What Is The Future Of PSA And SGC After Merger Bomb

The world of sports card grading was hit by a bomb on Wednesday night. Collectors, which is the company that owns PSA, the biggest company in the grading, is acquiring SGC Grading, the second-largest outfit in the game. PSA’s Takeover Of SGC, changes the landscape of grading completely.

After much talk over the 24 hours preceding it, the deal was announced officially by both parties on Thursday, February 29, 2024. The official announcement about the prospective deal was moved up after both companies’ sources told several media outlets that the agreement would be announced shortly.

How the news went down

The news was first broken by Darren Rovell, who said Collectors was acquiring Florida-based company SGC. Because it had already been published widely, SGC released a statement about these developments.

President Peter Steinberg noted, “SGC will remain an independent grading brand. And no changes are contemplated. Joining forces with the Collectors team will allow SGC to double down on our strengths while greatly enhancing our capabilities to innovate and modernize our offerings moving forward.”

Collectors soon put out its own statement regarding the blockbuster deal. CEO Nat Turner said, “Our portfolio focuses on service providers that bring expertise, quality, and value to hobbyists, and SGC has built a strong reputation on these three fronts. We recognize that every collector has their preferred authentication and grading provider, and we look forward to providing expertise that will continue enhancing SGC’s customer offering.”

Who are PSA and SGC?

PSA has its main corporate office in Santa Ana, California. However, it conducts most of its operations from its Jersey City, New Jersey offices. Meanwhile, SGC is located in Boca Raton, Florida.

SGC broke into the grading space by differentiating itself from PSA in two main elements. First, it focused primarily (at least in its early days) on vintage cards. It specializes in grading pre-World War 2 cards and has developed an excellent reputation for expertise. They were also known for having a particularly harsh grading scale. That made their 10s highly sought after and helped to increase the overall value of SGC cards.

However, over the last few years, SGC has actively promoted itself as a viable alternative for ultra-modern cards. It did so by changing its grading scale from a 100-point one to a more standard 10-point, based on the PSA one.

This effort has had mixed results. On the one hand, they have managed to diversify SGC submissions significantly. A complete 61.7% of card submissions to SGC in January 2024 were from the 2020s.

But on the other hand, they have not come close to challenging PSA for supremacy. For example, SGC had a solid month in January, grading 157,000 cards, an increase of 28% over the previous month. But that is dwarfed by the 1,220,000 graded by PSA over the same period.

The differences are stark and constant. Over 2023, PSA graded 13,500,000 cards (sports and TCG), while SGC processed 1,500,000 cards over the year. Indeed, while SGC has managed to grow its business, the Florida-based company has recently fallen behind CGC and is now the third-biggest grading company after enjoying second place for quite a while.

What this means for PSA

PSA was already a colossus at the top of the grading world in 2021. However, they were suffering from serious structural issues. There was a massive backlog at the company due to a variety of bottlenecks and a good deal of mismanagement.

During the COVID-19 pandemic card bubble, they proved utterly unable to process the increase in submissions. PSA was reportedly experiencing a backlog of SA one million items. Its attempts to deal with it involved closing submissions, which only increased the frustration felt by collectors.  

In February of that year, a group of investors bought the company through an $853 million deal, which also turned it from public to private. Shareholders enjoyed $92 per share on this deal. Collector Nat Turner, D1 Capital Partners L.P., and Cohen Private Ventures spearheaded the investor group. NBA All-Star Kevin Durant and Arizona Cardinals wide receiver Larry Fitzgerald were also part of the group.

At the time, PSA promised, “As a private company, we will have the flexibility to further invest in infrastructure, technology, and R&D to reduce turnaround times and increase operational capacity while protecting and enhancing the integrity and consistency of Collectors Universe’s best-in-class services.” They proved true to their word, have since eliminated the backlog, and entered into several meaningful partnerships that increased their reach in the hobby. That has helped them cement a seemingly insurmountable lead over all the other actors in the grading space. The purchase of SGC is one step on a seemingly unstoppable march to complete domination of the grading space.

What the deal means for SGC

While the implications of this move for PSA are completely clear, for SGC, this is a more complicated issue. As we have noted, SGC CEO Peter Steinberg vowed that “SGC will remain an independent grading brand. And no changes are contemplated.”

But as we know, when a large corporation takes over a smaller one, it can play out in several ways. Sometimes, the smaller company disappears into the larger one and becomes an increasingly irrelevant subdivision. That can end with the brand disappearing altogether. That is a danger here. SGC is so much smaller than PSA that we could imagine it becoming an afterthought.

In other cases, the smaller entity retains its independence and everything that makes it unique. That often occurs when the more prominent company does not micromanage and respects the autonomy of the smaller outfit.

That is undoubtedly what Steinberg and SGC are hoping for, and they have probably put elements in the terms of the deal to safeguard that.

How unique is SGC?

However, the genuine concern is how much of a separate brand SGC really has. I have been a pretty enthusiastic SGC customer and have reviewed their services in the past. A few things stand out about SGC, providing it with a unique flavor, different from the competitors. Their specialty in vintage and harshness of grading have already been mentioned.

However, there are other elements that collectors associate with SGC. When they return from grading, the cards come in a really cool tuxedo package. It’s not exactly a crucial element of their service, but it’s a fun touch.

