1585 - Grading Company Dilemmas

Foreign. Doctor James Beckett Sports Card Insights Grading Company Dilemmas Every grading company has something going on now and it's in the news. I know BGS the best because it had my name on it. But PSA is the market leader and they have paused. SGC has dramatically increased their basic rate. BGS is paused. So what's going on? First, thanks Sponsors Tops Panini Upper Deck Heritage Auctions Hugs of Scott Auctions Mike Stadium Sports Cards burbank sports cards compsed.com cage lawyer one of my regular listens if PSA's attacking the backlog so vigorously, then why did it grade fewer cards in August? How could that be? And basically I think there is an answer for that. They didn't force vacations on their employees or cut back iron. I think the unit production how many cards they graded is not the same as the grading capacity because every card doesn't require the same amount of time when they've got mostly $80 subs and up coming in compared to $20 subs or something like that. I'm not saying that $80 subs take four times as long as $20 subs, but they might take double. Certainly with a higher dollar card. I wouldn't want a sloppy job. Actually a sloppy job means they're not looking at it very closely. And at very closely that generally means a higher grade. Looking at it with greater scrutiny gives more chance to find micro flaws. So Yu-Gi-Oh I think their mix they're doing a higher percentage of cards that take longer and it needs to take longer. They're charging more and they have more exposure. But all the companies are dealing with the same problem right now and that is that the scarce resource in card grading is not plastic coming from overseas or shipping or imaging or record IDs. It's not just graders, but it's credible grading judgment that is not instant. It is trained. You have to have some aptitude. I know when we were hiring BGS graders, a lot of experience with cards, but a sharp Yu-Gi-Oh and trainable. We didn't want graders that just would look at the card and say Yu-Gi-Oh that's a seven. No. They had to say here are the problems. So I think the training at BGS with the subgrades, I've always thought it was more in depth and I've always thought BGS took more time but can't prove that. The other thing that happens with PSA as well as BGS is BGS doesn't nearly have the staff that PSA does. But why don't you just let the Graders work double shifts. Let them work 16 hour shifts and they get twice as much done. I'm not sure they would get twice as much done. I think it's a burnout job. I think even graders that request to do a double shift, I'm not letting them try it once, but I'd really monitor it. I think it's a recipe for burnout. I know that firefighters work long shifts, double shifts, but they're waiting for the call and then the adrenaline kicks in for the graders. They're just nose to the grindstone always. So another production shift. If it's new people, that's good, but you need to have enough experienced graders. In fact, if you had a night shift, nothing wrong with that. But then you gotta senior graders working the night shift to make sure the quality control is maintained. It's not just labor, it's skilled labor, trained labor and trained in your system. If somebody came over from SGC to psa, they would still need to be trained in the way PSA does it. It wouldn't take as long because they already have some ability. But the other reason it can drop off is when you're hiring so many people, some of your best people are involved in the training and so you've got to take them off the line to train the newbies and review their work. And that's the friction that happens with trying to scale your business. And PSA said they put $200 million into it. It's not instant results overnight. So maybe the several graders are not grading cards in August because they were on the training line of getting the next group of graders up to speed. So it's. That's the right decision and that would be an explanation. The other thing is if you overwork your best people, you're liable to lose your best people, burn them out or they could be poached. I haven't seen a lot of poaching or leaving because they're frustrated and they want. I'm just gonna. If I'm gonna work this hard, I'm just gonna work on my own. I'm gonna just buy raw and grade. I don't think they're gonn. As a senior grader, I think you have so much knowledge that you could do your own thing at a pace that allowed you to get back to enjoying it. Another dilemma is what to do about PSA's tremendous pricing power and their ability to turn off various levels. People think, are they insane? No, they're not insane. They have pricing power. They've earned it over decades. And they're using it really rationally. It's helping them make more money, which is what companies like to do. I've always said it's good to optimize your earnings, not just maximize, because maximizing sometimes burns people and gets people frustrated at you. But they've earned it and they Goldin get away with it if the secondary market didn't give them greater liquidity and the biggest resale premium. With rare exceptions, nobody has to submit anything to psa. The collector