The Information's pricing model

Jessica Lessin and her team launched The Information this week, “a subscription publication for professionals who need the inside scoop on technology news and trends”.

All the buzz was about the site's pricing model and not the content. At $39 a month of $399 a year, it's much pricier than other technology news sites, most of which are entirely free and ad-supported. When I first heard the price point I thought it was crazy.

But after hearing more about the service and visiting the site, I realized it wasn't that crazy after all. What Lessin and team faced was a classic pricing problem, when you have one set of customers who will pay a lot for your service and many more who won't pay nearly that much.

The ideal scenario in such cases is to try and charge the customers who are willing to pay more a higher price while charging all the other customers exactly the maximum they're willing to pay also. When you can charge every potential customer the reservation price each of them is willing to pay, you've achieved first degree price discrimination, the holy grail of pricing. You've achieved maximum profit.

In reality, that's nearly impossible. The best most businesses can do is some form of segmentation of their customer base into different payment classes. Airlines are one example of a company that do a decent job of segmentation, and they do so by all sorts of methods. They split their seats into First/Business/Economy classes to try to grab money from price insensitive wealthy travelers (some are just plain rich, others pass through the bill on company expense reports). They also charge different prices depending on whether your trip has a Saturday night layover, or how late in the game you purchase your ticket. All these are methods of trying to segment out business travelers to capture more revenue from them.

Another example is with high end software. To take one example, when I was growing up, Adobe Photoshop cost $1000. While it was very useful software, for most people, including myself as just a student, that's a crazy price, far greater than the software itself was worth to me. But for a select set of customers, graphics professionals who used Photoshop every day in their professional life, $1000 was nothing. Those people probably would have paid more than that, actually, since it was critical to their livelihood.

Adobe was faced with a difficult problem: how could they segment out these groups of customers? They never came up with a perfect solution, so they basically picked a price that was geared more towards professionals. Other users were left to try to borrow a copy from work or a friend, or in many cases to pirate a copy to use. Of course many software companies offer educational discounts to try to segment out cash poor students, but even with an educational discount Photoshop was still over $200, even for an upgrade.

Later on Adobe tried to release a much lesser featured version of Photoshop called Photoshop Elements that they sold for a far lower price, at retail it ran anywhere from $30 to $50, but most often it was just thrown in when you purchased a digital camera or printer. As far as I can remember it never really took off.

Which brings us back to The Information. Lessin and her small team could have tried to support itself with ads, but that would mean bringing on ad sales people and spending time trying to drum up enough eyeballs on a daily basis to make the site an attractive advertising destination. It's not as if the tech coverage cupboard is barren.

Alternatively, they could focus on a much smaller audience, but one that could cover all of their expenses with subscription revenue. I'm guessing that, as with Adobe and Photoshop, The Information didn't feel like they had a much larger audience that they charge a much lower fee, say $5 a month, to be worth trying to segment that group out. Regardless, It's not really clear how a news site can easily segment out its user base the way an airline can.

Usually, if you hear a price point and it sounds crazy, it's not for you. Think $5,000 reports from investment banks or Gartner/Forrester. Netjets subscriptions. Courtside seats to Lakers games. That $8,000 bottle of Screaming Eagle on the restaurant wine list. The $1000 omelette at Norma's. Fine art. It's no different with The Information, albeit at a much lower price point. I haven't read any of their articles yet and have no opinion on whether they'll make it or not, but the math, based on the size of their team, doesn't indicate that they'll need an outlandish number of subscriptions to make it a profitable or at the low end a good lifestyle business.

The bright side, for those who do subscribe, is that since The Information's business model is not built around page views and display ad CPMs, readers shouldn't encounter annoying content packaging like slideshows or articles split across a gazillion pages with ad banners on every page.

The cost of commuting

There is a clear connection between social deficit and the shape of cities. A Swedish study found that people who endure more than a 45-minute commute were 40% more likely to divorce. People who live in monofunctional, car‑dependent neighbourhoods outside urban centres are much less trusting of other people than people who live in walkable neighbourhoods where housing is mixed with shops, services and places to work.

A couple of University of Zurich economists, Bruno Frey and Alois Stutzer, compared German commuters' estimation of the time it took them to get to work with their answers to the standard wellbeing question, "How satisfied are you with your life, all things considered?"