More importantly, SGC has developed a wonderful and well-deserved reputation for its speedy turnover and excellent customer service. As I wrote in my review, “So how did they do? By my count, it was 22 business days from door to door. So SGC certainly delivered on their promise to provide grades quickly and efficiently.” Meanwhile, they also have a reputation for engaging with customer concerns at a much higher level than PSA.

Indeed, some observers are hoping that PSA will learn something from SGC about engaging with customers. But of course, a lot of that is simply a function of being a more minor operation. Will they be able to maintain that? That will depend on PSA and its ambitions.

Why is PSA buying SGC?

This is the million-dollar question. With 78% of the market, PSA doesn’t need SGC for much. They already seem to dominate everything. In particular, it doesn’t make all that much sense if they don’t intend to integrate SGC into PSA and keep it independent. It’s not like SGC is such a profitable venture that it makes sense to buy it for that reason.

All we can do is speculate. But the customer service of SGC may be one reason for this. It is certainly better than what PSA has to offer in that realm. Some have also wondered if PSA is doing this to get more graders.

The volume of cards they deal with is massive, and training new graders to be up to snuff is difficult. Meanwhile, SGC arguably has a better grading staff than PSA. They may want to take advantage of that and improve performance.

Perhaps the most tangible reason here would be to purchase a reliable and fully functional southern hub for PSA. Remember, they recently expanded to Japan and have endless submissions to work through.

What these reasons have in common is that neither of them bodes well for the continued independence of SGC within the Collectors portfolio.

More clandestine options

But of course, there is a third option. PSA could be engaging in an attempt to destroy SGC. There are two kinds of acquisitions. One is designed to continue, and one is designed to kill. The killer acquisition is when the more prominent company buys the smaller one to shut down a competing product.

Meanwhile, most acquisitions are designed to continue offering the smaller company’s products. Is SGC really worth killing? I guess that depends on how ruthless we believe PSA are.

Did you think we were out of options? Not so fast. There is a final possibility. PSA may have bought SGC to deny them to a rival. There are two main suspects here. One is CGC, which has been growing in recent months and has deep pockets behind it. CGC is already doing a good job challenging PSA in the TCG market. SGC would give it a trusted name in sports, allowing it to reduce PSA’s market share genuinely.

But the biggest nightmare from PSA’s perspective would be a Fanatics takeover of SGC. Fanatics has a knack for dominating every space it enters, and its ruthlessness makes PSA look like a Girl Scout group. If there were reason to believe either of those players was ready to take the plunge on SGC, it would be worth it for PSA to act first and do so with determination.

A distinct possibility

We discussed the two major plays a big company can make when buying a small one. Either allow it to maintain its independence or crush it like a bug. But there is a third option: use it for your purposes.

SGC is traditionally best known for the services it offers in the vintage space. Therefore, some have wondered if there is a possibility that PSA might use SGC as the place to grade vintage cards while maintaining the status as the leading company for ultra-modern cards.

That would make sense because it would eliminate SGC as a competitor and properly remove some of the pressure from PSA. But it would take away SGC’s independence.

Is PSA now an unethically large monopoly?

According to the latest grading data from GemRate, PSA is currently responsible for operating 78% of the grading market (including sports and trading card games). Meanwhile, SGC has 7% of the market activity. That means that even before this purchase, PSA was a functional monopoly and an unusually powerful one at that.

While it is true that the traditional definition of a monopoly is when one company is the ONLY one providing a service, that isn’t how the market works in practice. While small rivals to the more prominent players always exist, an outsized market presence can place massive barriers to the entry of new players and the growth potential of existing companies in the market.

There are other elements that help determine if a company is a monopoly in its field aside from market share. Another factor to look at is if the dominance of the relevant company is felt over a long period.

The Second Circuit court determined that a monopoly has “the ability ‘(1) to price substantially above the competitive level and (2) to persist in doing so for a significant period without erosion by new entry or expansion.'”

If a company has a dominant share over the long run, it can shape the market in accordance with its needs and deny entry to new actors. PSA was founded in 1991 and was instrumental in creating a demand for its products. Their rivals were made later and were, therefore, constantly playing catchup.

Though Beckett is an older company, formed in Ohio in 1984, it did not start grading cards until 1999. Meanwhile, SGC was founded a year earlier, in 1998. PSA’s structural advantage has shaped the grading space and helped the company become the giant it is today.

That is why courts in the United States and elsewhere have generally considered companies with more than 50% market share monopolies. Looked at from this perspective, an increase from 78% to 85% is not particularly significant.

PSA already has an unhealthy percentage of the grading market. Indeed, the purchase of SGC is an example of the massive power that having 78% of the market entails. Collectors can swallow their most significant competitor (in the sports space) without breaking a sweat.

Final thoughts on PSA’s takeover of SGC

With all this info in mind, there is no question that PSA is functionally a monopoly. The purchase of SGC is more of a symptom of that malaise than the cause.

The company already has a controlling share of the market, one that does not allow competitors to thrive. US anti-trust laws exist for a reason. Because if there are no options, prices and the level of services plummet.

As for SGC, this will not likely end well for them. Whatever guarantees PSA has given them, PSA will likely swallow them whole. It may take a few years, but most of the possible scenarios are not good for their long-term future.