What happened to GAI Grading? And how a bad grading idea sunk their successor Global Authentic.

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.

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

Why most ‘Buy It Now’ sports cards on eBay are overpriced

Introduction

As a vintage set builder who largely uses eBay to buy cards, I often get very frustrated with not being able to acquire certain cards at market prices.  I have a number of “Followed Searches” on eBay (e.g., what used to be “Saved Searches” but apparently the word “followed” test markets better) through which I get daily updates of new listings on eBay of various types of cards.  For example, I have an eBay search on the words “1950 Bowman” with “SGC”, because I have a 1950 Bowman baseball card set in which all the cards are SGC graded.  I have probably purchased one hundred cards because of this search.

One of the aspects of eBay searching that bothers me is that week-after-week or month-after-month, I will see the same listings that come up repeatedly trying to sell a certain card for well over 200 percent of its market price.  These listings are almost always fixed price (e.g. Buy It Now) listings, but they can be auction listings where the starting action price is above the market value of the card.  Some of these listings can be attributed to the seller not knowing the true market price of the card, but others I have seen literally for years with the card in question not being sold over probably fifty different eBay listing periods.  To collectors, these listings are just an annoyance because they create background noise and waste our time when we are looking at the results of our saved searches or are paging down on eBay after a search.

Since the conversion rate (e.g., actual completion rate where somebody buys the card) on overpriced auctions is very, very low, why do some sellers continue to list cards that are very overpriced?  For cards relisted many times, it is not seller ignorance of the market price, because an economically rational seller would adjust his or her price downward after initially overpricing the card when the listing does not convert into a sale.  To understand some of the dynamics of overpricing, let’s run an experiment.

The Experiment

I went to eBay and looked at all the listings selling a 1989 Upper Deck Ken Griffey Jr. #1 in PSA 9 grade.  This card was chosen because it is an iconic modern rookie card of one of the best players of recent decades who is a sure-fire Baseball Hall of Fame player.  The card also exists in sufficient quantity at PSA 9 grade so that determining an average market price can be based on many observations (e.g., converted listings). As such, any average price figure will more likely represent the true value of the card.

While some people might argue that the PSA 10 version of the card should be the standard examined, PSA 10s are less numerous.  Also, the sort of mystical way that cards are given PSA 10 grades versus PSA 9 grades likely makes their market less efficient.  A Griffey PSA 9 is a good benchmark because such cards are “Mint”, generally look the same and cannot have qualified grades by PSA standards.  Therefore, a 1989 Upper Deck Ken Griffey Jr. #1 in PSA 9 grade is a standardized card for the most part.

I examined all listings for this card that closed on eBay between 9-27-2014 and 10-31-2014, finding these listings using a number of different search terms related to the card so as to minimize the chances of missing any listing.  While the time window is sort of arbitrary, it covers over a month of concluded listings.  I also did not use listings where multiple copies of the card were being sold or the card was bundled with some other cards.  Only PSA 9 listings were counted.  Shipping was included in any prices reported so as to eliminate the effect of various shipping cost strategies. (footnote 1)

Here’s a description of the raw data:

Number of completed and successful auctions: 40

Number of completed and successful 'Buy It Now' listings: 9

Number of unsuccessful auctions (e.g., opening price was too high) or unsuccessful 'Buy It Now' Listings: 21

The chart below shows the results.

Of the 40 successful auctions, the average price was $42.56.  Prices ranged as low as $36.10 to as high as $51.98 in successful auctions.  However, the market for this card seems to be relatively informed as there is a normal distribution with a vast majority of the auctions clustering between $40 and $46.  Therefore, most final bids squeeze into this $6.00 price window.

The price of convenience. We can actually calculate the price of convenience from the data.  As shown in the chart, the average successful 'Buy It Now' price was $48.38.  Therefore:

$48.38  - $42.56  = $5.82

Thus, the average buyer, who did not want to compete in an auction and thus wait to buy or possibly be outbid, paid $5.82 for the convenience of getting the card purchased right away.  Nine buyers went this route versus 40 who got the card through auctions and generally paid less. (footnote 2)

Returning to the opening thesis of this post, the average price of unsuccessful 'Buy It Now' listings (or auctions where nobody bid on the opening price) was $61.58, which is approximately 145% of the average final successful auction price.  This was also not a trivial amount of the overall listings at 21 unconverted listings.  One seller was even listing the card at $99.99 with free shipping, which is 235% of what the card is worth at auction.

Therefore, we have established with this analysis that some sellers list cards at way above their price in a range that will not lead to the cards being purchased very frequently.  The fact that only 9 of the 30 Buy It Now listings were actually successful indicates that possibly a majority of Buy It Now listings are significantly overpriced, even when one factors in the convenience of not having to participate in an auction.

The Why of Overpricing

So why do sellers list a card in a price range where it is very, very unlikely to sell (for example, the 1989 Upper Deck Ken Griffey Jr. #1 in PSA 9 grade at $99.99)?  Here are the reasons that come to mind:

1. They are hoping for an uniformed buyer.  This idea has to be the basis for most of this pricing.  While most buyers of sports cards on eBay tend to know pricing, especially for graded cards, occasionally somebody’s parent or significant other goes online and wants to find a gift.  You would have to be a ‘newby’ to buying sports cards to fall for the $99.99 price on a 1989 Upper Deck Ken Griffey Jr. at PSA 9, but this might happen on rare occasions.

