The Bot Market I: Basics, Incentives to Innovate and Persuasion

Overview: Sneaker bots—the software resellers use to hoard the sneakers they resell—can be traded mainly through electronic marketplaces like Tidal, Bot Mart, Splash Market and Bot Broker. These sites provide both a platform that allows users to communicate and search for a double-coincidence of needs, and a reliable way of trading digital goods through a middle man. In these marketplaces, buyers make Want-to-Buy (WTB) posts with a willingness to pay, sellers make Want-to-Sell (WTS) posts with a desired selling price and users can find each other to start negotiations. Once a deal is struck, a middleman working for the marketplace secures the license, the payment is made, and turns the license to the new owner, all in exchange of a fee. These marketplaces keep real-time tracking of all their transactions and prices, so that market prices are easy to trace and link to market events, such as bot performance, updates, changes in developing teams, and so on.

In this post, I will propose some ideas around technological innovation and market manipulation. For starters, licenses for the top-performing bots are often out of stock because their performance partially hinges on a limited number of users exploiting the code routines, as well as for monopolistic competition reasons—the less licenses in the market, the higher the price. The first thing to know is that, nowadays, bot companies do not consist of an amateur developer working from his basement; companies have full-time, professional developers dedicated day and night to code and update routines to counteract retail sites' protections. To get an idea of how intensive the process is, some companies push from one to five updates a day. In exchange, companies "receive a one-time license fee plus a periodic subscription" from their user base. 

Take Bot P (to not use the real name), one of the top performing All-in-One (AIO) bots, as an example: the retail cost of the license is $500, with a quarterly renewal fee of $150, and a user base of less than 2,500 users; that is around 1.5 million dollars in renewal fees a year. Things get tricky next, though. Considering the operation costs, including the technological resources such as servers and infrastructure, and having a team of at least 5 full-time experienced developers and of around 12 total people, per LinkedIn, the numbers do not quite add up. It seems like full-time, experienced web developers could make more money somewhere else (Senior front-end developers in amazon can make up to 250 thousand dollars a year). It also seems like the manufacturer is leaving money on the table, considering that June's average trading price in marketplaces is north 5,200 dollars. So why do bot companies invest so heavily in their technological progress if they will only sell a limited number of licenses at a way-below-the-market price and will not be able to cash on their success?

The answer is that they actually cash on their success, but not in a conventional way. Bot companies heavily rely on the market persuasion and information manipulation, two practices that are widespread and valid, in the sense that there is no regulation against them. It all starts with the technological progress and information transmission. Bot companies provide API keys for information-centralizing companies, which build monitors that register bot checkouts in real time. In this way, comparative information of performance is readily available for users and investors: it is relatively simple to have an idea of which bot took majority of the stock on a given release. Then, bot companies rely on public relations (PR) teams that spread the news on social network, as the following image shows:

This, in fact, leads to an increase in the bot prices in the secondary market, via an increase in demand, as the following image shows (look around June 10th, and its 24-hour average, compared to the 7 day average):

A cashing opportunity follows for the manufacturer. There is a piece of the puzzle missing, however, as companies keep their retail license prices below the market and the number of licenses fixed, right? well, on paper. Here is where the shady business starts. Companies backdoor a limited number of copies at a near-market price. By backdoor, I mean that they sell them to a select group of people through the "backdoor" or privately, under certain conditions that will protect the market price. The two previous images show that the manufacturer spread the news of its success and that the market price reacted positively. The following image shows how, then, copies were handed to the market via a special group of sellers, directly by the bot manufacturer:

Often, as part of the deal, there are strict rules on price competition for the benefactors of the backdoor; this protects the market against the classic Bertrand competition where sellers compete until they reach the cost at which they purchased the license. To summarize, through success-news spread and backdoor practices, bot companies can cash at market price on their success and thus, have incentives to invest in technological progress: technological progress increases the probability of success, a successful day leads to an increase in the demand and the manufacturer can sell a limited number of licenses in the secondary market at a market price. Returning to the Bot P example, a good day of success and backdooring 20 licenses produce 100 thousand dollars in profit, just like that.

Some interesting questions remain. First, who are the people the licenses are sold to and why the companies entrust them with the reselling process? Backdoored licenses are sold to "bot-flippers," which essentially are rent-seekers looking for trade opportunities in the market. These agents put the effort needed to find disparities between WTB and WTS from different users and exploit them for a rent. Bot-flippers are less risk-averse in nature than the average bot user and have more intel of the market. As a result, by selling to bot-flippers, the bot companies have better control over the supply-side of the problem; bot-flippers are more patient and can hold the copies for longer, waiting for the right buyer to pay the high price. 

So why backdoor to bot-flippers, instead of a general, open-market release? As the market reacts to the information, releasing the licenses to the regular users would directly reveal the manufacturer's intention to increase the supply, affecting the market value: by being uncertain of how many licenses would be released, and how that compares to the increase in demand, the most risk-averse owners would try to cut their losses and sell while the price is high, leading to a further increase in the supply. This would motivate the next "risk-aversion" tier owners to do the same, and so on, leading to a self-fulfilling prophecy where the demand increases less-than-proportionally to the supply, and the market price is negatively affected. So the backdooring of licenses allow the companies to cash their success through an increase the supply, selling at market price, in a way that such an increase it is diluted with the recent increase in demand, all while controlling the selling rules and avoiding a panic dump of licenses from the average user that wants to protect her investment. In short, backdoor protects the market value. Bottom line: by backdooring, companies are just protecting the value of their brand and of its users' investment... well, when it is carefully thought and executed.

The following image shows the price of a bot that backdoored copies in excess and was not careful with the handling of the backdoor, leading to the operation becoming common knowledge; owners panicked, the high demand was not backed up by the bot success, and prices dipped:

Disclaimer: I am not affiliated with any of the related software companies, and as such, all the information contained in this post is theorized from my understanding of the situation, what I have been able to first-hand see as a member of the sneakers community, and what other members with knowledge of the situation have expressed to me.