When California sued YTB last summer, Attorney General Edmund G. Brown Jr. said he wanted to put the multilevel marketer out of business because it was operating an illegal pyramid scheme and deceiving the public about the income potential for participants.
Though the recently announced settlement in the California case by no means puts YTB out of business, it will significantly reshape the company by pushing it in the direction of a travel franchise operation, de-emphasizing its multilevel marketing division and making it less lucrative.
Yet, despite Brown’s victory cries, the settlement failed to produce a court ruling that answered the root question: Was YTB guilty of operating an illegal pyramid scheme?
Nevertheless, with the ink barely dry on the California settlement, Illinois jumped on the bandwagon. A suit filed this month in the state’s courts also accuses YTB of running an illegal pyramid scheme.
It is a charge the company has consistently denied. But determining which side is right depends on what differentiates a legitimate multilevel marketing model, also known as an MLM or network marketing model, from an illegal pyramid scheme.
James Toma, the California deputy attorney general most involved with the YTB case, said that when reviewing a possible pyramid, the state "looks at the actual operation of a scheme and not just the literal description," seeking evidence that people are paying for a product they don’t technically have to buy, because they intend to use that product as a model to help recruit others into the scheme.
California concluded that some YTB sales reps have been signing on as referring travel agents merely as a way to recruit other prospective RTAs, which explains why the settlement requires that by June 1, YTB must provide a free demo site for the recruitment of new RTAs.
In addition, Toma said California looks at the portion of an MLM’s income that comes from recruitment-related sales vs. how much stems from selling a retail product to outsiders.
"The public needs to know," he said, "because that determines how long the company can survive."
Although Toma said there are no set formulas for judging these criteria, the YTB settlement will change the balance between its multilevel marketing and travel revenues by limiting the income of recruiters who sign on a high number of other recruiters and by requiring recruiters to reveal to their prospects the grim facts about attrition rates and the portions of investors who earn little or nothing.
While agreeing to sweeping changes as part of the settlement, YTB did not admit to any wrongdoing.
The company has been controversial since it became large enough to attract attention more than two years ago, generating unusually passionate pro and con views about its operations. Its critics will see the California deal as proof of an illegal pyramid; ardent supporters will see the opposite.
In this highly charged crucible, the company’s critics and supporters alike — but especially its critics — have made a lot of claims about YTB on blogs, in forums and in letters to the editor.
Some are simple statements of fact. Some are pure myth. Many fall somewhere in the middle, representing a nugget of truth distorted in the heat of argument.
In an attempt to add nuance to myriad heavy-handed generalizations about YTB, Travel Weekly sought out experts and former RTAs and asked them to assist in affirming a variety of claims. Some are quoted by name, but many asked not to be identified.
What follows is a list of the most common assertions about YTB by critics and others, followed by Travel Weekly’s analysis of their merits:
• Most suppliers don’t care how YTB gets business as long as it delivers bookings.
Somewhat true. It is hard to read the minds of suppliers, but judging by their actions, it seems fair to conclude that most suppliers are not too concerned about YTB’s business model as long as the company abides by basic requirements to pay its bills and remain registered or licensed where required.
A high portion of self-sales raises red flags. Those suppliers that care the most have ceased taking bookings from YTB, whereas others are withholding travel agent benefits from the RTAs but taking the bookings and paying commissions.
• Travel Weekly is being played for a sucker when it includes YTB in the annual Power List.
Not true. A company’s place in Travel Weekly’s list is determined by a single criterion: the total gross sales volume produced by an ARC-approved travel agency. YTB is an ARC agency.
Travel Weekly relies on Power List candidates to report sales volume accurately, whether the candidate is American Express Business Travel at No. 1, YTB at No. 26 or any other company on the list.
• YTB is a card mill.
Not true. A card mill is a company that entices people to pay fees for an ID card that will entitle them to travel agent perks and discounts.
When pitching the RTA opportunity, sales reps vary in the extent to which they rely on discounted travel as a selling point, but former RTAs report that the pitches do not lean heavily on perks derived from the ID card. In fact, one New York-based RTA said, "It was pointed out that this was not an industry card."
Initially, YTB offered cards to all RTAs, but in early 2008, it began requiring that a candidate first sell $1,500 in travel to someone outside his or her immediate family. Kim Sorensen, CEO of the YTB Travel Network, said YTB has gone to great lengths to create a card that does not resemble other industry IDs, and the credential "clearly states the card is not to be used for reduced-rate travel."
• YTB engages in "related-party transactions."