Their finding was seemingly straightforward: the longer the drive, the less happy people were. Before you dismiss this as numbingly obvious, keep in mind that they were testing not for drive satisfaction, but for life satisfaction. People were choosing commutes that made their entire lives worse. Stutzer and Frey found that a person with a one-hour commute has to earn 40% more money to be as satisfied with life as someone who walks to the office. On the other hand, for a single person, exchanging a long commute for a short walk to work has the same effect on happiness as finding a new love.

Daniel Gilbert, Harvard psychologist and author of Stumbling On Happiness, explained the commuting paradox this way: "Most good and bad things become less good and bad over time as we adapt to them. However, it is much easier to adapt to things that stay constant than to things that change. So we adapt quickly to the joy of a larger house, because the house is exactly the same size every time. But we find it difficult to adapt to commuting by car, because every day is a slightly new form of misery."

Much more here. The irony of my move from Los Angeles to San Francisco has been an enormous lengthening of my commute, it's the longest of my life, and I feel that pain acutely. LA is legendary for its bad traffic, yet the overall lower cost of living in that region makes it far easier to live closer to where you work which is ultimately what matters the most. The quest to get from the West Side to downtown during rush hour in Los Angeles is actually much less painful and long than having to drive up the 101 to San Francisco from the Peninsula during rush hour.

Most days I take the Caltrain, but again, it's the variability of the service that drives me crazy, to Daniel Gilbert's point. At least once or twice a month, something catastrophic causes train service to just dry up for several hours, leaving you stranded. Often it's because of a suicide, at other times it's a car that gets hit, or a power line that falls, or something else you would think would be a rare black swan event. And then your evening is shot, your dinner date left to make alternative plans, unless you pony up for a $90 to $100 taxi or Uber up to the city, but oh wait, the traffic on the 101 means you won't make it on time anyway.

It's difficult to judge what it's like to live in a city just by visiting as a tourist. It wasn't until I'd lived in NYC for a year that I realized it's a far better city to live in than to visit, contrary to popular wisdom. The same is true of Los Angeles, where most natives know when to avoid certain highways at certain times, spending more time in their neighborhood.

For all the good that cities have brought to the U.S., they fail miserably, with the exception of New York, on the quality of public transportation. At least 30% of my pleasure in visiting cities in Europe is being in an environment that makes me, as a pedestrian, first among citizens. American cities were built up in the age of the automobile, and that metallic beast has taken control of our cities in a way that may not be overturned in our lifetime.

It may be that China is where we see some of the greatest innovation on this urban planning dilemma. For one thing, their hand may be forced by the shockingly high levels of pollution in their largest cities. They also face a huge migration of people from rural to urban areas, probably the largest in human history. Combine that with a form of government that has much more freedom to impose its will in matters great and small and you have the potential for a new type of city to be erected, one that is built around direct human mobility rather than transportation by automobile.

Turning attendance/attention into money

Technology companies spend a lot of time trying to capture user attention (the only good with a quantity fixed by the laws of the universe) and then trying to turn that user attention into money, the means by which a great product or service becomes a business (every online business ultimately concludes in someone somewhere buying something).

Perhaps no place pushes the boundaries on solving this problem more than Las Vegas (some might say it's the adult movie industry, and others might argue that's just a subset of Las Vegas).

Though it's behind a paywall now, Josh Eells article in the Sep 30, 2013 issue of The New Yorker titled “Night Club Royale” was a fascinating look at the latest in Vegas' monetization success.

On the final Saturday night of 2012, Jesse Waits entered the Encore resort in Las Vegas and took a private elevator to the seventh floor, where a young d.j. named Afrojack was staying. Waits wore a black Tom Ford suit without a tie, and he was texting on two phones at once. Thirty-seven and handsome, with straw-colored hair, Waits is the managing partner of XS, a club on the Encore’s ground floor, which features a vast indoor dance space and an elevated open-air stage that looks out over a swimming pool surrounded by palm trees. According to the magazine Nightclub & Bar, XS is the top-grossing night club in the country, bringing in between several hundred thousand and a million dollars a night. The Encore’s owner, the casino magnate Steve Wynn, likes to joke that the club “has a perfect name.”

There are four dance clubs inside the Encore and its sister resort, the Wynn. According to an executive at the company, the clubs’ combined revenue last year was a hundred and eighty million dollars, which was more than the slot machines earned. (The Wynn’s press office disputed all figures related to salaries or revenue, but declined to provide accurate numbers.) “Half of Steve Wynn’s profit comes from the night clubs,” Andrew Sasson, a rival club owner, told me. “Gambling is an amenity now.”