can make a decision. Look at the incremental resale value, which is the big number. And if that number is big enough than an additional grading cost compared to somebody else or even additional time, as long as the risk of great uncertainty is not huge, that people are making that bargain. I did have a few days ago about pushbacks. Who's pushing back against psa? They're pushing back in social media, but they're not pushing back in terms of their actual behavior. They are ready to go. When PSA turns off the pause, they're going to jump in there. I think it's no sure thing, but that's what's happened in the past. The other thing about nobody has to submit to psa. Nobody has to submit to anybody at the national convention and yet the national convention, I know BGS had huge business and PSA had even more business. And yet the prices, the grading costs are more. The time you have to pay more to try to get it and then sometimes they can't. Even you've got to get there Wednesday or very early to get it back by the end of the show. And if you don't, then you're dealing with the mail again. For expensive cards, I can see it. For cheaper cards. Cards not necessarily a good deal. Let's say he's done the investment, but it hasn't kicked in yet. They're not squeezing the last dollar out of the business. They're investing in the future. And I like that they're reinvesting in a category. It's a huge vote of confidence for the industry, especially because they have very sophisticated ownership, big money, and they're not playing a game. It's the game of business and they expect to one-of-one as relates to an enduring business dropping to the bottom line. So PSA, the $80 Fleer is really functioning as a demand control lever or valve. That's how they're rationing out their scarce capacity by not doing the lower price cards. They'll come back to it, I'm sure. I don't know if they'll go all the way down. But again, nobody's forcing you to do psa. I've been a vocal, I one-of-one say advocate of the upcharges, but I really, I don't see the issue there that nobody's forcing you. You can choose. There's several different grading companies and you just do the math and say I'm either going to go with PSA and play by their rules or I'm going to try something else and see and they do have additional expenses. Like I said, I would take longer and there's certainly insurance exposure and you ding a card they're guaranteed is good with BGs. The fact that they paused after PSA did like they did four or five years ago, it's a little bit frustrating for me. I can't say that if I were in the driver's seat, I would have done the same. I don't know all the circumstances, but they've been on a rol. And now to pause again, they're only pausing the low level. So maybe they're going to be getting some of the bigger things because their volume was strong in July and August. They're making business decisions, but I'm glad they're not lowering the standard or throwing some new graders into the fray when they're not trained. The people that I hired, which was mostly those original guys, they've just vociferously and vigorously defend the brand and they realize that integrity and accuracy are at the center of that. It's got my name on it, so I care, but I don't have financial stake in it other than I want them to do well and they are taking it seriously. So they're very careful in who they train and bring on and that takes time. Cgc, they seem to be doing well. And one of their secrets, I think, is they're so strong in tcg. I think it's way easier to hire capacity in tcg. The rounded corners and most of the cards are nines and tens, I think. So they're going strong in that and they're pressing their advantage there. And we'll see now on the sports card, there's nothing wrong with them, but they're fighting the same battle against PFC as everybody else. SGC in the news and the fact that they raised their prices from 15 to $50, actually, that's not unprecedented. The highly esteemed Peter Steinberg, back four or five years ago in the COVID days went from, I don't know, it was 15 to 75, but he went up to 75. And people were shocked and frustrated. But some people paid it and then later he Tribute it down and then you're a hero because you Tribute it to 35 or $25 and then it got as low as 15 lately. And so you drop it in half. Obviously at $15, they're making money. So if it costs them $10 to grade A card all in fully loaded, then $15 gives them a $5 profit, $50 gives them a $40 profit. So even if their sales drop in half, they're going to make more money, significantly more money, even if they get half as many submissions. But will they get half as many submissions? I don't think so. There were three groups before that used sgc. One was the anti PSA people and there are some of those. Number two was the diehard vintage people that had a strong loyalty to SGC. We understood that that's what we considered acquiring them 25 years ago. And the third group were people that were just shopping price and specials on the modern cards that that business is gone and it's certainly gone at $50. But I think PSA had to approve this. Even though they're saying the SGC is running independently. But