The Scam Economy: ScoreBig edition

It's natural for travel hackers (and their concerned family members) to wonder, who really pays for what we do? The obvious answer is, "everybody else." There are enough people buying low-denomination gift cards with cash to make it worthwhile to sell high-denomination gift cards with credit cards. Enough people get trapped under high-interest-rate credit card balances to make it worthwhile to incentivize purchases made with credit cards for those who pay their balances in full and on time. Wells Fargo appears to have simply been a basket case, but they undoubtedly had something similar in mind when they launched their aggressive cross-selling strategy.

I've long wanted to write a book about that economy: the scam economy. I got to thinking about the subject again when I saw Anita's post at Frequent Miler about ScoreBig's current financial difficulties. We can get used to travel hacking, reselling, and extreme discounting, but it's worth taking a step back to really appreciate that the overwhelming majority of these companies are simply scams, and more and more we live in a scam economy.

What the real economy looks like

In the real economy, Lin-Manuel Miranda had an idea for a musical, wrote it, raised some money from investors, hired some actors and musicians, and started selling tickets.

Hamilton was a huge success, and will run on Broadway for years, then close just so it can reopen and also win the Tony for Best Revival.

Add capitalism's secret sauce

People have been putting on shows for a long time, from Russia's traveling skoromokhi to Shakespeare's Globe.

What advanced market capitalism adds is that Lin-Manuel didn't have to put this show on by himself. He didn't need to build a theatre (the Richard Rodgers Theatre opened in 1924), he just has to rent it out. He didn't need to negotiate a contract with his actors or musicians, since they belong to unions (Actors' Equity and Associated Musicians of Greater New York, respectively) that handle those negotiations for all of Broadway. He didn't even need to handle tickets sales, since Ticketmaster has deep experience collecting money from patrons and handing it over to production companies, minus a reasonable fee.

Enter the scam economy

What does ScoreBig add to this equation? Well, for a variety of reasons Lin-Manuel chose to sell his tickets for less than the price that would attract only the number of customers capable of filling up the theatre. Economists call that the "market-clearing" price or the "equilibrium" price, but in the real economy, people set all sorts of prices for all sorts of reasons.

If Lin-Manuel wants to sell tickets for a price low enough that working-class families could conceivably someday afford to attend his show, rather than perform for oil sheikhs and Russian kleptocrats all week, that's his prerogative — it's his show, after all.

It also happens that sometimes people buy tickets that they ultimately don't use for themselves. Maybe they have an emergency that keeps them from the theatre; maybe they bought them speculatively in the hopes they'd go up in value. ScoreBig and sites like it allow owners of unused tickets to sell them to those who were unable to buy tickets at their face value, since the show is sold out months in advance.

But Anita's experience shows that this isn't the function ScoreBig was performing. They weren't moving tickets from willing sellers to willing buyers:

"there may be an issue regarding the continued validity of the tickets you purchased"
"ScoreBig’s email advised that only the seller of the tickets could confirm the validity of the tickets"
"The CSR said...'If it makes you feel any better, we aren’t getting paid for these.  We made a decision as a company that we are honoring the tickets because it is the right thing to do.'”

What the hell is going on here? I can't say for certain, but here's one version:

• Someone wrote a script that was able to purchase a block of Hamilton tickets at their face value;
• After successfully booking the tickets, they sold them on at a markup to a large broker;
• That broker listed the tickets for sale on a variety of platforms, including ScoreBig;
• In order to attract a larger market share, ScoreBig aggressively offers discounts through cashback portals, gas discount programs, and other extreme couponing techniques;
• ScoreBig collected money from Anita for the tickets, but doesn't pass it on to the broker until some time after the tickets are delivered;
• ScoreBig uses the money it collects from Anita to cover its operating expenses, debt, and to pay brokers for tickets that have already been delivered;
• ScoreBig doesn't make enough money doing this, so faces a liquidity crisis and has to renegotiate its capital structure, stiffing its vendors and leaving them on the hook for Anita's tickets.

Let's call this exactly what it is: a scam. And it's a scam whether or not ScoreBig stays in business, and whether or not they ever made any money doing it.

I don't have anything against reselling tickets, whether it's on the pavement in front of the theatre or online. I don't have anything against buying tickets speculatively in order to resell them. I don't have anything against middlemen stepping in to facilitate those sales.

But when you borrow money to start a company that requires an increasing number of customers funneling money in through the front door to cover your operating costs, liabilities, and to pay your vendors, and then when the money coming in the front door ends up not being enough to cover those liabilities you stiff both your customers and your vendors, you are running a scam, pure and simple.

Obviously there's a connection between ScoreBig's business model and the financialization of the American economy in general. If private equity bankers can raise billions of dollars to purchase profitable companies, load them up with debt, strip them of assets, and distribute the cash to themselves and their partners, who am I to complain about ScoreBig's business model?

And maybe that's right. Maybe if we want Lin-Manuel to be able to raise the money he needs to put on the greatest show of the 21st century, we have to tolerate the ScoreBigs of the world ripping off their customers and vendors.

But that doesn't mean we should get jaded about the scamification of our economy. If you want to bet big on ScoreBig, or Uber, or AirBNB, or any of the other criminal enterprises masquerading as technological innovations, go ahead, and just pray you're not the last one left at the party, holding the bag.