Matrix sale
Encyclopedia
A matrix scheme is a business model
involving the exchange of money for a certain product with a side bonus of being added to a waiting list for a product of greater value than the amount given. Matrix schemes are also sometimes considered similar to Ponzi
or pyramid
schemes. They have been called unsustainable by the United Kingdom's Office of Fair Trading
. A matrix scheme is also an example of an 'exploding queue' in queueing theory
.
, although others are happy with their purchase. To move upward in the list, a person must wait for new members to join or refer a certain number of people to the list. This is accomplished through purchasing a token product of marginal value: usually e-books, cell phone boosters, screen savers, or other software CDs/DVDs. When a pre-defined number of people have purchased the token product the person currently at the top of the list receives their reward item, and the next person in the list moves to the top. The rewards for those at the top of the matrix list are usually high-demand consumer electronics, such as portable digital audio players, high-definition television
sets, laptop computers, and cellular phones. Reaching the point on the list where you receive the expensive goods is termed "cycling".
In many cases, the token product alone could not be reasonably sold for the price listed, and as such legal experts claim that, regardless of what is said, the real product being sold is the "reward" in question in those situations. In these cases, the operator could be charged with running a gambling
game or failing to supply ordered products. Steven A. Richards, a lawyer who represents multi-level marketing (MLM)
companies for Grimes & Reese in Idaho Falls, Idaho, has stated that often there are no clear legal tests for Ponzi schemes. But if the product sold has no value or very little value, and consumers wouldn’t buy it without the attached free gift, the scheme probably runs afoul of federal and state laws.
The “Matrix List” by which the sites receive their name would be what is known as a straight-line matrix, or 1 by X matrix. This is similar to many MLMs that use Y by X matrices to fill a down-line.
For example, one situation may be a 1 by 10 matrix for a Sony PlayStation 2
(a common reward). In such a matrix the site would usually sell an e-book for $50 to be placed on the list. After 9 additional people purchased a spot, the first person would receive either a PS2 or cash value equivalent and would be removed from the list. The person who had been second would move up to the first spot and an additional 10 people would have to purchase in order for this person to receive a PS2. It is this orderly movement which has also given the name “Elevator Scheme” to these sites as people would move up the elevator (escalator, ladder) to the top at which they would then “cycle” out of the matrix.
In such a matrix, 9 out of 10 or 90% of all customers will not receive the reward item, because the rules of the scheme are that one reward is issued for every 10 customers that join. (The fact that the reward is issued to the customer at the top of the list doesn't change the proportion of rewards given to customers signed up.) Supporters claim that additional revenue streams from advertising are used to keep the lists moving. However, detractors claim that it is impossible to generate enough outside revenue. If the entire world were to join the list, 90% of the world would be unable to cycle if the site did not draw sufficient alternate revenue streams. Adding more people to the list does not change the fact that the majority would receive nothing without these streams.
Additionally, the amount of time needed before a given individual will receive the product in question is often mistaken. In a matrix in which 10 people are required before it will cycle, the first person to join only needs 9 additional sign ups, but the second person needs 18 additional sign ups, 8 more for the person above him, and then 10 more for himself. The third person on the list likewise needs 27 additional signups, 7 for the person on top of the list, 10 for the person directly above him, and then 10 for himself. And then the number of people required continues to grow for each new person joining the list. For the 10th person to cycle it would require 100 people total, and 1000 for the 100th, and so on.
In such a system you have a Markovian arrival, Markovian service, and one single server (F. S. Hiller and G. J. Lieberman. Introduction to Operations Research. McGraw-Hill, New York, 1995). In the standard Matrix queue service rates are a function of arrival rates since the time to cycle out of the queue is based on the entry fee into the matrix from arriving members. Also, since members move through the matrix in single file, it is easy to associate the single server.
The basic premise of queueing theory
is that when arrival rates equal or exceed service rates overall waiting time within the queue moves towards infinity (Hiller and Lieberman).
The basic formulation includes three formulae. The traffic intensity, ρ, is the average arrival rate (λ) divided by the average service rate (μ):
The mean number of customers in the system (N):
And the total waiting time within the queue (T):
It is possible to see that as arrival rates rise towards service rates the total waiting time (T) and mean number of customers in the system (N) will move towards infinity. Since service time can never exceed the arrival time in the standard matrix, and total waiting time can only be defined if service times exceed arrival times, the only way for the matrix queue to reach stability is for outside income sources to exceed those being entered into the system.
has issued warnings to the public about these sites. Additionally, the US Federal Trade Commission
and the UK Trading Standards
have issued warnings to the public regarding the ease with which these models can be manipulated for fraudulent purposes. Many of the original matrix sites, including EZExpo.com, are no longer in operation; some of them closed down while defending civil lawsuits. In 2003 EZExpo and several payment processors were sued in the civil courts for running an illegal lottery in the state of California, with the payment processors abetting the scam. However, the civil case is still ongoing. One result of the lawsuit is that those payment processors and some others no longer accept matrix schemes as customers. Currently, no legal precedent exists regarding the matrix scheme in the US.
