[Fausty]

Back in the early 1990s and fresh out of MBA school, I hired on in the IT department of a company that provided "credit card protection service" to the big card companies. For only $50 a year or so, they would "protect" cardholders if their wallet was stolen - cancelling their cards and indemnifying against any charges accrued after the theft. Yes, such indemnification was already provided by the card companies themselves - but not every cardholder knew that.

Of the $50 yearly fee, about half went back to the card companies as "commission." The signups - via inserts in monthly card statements - were borderline misleading: people read that language and thought they needed this "service" or they'd be on the hook for thousands of dollars if their wallet was stolen. Once they signed up, that card got banged $50 every year like clockwork - after all, it was the card companies themselves who were doing the billing (via a shadow third company). Cancel? Yeah, right. Call in to cancel, and you got a "retention expert" on the phone who was paid only if she convinced you not to shut off the money. Oddly enough, even though we got lots of cancellation calls, every year the billing seemed to go up and up and up. . . and complaints were also piling up for unauthorized charges after people had cancelled.

At its peak the company was bringing in $150 million or so in revenue, and netting - AFTER taxes - about $40 million in pure profit. Everyone agreed that it was a "genuis" business model - so profitable, so easy, so reliable! Being a young punk (and now, of course, a not-so-young punk) I wondered aloud if, you know, the fact that our customers hated us and didn't actually want - or benefit from - the "service" we provided bothered anyone else. I was shouted down by the bigger corporate dogs - what did I know anyway? I ended up leaving after making Vice President, and eventually testified against the management on an insider trading case that landed on the front cover of Businessweek and involved Jeb Bush. But that's another story. . .

All these "great business models" that involve squeezing money out of people for stuff they really don't want or don't want to keep buying are built on sand. Yes, "subscription revenue" is great - my own company is subscription-based and it's a nice way to provide service for customers. BUT - and this is a big "but" - you must EARN that subscription every billing cycle. Sitting back and banging that card, ad infinitum, trusting that the hassle of cancelling is enough to keep most "subscribers" locked in, is lazy and dumb. Our customers ask us to cancel? Done. We even pro-rate a refund for the part of the month they haven't used. No questions asked. It hurts, if we have a network hiccup and a bunch of customers cancel overnight - but it keeps us honest.

I see these genuises who are getting "rich" banging cards for people who are barely convinced they want to buy, and I cringe. Sooner or later, it all comes crashing down. Yes, always. Someone might be quick enough to grab some money and run, in the meantime, but nobody makes REAL wealth that way. Wealth with lots of zeroes, that is.

It's alot more fun - and more interesting - to build a company whose customers really love the service one provides, and are happy to pay a fair price for it. Also a much harder task than just figuring a way to "game the system" long enough to grab some loot, admittedly. But, these little scam "businesses" that only know how to bill aggressively, they are a flash in the pan - not one of them has had any real impact on the world, and they're not even a footnote a few years from now.

The ones who really bust ass to do something genuinely useful for their customers, they get to write the rules for how the future unfolds. Sign me up for that game - the scams aren't worth the hassle, just building fancy sandcastles during an incoming tide.

Regards,

Fausty

ps: That card-protection company (Safecard Services, NYSE-listed) was purchased by CUC for $400 million or so. . . and CUC as we know eventually generated its own multi-billion dollar fraud meltdown and some serious criminal charges. What goes around comes around: scams beget fraud beget scandal beget nothing but heartache for all involved.