The clubs achieved this success by championing electronic dance music, or E.D.M.—an unwieldy name for a sleek sound marked by propulsive kick drums, dopamine-rush synthesizers, and soaring vocals.

No other place in the world is so brazenly focused on parting you from your money, and with its hotel replicas of places like the Egyptian pyramids, New York City, Paris, and Venice, it's nothing less than an architectural microcosm of the global capitalist economy, distilled into its purest state. For that reason, many find it grotesque. I'm amused by its honesty.

Teen-age fans seek out E.D.M. online, or at festivals such as Electric Daisy Carnival, which is held in Las Vegas each June. But listeners of legal drinking age often prefer to experience the music at a club like XS, where gold-plated molds of female torsos hang over the bar. Customers pay from five thousand to twenty-five thousand dollars to reserve one of the banquette tables near the dance floor, which are stocked with Belvedere vodka and Perrier-Jouet champagne, along with silver ice buckets, carafes of orange juice and cranberry juice, and glass tumblers stacked in small ziggurats.

Vegas is like a technology portal, or Netflix, or even a newspaper, trying to aggregate all the forms of entertainment that will induce people to fly out into the middle of the desert with their wallets in tow. There's gambling, more of it than you can imagine, running 24 hours a day. There are live shows from some of the premiere acts in the world, from musicians to magicians to acrobats to people painted blue, running every night. Some of the greatest chefs in the world have been flown in to open marquee restaurants. There are huge sporting events, from boxing to UFC. There is sex, both the suggestion of it and the actual act itself, all for a fee.

Now add to that E.D.M. Vegas saw the popularity, tested it out at its night clubs, and turned it into one of its most lucrative cash flows. But even the cash itself isn't taken directly in exchange for the music.

A maxim in Vegas goes that the person who invented gambling was smart, but the person who invented chips was a genius. The same could be said of night clubs and bottle service. Last year, XS earned more than eighty percent of its revenue from alcohol sales. A bottle of Grey Goose that wholesales for forty-five dollars costs more than six hundred in the club—a markup of more than a thousand percent. The biggest customers often spend half a million dollars on drinks in a night. Because the clubs are often full, the extravagance of the bar tabs distinguishes a great night from a good one. “It's a whole new metric,” will.i.am, the leader of the Black Eyed Peas, who also d.j.s at the Wynn, told me. “What makes a hit in pop music is how many times a song gets played on the radio. A hit in d.j.-land is how much alcohol is bought.”

Brilliant, it's virtual currency. And Vegas has many such tricks in its playbook, it mixes and matches them contextually. At the gambling tables, it's the opposite of the night clubs. The entertainment, the gambling, costs you money, and the alcohol is free. If you gamble enough, the hotel will comp you with free stays, meals, or show tickets, knowing they'll make up for it elsewhere, just like some of the most popular internet services in the world offer you their service for free in exchange for selling your attention to advertisers.

The D.J.'s themselves understand how important it is to be fluid in value capture. They were some of the first musicians to realize that selling recorded music was a dead end financially and to use it as a loss leader to other revenue streams like live performance. “You put your music on the Internet for free, and promoters fly you out to d.j. and pay you three million bucks a year,” will.i.am notes in the article.

Many businesses could learn from how quickly Vegas pivots, copies, and assimilates.

For decades, there were no dance clubs on the Strip; the big resorts worried that clubs would distract customers from gambling. In 1995, the Rio added a club, and soon other resorts did, too.  Most of them played an “open format” of hip-hop, Top Forty, Michael Jackson, and classic rock. Prominent dance d.j.s performed occasionally, but none established a residency until 2008, when the British trance producer Paul Oakenfold started a weekly gig at the Palms. XS opened the next year, and by the time Afrojack signed his contract, in 2010, the Wynn clubs featured E.D.M. five nights a week.

I have many friends who despise Vegas and won't go, but I recommend tech entrepreneurs spend some time there studying the surroundings and seeing how they've engineered the entire space to lead to the only conversion that matters: transfer of cash. Recall the Russian writer Viktor Pelevin has said the main character of modern pop culture is a briefcase full of money. He was onto something.

Lest you think it's a road paved entirely with gold, Vegas also has another thing in common with the tech industry: bubbles.

The promoters at the Wynn acknowledge that the d.j. bubble will pop. “It may not last longer than next year,” Waits said. In the meantime, the resort plans to wring as much profit from E.D.M. as possible.