they may be thinking their submissions are not going to drop off that much because if you're an anti PSA person, you're just going to send to SGC and if you're a vintage in all your other T206s, you're probably going to keep sending them. So this may be a really sharp decision that's very unpopular, but puts SGC more toward being the boutique for vintage cards that it seems to me they're doing. And they're going to go from 50 back to 25 or something like that in a month or two maybe. And then they're heroes. It's Yu-Gi-Oh that's great. I don't know that people will hold off. I don't think they'll say, I'm going to wait till it comes down because I think the whole hobby has a problem with deferred gratification. But SGC has earned a strong reputation, decades of brand equity equity of being doing a great job on the business Tag. Don't hear as much about tag, but Tag Mag has become more of a tcg. But their concepts are good. I was impressed when I met with them many years ago. But they've got a pause on their low level tiers because they have a backlog. How can they have a backlog if they're a tech grading firm that's hands off. They're not completely hands off. In fact, they're the most technological of the companies that grade cards. But they can't just leave the room and let the cards go through a conveyor belt and they come out and slap. There is human intervention. And if they haven't said it. But I think their bottleneck is the fact that they some senior graders that review most if not all the cards. I just think you're trusting the machine, but you're verifying with a senior grader. And senior graders are not easy to find and they have to be trained then also in the tag system. Still, I like tag for TCGs. They've stayed out of vintage because that's very difficult to do with a machine. So Yu-Gi-Oh I don't believe Yu-Gi-Oh is going to replace the expert grader, but the pitiful grader, the untrained, not even amateur, but somebody that just doesn't have good eyesight. I think Yu-Gi-Oh can do that. It can examine a card and suggest some things for the grader to look at. But I just, I don't think it's going to be the whole deal. But it's Yu-Gi-Oh assisting the experts. And I think they're all probably doing that to some degree. But you've got to be able to explain if something gets a 6 or an 8 or a 9 or whatever it is, ultimately you've got to be able to explain why. And if you don't, the transparency of showing that you know what you're doing is going to become more and more in demand. PSAs move toward that, but they've got a long way to go. But they're the market leader. Bgs, the report card I appeal is becoming not a secondary grade because for some people, if they get a card that's below five and it's vintage, then they're immediately looking at the I appeal and they don't care if it's a 1, 2, 3, 4 or 5. It's already going to be a lower price and they want to get a great I appeal thing. Now Fanatics Collect is doing I appeal for free for vintage cards that are above 250. So it's hard to compete in with three, except to do that. You've got to put it inside their vault or auction. They also being the successor entity picking up PWCC which really started some of that IPO with their 5%, 15%, 35%. I think the hobby, while not rejecting it, it's not understood. I have a PhD. I don't understand it. There's 10 copies of something, how can it be in the top 5%? It's got to be subjective. Whether it's all the cards in that set, all the ones you've seen, the 15%, 35%, I think it's subjective. It just means something is superior or really good or I'd rather see adjectives. But people like numbers. My BGS idea, if you've got a vintage card, it's a 5 and it looks great for the grade. I put 5 plus on it and maybe it's a plus sticker. If it looks so great for the grade, then you think, how did that possibly get a five? You might say, if it's a five plus plus, why don't you just make that a six? No, because it's technically a five, but it's an unusually attractive five. And if it's a five plus plus again, even that, I don't want to put a six on that. It's technically a five, but the words to me are a five plus plus is I can't believe that's in a five holder. They are overly penalizing something that I don't have a problem with and that most people don't have a problem with. So the technical grade is supposed to be objective and it to the greatest extent it can be, it's objective. But Yu-Gi-Oh appeal I don't think can ever be objective. Somebody is looking for perfect registration or perfect centering or corners that are uniform and print stains on the card back, not a big deal. So I think the technical conditioning has been standardized and people think that's not very tight. But the aesthetic preference is a whole nother story. If you didn't put the number on there and people say just don't put the number, just put an Yu-Gi-Oh appeal number, I still think that's too subjective. The other thing that's come up is this pre grade movement where for 10 bucks or plus or minus, you can send in your cards. And if you're thinking about sending in to pay 80 bucks, then to pay 10 bucks to eliminate bad submissions that are going to backfire on you, that's