A Sports Betting Boom (Copy)
A brand is a promise; it sells what you stand for and what your consumers should expect from you. As you deliver on that promise, you build trust. If it appears that you’ve done something that betrays what you stand for, you have a problem. Just ask Robinhood.
“It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.” -Warren Buffet. You could do everything right, good execution, and noble reasons for why you do things. However, if you make those reasons unclear to your consumers, your audience may make their own story and simply believe what you are doing is wrong. In case you didn’t hear, within the past few weeks the whole financial world was taken by storm by a bunch of Reddit users who may have completely changed society as we know it. There’s a big lesson to be learned in the Robinhood saga that has nothing to do with finance or trading. It’s simple really: perception matters.
For people who don’t know the stock market *raise hands*
To try and make what happened with Robinhood a little more clear to the average reader, I’m going to briefly explain the stock market with radical simplicity. In my experience, the best way to learn complicated concepts is from having them explained as if speaking to a toddler (after all this strategy got me through grade 11 Biology).
To help simplify the stock market let's pretend stocks are trading cards instead. So if you understand Pokemon cards, you’re one step closer to understanding stocks. If you don’t, well, you’ll be learning two things today.
Stay with me here.
Let’s say you borrow a card from your brother, and you promise that no matter what you do with this card, you will give it back to your brother in one year. So now with your new, borrowed card you quickly go on eBay and ask to sell the card for $10. Simple so far, right? But remember, in one year you have to give that card back to your sibling. Let's say that one year goes by and you go back onto eBay to find the card to give back to your brother. You find the card and to your luck it’s offered for $4. So you buy the card for $4, the same one you sold a year ago for $10.
Quick math, 10 minus 4 equals 6. Therefore you just made $6 by doing almost nothing. However, the opposite could have happened. If you went on eBay and your brother’s card was now offered for $100, well now you have to pay back the difference, and instead, you lose $90. The scary thing is, there is no limit to how much you could have had to pay to get your card back. The value of your brother’s card could have gone up hundreds or thousands of dollars and you would have had to pay it all back.
This is essentially what happened with the Gamestop stock or, as I will refer to in this article, GME.
What happened with GME?
Wealthy hedge funds such as Melvin Capital chose to short the GME stock (Short = to bet against), believing the company and stock was on the decline. However, the most insane, ridiculous, and (in my opinion) amazing thing happened. A bunch of Reddit users on the subreddit r/wallstreetbets banded together and said they were going to buy as much GME stock as they could. These were just everyday people who decided to band together to “stick it to the big guys.” When many people buy a stock or demand for that stock increases, the price goes UP. Their collective action increased the price of GME by 1700% in January, 2021 and forced powerful banks who chose to short GME to pay the difference.
This is basically like going back on eBay and realizing your brother's card was now worth 8,000% more than what you bought it for, and now you have to pay back the difference.
The GME stock quickly became a meme (and oh, the memes did not disappoint) where everyone from Elon Musk to Snoop Dog jumped on the GME bandwagon and sent the stock price “TO THE MOON.”
One of the best parts? The majority of the people buying the meme stocks were retail investors (the average, everyday person) trading on an app called Robinhood. These individuals were getting rich by taking money from hedge funds betting against failing companies. Yes, an app called Robinhood was the actual tool the “poor” were using to “steal’ from the rich (a perfect marketing campaign that none of us could create if we tried). Within a couple of days, Melvin Capital had to avoid bankruptcy and needed to get a $3 billion investment to stay afloat, barely.
Robinhood became the #1 most downloaded app on the App Store, and the GME stock rose all the way from $4.84 in August 2020 to $483 on January 28th and forced hedge funds to lose over $70 billion. It seemed like the stock really could go all the way to the moon.
But then it happened.
How To Ruin a Brand in a Day
Just as Reddit users and the everyday person were becoming millionaires off of GME, apps like Robinhood and other brokerages shut it all down. They disabled the buying option for users and the only thing they could do was sell. This drove the stock price downwards and subsequently put many of the Reddit users into a panic sell, which forced the price to fall. Therefore, ultimately made the retail investors lose money and saved the hedge funds.