Ideal length for various pieces of art

Richard Brody of The New Yorker is thought-provoking if sometimes cryptic. In a short post on Greenberg starring Ben Stiller, he writes:

I saw Noah Baumbach’s “Greenberg” again on Saturday and this time, despite the title, saw it less as a portrait of the remarkable character—unusual but exemplary—played by Ben Stiller than as a romantic comedy. It reminded me that the rules of romantic comedy have changed—that the high-concept variety of the genre is more or less dead. The best romantic comedies of recent years are distinguished by their lack of a mainspring; they are, in effect, stories of people tossed together by circumstances who try to cope together. They’re linear films, which build more on character than on situation, and which, theoretically, could run indefinitely long.

There are two ideal durations for a feature film: sixty-three minutes, which is an hour of setup and a brief tag of a wrap-up; and three hours, of which the first hour of setup is followed by two of working-out. The ninety-minute length (or its modern variety, the two-hour version, which includes more backstory) is constructed on the artifice of a plot mechanism that brings lots of plot threads together in an accelerating dénouement. It worked in an age of abstraction—an age when movies themselves, made largely on studio sets with the help of an unprecedented battery of theatrical paraphernalia, achieved an extraordinary simulation of specifics through remarkably artificial means. The stories that studios set in motion were equally abstract, relying on situations that had the built-in necessities of social conventions that themselves ran along more or less unchallenged. Classic Hollywood storytelling bought its efficiency at the price of all it excluded or filtered out, and its ingeniously constructed stories were less the cause of that exclusion than the effect of a society that was hardly inclusive.

In a world where streaming video is starting to become a more accepted distribution method, more TV and film can find its natural running length. TV especially has always tried to adhere to durations that fit into half-hour increments (with or without commercials) since it made it easier for people to remember the start-time of TV shows and because all the other programming around it was scheduled around it.

Despite the lack of such constraints, movies now all tend to run a standard 90-120 minutes long. The run-times in cinema seem to be more of a marketing or economic decision than anything else.

I would love to see more movies dare to be shorter or longer. Many documentaries, for example, would really benefit from shortened runtimes. To reach a 90 minute duration, so many of them layer on heaps of unnecessary backstory and talking head footage; it's a bore.

At the same time, a great movie like the Italian miniseries The Best of Youth would not be the same experience without its six hour running time. On Italian TV it aired as four 1.5 hour episodes, but in the U.S. it played in theater briefly as one six-hour movie, two three hour blocks separated by an intermission. I saw it in NYC with about six other people one weekday afternoon, and it remains one of the memorable moviegoing experiences of my life. Spending all that time with that family, you come to know them as your own, and every emotion you feel has the associated weight of that intimacy.

It's rare to see movies of such length anymore. Would Lawrence of Arabia, with its near four hour runtime, get greenlit today? Perhaps it would, though it would be broken into two volumes, like Kill Bill, and released over two successive winters.

An economic lens on art

From an old interview of Tyler Cowen by Emily Moore:

Tyler Cowen: The economics of art is one good way to better find the art you will enjoy. For instance, I find I often like very popular art and very niche art, yet with some degree of allergy to what falls in between. What goes under the name “indie music” I usually find pretentious or just flat-out mediocre. I’d rather listen to Michael Jackson, or even Taylor Swift for that matter. That said, I’m even more game for some of the more obscure corners of Indian classical music or polyphonic Pygmy chants. I tend to be suspicious of “that which is aimed at being different”, perhaps because it too often caters to a feeling of superiority or trendiness and sidesteps its loyalty to a true artistic vision. Very popular art is often a more pure art in the aesthetic sense, even if some sides of it repulse us. I thought Titanic was a splendid movie, with all of its imperfections, but I like Béla Tarr too. I don’t know whether this same analysis is useful to artists who wish to stick with their personal visions, but it is telling them they will always face a trade-off, and they will always be somewhat unhappy with what the market rewards them for. Maybe they should simply get used to that idea and get on with things.

The essay referenced several times in the interview is “An Economic Theory of Avant-Garde and Popular Art, or High and Low Culture” (PDF). Perhaps we need to cut the NYMag Approval Matrix into thirds, with the middle layer, between the highbrow and lowbrow, as a danger zone of artistic mediocrity.

Among the footnotes in that essay, noted by Moore, is this: “The limited evidence collected indicates that the income of artists is low relative to their human capital.” I've always believed the same, explaining my deep ambivalence over friends who pirate content freely. One idea to subsidize art: income tax breaks for artists. Or perhaps artists should turn more to human-capital contracts, a way of making artists less sensitive to the wild income fluctuation inherent in the field, especially in an artist's early years.