAI. The large decline of revenue caused by the financial crisis was likely the last straw as it would have been likely that they could not have covered their fixed costs of rent and utilities. The fact that GAI employees were some of the creditors listed in the Chapter 11 filing indicates that they could not make payroll at the end.
The Disaster in Iowa
After moving to Iowa and
re-starting as Global Authority, the company
never really got off the ground and then basically committed suicide with a
major strategic blunder. The company’s
CEO was Demian Werner and GAI’s Mike Baker was director of grading and
authentication. Werner was likely the source of capital to the firm as Baker had to purchase the card grading assets
from GAI (this is pure speculation by me, however). From the little information that I can find
publicly about Werner, he is based in Bettendorf, Iowa, was active is selling
sports collectibles and now runs a small security firm based in Bettendorf,
Iowa (footnote 6).
Global
Authority originally started by attending shows and grading cards under the
Global Authority brand name. They even
started a Facebook page that still exists as of this writing on February 9,
2015 (https://www.facebook.com/globalauth). In May of 2010, Global Authority announced the
idea that would become their undoing:
Free Grading (footnote 7).
Why
was free grading a terrible blunder?
Here’s how it worked. A customer
could submit cards to Global Authority.
They would be graded for free.
The customer would then choose the cards to encase and pay the grading/encapsulation
fee only for those cards. This seemed
like an offer to good to be true. As one
blogger wrote:
FREE CARD GRADING. Did that get your attention? In a time when the economy is soft and
people’s discretionary (collecting) income is less than it used to be, GAI is
the first only only card grading service to offer this value. Collectors can choose to have there cards
returned to them graded or pay to have them encased. From the very beginning, card entry, tracking
and easy of use of GAI’s service is some of the smoothest and best that I have
used. You can watch and control your
submissions through the whole process.
The advantage of having you enter your cards into GAI’s live system is a
quicker turn around time. Instead of
having to wait for them to receive your cards and have them enter them, you are
already one step ahead with having entered your cards yourself. Once your cards are graded, you can choose to
have any or all of them encapsulated, returned or placed on consignment with
GAI. With regular e-mail updates of when
they receive your cards, grading is finished, encapsulation is finished and
when they send out your cards, you are never left out of the loop and wondering
what or when the next step is. The card
holders themselves are stack-able and the thicker memorabilia card only
required a slightly thicker holder. What
I really like about GAI’s holders is the card information and grade on the top
spine. This saves time and makes for
easy identification of your graded cards when stored vertically. The value and ease of use of GAI’s on-line
submission make their service one that collectors and dealers both will
enjoy. I strongly recommend GAI grading
service for collectors who like to have more control in the grading process and
to see if their card is worth encapsulation after the free grading. (pasted
from http://www.going9baseball.com/2011/07/07/bike-spoles-and-show-boxes-global-authority-inc-grading-service-review/
on February 9, 2015)
It
was too good to be true. Think of the
economics of this grading strategy. How
many modern sports cards exist in the world that are only worth something more
than pocket change if graded a GEM-MINT 10?
Tens of millions is the answer.
Think of the 1990 Fleer Michael Jordan (and like cards) that one cannot
sell on eBay for fifty cents ungraded but will sell for $25.00 if graded GEM
MINT 10. Hence, this grading strategy attracted
a tidal wave of junk era submissions to Global Authority where the vast
majority of cards would not turn into revenue but still had to be
examined. It’s very likely that
customers might submit 100 cards with only the 3 that graded GEM MINT 10 being
converted to actual revenue. Global
Authority would still have to look at the other 97 cards and also ship them
back to their original owners.
Given
this situation, Global Authority literally drowned in submissions. As a small operation, it was largely swamped
by a tsunami of cards that would likely not lead to revenue. This title wave of cards also creates
costs. You have to have a system of
keeping orders separate, and legitimate graders pay for insurance to cover the
cards that are in their possession for grading.
The costs of managing this tsunami of cards were extremely high for such
a small amount of revenue.
The
results can be seen by running a Google search on the words “Global Authority”
and “Better Business Bureau” (use quotes around the words). Global Authority soon fell months behind on
processing orders and eventually the whole system collapsed with no cards being
graded. Some orders were lost.
You
will see Global Authority roasted on chat boards all over the sports card
collecting world for ripping off customers.
Customers sued them, contacted the Iowa Attorney General and complaints
exist even to this day. As of 2014, the
company was no longer grading cards and was trying to return submissions to
their owners. All presence of their web
site has been pulled off the internet, so one can safely assume they are out of
business.
What
does the story of free grading tell us?
First, customers are not always right in every aspect. Customers would love companies to give their
products or services away for free. Customers are
always right when it comes to promised service and quality within a desired
price range, but that is quite different.
Second, a business has to think through the economics of pricing very
carefully. It’s clear that neither Baker
nor Werner put enough thinking into the free grading concept before launching
it. Maybe Global Authority was desperate
for volume at the time of the pricing idea, but volume can sometimes drown a
business, especially when it is unprofitable volume.
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. GAI’s actual bankruptcy filing can be found here: http://bankrupt.com/misc/ccb08-18315.pdf
2. http://www.sportscollectorsdigest.com/news/global_authentication_backruptcy
3. http://www.sportscollectorsdaily.com/gai-split-baker-buys-grading-division/
4. http://www.bloomberg.com/research/stocks/private/person.asp?personId=28491653
5. http://www.sportscollectorsdaily.com/gai-hoping-to-move-forward/
6. https://www.aihitdata.com/company/0066A45A/GLOBAL-AUTHORITY/people#main
7. http://www.kcrg.com/news/local/Bettendorf-Company-That-Kept-Clients-Trading-Cards-Promises-to-Return-Them-167370735.html
1. GAI’s actual bankruptcy filing can be found here: http://bankrupt.com/misc/ccb08-18315.pdf
2. http://www.sportscollectorsdigest.com/news/global_authentication_backruptcy
3. http://www.sportscollectorsdaily.com/gai-split-baker-buys-grading-division/
4. http://www.bloomberg.com/research/stocks/private/person.asp?personId=28491653
5. http://www.sportscollectorsdaily.com/gai-hoping-to-move-forward/
6. https://www.aihitdata.com/company/0066A45A/GLOBAL-AUTHORITY/people#main
7. http://www.kcrg.com/news/local/Bettendorf-Company-That-Kept-Clients-Trading-Cards-Promises-to-Return-Them-167370735.html
