As most of you know, Herb Greenberg prepared a story about Herbalife for CNBC. The 20 minute documentary was titled Selling the American Dream. Herb worked for a very long time on the story, interviewing several people all throughout the country. I was interviewed by Herb in the CNBC studio in July of 2012. If you blink in the video, you miss me. I was only on for about 10 seconds, right around the 16 minute mark.
While Herb was working on the story for over a year, the catalyst for CNBC airing the story was the saga between Bill Ackman and Herbalife. There’s a great guest post on my site about the impact (or lack thereof) of Ackman’s Bear Raid on Herbalife.
Personal Views on Greenberg
He’s a very pleasant person. And he’s very intelligent, surrounded with a great staff of people. And unlike a lot of MLM critics, he actually gives a little airtime to BOTH sides of the agrement. While he certainly favors the negative side by providing links to MLM critics, he at least tries to inject some pro-industry commentary. I believe he’s spoken with the DSA, he interviewed Herbalife’s CEO and he also interviewed me. He dove deep and did his homework. In his own words, “After 10 months of independently digging into Herbalife and the industry, culminating with the CNBC documentary, “Selling the American Dream,” I can say with a fair degree of certainty: Multi-level marketing, which has been dogged by the same legal questions and controversies for 65 years, needs to be cleaned up.”
While not everyone shares this view with me, particularly leaders in the DSA, I actually agree with Herb on the need for change. I’ve written in the past about the MLM industry’s problem with self deception. Burying our faces in piles of money, pretending there’s not a problem is a sure path to irrelevancy. Paying commissions on internal consumption is fine. But we need to create better standards to alleviate the growing problem of “opportunity driven demand.” Opportunity driven demand exists when people purchase products they never would buy at prices they never would pay with the expectation of recovering their “investment” by recruiting additional participants (to repeat the cycle).
There needs to be legitimate value in the products and services changing hands. The popular sentiment that “all pay plans driven by product volume are legal” falls short of common sense and fails to account for opportunity driven demand. Under the influence of a pay plan, people will literally pay $1,000 for an ounce of lemonade. If you drive a pay plan from such sales, is it legal? Of course not. It’s this distinction that’s leading to so much confusion on Wall Street. We can attack the short sellers for manipulating the market. But really, they’re just exploiting the ambiguity in the law. And until the law is cleaner, it’ll keep happening whether at the hands of short sellers, class action attorneys, regulators, FTC, whoever.
My role in Herb’s story was simple: I was to discuss the laws in place distinguishing legitimate MLMs from illegitimate pyramids. While we discussed a lot of the positives in the industry, there’s none of that content that made the final cut. I’m not complaining. I’ll take the exposure when I can get it. But I’m just letting you know, I tried. The interview was an intense thirty minutes. The questions came at me rapid-fire the moment I hit the seat. It was fun.
Greenberg’s View on MLM
If you’re not able to tell by reading Herb’s stories about Herbalife and the MLM industry in general, he has a bad taste in his mouth. Intellectually, he’s not able to really “feel” and understand the benefits of the distribution channel. In an article Herb Greenberg posted on LinkedIn, he extends his focus away from Herbalife and discusses the potential challenges facing the entire industry. In his view, he predicts some regulatory activity against some of the larger companies. This would, in turn, trickle down and affect the smaller companies. While Herb senses a disturbance in the industry, he’s not able to put his finger on it. In his mind, it makes no sense for people to buy an arguably inferior product via MLM. This rationale assumes that the product is inferior and discounts the benefit of joining a community of people that share a common goal. In Herbalife, that common goal is weight loss and nutrition. Notorious short seller, John Hempton, summarized it well when he said,” Herbalife works in the same way as alcoholics anonymous – by supplying (and in this case selling) a support group to help you kick the ‘fat addiction’.” There’s power (and value) in community.
One thing is certain, as Herbalife’s stock continues to climb, Ackman will get desperate and start lobbying Congress (if he has not done so already). Will he be able to get the regulation he needs to save him from a stupid bet? It’s unlikely. And even if regulation does come, it’ll likely affect the smaller MLMs significantly more than companies like Herbalife. In my opinion, Ackman’s prayer for a government savior will go unanswered.
Conclusion, Lessons Learned and Special Thanks
I learned a lot from this experience. First, if someone with a platform invites you to participate in a conversation, show up. There seems to be this fear of the media by professionals in the industry. While there’s certainly the potential for bad, the upside outweighs the risk. We need more professionals willing to put their necks out there, communicating the benefits of the model. Second, the critics are becoming more organized. The internet is sticky and their content is spreading. The critics are getting in the ear of hedge fund managers, investment bankers, journalists and politicians. They’re like like Agent Smith in the movie The Matrix. If you’re not a tech nerd like myself, Agent Smith was like a computer virus, hell bent on destroying the very program that gave him life.
I want to extend a special thanks to Len Clements of MarketWave. Len is a great friend, and someone I trust very much. He took the time to help me prepare for the kinds of questions that are common from people skeptical of the model. His insight was key. I also want to thank my partner’s wife and Thompson Burton litigator, Melissa Burton. She literally reviewed my notes beat me up for over an hour on the issues. She has a good mind for poking holes in arguments and was invaluable for my preparation.
I’ve included some pictures below from my trip to New York. It’s such a fun place. My wife and I got a babysitter and left the three kids at home for a few days. I hope you enjoy the pictures.