The dotcom bubble was full of absurdities. A common business model was giving away software or services and finding unconventional ways to make money off it, a model we today call “freemium” and that may or may not involve spyware. Geocities with its free web hosting was a good example. But Cyberrebate.com took it to an extra special level of absurdity. It gave away actual physical merchandise and had a scheme to make it profitable. Cyberrebate made its debut May 16, 1998, and closed its doors exactly 3 years later, on May 16, 2001.
Why Cyberrebate is one of my favorite dotcom stories
Alongside Internet America, Cyberrebate is one of my favorite dotcom stories. The dotcom era was an era of excess, but Cyberrebate drove the excesses to particularly excessive levels of absurdity, because free stuff is so hard to resist.
I remember going into a guy’s office in late 1998 or early 1999, and he showed me this box of junk he’d just received for free. Well, it wasn’t exactly free. It was an online store that promised 100% rebates. So you had to fill out a bunch of paperwork, mail it in within a certain length of time, not make any mistakes, and wait months for the rebate check to arrive. But if you were willing to do all of that, you could get a bunch of trinkets for free.
This was more than 25 years ago but I remember it like it was yesterday. I never ordered anything from them myself. But the absurdity of a 50-year-old man being so excited about getting a $6 laser pointer for free was unforgettable. And he seemed genuinely disappointed that I didn’t go order a bunch of stuff too.
Estimates of how many customers send in their rebate paperwork varies. In researching this story, I found estimates ranging from 5 percent to 50 percent. Some additional percentage send in the paperwork but make a mistake filling it out. So the theory was, they could sell cheap merchandise at up to 10 times its list price, put people through the rebate wringer, pocket the money maybe as much as half the time, drag their feet the rest of the time, taking up to 14 weeks to send rebate checks, and make money off the interest while customers waited.
Trailing only Amazon and Ebay
In January 2001, Cyberrebate had 7.7 million web users per month and was the third largest online retailer in the United States, behind Amazon and Ebay. Elite company indeed. They were getting good press coverage too. It was an easy feel-good story, as long as people were getting their rebates. On the surface, it looked like things were going great for them.
And if everyone had played fair, Cyberrebate might have made a go of it, at least until the novelty wore off. To stave that off, they moved beyond selling dollar store trinkets and offering substantial merchandise. You could order a television or a stereo system from Cyberrebate, for example.
But since you’ve probably never ordered anything from this dotcom giant who once rivaled Amazon and Ebay, you can imagine something went wrong. And something did, indeed, go terribly wrong. If there’s one thing people like, especially stereotypical Americans, it’s getting something for nothing. Cyberrebate grossly underestimated how many people would put in the effort to send in their rebate forms when they could get a 100% refund. And while they could–and did–raise prices to compensate, higher prices just made people that much more likely to send in the form.
How Cyberrebate’s wheels came off
Worse yet, Cyberrebate underestimated how many people would order absurd amounts of merchandise and then send in for the rebate. I found accounts of people maxing out their credit cards with the expectation that the rebate would arrive before the payment came due.
The August 2001 issue of Maximum PC, in its requiem for Cyberrebate, stated some customers were reselling the items they bought. It’s not hard to imagine someone ordering a large amount and then stocking a flea market booth with it. As long as the rebate eventually arrived, they stood to turn a nice profit, even if they sold the merchandise at a steep discount.
In early 2001, rebate checks started bouncing, and the press started calling it a scam.
By May 2001, Cyberrebate had $83.3 million in liabilities and only $24.5 million in assets. $80 million of those liabilities were unpaid rebates due to customers. It didn’t end well for anyone involved. Four years later, some creditors received 8.8 cents on the dollar. In August 2006, a final disbursement went out, paying $1 for every $1,600 owed.
I don’t know that founders Joel Granik, Joseph Lichter, and Athan Vadiakas set out blatantly rip people off. But the Federal Trade Commission charged Granik and Lichter, fining both of them $40,000, and barring them from running businesses offering certain types of rebates again.
The dark side of Cyberrebate
As if maxing out credit cards wasn’t enough a May 18, 2001 Cnet column by Brian Livingston said some customers had sent their entire life savings in to Cyberrebate, hoping to get a truckload of free merchandise and later get all their money back. At the time it filed bankruptcy, Cyberrebate had nine customers with pending rebates in the range of $70,000 to $116,000.
Some of the stories compared shopping at Cyberrebate to compulsive gambling. Or maybe some people were running massive resale operations. The dotcom era caused a lot of people to lose money foolishly, but losing it on a bad stock can happen in any era. Losing your life savings to $100,000 worth of free-after-rebate stuff you didn’t need might be unique to the dotcom era.
How Cyberrebate could have survived
The danger with Cyberrebate’s business model is people’s willingness to game the system. That’s probably why no one has tried it on such a wide scale since. To me, their two biggest mistakes were not imposing some limit on how much you could order or at least on the size of the rebate, and offering unlimited shipping for $4.99.
Offering something less than a 100% rebate also would have been a good idea. While the 100% rebate was irresistible, it also invited freeloaders to order absurd amounts to resell. If you’ve heard the parable of the tragedy of the commons, the tragedy of Cyberrebate was the tragedy of the commons writ large. To the tune of 80 million bucks.
The lesson of Cyberrebate, like so many stories, is that you underestimate human greed at your own peril.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.
does anyone remember iwon?