True. While it is not illegal for YTB merely to have financial dealings with companies in which its officers or board members have an interest, such dealings often have raised eyebrows.
YTB has openly advised of such situations in its financials. For example, YTB’s founders — Sorensen, Lloyd Tomer and Scott Tomer — own BerylMartin, based in Griffith, Ind., which YTB uses for printing sales materials and for staging YTB’s annual convention.
YTB paid BerylMartin $8.4 million in the three years ended Dec. 31. Sorensen said the partners bought BerylMartin when it was bankrupt because YTB relied on it for many services.
However, he said, assertions that the partners were siphoning off YTB funds through BerylMartin led YTB to substantially reduce its dealings with the company. Sorensen said the partners "haven’t taken a dime" out of BerylMartin.
In 2005, YTB leased office space in two buildings in Edwardsville, Ill., its former headquarters, from Meridian Land Co., which is owned and controlled by two men who were then YTB board members, Dr. Timothy Kaiser and Clay Winfield. Winfield resigned from the board effective April 30, and Kaiser will leave in mid-June.
And in spring 2007, YTB bought three vehicles for $128,000 total from a company controlled by Lloyd Tomer, YTB’s chairman.
There is no evidence that any of these transactions were illegal or presented a conflict of interest.
• YTB is built on RTAs pointing family and friends to their websites for direct bookings.
True. But there is more demand for offline services than the model anticipated. RTAs who want a travel business often make the bookings themselves, either at their YTB site or by calling suppliers directly.
Catherine Brock of Long Beach, Calif., said that referring family and friends to the Web "is not as easy as YTB says it should be." Her host now is Montrose Travel.
Sorensen said about 60% of sales are booked at the websites and that the 40% booked offline includes all group business. It is not clear, though, how much of the Web-based business is booked by RTAs on behalf of their clients.
• Carnival Cruise Lines cut off YTB agents from BookCCL.com and from direct-supplier calls.
Not true. As confirmed by both parties, YTB is directing RTAs away from Carnival toward a new website with marketing materials for various suppliers, including Carnival, to improve efficiencies.
It also established a Carnival desk to take calls, not only to answer questions but also to provide training to less-experienced RTAs. But no YTB agents have been cut off from Carnival’s travel agent resources.
• RTAs are driving suppliers crazy by asking dumb questions.
There is some truth to this, but some former YTB agents pointed out that everyone was a newbie at some time. Patty Jo Attwood of Cape Coral, Fla., now with Montrose Travel, said she had not realized how unwelcoming her supplier contacts were being until she experienced warmer responses once she began identifying herself with another host.
One problem for YTB is that if just a small percentage of its tens of thousands of RTAs ask a dumb question, the total number of dumb questions suppliers must deal with could be quite large.
Sorensen said that following last fall’s restructuring, sellers with the least training — those now labeled "affiliates" — will not be paid commissions if they make bookings by calling suppliers directly.
• RTAs are uninformed, unknowledgeable and unskilled.
Partly true. Former RTAs acknowledged that the majority of their colleagues fit this characterization.
It is worth noting that YTB created a model that presumed its referring travel agents would literally refer travelers to a website; hence, no skills would be required.
Having "uninformed, unknowledgeable, unskilled" affiliates becomes an issue only when they discover that their friends and family need assistance in arranging travel. That reality has pushed YTB to offer training for travel-focused RTAs.
• RTAs are only interested in signing on other RTAs.
Split decision. This blanket statement doesn’t quite make the cut, because while a large majority of RTAs are more focused on selling websites, some RTAs want to sell travel.
Still, the California attorney general found that of the more than 200,000 people who paid YTB for websites in 2007, 62% earned no commissions, even on their own travel.
Rich Segarra, a former RTA based in Virginia Beach, Va., and now with TraVerus, said RTAs who want to sell travel often have been made to feel like the odd man out.
"Most RTAs, as well as YTB, are essentially interested in the network," he said, adding that most of the time when he called anyone about a travel question, "I was told, ‘Don’t worry about travel.’ "
• RTAs are only interested in free or discounted travel.
Not true in practice. The prospect of travel benefits does appeal to many, and former RTAs said they knew colleagues who treated YTB like a travel club.
However, this percentage is necessarily small because RTAs are now required to gain approval at YTB’s reduced-rate desk to accept trade courtesies, based on YTB’s productivity rules as well as those of each supplier.
• YTB is interested in selling memberships, not travel.
