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Wednesday, December 01, 2004  

Internet: Success of iPod attracts scammers

Perhaps the most biggest scam on the Internet currently involves a small device -- the Apple iPod. Possibly the biggest success in Internet-related technology currently involves a small device -- the Apple iPod. The situations are not unrelated. First, let's consider the latter. Apple has sold six million of its portable music players in less than three years. Apple expects to sell another million during the Christmas shopping season.

Furthermore, it appears some of those consumers wandering into Apple Stores at malls seeking iPods will be replacing their Windows-compatible computers with Macintoshes. ZDNet has the story via Silicon.com.

According to a survey of iPod users by financial analysis firm Piper Jaffray, Macs are basking in the reflected glory of the iPod, with some who own the music player saying they have already or are intending to ditch their PCs for Macs.

The research found that 6 percent of iPod users have made the switch. An additional 7 percent said they are planning to dump their old PC for an Apple machine, according to the survey.

Gene Munster, Piper Jaffray senior research analyst, said the iPod halo effect will make a difference to Apple for a while to come.

"We're in the very early innings of a multiyear trend," he said.

Among the factors influencing the PC-dumping crowd are ease of use, a focus on entertainment and the perception of better security.

The price of Apple stock has increased by 187 percent in 2004.

Apple's reputation for exquisite design of products that are easy to use has been its glory for decades. Unfortunately, as a market share between three percent and six percent for most of its history attests, the reputation has not necessarily resulted in purchases of its computers. The iPod accounts for 23 percent of Apple sells. According to the Mac Observer, Gartner reports Apple now has a market share of 3.2 percent in the United States, and, 1.8 percent globally. The coming year will determine whether Apple can convert a spectacular response to the iPod and the iTunes Music Store into sells of more Macintoshes.

The scam piggybacks on the gleaming reputation of the iPod. The combination MP3 player and hard drive is the rather expensive item that many consumers desperately want. (A lecture about the difference between 'wanting' and 'needing' could be inserted here, but I will resist.) That seems to be particularly true of teens and 20-somethings, who are willing to take financial risks to obtain the product of the week, month, year. . . .

Leander Kahney tells us more at Wired.

A search for "iPod" on eBay yields a couple thousand listings for the digital music player and accessories, but beware: Hundreds of the listings are inducements to join pyramid-style scams.

Ebay is swamped with new "matrix" schemes, which appear to be legitimate buyers clubs but are in fact variations on classic pyramid scams, which are outlawed around the world.

. . .The eager bargain hunter is told not to bid on the item, but is directed instead to sites like My3Mobile, The Phone Matrix, or Goraks.com, which offer iPods or cell phones as free gifts when products like CDs or eBooks are purchased.

The catch is that buyers only get their free iPod after more people sign up. When making a purchase, the buyer's name is added to a list. As new members join, names are shuffled up the list. When they reach the top, the iPod is dispatched

To speed up the process, buyers are often encouraged to recruit new members to join the scheme. And that's where all the eBay posts come from: Victims are using eBay to recruit new members.

The "matrix" scheme is a revision of the illegal pyramid scheme, with the iPod as the lure instead of a check. Pyramids rely on recruiting participants who contribute varying amounts of money toward an eventual big payoff. Each participant is in turn urged to bring in others. Persons who begin participating early in the scheme do collect. However, most never will since the pyramid will collapse. James Kohn, an attorney for the Federal Trade Commission told Kahney why.

As the scheme grows, the number of new members needed to support it grows exponentially. The number of people needed to sustain the scheme would exceed the world population after about a dozen iterations. In practice, the schemes collapse much sooner than that, although early members sometimes get what's promised, Kohm said.

"You are always going to have more people who are not getting anything than those who are," he said. "Everybody's recruiting, but not everyone's going to get an iPod."

Success can generate ill effects, including envy and efforts to discredit. The use of the iPod as the major incentive in matrix schemes is a reminder there are always people willing to profit from success in unethical ways. The product may be the one to get, but participation fraud is not the way to obtain it.

5:30 PM