Ok, I found a very good article that explains a lot about how this system works. I think that some will find this very interesting and informative (klown). This is the entire article and it is a bit lengthy but it proves my point rather well:
The Free iPod Offer, and Why It Isn't a Scam.
By now you've probably seen the free iPod site. It's a pyramid scheme of sorts, in which you sign up, complete 1 offer, and get 5 people to sign up under your referral link, who also complete 1 offer. Once you do this, you get a free iPod in the mail (assuming your referrers are all legitimate, and that you are the only account with your address. Only one account is allowed per household, or else their profits would take a hit). The new 20GB iPod they have on there is worth $300. Even if you have one already, you can do the offer just to sell it on Ebay for a nice profit. It sounds too good to be true, especially considering the facile nature of most of the offers. The Ebay offer doesn't even require a credit card if you sign up with a paid ISP e-mail address. And the AOL and Ancestry.com offers can be cancelled once your freeipods.com account is credited with completing an offer, so you don't get charged anything.
Understandably, a lot of people are nervous about this. I mean, how could they possibly be making money giving away $300 iPods? Well, I sat down and did some back-of-the-envelope calculations. And I really wish I had thought of this offer (I really wish I had a sandwich, too). You see, even though they give away iPods to the occasional person, they are ultimately making a nice assload of cash. There are 2 main reasons for this:
Exponents. You see, the lucrative part of a legitimate pyramid scheme is the people who get in at the bottom of it, i.e., the people who are the last to hear about it. The people at the top have an easy time getting their iPods, because finding 5 people who haven't signed up yet isn't hard if you're one of the first people to do it. But once everyone has signed up, finding 5 new people is impossible. There are tons of people at the bottom of the pyramid who completed an offer, but can't find 5 people. And the amount of people at the bottom, compared to the rest of the pyramid, is huge. It's called a pyramid scheme for a reason, the number of people at the top is small, and the number of people gets exponentially larger at each level, as new people start getting referred.
People are jaded. The phrase "pyramid scheme" makes people nervous, and we're conditioned to be wary of things that are free. TANSTAFL: There ain't no such thing as a free lunch. You see, the worst-case scenario for the free iPods company (Gratis Internet) is if every single person who signs up gets exactly 5 people to complete an offer, until there are no more people left (this is the most efficient way to form the pyramid). This natural paranoia about the free iPod offer, counter-intuitively, actually helps them make a profit in the long run, because it hurts the efficiency of the pyramid. Gratis Internet doesn't want the pyramid looking like a pyramid. They want lots of isolated branches and dead ends, because this means they don't have to send out as many iPods. Paranoia is exactly what results in these isolated branches and dead ends. There will be lots of isolated people unable to find 5 others to complete an offer under them, simply because their friends are all distrustful of the site.
There are other inefficiencies, too. People might get more than 5 people under their account. Those extra people aren't contributing to someone getting an iPod, so Gratis gets to save some cash. Some people won't sign up as a referral at all; they'll just sign up from the main page. These people also don't contribute to anyone getting an iPod. All of this means more people at the bottom of the pyramid who will not be able to find 5 people, and who will therefore not get an iPod. Let's look at the worst-case scenario for Gratis (which is also the best-case scenario for us, the consumers):
Now, the rules on the site state that only 1 account is allowed per household, and that only U.S. residents can participate. There are about 41.5 million households in the U.S. This is a huge-ass pool of potential accounts. By the way, I'm assuming that every single household gets an account, which is a completely unreasonable assumption...but, the math works out the same if they all get accounts or only .5% of them do, when you look at the relationship between profits from people completing offers and losses from sending out iPods. So hurray for that.
What Gratis wants is for the pyramid of households to be constructed in the least-efficient way possible, because it means less free iPods cutting into their profit margin. So, say the reverse happens, and the pyramid is put together in the most efficient way possible. Pretend that there are no jaded or dumb people. The entirety of America is united in fucking over Gratis Internet. Well, then what you end up with is called a balanced quintary tree...which is a fancy way of saying a pyramid, with one account at the top, 5 people referred under him/her, then 5 people referred under each of those people, etc., until there are no more people left to be referred. That tree looks something like this:
The total number of people in a pyramid or tree like this is about 5^h+5^h-1 (these are the 2 most significant terms of the sum, where each "level" has 5^h people in it), where h is the level of the tree's bottom, i.e., where the last people are. It's important to note that I'm starting the level counting at 0, so that the very first person at the top of the tree is at level 0. So, setting 5^h+5^h-1 equal to 41.5 million households, and solving for h, you get h=10.786. The number of people at any given level is 5^n, where n is the level number, so the number of people at the bottom of the tree is 5^10.786 = 34.6 million households at the bottom. That's 34.6 million accounts who can't possibly find 5 other households, and therefore can't get iPods, and who therefore are not draining Gratis of money. That means roughly 83% of the total pool of potential accounts can't possibly find enough people.
This is why I wish I had thought of this idea first.
And this is the worst-case. In reality, the pyramid won't be formed so efficiently, which means Gratis needs to send out even less iPods. But let's continue to look at the worst-case.
If 34.6 million people can't get iPods, then the remaining people will get iPods. So, 41.5 million - 34.6 million = 6.9 million iPods sent out. If everyone gets the 20GB iPod, which is $300, this means Gratis has to spend 6.9 million * $300 = $2.07 billion. How much do they need to get paid per offer in this case, in order to break even? $2.07 billion / 41.5 million = $50 per completed offer. This might seem like a lot for the offer companies to pay Gratis per offer, but if the pyramid is less-efficiently formed, it will be even less money than this, because they'll have other sources of revenue. And, I bet that Gratis gets paid for pageviews on top of people completing offers. And, there are all those surveys before the offer screen when you sign up, which must all be paid for by various companies. And the companies are probably willing to pay a lot per offer, since the potential for them ultimately making a profit is so high. Most of the offers are initially free, but after a trial period, you need to pay a regular fee (unless you cancel before then). I have no experience with marketing and advertising, so I could be completely wrong, but it seems reasonable to me at least.http://people.bu.edu...od_analysis.htm
Edited by kram, 01 January 2005 - 01:15 AM.