2. There is no seller penalty on eBay for unconverted listings.  Because eBay gives away so many free listings to sellers, the marginal cost of listing a card at too high a price is $0.00.  Therefore, it does not cost the seller anything to go fishing for somebody uninformed.  eBay will now even automatically relist unconverted listings for you, so it does not even take time to relist a very overpriced item.

3. There are no negative reputation effects for overpricing.  Because eBay buyers only rate converted auctions, sellers who frequently list 'Buy It Now' items at too high of a price do not receive any reputation loss.  Only if the shipping is priced too high, could it affect their feedback.  As a result, many of the overpriced listings also come with free shipping.

4. Most eBay sellers are not business people.  Business people rightfully consider inventory holding costs as part of their business.  There is an “opportunity cost” to not selling inventory, which is that you do not get the cash for the item that can then be used to buy more inventory to sell.  Since the average seller on eBay is a collector or a small business person, they often focus excessively on getting the best profit margin for card without considering the cost of money tied up in inventory.

5. In some cases, a seller may overprice a card when they are unsure of the market for the card.  I have done this myself.  This type of seller is less of a nuisance because they ultimately drop their price upon relisting as they learn the market.  I suggest that such possible temporary overpricing may even be a good strategy in markets for cards that are thinly traded (I will have another post down the road on thinly traded card markets).

What to do

Unfortunately, I do not think buyers can do much about the nuisance of dramatically overpriced cards on eBay.  Why I call the situation a nuisance is that these listings waste your time as you are looking for cards and have to scroll paste them.

In a perfect world, eBay would provide the solution by changing their pricing structure.  For example, cutting the final value fees by 25% on auctions that start under $1 with free shipping would be a possible solution to this problem.  This could be combined with less free listings.  A lot of sellers listing cards would embrace this option because they are already doing it anyway (e.g., having low starting prices).  Others would follow and volume upticks might offset lower final value fees for eBay.  The relative scarcity of free listings would stop the fishing expeditions with the high priced 'Buy It Now' auctions.

However, I cannot see eBay accepting this idea because the number of listings is a key metric they report to Wall Street.  I wish Wall Street would pay more attention to converted listings.

To do yourself a favor when you search for a widely available card on eBay, click on the button to display Auctions only.  Ultimately, you will pay less, on average, using an auction to acquire a card.  Also, your eyes will thank you with less listings to scroll through since you will not have to look at the Buy It Now listings.  If you do want to pay for the convenience of buying it now, I suggest a quick look at the recent sold listings, which can be found by clicking on a box in the left hand column as your go down the search results page.  That way, you can get an idea of how much you are paying for convenience and if a Buy It Now price is too high.

My advice for sellers who want to sell cards through Buy It Now auctions is to also examine the recent finished auction prices.  As shown on the data on Ken Griffey Jr.’s Upper Deck Rookie card, you would want your Buy It Now price to be at the upper end of the normal distribution of auction prices.  There are some auction buyers willing to pay at the end of the right tail and you can capture those higher than average prices without having to list your card a dozen different times.  The key is to again scan the recent completed auction results and set your price around the level of the highest converted auctions.  Also, you should realize that eBay charges generally higher final value fess on Buy It Now listings.

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. I did exclude one successful auction that was an outlier.  In this auction the seller claimed that the card was under-graded and should have been a PSA 10 instead of a PSA 9.  They also included many high resolution scans to back their claim.  This approach seemed to convince some buyers, because the auction closed much higher than other auctions.

2. Two auctions actually went higher than the average Buy It Now price.  Such situations are quite possible when bidders become emotionally attached to “winning” an auction.  Such emotional attachment only costs a couple of dollars on a 1989 Upper Deck Ken Griffey Jr. #1 in PSA 9 grade.  However, if one was buying a house at a Sheriff’s auction, such emotional attachment could be more costly.

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.

1970s Topps Football Cards – Sweaty Guys and Airbrushed Pictures

Topps baseball sets in the early 1970s showed many design innovations like (1) the beautiful black bordered 1971 set, (2) the groovy, hip 1972 card designs, and (3) the 1975 bold color and mini-test-market designs.  These sets were eye-pleasing with mostly good, clean staged photos of players with occasional in-action shots.  As a result, many 1970s Topps baseball sets are still sought after by set builders today.  Thus, despite Topps being a monopoly in baseball cards, product designs were generally fresh in the early 1970s.

In football, Topps went in the opposite direction.  The football card sets basically were pretty awful with the exception of the 1972 design, which built on the bold block lettering and bright colors similar to many late 1960s and early 1970s consumer products.  However, in my opinion, Topps football cards of this era were really just below par because the pictures were not very good.  There was a reason that the pictures on football cards were bad throughout most of the 1970s.  As a cost savings measure, Topps only licensed from the National Football League Players’ Association (NFLPA) and dropped licensing from the NFL from 1970 through 1981 (footnote 1).  As a result, football cards could not show any team logos or other NFL copyrighted images (see my earlier posting here on how licensing works: http://junkwaxandobservations.blogspot.com/2012/08/how-sports-card-royalties-work.html ).  Football cards would have to be produced without using any NFL licensed material.

