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Building a Pyramid, 2by2?

Tao Yue

“Do you want to get involved with 2by2?”

Here in the Boston area, that question will produce puzzlement. But in the New York City area, that question will provoke strong reactions, especially among the high-school and college-aged.

Mostly, there will be feelings of excitement. Eagerness. And hope. Hope that 2by2 will make millionaires out of the company’s worker bees. Back in my high school in Edison, New Jersey, one student who hitched onto the 2by2 bandwagon early on is driving a new Lexus and reputed to be earning tens of thousands of dollars a month. Of the two thousand students in the high school, dozens, perhaps hundreds are involved.

Naturally, I couldn’t help but be curious about how this sudden fortune came about. And my chance came over the summer, when half a dozen people tried to recruit me. I was told to get in early, that it was already too late in Southern California, where the scheme originated. But it was still new and fresh in the New York City metropolitan area. Would I be interested in striking it rich with an initial investment of only a few hundred dollars?

But something else was interesting. Several of the recruiters were only casual acquaintances, people who hadn’t been in contact with me since high school. Why the sudden interest in me?

I did some research, both on-line and by asking those involved with 2by2, and got a pretty good idea of the business model. See what you think.

2by2 is, according to their web site, “the Internet Community That Pays You Back” and “ranked by Dun & Bradstreet and Entrepreneur Magazine as the 16th fastest growing new business in America.” To get in on the action, you pay them a fee, somewhere around $400, which entitles you to a web page used to sell products. Just like Amazon.com’s affiliate program, 2by2 would pay commissions to you for sales made through the web page.

So far, so good. The fee is a bit steep, but hey, 2by2 does all the work for you! All those other on-line stores force you to build your own web page. And what’s a $400 investment when you’ll be driving a Lexus within months?

There was a second aspect to the program, one which inspired its name: 2by2. Participants each had two prongs beneath them, and were told to find two friends to fill those places. They in turn would pay the fee and also get a web page and two spots to fill. Each person who signs up underneath you, to a certain extent, earns you a bonus of somewhere around $50.

Let me shift gears here and relate a bit of business advice from the Federal Trade Commission: “If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as ‘pyramiding.’ State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.”

Or the United States Postal Inspection Service: “There are many multi-level distributorship schemes that are nothing more than sophisticated chain letters.” By law, it is forbidden to send chain letters through the U.S. Mail.

Yet, there are millions who join multi-level marketing schemes, some legitimate, others thinly disguised pyramid schemes. These are the same people who flood our inboxes with e-mails which begin, “A little boy in the Mayo Clinic is dying of a previously unheard-of disease, and Bill Gates will donate two cents to the American Cancer Society if you forward this e-mail to fifty friends.” Yes, the very same e-mails which take money away from the fight against cancer by forcing the ACS to maintain e-mail server capacity beyond what it ordinarily would need.

But the pyramiding situation in the United States, land of capitalist opportunity, pales when compared to the one which Albania suffered through. In 1996, $250 million of Albanians’ hard-earned money was invested in pyramid schemes. For a nation as small as Albania, this number is staggering. In fact, the domestic savings of Albanians in 1995 totaled only $350 million.

For Albanians, the pyramids were seen as a better bet than banks, offering spectacular interest rates of up to 40 percent. The pyramids collapsed, as pyramid schemes tend to do when new memberships die down and become insufficient to pay existing participants. When that happened, there was an uprising against the government, which tolerated the pyramids, and people rioted in the streets.

Of course, that’s quite extreme. Nobody imagines that such a thing could happen in the United States. We’re experienced in capitalism, right? We know that you can’t make money from nothing, right? Well, maybe we do. On the other hand, in the 1980s, Ronald Reagan spoke to cheering crowds at rallies held by the Amway corporation, a multi-level marketing corporation which is still operating today. So did George H. W. Bush, and Colonel Oliver North. Albania certainly learned our lesson well. Too well.

While multi-level marketing schemes and pyramid schemes are not necessarily the same thing, there is a clear connection. Many MLMs are pyramid schemes. Perhaps even most. I formed a clear impression in my mind about 2by2 from the moment I heard about it. But when I warned people against it, participants told me to stop, cautioned that I was slandering the company, and argued that I could not possibly understand the earnestness of the company if I hadn’t attended one of its glitzy presentations where superlatives and carpe diem exhortation were thrown around freely.

OK, fair enough. I will reserve judgment on 2by2’s pyramid status until it either collapses or exceeds Microsoft in market capitalization. But there is no question that 2by2 is at least a multi-level marketing scheme. And one that has attracted many bright, excitable college students. While researching 2by2 on the Internet, I found complaints from students at universities as prestigious as Princeton and USC.

In the hopes that I would be next to join, people who hadn’t spoken to me in over a year suddenly treated me like their best buddy. I still am not sure whether they really believed in 2by2, or simply realized that they could not afford to leave one of their two legs empty. In any case, they asked me: would I fill that spot?

Across the river from MIT, the most famous pyramid scheme of them all, the postal coupon scheme created by Charles Ponzi, reached the heights of success. At one point, he was taking in (and paying out) over a million dollars a week. Within two years, his scheme had started to collapse, and he was in prison.

Will I take my spot in the pyramid? No, I think I’ll pass.