Matrix scheme
From Wikipedia, the free encyclopedia
A matrix scheme, also known as a Matrix Site, Elevator Scheme, Escalator Scheme or Ladder 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.[1] Matrix schemes are also sometimes considered similar to Ponzi or pyramid schemes. [2] They have been called unsustainable by the United Kingdom's Office of Fair Trading. [1] The Matrix Scheme is also an example of an exploding queue in Queueing Theory.
Contents |
[edit] History
The first known matrix scheme is widely believed to be EZExpo.com, which started the popularity of Matrix Schemes in 2002. [2] 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.[3] Stormpay later claimed to be independent of TymGlobal, and they no longer accept matrix schemes. Although many have since ceased trading, some schemes are still known to be operating worldwide.
[edit] Operation
The operation of matrix schemes varies, though they often operate similar to Ponzi schemes.[4] 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 shareware CDs. 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.
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. 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.[4]
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 PS2 (which was quite common). 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 would never receive their reward item as eventually the matrix must reach a point by which it will be nearly impossible for new people added to the list to reach the top. 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 90 people total, and 900 for the 100th, and so on.
[edit] Matrix Sales
Matrix sales are similar to a pyramid scheme or Ponzi scheme. It usually employs custom-designed message boards on the internet. Many former participants of these schemes consider them to be a form of confidence trick.
In a matrix sale, customers are told they can obtain an expensive item at a low price. To do this, the customer purchases a cheap item from the operator. Typically, this cheap item has very little value in itself and is sold overpriced; the principal motivation to buy it is that the buyer is added to a list. The operator then promises that every time the number of people in the list passes a certain margin, an expensive item will be sent to the first person on the list who has yet to receive one. Reaching the point on the list where you receive the expensive goods is termed "cycling".
In most cases the operator of the scheme does send out the items as requested, and thus participation in such a scheme does have a possibility of being worthwhile - the first few participants may actually receive the high value item. However, since for every single person who receives such an item multiple others must also join the list, sooner or later the supply of new members will run out, and the operator will get to keep the money from the later members who now have no hope of receiving the expensive good. Typically, the number of participants required to join for an item to be sent out will be such that the operator will be able to purchase the expensive item using the money paid to join by those participants: thus, they take no risk.
As an example, customers may be told they can obtain a $100 mobile phone by purchasing a ringtones CD for $15. Every time 10 ringtones CDs are sold, the next person on the list will be sent a mobile phone. When the first 10 people join, the operator has made $150, and can send the mobile phone to the first buyer while keeping a $50 profit. This will continue to apply for every 10 people that join.
When the supply of new members dries up, there will probably be some number of members who have joined since the last phone was sent out (between 1 and 9, since if there were 10 another phone would have been sent out); since with no new members no more phones will ever be sent, the operator will get to keep the money these people have paid (between $15 and $135).
Note that this does not mean that everyone who joined prior to those last 1-9 people received a phone; it means only that the operator does not get to keep all of their money, since they must spend some of that money buying phones for the few who did get them. From the consumer's point of view, by necessity only 1 in 10 of people who join will receive phones. When the first phone is sent out, 9 more members will have joined to enable that to happen, and will be hoping to receive phones too - but they will only do so if 90 more members join. Of course, customers are able to predict how many more people will need to join for them to receive the expensive item and will decline to join the scheme when the number gets too great, thus further increasing the probability that only a very small number of items will actually be sent out.
The sale of the low cost item is intended to prevent the operator being charged with running a gambling game or failing to supply ordered products; the operator can argue that the buyer did indeed receive the low cost item they were paying for. Some sites offering matrix sales claim the schemes are legal. This is strongly contested by groups such as Matrixwatch.
[edit] Matrix Scheme in Queueing Theory
A Matrix Scheme is easily represented as a simple M/M/1 queue within the context of Queueing Theory 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 service rates equal or exceed arrival 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):
ρ=λ/μ
The mean number of customers in the system (N):
N = ρ/(1-ρ)
And the total waiting time within the queue (T):
T = 1/(μ-λ)
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 [5]. 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.
[edit] Legality
Currently there are no laws specifically naming matrix schemes illegal in the US. However, the US Federal Trade Commission has issued warnings to the public about these sites. 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. 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.[6] [7][8] 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.
[edit] Notes
- ^ a b Matrix Website Scheme stopped by Office of Fair Trading. Retrieved on 2006-08-05.
- ^ a b $150 plasma TV site faces lawsuit. Retrieved on 2006-08-05.
- ^ The Leaf Chronicle. Retrieved on 2006-08-10.
- ^ a b $150 for a plasma TV? A bad bet. Retrieved on 2006-08-05.
- ^ M/M/1 Queueing System. Retrieved on 2007-03-03.
- ^ California Courts - Appelate Court Case Information -Docket Entries. Retrieved on 2005-08-06.
- ^ Wage Law: Prop 64 Cases To Be Argued. Retrieved on 2005-08-06.
- ^ The Antitrust Monitor: Prop 64 to the Rescue for Neovi, PaySystems, and PayPal But Not for Ginix. Retrieved on 2005-08-06.