In the UK, the Office of Fair Trading has declared some of them to be illegal. On July 1, 2005, two matrix sites, pulsematrix.com and phones4everyone (themobilematrix.com), were declared to be running a form of illegal lottery. These two sites promptly closed down as part of a settlement agreement with the Office of Fair Trading (OFT). Other similar matrix sites also used this decision to close down their sites. A few UK matrix sites carried on by utilizing contractual law to trade legally, with one major site carrying on until May 2006 when it was sold to a company in Denmark. In the UK there is no specific law against matrix sites.
Other countries may have different laws regarding these matrix sites, but information is unavailable at this time.
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
involving the exchange of money for a certain product with a side bonus of being added to a waiting list for a product of greater value than the amount given. Matrix schemes are also sometimes considered similar to Ponzi
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
or pyramid
Pyramid scheme
A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
schemes. They have been called unsustainable by the United Kingdom's Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
. A matrix scheme is also an example of an 'exploding queue' in queueing theory
Queueing theory
Queueing theory is the mathematical study of waiting lines, or queues. The theory enables mathematical analysis of several related processes, including arriving at the queue, waiting in the queue , and being served at the front of the queue...
.
History
The first known matrix scheme is widely believed to be EZExpo.com, which started the popularity of matrix schemes in 2002. By 2003 more than 200 matrix schemes were in operation, including one which had the same owner as the payment processor Stormpay (TymGlobal). Subsequently TymGlobal and Stormpay were accused of running an illegal Ponzi scheme. Stormpay later claimed to be independent of TymGlobal, and they stopped accepting matrix schemes as customers. Although many have since ceased trading, some schemes are still known to be operating worldwide. The payment processor, Stormpay, is no longer trading.Operation
The operation of matrix schemes varies, though they often operate similar to pyramid or Ponzi schemes. Some of the former participants of these schemes consider them to be a form of confidence trickConfidence trick
A confidence trick is an attempt to defraud a person or group by gaining their confidence. A confidence artist is an individual working alone or in concert with others who exploits characteristics of the human psyche such as dishonesty and honesty, vanity, compassion, credulity, irresponsibility,...
, although others are happy with their purchase. To move upward in the list, a person must wait for new members to join or refer a certain number of people to the list. This is accomplished through purchasing a token product of marginal value: usually e-books, cell phone boosters, screen savers, or other software CDs/DVDs. When a pre-defined number of people have purchased the token product the person currently at the top of the list receives their reward item, and the next person in the list moves to the top. The rewards for those at the top of the matrix list are usually high-demand consumer electronics, such as portable digital audio players, high-definition television
Television
Television is a telecommunication medium for transmitting and receiving moving images that can be monochrome or colored, with accompanying sound...
sets, laptop computers, and cellular phones. Reaching the point on the list where you receive the expensive goods is termed "cycling".
In many cases, the token product alone could not be reasonably sold for the price listed, and as such legal experts claim that, regardless of what is said, the real product being sold is the "reward" in question in those situations. In these cases, the operator could be charged with running a gambling
Gambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
game or failing to supply ordered products. Steven A. Richards, a lawyer who represents multi-level marketing (MLM)
Multi-level marketing
Multi-level marketing is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation...
companies for Grimes & Reese in Idaho Falls, Idaho, has stated that often there are no clear legal tests for Ponzi schemes. But if the product sold has no value or very little value, and consumers wouldn’t buy it without the attached free gift, the scheme probably runs afoul of federal and state laws.
The “Matrix List” by which the sites receive their name would be what is known as a straight-line matrix, or 1 by X matrix. This is similar to many MLMs that use Y by X matrices to fill a down-line.
For example, one situation may be a 1 by 10 matrix for a Sony PlayStation 2
PlayStation 2
The PlayStation 2 is a sixth-generation video game console manufactured by Sony as part of the PlayStation series. Its development was announced in March 1999 and it was first released on March 4, 2000, in Japan...
(a common reward). In such a matrix the site would usually sell an e-book for $50 to be placed on the list. After 9 additional people purchased a spot, the first person would receive either a PS2 or cash value equivalent and would be removed from the list. The person who had been second would move up to the first spot and an additional 10 people would have to purchase in order for this person to receive a PS2. It is this orderly movement which has also given the name “Elevator Scheme” to these sites as people would move up the elevator (escalator, ladder) to the top at which they would then “cycle” out of the matrix.