Partly true. YTB says on its website that it is "first and foremost about selling travel and travel products, and secondly, travel websites." The company boasts sales volume of more than $400 million and aspires to be the world’s largest agency by 2011.
That said, however, YTB has so far earned a lot more money selling and maintaining websites than it has selling travel. In Securities and Exchange Commission filings, it reported that 2008 travel commissions accounted for only 17.2% of net revenue, up slightly from 14.5% in 2007.
Website sales and monthly fees accounted for 75.3% of net revenues, while sales of training and marketing materials to recruits accounted for 5.9%.
• YTB gives the travel agency business a bad name.
Not true. Suppliers that don’t much like YTB and its agents know the difference between them and mainstream agencies. As for the public, former RTAs said their clients generally did not know about the company, or they viewed it as an MLM and not primarily as an agency.
• YTB provides no training for travel sellers.
Not true. Though YTB did launch with minimal agent training, that has changed. The real issue has to do with the quality of the training.
Former RTAs described some of the earliest sessions as being useless or sharply criticized the overwhelming emphasis on building a network at the expense of travel training. For example, Attwood said her first sessions in early 2008 should have counseled her to register her business as required by Florida law.
But the training choices are richer now. The top-of-the-line proprietary program is YTB E-Campus, which provides, at a cost of $29 per module, training sessions created by industry consultant Marc Mancini. It is accessible from YTB’s back-office portal for agents. By later this year, completing this series will offer better income-earning opportunities, Sorensen said.
Assessments of YTB training vary greatly, reflecting the fact that some RTAs came to the program later than others and suggesting that some have higher expectations than others.
One called YTB’s courses "inadequate at best and expensive," whereas others described the Mancini courses as being "very well done."
• YTB tells prospective RTAs they will earn commissions on others’ travel and their own, take deeply discounted agent trips and get healthy write-offs for travel and other expenses. It tells website sellers they can become millionaires.
Mostly true. YTB makes canned presentations available to sellers that paint a bright picture of "traveling as an insider" or enjoying access to proprietary YTB Exclusives at deeply discounted prices. They also highlight the possibility of deducting travel spending and other expenses on taxes.
On the marketing side, Lloyd Tomer has said he will make millionaires of some sales reps, and a few reps indeed made more than $1 million in cash or stocks in 2008.
Nevertheless, YTB’s thousands of freelance reps sometimes make grander — or sillier — promises, which led the California attorney general’s office to conclude that YTB was making "wildly misleading claims" about the income potential in the travel business.
Richard Smith of Greenville, S.C., now with Montrose Travel, recalled being told that by selling websites he would be "well off" in a couple of years. Attwood said she was told it would be "easy" to make "five figures and above."
Segarra said he was told he could be "financially independent" in a couple of years and that, if he worked hard, he could make six or seven figures. He said he did not regard these as outsized claims. A few sales reps, though a tiny percentage, have achieved earnings of that magnitude.
• YTB has forgiven $1 million in debts owed by its sales directors.
True. The company wrote off $1.2 million related to advances and loans made to its sales force in 2008.
• YTB does not offer client support.
As a blanket statement, this is not true. However, personnel at the call-in services YTB operates frequently advise callers, whether consumers or RTAs, to call the suppliers’ toll-free numbers.
YTB-provided websites also refer consumers to suppliers’ toll-free numbers; if the client wants to call YTB’s customer support, the RTA provides the number. Most, though not all, former RTAs were dissatisfied.
• YTB is a cult.
Absolutely not, said former RTAs. The buzz outsiders see at a YTB event, they said, is typical of an organization motivating a sales force. Eric Johnson of Santa Rosa Beach, Fla., said Lloyd Tomer, a former preacher, "is like a magnet. … He gets ovations when he comes into a room."
And Brock observed: "YTB does have a strong community culture with an us-against-the-world mentality. … I think the business model attracts personalities who like that type of culture." On the other hand, she said,
"Frankly, the anti-YTB crowd could be accused of the same thing."
• Lloyd Tomer once owned Elvis Presley’s plane, the Lisa Marie.
Partly true. Lloyd Tomer, along with some members of the First Church of God in Benton, Ill., where he was the pastor, briefly owned a half interest in the plane in 1978. The aircraft was repossessed within a few weeks.
Sorensen said Tomer and his partners "lost their shirts. … The project was a colossal failure at all levels and has provided his critics with a good chuckle for one-third of a century."
Sorensen added that the YTB chairman "has very fond memories of riding around in Elvis’ plane and sleeping in Elvis’ bed during one of the shortest business ventures in American history."