good. But you're not going to pay 10 bucks if the grading service is a $20 service, unless more than half of them are no good and if you can't even get half of them right, then you need an Yu-Gi-Oh exam or you need to do some grading training. If you can't even do it for yourself and you can take a picture with your iPhone and you can enlarge it and there's apps where you can look at it, but I still think it's a useful thing. I think pre grading and submission prepping, that's here to stay. The other thing that has always been the case and may not be is that heretofore if you see a RAW card in a showcase, you think, what's wrong with that? If it were a 10, it's probably been submitted and didn't get the grade and so it just cracked out. So RAW is interpreted negatively. But think about it. Now for the cheaper cards. The cards that don't warrant an $80 submission, they're not being submitted and there's nothing wrong with them. When the price comes down, they will be submitted. And so that could flip. People's understanding of the reasons it's not graded is because PSA is on pause and so is bgs. And if they do that and they realize that most of these cards, the manufacturing is getting better and better. And so if it's a 80% chance of being a gem mint and a 20% chance that it's only mint, people could change the interpretation of Raw. The RAW doesn't mean it's rejected, it means it's just not yet graded. Especially with the pauses, people can think they haven't had a chance to send it in yet. It's not worth it. The other thing is there are more people coming into this industry to do grading. Companies I'm aware of one and maybe two. They'll announce when they want to announce, but when you've got such demand, long queues, high prices, especially on the lower end, a slightly cheaper alternative that at least has the confidence. We don't know what they would have to do to generate the confidence, but we thought we had a good chance and we jumped in. But we had an established brand even then. We had people that were complaining, hey, you shouldn't be doing that. But they knew who we were and they knew we had a standard of excellence. So there's going to be more people coming in, more companies and knowing what's happened in the industry. They will be well funded, they will not be fly by nights. They'll jumps in with a beautiful holder and maybe some special introductory pricing gai, which is where Mike Baker went when he left. PSA had a rocky road. They had some success for a while. I like those guys and they were grading some things that PSA didn't grade, but somehow they got into some financial difficulty. And I don't know exactly what happened, but my point is, I think these new entrants into grading companies are going to be overfunded to where they've got plenty of running room to do what they need to do, even to lose money at first, perhaps in order to establish a Beckett The problem with grading frequently is not what grade you get. It could be that the grading company disappears or becomes irrelevant. That's why people are slow to adopt grading and going away. All the ones I mentioned are going to be plugging away. Even with PSA and Beckett and SGC linked, they're still have different slabs of their own. If you don't like one, you can go to another. The other thing that I've heard place about is that graters underpaid. These grading companies are cheapskates. I don't think that's the case. In fact, I think I can make a case that sometimes junior graders are overpaid and that's the number most people look at. It's what's the starting salary. I don't think they make money from junior graders that are not well trained. And so for six months or three months, whatever it is, they're getting paid and they're not producing at a level that's profitable. Now. Are the senior graders underpaid? I don't think so. And the reason I don't think so is because I'm not seeing a lot of movement of senior graders at one place being hired away. Because if you gave them whatever they're making a little bit more again. Our guys at bgs, there was an esprit de corps. They were loyal to the brand and loyal to each other. But if they were drastically underpaid, I wouldn't expect them to do that. I don't think there's ever going to be one grading standard that's universally applied. I also don't know that there's going to be a universal pop report or a universal registry in the way people want it to be. BSA has too much going for it. They don't have to say yes to that. I had a conversation with Nat Turner about that and he kind of looked the other way. That is part of the PSA edge. Their registry and their pop report and their confidence that their brand is primo. So thanks everybody say is to be admired. Not just because they've got more graders, but they have earned their network effects. Somebody comes in say has a 30 year head start with the registry, the pop report all those things, it's going to make any new entrant look like they're a century behind. Only 30 years. So thanks everybody. Be back again with another episode. Enjoy the hobby and enjoy your grading experience. It's pretty exciting to get the reveals and get a grade you're pleased with.