For Robinhood, this went against their entire ethos on what they are supposed to be as a brand. They had positioned themselves as a platform for the people, allowing anyone and everyone to trade—at least until it inconvenienced them. The brand that once claimed to “democratize finance for all” did quite the opposite. Even Jordan Belfort came out and took a stance against Robinhood. You know if the guy they based the movie “The Wolf of Wall Street” on calls you out on your ethics, you really messed up.
Needless to say, the tweet from Robinhood in 2016 calling to “Let the people trade.” did not age well.
With this said, in my opinion, this shutdown was the right decision for Robinhood. In simple terms, every time someone buys a stock on Robinhood, the company has to put a deposit down. So with the insane amount of retail investors using Robinhood, the company was heading towards bankruptcy (a bit of an exaggeration, but if GME kept going to the moon, Robinhood most likely wouldn’t make the trip). The way the current financial system is set up forced the company’s hand to shut down certain stocks as they didn’t have any other choice. This was a “5 Sigma standard deviation event” or a 1 in 3.5 million chance of occurring, and no one was prepared for it (I mean who are we to judge someone mishandling such a rare event after 2020). At the core of this is the simple fact that the financial system simply gave Robinhood no other choice. As the old saying goes, “don’t hate the player, hate the game.” However, Robinhood completely failed to articulate this to its audience.
Public Perception:
Today's consumers have more options than ever when choosing a vast mix of products and services. In such a fiercely competitive business environment, trust has become the key differentiator for brands. Trust is based on the relationship between a company and the consumers. The brand needs to deliver a quality product or service that receives good ratings and treats its consumers and others well.
In this instance, when the product here is “democratizing finance for all,” it’s a really bad look when you shut down retail trading, and it benefits the big guys. The public perception story consumers began to make up was that Robinhood was bending to the will of colossal hedge funds, which is detrimental to this particular brand based on the outlaw hero who stole from the rich. When to the average consumer, it seems like Robinhood was doing the exact opposite.
It turns out this wasn’t the whole story; however, Robinhood was too late to get their message to the public. Giant figures in the financial industry such as Elon Musk and Dave Portnoy began spreading these false claims like wildfire, the internet embraced these theories, and there seemed no way Robinhood could go back.
As a result of their decisions during this PR crisis, Robinhood received the worst reviews on the App Store and fell out of the top 25 most downloaded apps. The Robinhood brand is officially tainted.
Lessons From RobinHood
The biggest lesson from this saga is that what happened here was easily avoidable. Robinhood’s issue wasn’t that they shut down particular stocks, it was the public’s perception of why. Simply stating that it resulted from “market volatility” to a bunch of retail traders doesn’t exactly get the message across of how Robinhood’s hand was forced to close the stocks or risk running out of capital.
No matter the efforts of Robinhood Co-Founder and CEO, Vlad Tenev tried to convey the company’s message that their hand was forced and this was the best course of action for the company to take to protect both themselves and their consumers (which again, I think was the right thing to do). The public did not listen. Robinhood was too late to change the narrative so to the people, the narrative looked like Robinhood betrayed them and broke their trust.
At the very core of the relationship between a brand and consumers is trust. A company, and its brand, are built upon how strong the trust is between their clients. You earn that trust by delivering on the promises you make consistently over time. Robinhood spent seven years building its brand and public image, and took less than a day to destroy it.
All-in-all, this has shown the craziness of not just our financial system, but about our society. How something is priced and how we value it, whether it is a card, a share of GME, or the companies we support, is a direct result of how a group of people decides to act toward it. It’s all mass psychology that determines how we perceive certain things and what we deem valuable in society. Value is whatever a bunch of people think the value is. A dollar bill, a piece of paper, is only valuable because we believe it is important. Yet a moment like this when what we value and who we trust gets disrupted; when forces so large change the status quo, it shows what the financial system is built off expectations. Truly, whatever we collectively believe, becomes our reality. This can be a brand's greatest asset or their end.
