What prevents gift card discounts from becoming an arbitrage opprotunity

March 24, 2015 11:18 AM

Every now and then I see iTunes Gift Cards drop in price. Just today, $100 cards are on sale for $75. What would prevent someone with a deep bank account from buying 1000 and cashing in? I always figure there must be a catch, but I don't see it.
posted by GilloD to Work & Money (13 answers total)

The catch is finding a buyer who is willing to spend more then 75$ on a itunes gift card from an unknown source vs. apple/a retail store where they get a receipt and some buyer protection if the card is no good. I have seen them listed on ebay/amazon but the trick would be for you to sell them for enough that after fees and what not you still come out enough a head to make the effort worth it.
posted by Captain_Science at 11:24 AM on March 24, 2015 [2 favorites]

People won't typically purchase unused gift cards for full cash value, so unless you for some reason want $100,000 of iTunes gift cards, you're not really gaining anything.
posted by jeather at 11:25 AM on March 24, 2015 [1 favorite]

Because it's only useful at iTunes, and if the "investor" wanted to sell the card they're likely to get about the same, or less than, they paid for it. It's like having a 25% off coupon and buying $100 worth of stuff: a gift card tied to a specific retailer is in many ways just a coupon for their products, it's not money.

Now, in the past I've been one of those people selling gift cards on eBay for 75% - 90% of their face value -- that's because I didn't pay any cash for the gift card; I got it as a perk from a business, or won it somehow, or got it from work as part of a Christmas gift. I don't drink coffee, so getting $20 cash for a $25 Starbuck's card is profit in my pocket because somebody else paid for the card in the first place (and probably didn't pay face value either).
posted by AzraelBrown at 11:26 AM on March 24, 2015 [1 favorite]

Nothing.

Sometimes there are extra fees.
Sometimes there are purchasing limits.
Sometimes you don't want to buy $1000 worth of stuff on iTunes.
Probably you wouldn't spend that much at iTunes if you didn't have to use up a gift card.
Most gift cards don't get fully spent.

If you go into Costco they even have a whole little area of discounted gift cards like this.

Discounted gift cards are great if it's a place you drop money at regularly. But most of the time it's going to be "oh man, for only $75 I can get $100 worth of stuff? I'm sure I can think of $100 worth of things to buy there."

The "catch" is they trick you into spending money you wouldn't spend. iTunes would rather have 75% of your dollar than 0% of your dollar.
posted by phunniemee at 11:26 AM on March 24, 2015 [5 favorites]

If you've got $75K you can blow on a thousand iTunes gift cards, it's pretty likely that you're able to put that $75K toward something that earns you money without having to deal with a thousand eBay or Craigslist transactions.
posted by Etrigan at 11:26 AM on March 24, 2015 [9 favorites]

Retail arbitrage offers other opportunities to benefit. People buy stuff, realizing the discount (usually as one of several strategies to reduce costs) and sell it on Amazon or elsewhere.
posted by carmicha at 11:39 AM on March 24, 2015

Because the going rate for resold iTunes cards is already lower than the current price Apple is offering. Take a look at this site. Plenty of cards being sold for 50%, 40%, or 30% off.
posted by acidic at 11:52 AM on March 24, 2015 [3 favorites]

Sometimes a retailer will discount its gift cards to get you to buy more now at the expense of you buying less later. If they're willing to bring in top line revenue right this second at a discount, this might be one way to do it (especially if, like Apple, they're very conscious of degrading the brand by discounting products rather than services like iTunes.)

There are two potential downsides for Apple here. One is they risk cannibalizing the group of customers who would have bought gift cards -- now or later -- at $100. Second is that while top-line revenue is one thing, accounting rules get very complicated around actually recognizing revenue for gift cards precisely because they're essentially a liability of uncertain size (will they be used at all? how much? when?).
posted by chesty_a_arthur at 12:03 PM on March 24, 2015

The accounting for this is problematic. As chesty_a_arthur points out, they are a liability until they are not. When they are not is either if they are spent or if a certain amount of time passes. The accounting entry itself is interesting. Debit cash $75 and credit a liability of $100 while debiting a liability of $25 in what I assume is contra equity account.
posted by 724A at 1:09 PM on March 24, 2015

Best answer: Okay, let's say you cash in and invest $75K into 1000 iTunes cards which are bought for $75 and valued at $100. So you're looking at, best case scenario, a profit of $25,000.

So, first, there's no market for you, GilloD, to be selling iTunes cards for the same price that Apple sells them. You can walk into basically any convenience store and buy an iTunes card that is backed up by Apple's guarantees and whatever.

So now you have to sell them at a discount. Let's say you cut 10% off; you're still making a profit but now there's at least ostensibly a reason for someone to hand their money to you instead of to Apple directly.

Now you have to find a way to unload these cards knowing that anyone who waits long enough for a discount iTunes card can get one because they constantly go on sale (which is why you have inventory to begin with.) So you customer base will be people who need a discounted iTunes card right at this moment, which is a market I wouldn't even know how to begin to court or advertise to.

By the way, unless you're selling them on the street for cash, some sort of merchant processing will be involved for you to collect the money and that will take anywhere between 1% and 5% percent of the transaction.

Meanwhile, no one is going to take them off your hands in bulk, because the only other people who would be buying discounted iTunes cards in bulk would be in direct competition with you and you're already working on razor-thin margins.

To so much as break even selling your $75,000 worth of $75 cards for (effectively) $85 you'll need to sell nearly 900 of those cards in what will probably be individual transactions. That's locating, selling to, and collecting from 900 customers before you even see a penny of profit.
posted by a manly man person who is male and masculine at 2:12 PM on March 24, 2015 [3 favorites]

$100 cash and a $100 iTunes gift card are not worth the same thing. One may be exchanged for $100 worth of stuff on iTunes. One may be exchanged for $100 worth of goods and services--including things from iTunes. So, $75 buys "$100" worth of gift card, which might be substantially less than $100, a number which must then be reduced by the costs of making the purchase (including just your time) and the costs of selling them (including finding buyers who might have a much easier time finding Apple).

Reselling gift cards can definitely be profitable. I can get iTunes gift cards at my grocery store very easily. But they're already set up to market them to me very easily. It is not, however, an arbitrage opportunity like you think it is, because you aren't paying $75 for $100, you're paying $75 for a piece of plastic and some opportunity to consume media. You can resell the opportunity to consume media, but it's not liquid enough to be risk-free at that price point.
posted by Sequence at 3:33 PM on March 24, 2015

Response by poster: Another scheme foiled! Thanks for the breakdowns :)
posted by GilloD at 4:58 PM on March 24, 2015 [1 favorite]

I feel like you've marked as best answer an explanation that this market cannot exist, which has been refuted in the comments above it. You can do it, and people do. A motivated operation at scale can logistically ship out 900 cards in a day, it's trivial. Locating customers is harder, but as mentioned, there's cardhub, and there's also Amazon and eBay.

There's a similar market where you see this sort of thing: video games. They have a high price:weight ratio, especially if you can sell download codes. Retailers often compete to discount high profile games, leading to some people performing the exact arbitrage you mention. In the video game markets I follow, you can tell when a retailer did some buy one get one free deal because the new in box price plummets temporarily. Which is an important point: there's lots of people doing this, and efficient markets lead participants to give away the arbitrage for more sales rather than pocket it.

That's the real challenge to your scheme, IMO: like a hundred people already got there first and the margins are now very slim.
posted by pwnguin at 9:58 PM on March 24, 2015