In such a matrix, 9 out of 10 or 90% of all customers will not receive the reward item, because the rules of the scheme are that one reward is issued for every 10 customers that join. (The fact that the reward is issued to the customer at the top of the list doesn't change the proportion of rewards given to customers signed up.) Supporters claim that additional revenue streams from advertising are used to keep the lists moving. However, detractors claim that it is impossible to generate enough outside revenue. If the entire world were to join the list, 90% of the world would be unable to cycle if the site did not draw sufficient alternate revenue streams. Adding more people to the list does not change the fact that the majority would receive nothing without these streams.
Additionally, the amount of time needed before a given individual will receive the product in question is often mistaken. In a matrix in which 10 people are required before it will cycle, the first person to join only needs 9 additional sign ups, but the second person needs 18 additional sign ups, 8 more for the person above him, and then 10 more for himself. The third person on the list likewise needs 27 additional signups, 7 for the person on top of the list, 10 for the person directly above him, and then 10 for himself. And then the number of people required continues to grow for each new person joining the list. For the 10th person to cycle it would require 100 people total, and 1000 for the 100th, and so on.
In queueing theory
A matrix scheme is easily represented as a simple M/M/1 queue within the context of queueing theoryQueueing theory
Queueing theory is the mathematical study of waiting lines, or queues. The theory enables mathematical analysis of several related processes, including arriving at the queue, waiting in the queue , and being served at the front of the queue...
In such a system you have a Markovian arrival, Markovian service, and one single server (F. S. Hiller and G. J. Lieberman. Introduction to Operations Research. McGraw-Hill, New York, 1995). In the standard Matrix queue service rates are a function of arrival rates since the time to cycle out of the queue is based on the entry fee into the matrix from arriving members. Also, since members move through the matrix in single file, it is easy to associate the single server.
The basic premise of queueing theory
Queueing theory
Queueing theory is the mathematical study of waiting lines, or queues. The theory enables mathematical analysis of several related processes, including arriving at the queue, waiting in the queue , and being served at the front of the queue...
is that when arrival rates equal or exceed service rates overall waiting time within the queue moves towards infinity (Hiller and Lieberman).
The basic formulation includes three formulae. The traffic intensity, ρ, is the average arrival rate (λ) divided by the average service rate (μ):
The mean number of customers in the system (N):
And the total waiting time within the queue (T):
It is possible to see that as arrival rates rise towards service rates the total waiting time (T) and mean number of customers in the system (N) will move towards infinity. Since service time can never exceed the arrival time in the standard matrix, and total waiting time can only be defined if service times exceed arrival times, the only way for the matrix queue to reach stability is for outside income sources to exceed those being entered into the system.
Legality
Currently there are no laws specifically naming matrix schemes illegal in the US. However, the US Federal Trade CommissionFederal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
has issued warnings to the public about these sites. Additionally, the US Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
and the UK Trading Standards
Trading Standards
Trading Standards is the name given to local authority departments in the UK formerly known as Weights and Measures. These departments investigate commercial organisations that carry out trade in unethical ways or outside the scope of the law.-History:...
have issued warnings to the public regarding the ease with which these models can be manipulated for fraudulent purposes. Many of the original matrix sites, including EZExpo.com, are no longer in operation; some of them closed down while defending civil lawsuits. In 2003 EZExpo and several payment processors were sued in the civil courts for running an illegal lottery in the state of California, with the payment processors abetting the scam. However, the civil case is still ongoing. One result of the lawsuit is that those payment processors and some others no longer accept matrix schemes as customers. Currently, no legal precedent exists regarding the matrix scheme in the US.
In the UK, the Office of Fair Trading has declared some of them to be illegal. On July 1, 2005, two matrix sites, pulsematrix.com and phones4everyone (themobilematrix.com), were declared to be running a form of illegal lottery. These two sites promptly closed down as part of a settlement agreement with the Office of Fair Trading (OFT). Other similar matrix sites also used this decision to close down their sites. A few UK matrix sites carried on by utilizing contractual law to trade legally, with one major site carrying on until May 2006 when it was sold to a company in Denmark. In the UK there is no specific law against matrix sites.
Other countries may have different laws regarding these matrix sites, but information is unavailable at this time.
News articles
- $150 for a plasma TV? A bad bet - MSNBCMSNBCMSNBC is a cable news channel based in the United States available in the US, Germany , South Africa, the Middle East and Canada...
- Warning over iPod scam - This is LondonThis Is LondonThis Is London may refer to:*thisislondon.co.uk, a website belonging to the Evening Standard*"This is London" or "This is London Calling", an opening message on the BBC World Service*This Is London, a 1983 album by The Times...
- eBay scam uses iPods as bait - Wired
- MSNBC article