I have never understood how all those pyramid scheme long distance companies exist. The way I understand it, investors lease some of MCI’s fiber optic long distance traffic, (at a profit for MCI, I assume), and then bring suckers in as “employees” who in turn look for other people to work for them–and buy their long distance plan.
These “employees” are really just drawing others into the plan so that the people at the top can shave a profit off of their long distance use. I had a landlord hound me for two years trying to make me one of his little long-distance bitch-zombies. The only way I could share in the profits, of course, was if I created my own little long-distance bitch-zombie army. Pure pyramid.
But: how can the schemers at the top make a buck when they’re already paying MCI for the service themselves? And, presumably, they’re trickling a pittance back down among the minions as well to keep 'em calling. And, the selling point is that they’re cheaper than the “big guys” from whom they are renting the service to begin with. Where the hell is any profit?
Is this a living example of Milo Minderbinder buying eggs at seven cents apiece in Genoa and selling them to the commisary for four cents apiece at a profit?
My understanding is that the “bulk buy” of lines is at a fraction of the normal cost of routing calls through those lines, so the long-distance companies can still beat the normal providers at prices and make a profit. I’ve not heard of the pyramid version of this, though.
The key to all pyramids is that they have to pay out right away for the guy starting it and never for the last 2 tiers.
The tiers in the middle actually lose time they would be paid for another job, but are kept focused on the “profit”, which should show their labor on the debit column, but never does. So they try to compare a hard job to a labor-free bank savings account and get confused by impossibly small earnings that look large that way.
This press release from Swiftcall, a long-distance provider, gives more details about how you can still be ripped-off and unscrupulous companies make a mint from these schemes. It looks like it basically revolves around bying “unused” or “excess” capacity from carriers like BT and selling it on to customers – BT charge the reseller the cost of “carrying” calls over their lines (but not for the actual calls themselves), the reseller charges the customer and pockets the difference.
Doink! No maintenance, no repair, no R & D… Suddenly, it all makes sense. I was working under the assumption that the real provider would factor all those figures into the rental fee, but if it is otherwise unused, I suppose they don’t worry about that too much.
Aye, and that’s why the major carriers aren’t too happy with the proliferation in the long-distance resellers. They see it as money lost rather than gained, even though they’re being paid for otherwise unused capacity. Of course, they could try to compete, but then they’d have to lower their rates to a loss-making (or minimal profit-making) level.
I worked at a switchless reseller for a couple of years. The “bulk buy” explanation is correct; the reseller bought up front (or committed to buy) millions of minutes of long distance from the regular long-distance company (called, in industry parlance, the “interexchange carrier,” or IXC). At that quantity, a significant discount was applied. The reseller then turned around and attempted to sell these minutes to consumers (primarily businesses, not residential, because that’s where the volume is) at a rate slightly higher than the discounted purchase rate but slightly lower than what the consumer could get themselves from the IXC.
And as far as the question, “How do they make money?” At least in the case of the company I worked for, they didn’t. It started out as a shady tax writeoff scheme for a big real estate investor (his property manipulations were written up in the Wall Street Journal, so he was a known snake). It took off faster than he anticipated, so he spun it off and formally incorporated it. Because this was in the late 80’s and early 90’s, when consumers were less familiar with the dog-and-pony show of telecommunications deregulation we now see every day, they were successful in signing up thousands and thousands of customers. Unfortunately, their margin – the slice of profit they earned from selling the minutes at a slightly higher rate than that at which they bought it – was never sufficient to pay for their operations, and eventually they folded. Total time frame, a little under ten years. Not a bad run for a technology company these days, but in the telecommunications industry, this sort of thing is a bad joke. (The Dow Jones wire carried an analysis of the reseller I worked for, calling it “a train wreck of a company.”)
I’d advise people to stay away from these really cheap sweetheart deals. Common sense, and my own personal experience, says that if something sounds too good to be true, it probably is.