"Seductive" marketing firms entice with big bucks

Public advocacy group: Fast cash opportunities may leave you in the hole

Aggie News/December 4, 2003
By Christian Danielsen

The era of the starving student may be over.

Campus billboards are plastered with flyers promising flexible hours, no experience necessary and lots of money. But cash-strapped college students who are tempted by such advertisements may be heading into a multi-level marketing business?closely related to illegal pyramid schemes?where a select few benefit at the expense of their many subordinates.

One of the companies behind these ads is Dallas-based Excel Telecommunications, founded in 1988 by entrepreneur and college dropout Kenny A. Troutt. The company became a Wall Street star in the early nineties when it reached $1 billion in sales in just eight years. Excel is now the fourth-largest provider of long-distance telecommunication service in North America.

The company´s extraordinary growth rate has been propelled by its pyramid-shaped hierarchy. Excel has a relatively small number of employees, and instead relies on its vast legions of independent contractors?or sales representatives?to sign up customers and recruit more sales reps to do the same.

UC Davis senior Michelle Ovadia has been with Excel for 15 months and spoke positively about her employment, saying she enjoyed being her own boss and that it had given her a degree of financial independence.

"Before I joined Excel, I was working at the [ASUCD] Coffee House for minimum wage," she said. "Obviously, it´s not for everyone, but if you´re willing to work hard, it´s a great opportunity."

Excel maintains two levels of sales reps: "Sales associates" pay $75 for the bare essentials of starting their business, while "managing representatives" pay $399 for extra resources like training, a web page and the company´s magazine. Reps are encouraged to sell to their family and friends.

Sales reps receive commissions on sales to actual customers, but the real money is made from building a "downline" of underling sales reps. Any customers generated by these new recruits earns the original sales rep a commission as well.

This encouragement to build the pyramid is why Excel has drawn criticism from public advocacy groups like Pyramid Scheme Alert. PSA´s President Robert FitzPatrick called the multi-level marketing model deceptive.

He said 99 percent of people involved in such ventures will break even or lose money because of standard startup costs, annual membership fees and simple arithmetic.

"These companies are very seductive, telling people they can make lots of money," said FitzPatrick, "but what they don´t tell you is that the model is mathematically predetermined to fail."

FitzPatrick explained that in multi-level companies, even if each rep only recruited five new reps each, "at the 13th level we´ve run out of human beings on the planet."

This hasn´t happened, he said, because most sales reps will give up recruiting, write-off their losses and quit the company.

A 1996 New York Times article reported that in that year, 86 percent of Excel reps declined to renew their membership by paying the required annual fee, which is now $199.

Excel spokesperson Paul Thies declined to comment on current turnover rates. He also stressed that the company was a legitimate business operating under "a strong code of ethics," and that anyone interested in joining firms like Excel should research the company thoroughly.

"We are not a fly-by-night, get-rich-quick scheme," Thies said. "This is a legitimate business for people who want to build a long-term income based on gathering people who use telecommunication services."

Although Excel reps do earn bonuses for recruiting other reps, the primary focus is on signing up customers, Thies said.

"We are a customer-driven company," he said. "[Our reps] cannot just gather more reps, and we investigate all complaints about that expeditiously and thoroughly."

The California Penal Code defines "endless chains" as those in which participants pay startup fees for the chance to make more money by enlisting new members.

For FitzPatrick, this should be interpreted to make the activities of companies like Excel illegal. He blamed the lack of government enforcement on heavy lobbying by industry groups like the Direct Selling Association, which represents Excel and other multi-level marketers, such as Amway and Mary Kay.

The DSA contributed more than $10,000 overall to 12 Congressional campaigns in 2002.

"We´d like to see the laws that are currently on the books enforced," FitzPatrick said. "Or at least see the government report the truth about these companies.that there is very little potential to make money for the average person."

Ovadia wouldn´t comment on how much money she had made with Excel, only saying that after graduation, "I´m planning on buying a really nice car."