Why would the Topps Company go without an NFL license?  Obviously, it saved them money, but the main reason Topps could undertake such a money-saving move was their monopoly position in sports cards in the USA in the 1970s.  While Topps had only the MLB players locked up by contracts and thus entry was possible in other sports, very few other companies seemed to want to enter the sports card business, possibly because they could not enter the baseball market, which was the major market by size at the time.  There are likely economies of scale to producing cards for a number of sports rather than just one sport.  You can allocate the capital cost of printing presses, salaries of card designers and general overhead across print runs for multiple sports year round.  For a market as small as sports cards, not being able to market baseball cards to anchor your cost structure was a fairly significant problem (footnote 2).

Anyway, the lack of an NFL license in the 1970s meant that pictures of many players would have to be close up still photos, posed shots or airbrushed action photos.  The photos would need to be airbrushed to clean off all the NFL trademarked team logos to avoid infringing upon NFL-owned properties.  While airbrushing and working around logos is common in the sports card trade, Topps position as a monopolist seemed to make them lazy in the production qualities of the 1970s cards with the pictures on the front especially suffering.  The quality of the airbrushing work was not very strong with colors often not quite matching team colors.  Also, by the late 1970s, a large number of football card pictures seemed to be close up shots of players on the sidelines staring off into space.  These were easy photos to take and did not require much airbrushing to clean up if taken at an angle where no copyrighted logos could be seen.  However, as a result, we have lots of pictures of sweaty players doing nothing.

Caption: Nick Mike-Mayer gets the almost neon green airbrush job of his Eagles helmet in his 1978 Topps card attempting to join Marvin the Martian.  “That makes me very angry.” says Marvin.

When firms are monopolists, they can provide a fairly lousy product or service and charge a high price for it without worrying about competition.  In terms of quality, the monopolist has to produce a product at a quality level that is just high enough to keep customers buying the product since sports cards are not a necessity.  Topps also expanded the size of their football sets in the 1970s, thus making any set builders buy more of their poorly designed cards.

Caption: 1978 Topps Football Cards. Stu Voigt in a posed photo still has a monstrous cowlick.  Give the guy a comb.  On the right, Joe Lavender apparently was reading a good novel on the sidelines.

The 1978 Topps football set represents the low point in picture quality in my opinion.  Now, it did not help the situation that the hair styles of the time were long hair or big afros.  This made football players all the more sweaty or unkempt.  However, we often see in Topps baseball cards from the same era, very nice posed shots of players who have big clean afros or washed hair.  Also, the baseball cards had much better use of lighting without players’ faces being in shadows.

Caption: 1978 Topps Football Cards. Ron Saul and Oliver Davis stare aimlessly off into space.  For some reason, the top of Davis' head has been cropped off.  Apparently, he has too much hair.  Love those sideburns!

Why Topps 1970s baseball cards were so much better than football cards in production values is possibly puzzling since Topps was a monopolist in both products.  One explanation might be that because Topps had a license that paid MLB with royalties that the baseball league gave Topps greater access to players or possibly even demanded better quality.  The NFL had no direct financial stake in Topps' 1970s products, so football teams may have been less accommodating.  Another possible explanation might be that Topps didn’t spend much on the photos because of the size of the market for football cards did not make it cost effective.  A third possible explanation would be that in the late 1970s that Topps card designs deteriorated in general across all sports and that football deteriorated more quickly because of lesser attention by Topps.

In the early 1980s, Topps’ design and photo quality in football cards became much better.  In 1981, Topps introduced a subset of cards in their football set called Super Action cards that had very nice photos of game action.  In 1982, they signed a license with NFL properties and could shows players in their uniforms without airbrushing out team logos.  This made both action and sideline photos easier because the photographer did not have to worry about capturing “too much logo” in any shot that would have to be subsequently airbrushed out.

 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. http://www.cardboardconnection.com/1970-topps-football-cards

2. Additional evidence of the economies of scale theory would be the short-lived tenures of both Fleer and the Philadelphia Gum Company in the football card market in the 1960s.  Fleer produced cards from 1960 to 1963 for the upstart American Football League (AFL) with Topps having the NFL contract.  When Fleer was sued by Topps in 1963 for beginning MLB baseball card production (and had to stop producing cards after printing their first 66 card series), they did not seem to pursue aggressive renewal of their AFL rights.  I suspect that being denied entry into baseball card market limited the attractiveness of making football cards.  Surprisingly, Philadelphia Gum Company backroom-dealed Topps to get sole NFLPA rights in 1964, which sent Topps scrambling for the AFL players’ rights, which had previously belonged to Fleer.  Philadelphia Gum Company exited with sort of a whimper after the AFL and NFL merged and the NFLPA awarded Topps sole rights to NFL players’ images in starting in 1968.  There is no evidence that Philadelphia aggressively tried to outbid Topps, so I suspect that producing football cards alone was marginal economically (see: http://www.psacard.com/Articles/ArticleView/5019/collecting-the-1966-philadelphia-football-card-set for more on Philadelphia cards from the 1960s and discussion of these contract issues.)

