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.
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
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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.
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.
