Wednesday, November 22, 2017

Calculated Thought: Canadian e-commerce giant gets called out

October 18, 2017 by Sean Annable, contributing writer

I was scrolling through Facebook one day and an advertisement caught my eye. It read, “Become a Facebook millionaire,” and I immediately thought, “What’s the new get-rich-quick scheme being pushed now?”

To my surprise, it was an ad for Shopify, the Canadian e-commerce platform.

A week later the headlines rolled out: Shopify’s stock price fell 20 percent over two days.

I know people who have used Shopify to create online stores, and some are quite successful. I think it is a great tool for entrepreneurs. It removes a ton of barriers by providing website design themes and payment gateways at a reasonable monthly price.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

Their stock rose over 100 percent this year. Why the sudden change in sentiment?

Ask Citron Research.

Citron Research is an online US investment newsletter that, according to its website, identifies “fraud and terminal business models.”

Its founder, Andrew Left, is a prominent short-seller. A short-seller bets against companies, borrowing shares from a stockbroker, and immediately sells them at the market price. Ideally, the stock price goes down, and the short-seller returns the shares to the broker at that lower price and pockets the difference.

In a recent post featuring Left, Citron outlined why Shopify may be operating against the rules of the Federal Trade Commission (FTC), a bipartisan US watchdog that fights for investor and consumer protection.

Left compared Shopify to Herbalife, a multi-level marketing (MLM) company that paid $200 million in fines after an FTC investigation found its business practices were unfair.

MLM business models recruit resellers who earn commissions and are usually compensated further for recruiting more resellers; some MLM business models have been likened to pyramid schemes. Complaints arose with Herbalife that resellers were duped, and that the majority weren’t making any money.

According to the FTC case, Herbalife was not a pyramid scheme, and the wrongdoing was that Herbalife misled its resellers by presenting unrealistic results. The ruling, according to an FTC press release, “prohibits Herbalife from misrepresenting distributors’ potential or likely earnings [and] prohibits Herbalife from claiming that members can ‘quit their job’ or otherwise enjoy a lavish lifestyle.”

Left claims this is exactly what Shopify is doing. He cites Facebook ads, including the exact one I saw, and posted screenshots of its website that read, “The online store for someday millionaires,” and of a letter-of-resignation template provided by Shopify for its users. Left’s main beef is the “dirty secret” that Shopify pays outside affiliate marketers to get new merchants to sign up.

Has Shopify done anything wrong? Affiliate marketing is used by countless businesses with no controversy, and Shopify is not an MLM business.

I will, however, say that the “millionaire” advertisements are irresponsible.

Although Shopify doesn’t provide information on its “churn rate” (how many users fail and fold up their stores), I can’t imagine the majority succeed, let alone become millionaires. We’ll see if the FTC pays attention.

I think it’s more troubling that Left stands to profit by the price declines in Shopify shares.

Was this a genuine effort to call out unfair business practices?

Or was it simply exploitation for profit?

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