Buying Hot Rookie Cards on eBay: A Bad Investment

Preface

As with other postings, I again want to emphasize that sports cards are a lousy investment.  Buy sports cards for any other reason than to make money.  Buy them because you love sports, admire a certain player, love to make sets or any other reason than to make money.

The Hot Rookie or Young Player

Rookie cards are the currency of sports card collecting in the modern era.  After the market for sports cards shifted from being a market for children to a collectables market at the beginning of the junk wax era in the mid-1980s, the only cards that have high value are rookie cards of famous players.  The best evidence of this fact is to open an issue of the Sports Market Report or go to PSA’s web site at look at the value of cards from recent years (go to: http://www.psacard.com/SMRPriceGuide/ ).  Only Rookie Cards in High Grade (PSA 9 or 10) are very valuable.

Why are rookie cards worth more?  To somebody not in the sports card hobby, this is actually a legitimate question.  The answer is that having a rookie card means that you have a card of a player before they became famous at professional sports.  It’s usually a player’s first chronological card, so there is no ‘sports card history’ of that player.  In other words, you have a card of that player from when he or she was just some ‘Joe Schmo’ and not on the cover of GQ.  Also, a player’s rookie year is likely to be the year where the least number of cards are printed of the player.  Any player that is a star in their rookie year has increased number of cards printed of him or her in subsequent years because of increased popularity.  For example, Panini Prestige printed a complete seven card special insert series of Tim Tebow cards in their 2012 Prestige series just largely because he’s Tim Tebow.  Supply expands to meet demand.

Caption: The Hot Rookie card: 2011 Topps Chrome Colin Kaepernick Black Refractor auto /25.  This card sold on 1-20-2013 on eBay for $1500.00 in an auction that garnered 31 bids.  Kaepernick has started 1/2 the season and has led his 49ers team to the Super Bowl in his 2nd year in the NFL.

As a matter of fact, not even all rookie cards of great players are valuable.  Because Panini, Topps and Upper Deck have so many brands (Prestige, Chrome, Finest, Score, UD, Rookies & Stars, etc., etc.), there are literally dozens to hundreds of different rookie cards of various players.  Again, this is an example of how supply has expanded to meet demand and thus the average price of a rookie card for any player goes down.  Indeed, players that emerge during their rookie season can even have more cards printed of them in late-season card series, which is again an example of supply expanding to meet demand.

The one exception to this supply expands to meet demand rule is autographed rookie cards.  There is a reason that all the valuable hot rookie cards are now only autographed cards.  Autographed cards are limited to the number of cards that a player can or is willing to autograph for the various card companies.  While a player can obviously sign thousands of cards (or the little autograph stickers that are put on cards), the player cannot sign nearly as fast as printing presses churn out new non-autographed cards.  Also, players get tired of signing cards; machines do not get tired of printing them.  As a result, autographed cards become the scarce rookie card commodity.  Again, look at SMR or PSA’s web site at the value of great young players' cards from recent years across all sports.  The only rookie cards that have very high value are the autographed cards.

Buying Rookie Cards of Hot Players

This brings to the front the question of how does the collector acquire valuable rookie cards?  There are two basic ways.  First, the collector can buy new packs and boxes of a card company’s new issues in hopes of snagging one of the randomly inserted autographed rookie cards.  Premium card brands tend to have more rookie autographed cards inserted, which is why the collector pays more-dollars-per-pack for the premium cards.   The card companies also aggressively advertise the “hit-rate” per box of autographs with brands like Bowman Chrome and Bowman Draft Prospects topping the baseball rookie card brands because of aggressive signing of young prospects to autograph contracts.

The problem with buying packs and boxes, however, is that the collector has to roll the dice with Lady Luck on getting hot rookie autographs.  Your chances of getting a hot rookie autograph are much less than getting a card autographed by some “good player” who is not a rookie and thus has 15,000 autographs floating around on existing cards.

Second, and more commonly, the collector can go on eBay (or some other site like Beckett’s Marketplace) and buy a hot rookie autograph card from somebody who was lucky enough to get one in their packs or boxes.  This seems easy enough.  You pay the market rate for the hot rookie’s card, it gets shipped to you, you get to own it, and you capture its future appreciation in value as the player in question wins Super Bowls, scores hat tricks, hit home runs or whatever he or she does.  If it was so easy……

It’s not.  When you buy a hot rookie on eBay, you enter a market where the value of the hot rookie card is tremendously over-inflated as an investment due to non-rational thinking.  Markets and emotions do not mix very well, and the sports card market is one that is jet-fueled by emotion and speculation.  For example, most sports card collectors love sports and have emotional attachments to particular teams and particular players.  I personally think this is a good attribute of collectors and sports cards, but it is a bad recipe for investing.  For example, what makes us search for the highest yield in Certificates of Deposit (for those of us with savings) is that we have no emotional attachment to the financial institution that takes our money as long as they are FDIC insured.  This attribute is what makes the market for Certificates of Deposit so competitive and efficient with relatively low-profits for banks.  We rationally search and take the highest interest rate.  No emotion, no mistakes, pretty rational.

