Possible Legal Ramifications of Upper Deck’s New Distribution Policy
In March, Upper Deck announced a new distribution program. Sounds boring, right? Once you look beyond the legalese, you'll see that Upper Deck might have just declared war against the Internet. Stick with me for a bit. It's important because it could affect prices of Upper Deck cards. And I'll translate the legalese, so don't worry about getting lost.
Since April, Upper Deck now requires its authorized hobby distributors to sell its current, sealed products only to Brick and Mortar (B&M) hobby shops for the first 90 days. In addition, those hobby shops have to agree to sell only to end-user collectors. Click here to learn more.
Legalese translation - Upper Deck hobby products will only be available from hobby shops for the first 90 days, and these hobby shops (and their distributors) are NOT allowed to sell their hobby products on the Internet during that time.
Not boring now, is it?
To make sure it has some Internet presence, Upper Deck has also created a new class called “UD Authorized Internet Retailers" (AIR). AIR are “hand-picked" and include the “select few customers that operate a B&M hobby shop" and also have an Internet presence.
Legalese translation - There will be very few authorized sellers of Upper Deck hobby product on the Internet for the first 90 days.
Any distributors who sell directly to collectors will be removed from the distribution network.
Legalese translation - Distributors can only sell to hobby shops. If they sell directly to customers on eBay or the Internet, they likely will no longer be able to sell Upper Deck hobby products.
To police this policy, Upper Deck is going to track the sale of boxes. Upper Deck expects hobby shop owners to let “buyers know they cannot sell boxes online or to other shops." Upper Deck will also monitor eBay.
Legalese translation – If someone buys hobby boxes from a hobby shop, and later sells that same hobby box on eBay, the hobby shop may be obligated to stop selling to that buyer. If Upper Deck becomes aware that a hobby shop's sales repeatedly appear on eBay, there is a possibility that Upper Deck will prevent distributors from selling to that hobby shop.
Now that we've covered the basics, what does this all mean for collectors?
First, there will likely be less Upper Deck hobby boxes and cases sold on eBay, and on the Internet in general, for the first 90-day window of availability.
Second, not only will there be less Internet supply, but any items sold on the Internet will likely be more expensive. The reason for this is twofold. First, Internet sellers are required to have a B&M store, which requires additional costs that the seller will have to recoup. Second, the laws of supply and demand will come into play. If there are less hobby boxes on the Internet (less supply), demand will increase. Therefore, prices will increase.
Going back to the first point, Internet price increases are inevitable under the new distribution program because of the new requirement that all authorized Upper Deck sellers must have a B&M presence. B&M stores charge higher prices than Internet mass sellers because of traffic. The Internet is ubiquitous, so an online seller can easily have 100 people anywhere in the world buy its boxes. At the same time, a B&M store needs someone to drive to the store and walk in the front door and, therefore, is limited to local customers. The decreased amount of customers a B&M store has dictates their need to charge a higher price to make the same profit as an Internet seller. For example. if an Internet seller sells 100 boxes at $60, when those boxes cost it $59, that seller will make $100 ($6000 in sales minus $5900 in costs). A B&M store is limited to foot traffic and probably cannot sell 100 boxes—but it can sell 10 boxes. Therefore, to make that same profit, it would need to sell those same $59 boxes for $69 to make its $100 ($690 of store sales minus $590 in cost).
Therefore, if B&M stores will now have most of the supply, the prices will necessarily be higher than Internet prices.
Most collectors today are like me, Internet consumers. You can see this by the vigorous traffic on eBay, versus the limited traffic in hobby shops. I buy 99 percent of my cards and boxes through eBay and online retailers like Blowout Cards. I really only buy sleeves from my local hobby shop, which, ironically, will be shutting its doors Friday.
That's part of what the Upper Deck policy is trying to save. If you can only buy hobby boxes at B&M stores, and the online prices are similar to store prices, the theory is that B&M stores will sell more, and do better in the economy. And maybe, someday, more hobby shops will open.
It is also foreseeable that if purchases are generally limited to B&M hobby shops, then supply will increase, and hobby shop prices will drop. Eventually.
But don't expect them to drop to the levels we've seen on Internet sites.
There's another ramification of this policy on collectors. If you buy an unauthorized product (e.g., buy from someone on eBay or an Internet seller who doesn't have the authorized “AIR" mark on its webpage), then you are purchasing products “as is." Upper Deck's support system will likely not assist you.
Already, Upper Deck's distribution policy has launched its first legal skirmish. In June, Upper Deck sued Blowout Cards, Frontline Collectibles and a number of as-of-yet unnamed Internet-only stores in a declaratory judgment action.
Legalese translation - In essence, a declaratory action is a peremptory strike. They are typically filed by someone who has been threatened with a lawsuit but the person making the threats has not filed the lawsuit yet. Because the threat of a lawsuit hanging over someone's head can affect their business, sometimes it is best to flip the tables and be the one to file a preemptive lawsuit. This will allow the judge to weigh in to confirm that no one is engaging in illegal behavior, and that the threatened lawsuit is baseless.
What likely happened is Blowout Cards or one of the other defendants challenged Upper Deck's policy as an illegal monopoly and maybe even threatened suit. So, rather than have the cloud of uncertainty hang over Upper Deck, it ran to the courthouse. This is a confident move on Upper Deck's behalf showing that it believes its distribution policy is legal. If you thought you were doing something illegal, you'd want to be as far away from the law as possible. Right?
The suit was just filed, so no other actions have happened (yet).
It will be interesting to see how the court weighs in on Upper Deck's new policy. In all likelihood, the matter will settle before it goes to court (almost all cases settle), but there's a good chance the policy is legal—it's not price-fixing, even though it will cause higher prices for the customer. Also, Upper Deck does state on its website that its attorneys weighed in on creating this policy. For their sake, you'd hope it's legal.
Regardless of what happens legally, the more intriguing issue is how the market will react to Upper Deck's policy.
Collectors know the hobby shop is an endangered species. This new policy could help preserve them. But the emphasis is on could. The market has changed. Online sales are the current way of purchasing goods of all types. Already, numerous B&M stores of other types have lost out to the Internet. Remember, renting videos from Blockbuster? Buying CDs from the CD store? Going to the bookstore just to buy books and not coffee?
Upper Deck's policy is trying to force the industry back to a simpler past, a past that I think is gone. Only time will tell how it will affect the hobby, but I know how it'll affect me. I'm an Internet consumer, and only a casual purchaser of Upper Deck products. Like I said, the one hobby shop by me is closing its doors this Friday. Therefore, if there is less Upper Deck hobby product on the Internet, I'll be exposed to fewer Upper Deck products. This policy is not going to get me to visit more hobby shops.
Don't get me wrong, driving people back to hobby shops is a laudable goal, but this policy won't drive me there. The test is how will it affect the Upper Deck loyalists? Will it drive them back to the hobby shop?
We'll likely discover the answer to this question over the rest of the year.
Legalese translation – I'm not psychic.
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