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September 1, 2003
The Cycles of Pyramid Schemes
By QBlog in
Searching the Web for quality information about Quixtar (or Amway) is a frustrating task. It takes dedication to trudge through the piles of links and phantom pages to find something worth reading. But enough about all that... that's another rant altogether. What I did find today was a Prepared Statement of Debra A. Valentine, General Counsel for the FTC. In this statement she makes some confusing remarks about the rules governing legal MLMs:
Since distributors were compensated both for selling products to consumers and to newly-recruited distributors, there was some question as to whether this was a legitimate multilevel marketing program or an illegal pyramid scheme. The Commission held that, although Amway had made false and misleading earnings claims when recruiting new distributors,(21) the company's sales plan was not an illegal pyramid scheme.She then goes on the explain why Amway was not illegal. Then she mentions refinements to the law in the 1990s and says:
As the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards -- the inventory buy-back policy, the 70% rule, and the 10 customer rule -- that were found acceptable in Amway. However, an appellate court decision called Webster v. Omnitrition Int'l, Inc.,(24) pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the "70% rule" and "10 customer rule" are meaningless if commissions are paid based on a distributor's wholesale sales (which are only sales to new recruits), and not based on actual retail sales.Ok, I've probably already lost you. It's not especially exciting stuff. However, this little nugget of truth stuck me as especially enlightening:
Pyramid schemes came back with a vengeance. Like most economic activity, fraud occurs in cycles, and new pyramid schemes exploited a new generation of consumers and entrepreneurs that had not witnessed the pyramid problems of the 1970's.In my mind this goes a long way towards explaining the rise and decline of Amway/Quixtar revenues over the years. I think it's a generational and cultural shift more than any sort of business news or new technology. Most people getting into Quixtar today have little direct knowledge of Amway beyond the fact that it's often the punchline to a joke. That also helps explain why the bulk of information about Amway came out in the early 1980s, right after the Pyramid Boom in the 1970s. A backlash of sorts.
Anyway, I have read the FTC ruling and read Debra's statements and from what I see, the rules governing Amway/Quixtar are still pretty ambiguous.