Here’s why the market for hot rookies is irrational:

1. It suffers from hype.  ESPN and the culture of 24 hour media attention raise the profile of young rookie players who are doing well.  They get a disproportional amount of media time.  Also, marketers, looking for the next young star to lock into their advertising plans, tend to make younger stars the focus on their advertising.  For example, how many times have you seen Robert Griffin III on television advertisements this year?

2. It suffers from distorted supply.  For example, let’s say that Robert Griffin III (RG3) does go on to become a Pro Football Hall of Fame Player and is enshrined in Canton, Ohio.  In this case, RG3 would end up signing about 100,000+ more football cards over the rest of his career as supply would rise to meet demand.  This would have a severe effect on the price for autographed RG3 cards.  While there would still be the same number of autographed RG3 rookie cards in existence as today, some of the demand for those cards would be siphoned off by people that just want an autographed RG3 card, just not necessarily a rookie card.  Those people in 2012 have to chase the smaller number of RG3 rookie cards on the market.  In the future, they can chase the any of the 100,000+ cards signed in the future.

3. It suffers from biased expectations of the future.  Psychology shows that there is a human tendency to extrapolate today’s norms into being the future’s norms and to underestimate the chances of bad events happening.  So, for example, because football players like Colin Kaepernick, Andrew Luck and Robert Griffen III had great years this year as rookies (or a 2^nd year player in the case of Kaepernick), the estimates of their future accomplishments by many of the buyers on the market assume continued high performance into the long term future.  This is not likely the case.  Without examining the merits of any of the three players, history suggests that injuries, loss of skills, regression to mean performance, off-the-field events or poor coaching will keep them out of the Hall of Fame.  While I am not a betting person, the odds are probably 1-3 that not one of them ever makes it to the Hall of Fame.  While they have shown they are great players for a short period of time (i.e., one season), Hall of Fame credentials are built over a decade of strong performance.  In the short-term 24 hour media world that we live in, nobody is thinking ahead a decade.

Because of these three market anomalies and collectors' emotional attachments to players and teams, the market for hot rookies itself is way too hot or super-inflated.  Prices rocket upward to the point that even if the player go on to make the Hall of Fame, the card probably does not gain too much in value in the future or even drops.  Given the odds of not making the Hall of Fame in any sport, buying hot rookies is an investment huge negative expected value.

Some Evidence

If you do not believe the thesis of this post, let’s look at some data.  I went over to the shelf and pulled out SMR magazine from February 2007 (5 years ago).  On page 92, the valuable PSA graded rookies from 2006 football card issues are listed (similar to how 2012 football card issues would be listed in February 2013 SMR today).

The players whose cards were valuable were:

Jay Cutler

Matt Leinert

Reggie Bush

Vince Young

DeAngelo Williams

AJ Hawk

Their autograph cards in PSA 9 condition were listed as being worth anywhere from $140 to $345. (footnote 1)

Here are some comparisons from eBay today:

2006 Donruss Elite Reggie Bush #204 Auto /100

Last sold on eBay in BGS 9 grade for $25 including shipping on 11-12-2012

SMR in February 2007 was $275.00 in PSA 9.

2006 Donruss Elite Matt Leinart #192 Auto /100

Last sold on eBay ungraded for $13 including shipping on 11-21-2012

SMR in February 2007 was $140 in PSA 9.

2006 Donruss Elite Vince Young #221 Auto /100

Last sold on eBay ungraded for $11 including shipping on 1-22-2013

SMR in February 2007 was $150 in PSA 9. (footnote 2)

While one could argue that 2006 was a particularly bad year for rookie cards of football players, it is an example of how hot rookie cards depreciate in value over time on average.  Players who are hot and the next Joe Namath usually are not. (footnote 3)

Occasionally there is the breakthrough player like Tom Brady, who was drafted in the fifth round and whose cards continue to have high value over time.  However, if you are a veteran collector, by the time you realized that Tom Brady was a great player his rookie cards had already taken off in price.  And for every Tom Brady, there are 25 Matt Leinarts.

What to do?

As I said before, collect great rookie cards for any reason other than trying to make money.  Buy a Colin Kaepernick rookie card because you love the 49ers and you want a piece of history related to their run to the Super Bowl in 2012-13.  Buy a Tim Tebow rookie card because you are a Florida Gator fan or like what Tebow stands for in his religious beliefs.  Buy an RG3 card because you like his pencil mustache and he won the Heisman Trophy.  Just don’t buy their cards to make money.

Also, if you build sets like me, you might want to focus on building sets where there are autographed inserts of rookies.  If you hit a hot rookie auto in a pack or box by chance, it can often finance building the entire base set plus some inserts if you sell it.

If you are not going to hold a hot rookie card for a long time, one can always try arbitraging the market.  That would entail buying a rookie when the price is low and quickly reselling if and when the price goes high.  Again, I do not think this is a good way to make money.  You either need to have insight into NFL talent that other people do not have or you are just playing roulette with your money.  It's better to buy a good low-risk mutual fund.

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. PSA 10 cards of these 2006 rookies were worth much more, but these should not be considered due to the almost impossible-to-understand nature in which PSA 10s are handed out by PSA.

2. Data was taken by looking at all the completed auctions for 2006 Donruss Elite cards on 1-31-2013.  Donruss Elite was chosen because it was a medium-to-high end brand with autographs only being numbered to 100 on the cards.  It was one of three brands listed in the February 2007 SMR where cards had reported values.

3. It should be noted that Cutler’s autographed rookie cards still hold some value as reported in SMR.

What is Junk Wax (or What are Junk Era Cards) and what caused the junk wax era?

Introduction

I am neither the first person nor probably the last to address this issue.  I want to first give credit to two very good articles about the junk wax era.  The first is by Ryan Cracknell on the Cardboard Connection web site (footnote 1).  The other is an eBay Guide by a person named Setbuilders, whom I cannot find his or her real name on eBay (footnote 2).

This posting will also reinforce a common theme you will see on this blog.  That theme is: Don’t Collect Sports Cards to Make Money!  In general, sports cards are a risky and lousy investment as compared to almost anything mainstream like stocks, mutual funds, gold or even a low-yielding money market account.  Sports card collecting should be done instead because you love doing it for any reason other than making money and you can spare a few dollars to indulge that love.  Rarely, will you make any money collecting.

Junk Wax

Junk wax stands for wax packs or boxes of wax packs of sports cards from the late 1980s or early 1990s that have very little value today.  This time period is also referred to as the “junk era” for sports cards.  Cards from this era have little value because they were massively overprinted in relation to what their demand would become and has been in recent years.  Hence, supply of these cards wildly outstrips demand, even for the best players’ rookie cards, which leads to low values or prices.  For example, the vast majority of 1988 Tom Glavine rookie cards that sell on eBay in PSA 9 (Mint) condition, sell for less than their cost of grading (footnote 3).  Thus, even though Glavine is a sure-bet Hall of Fame player who is not tainted by steroids or other PEDs, his cards are so abundant that they must be absolutely GEM-MINT  in order to get graded and sell at a profit.

The exact years of this junk era are unclear, but many argue that it runs from 1986 to 1993.  I think it actually started earlier than 1986, but 1985 issues by Topps, Donruss and Fleer sets had some amazing rookie players (Clemens, Puckett, & McGwire in Topps), which seem to make those sets look more valuable than say 1986 sets, which largely have Jose Conseco as the only key rookie and Jose’s stock as a great player sank like the Titanic long ago.

The baseball strike of 1994-95, which wiped out the 1994 World Series, is often seen as the end of the junk era (footnote 2) because it massively decreased interest in baseball.  This decline in popularity of baseball, which is the main sport for collecting sports cards, caused many sports card stores to go out of business (footnote 2) and several sports card manufacturers to begin having financial trouble that ultimately led to their demise.  The remaining companies had to adjust their strategies to survive (having multiple brands, shorter print runs, inserts, autographs, etc.), and ultimately demand and supply for cards came into balance, although newer cards will never likely have the value that vintage cards retain.

Makings of a Mania

The junk wax era had all the makings of a classic economic bubble in which assets trade or sell at prices that are very inflated over their true value (footnote 4).  I would refer to junk wax more as a mania than a bubble because economic bubbles usually burst very quickly leaving people who hold once-inflated assets with very suddenly much less valuable assets.  For example of a bubble, think of real estate in San Diego.  Housing prices dropped almost 30 percent in 2007 and 2008, which is a tremendous rate of deceleration (footnote 5) and stock market bubbles often crash in less than a day.  The inherent lack of value of junk era cards was discovered much more slowly and some people today still do not understand that their carefully collected and protected junk era cards are not worth very much (footnote 1).  In others words, the bubble did not just pop.  The lack of value of junk era cards became knowledge more slowly with those hanging onto their "junk wax" longer taking the worst losses.

The cause of the junk era mania was the transformation of sports cards being primarily sold to children (or purchased by parents to give to children) to sports cards being primarily sold to collectors or hobbyists (footnotes 1,2).  Even though the first baseball cards were packaged with tobacco products, baseball cards and subsequently other sports cards were often given to children by adults.  For example, even on the back of 1952 Red Man Chewing Tobacco cards is the trademark line: ‘These Baseball Cards are for Red Man “Chewers” and Their Boys’.  It was anticipated that cards would make it into the hands of children who would see the players as athletic role models.  By the 1960s, Topps cards were almost exclusively found in the candy and gum aisles of your local drug stores and general merchandise stores (or what were often called dime stores).  I remember buying the vast majority of my childhood cards from 1^st through 5^th grade at a drug store that I would stop at with my family after Church on Sunday to eat lunch at the counter.  I also purchased cards at another drug store that was a bike ride from my house and even in 7^th and 8^th grade several friends and I would ride our bikes up to this drug store to purchase a soda and Topps Hockey or Baseball cards.

Kids were not collectors but rather read, examined, tacked to bulletin boards or played games with their cards usually destroying them in the process.  I must have destroyed cards that would be worth thousands of dollars today.  For example, my friends and I created a hockey game where we shot dice at little goals using hockey cards that were in the palm of our hand.  Bobby Orr was one of my “lucky” players and I won many games with his cards but destroyed them in the process.  We also had baseball games with cards, stepped all over them and colored beards and glasses on the guys we hated from the Yankees (I grew up near Detroit).

The main point is that almost all kids acted like this with their sports cards.  It was part of growing up.  The vast majority of vintage cards printed were destroyed by their owners.  If not totally destroyed by their owners, they were put in boxes after their owners grew tired of them.  These boxes in most cases were inevitably thrown out by parents doing Spring cleaning in some future year.

However, there were a small number of adults who collected cards or by chance got their hands on some cards that survived being thrown out by somebody’s parent.  By the early 1970s, many of these people were meeting in clubs or swap meets to trade or sell cards.  It became apparent that some cards were valuable or desired (Mickey Mantle cards, tobacco cards, etc.), but there was little information about the value of these cards.  While some mail order houses advertised prices in generalist hobby magazines or developed mailing lists with cards and prices, there was no solid information on pricing.  There were a couple of low circulation publications like Sports Collectors Digest or Baseball Hobby News, but no systematic price guides.  This situation was not a big deal because the number of hobbyists collecting cards was rather small.

This changed with the 1979 Sport Americana Baseball Card Price Guide in 1979 by James Beckett and Dennis Eckes.  By collecting information from Hobby Dealers (who were not that many in number), Beckett and Eckes were able to lay out the values of various cards.  For example, a Mint condition 1951 Bowman Mickey Mantle card #253 was being sold for $90.00 by dealers (Beckett and Eckes, 1979, p. 32)  That price would be $285.59 in 2012 US dollars adjusting by the consumer price index.

Caption: This is a scan of my copy of the first Beckett price guide published in 1979.  My late father found this at a garage sale in the early 1990s.

Beckett followed with more price guides and was producing a monthly baseball card price guide magazine by December 1984 (footnote 6).  This was a major turning point for the sports card market because people realized that there was money in those pieces of cardboard with pictures of athletes on them (footnotes 1,2).  Newspapers caught wind of the value of sports cards and articles began running about how people were turning old attic finds into hard cash.

For new sports card issues by the early 1980s, cards had become collectibles and a flood of new buyers entered the market (footnotes 1,2).  These buyers, however, were quite different from the children who previously played with cards.  Most of the flood of new buyers were adults or at least teenagers, and they tended to preserve their cards in either plastic pocket protectors or other means that protected the conditions of the cards.  The goal of course was to have fun collecting AND to make money on their well-preserved collections when they would later sell them (footnote 2).  The confidence of these new collectors was buoyed by the continued rise in value of vintage cards.  For example, by 1984, the Mint condition 1951 Bowman Mickey Mantle card #253 had risen from $90.00 in 1979 to $375.00 in five years (footnote 6).

This set the stage for the sport card mania to take off full flight.  There was a limited supply of vintage cards available.  However, new cards came out every year and logically if these cards would similarly rise in value as did vintage cards, there was money to be made (along with the fun of collecting).  Or so people thought….

The flood of new supply of new cards to the market

The sports card hobby kicked into overdrive to meet this drastically increased demand in the early 1980s.  A number of factors began to dramatically increase the supply of new cards to the market.  They were:

1.  After years of legal wrangling, Donruss and Fleer entered as fully-licensed major baseball card producing companies in 1981 (see my prior post on how licensing works here: http://junkwaxandobservations.blogspot.com/2012/08/how-sports-card-royalties-work.html ).  These companies broke the 25-year Topps monopoly by not distributing gum with their cards but rather stickers.  Score would then enter the market in 1988, and Upper Deck would enter the baseball card market in in 1989.  Suddenly, there were multiple companies turning out baseball cards and more generally sports cards.  This would of course increase the supply of cards dramatically across the market (footnote 2)

2.  Sports card specialty stores began popping up everywhere like crazy to meet the hobbyist demand.  You could find vintage cards at these stores, but they extensively catered to the latest card releases by all the various card companies.  They became the primary distribution outlet for sports cards, as your local drug stores had limited shelf space and could not handle multiple brands of cards.

3.  None of the sports card companies practiced restricting their print runs.  They would sell as many cards as they could print.  Huge hobby demand drove the printing presses for cards into overdrive.  Print runs were never published.

While this huge avalanche of new cards should have been a sign that newer cards would not rise in price like older cards, several aspects of the market masked the oversupply (footnote 1).  First, most of the new collectors bought and stashed their cards in closets or storage units.  The stashing was done so that 20 years down the road, the collectors could cash out.  People bought unopened cases of wax boxes.  Also, the card companies made stashing and storing easier by starting to sell complete factory sets.  People would buy 20, 30 or even more factory sets, which ensure them that they had multiple crisp cards of any player that would make it famous.

Second, because people stashed new cards rather than selling them, there was no way to know what the appropriate price was for these stashed cards and sets (footnote 1).  There was no real market mechanism like eBay to let people know what the true value of a card was.  Indeed, card values seemed to oscillate with a player’s fortunes on the field with Mark McGwire cards probably being the most speculated and overpriced cards as Big Mac racked up so many homers.

Third, the people and groups that could have possibly foretold of this oversupply had an economic interest not to stop the mania.  Beckett was selling a lot of magazines as the sports card market sizzled.  The sports card hobby shops had no real interest in pointing out oversupply, even if they knew about it, because their whole business was dependent upon sports cards being collectables that people believed would increase in value.  The card companies had no real reason to think of restricting output on any particular issue because that was just lost money to them as long as people kept on buying.  Even if they had an inkling, none of the parties in the industry had the economic motivation to tell collectors that the “emperor had no clothes” when it can to the value of cards in the market.

The beginning of the end

Some observers perceive the years 1990 and 1991 as the peak of the sports card boom or mania (footnote 1).  The baseball strike of 1994-95 certainly started the beginning of the end of the mania.  The strike reduced demand for baseball cards and started driving collectors from the market due to disgust with both MLB and the players.   Some collectors began to unload their modern card collections at a fraction of what they thought they were worth.  These were actually the lucky collectors.

The manufacturers would also suffer.  After doubling printing plant capacity in 1991, Donruss-Leaf was sold by its owner to Pinnacle Brands, the maker of Score brand cards, in 1995.  This reflected the suddenly diminished market for sports cards.  Pinnacle Brands would declare bankruptcy in 1998 (footnote 7).  Sports card stores began closing.

As I said before, the sports card mania though was not a bubble and had a slow, halting depreciation in prices of cards from this era.  Indeed, there was a short rise in interest in junk era cards in 1998 and 1999 because of the home run race between Mark McGwire and Sammy Sosa.  I remember McGwire’s 1985 Topps card going on eBay for $50 in ungraded state in 1998 if the card had a nice scan and looked in Mint shape.  However, this high point quickly faded with eBay becoming the main way that cards were bought and sold in the early part of the last decade.  Once eBay gained popularity and people started listing all their stored up “junk wax” in the early part of the last decade, reality set in.  It became abundantly clear that there were way, way too many cards still in existence from the junk wax era that were in pristine shape or not even opened in factory sets or wax packs.  Strong information about supply and demand from a market like eBay that has millions of buyers and sellers revealed the true huge oversupply of junk era cards.  Today, a 1985 Topps Mark McGwire rookie card sells for just under $10 in PSA 8 grade (average of prices checked on eBay, 10-8-2012, and includes shipping), which barely covers the cost of grading.  Ungraded versions with good looking scans sell for $3.00-$7.00.  I saw an ad on my local Craig’s List site today selling the following unopened factory sets for $5 each: 1988 Donruss, 1990 Donruss, 1991 Donruss, 1992 Donruss, 1988 Fleer, 1990 Fleer, 1991 Fleer, 1988 Score, 1990 Score and 1991 Score.  Five dollars is far less than these sets cost when manufactured.  I have seen this advertisement before, which indicates that the seller is not having that much success offloading the junk wax.

Also, the price of junk era cards or junk wax just seems to go lower as more and more people break out those old stuck away boxes and factory sets that they thought would make them wealthy some day.  It also does not help prices that many of the junk wax era heroes in baseball have been implicated in steroids scandals thus tainting their accomplishments.  McGwire, Sosa, Bonds, Clemens and company may make it into the Hall of Fame at some point, but their cards’ values will suffer from the stigma of PEDs.

One final ironic note may be that cards that ultimately may have the most value from the junk era are 'error' cards.  The infamous 1989 Billy Ripken “F**k Face” card has now passed the 1989 Fleer Ken Griffey, Jr. Rookie Card in value (PSA online SMR checked on 10-8-2012).  Indeed, a version of this same Billy Ripken card is now more valuable than the iconic 1989 Ken Griffey Upper Deck Rookie Card (PSA online SMR checked on 10-8-2012).  There are even collectors who specialize in collecting mainly error cards from the junk wax era (for one web site, see: http://junkwaxgems.wordpress.com/ ).  There were a lot of error cards because you had so many companies cranking out cards so fast for hungry collectors that proofing cards probably only slowed down their cash flow.

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. http://www.cardboardconnection.com/why-sports-cards-early-90s-worthless

 2. http://reviews.ebay.com/Late-1980-apos-s-amp-Early-1990-apos-s-quot-Junk-Era-quot-Baseball-Cards?ugid=10000000002661402

3. Data on Glavine’s 1988 rookie card auctions comes from personal examination of eBay auctions that were listed as finished on 10-5-2012.  Topps Tiffany and Score Glossy Glavine rookie cards at PSA 9 go for higher amounts, so they might be considered an exception.

4. Nice discussion of the causes of economic bubbles can be found here:

http://en.wikipedia.org/wiki/Economic_bubble

5. http://www.jparsons.net/housingbubble/san_diego.html

6. http://www.beckett.com/news/2011/12/turnbackclockdecember84/

7. http://en.wikipedia.org/wiki/Donruss