I’ve seen a bunch of approving links to Oliver Reichenstein’s article advocating a “business class” pricing model for online media. The idea is that the information is free, but paying customers get a superior user experience. It’s a nice idea, but I actually question the analogy. Consider the question he started with:
But the flight industry is a tough environment too, and they found ways. So tell me: Why do people fly Business Class? In the end, an airplane brings me to the same place regardless of whether I fly Economy or Business Class and the massive price-increase I pay doesn’t compare the difference in value.
Two issues here. One is that despite extensive subsidies and regulatory protections, it’s not at all clear that “legacy” airlines actually have found a way. The number of these firms keeps shrinking (witness the United-Continental merger) over time. But more to the point, it seems to me that relatively few business class fliers actually do pay for it. Instead airlines are basically living off principle-agent problems. When lawyers at nice firms travel for work, they fly business class and charge the airfare to the client. Or people fly coach for work, racking up frequent flier miles, and then use the miles to buy upgrades. In those cases, it seems likely that if the individual enjoying the business class seat could pocket the price difference as cash they might. But they can’t so they don’t. Either way, it’s called “business class” in part because of the expectation that you won’t actually be paying for it out of pocket.
This model works in media, too. Nobody buys a Bloomberg terminal or a National Journal subscription, instead they work at places that pay the fee. Anyone who can get themselves into that kind of “this counts as a legitimate business expense” is well-positioned to make money. Selling directly to consumers is much harder.
It should be said that this isn’t just a matter of third party payment, it’s also about taxes. If your firm buys me business class airfare, that’s a tax deduction for you. If you paid me the same amount of money, then I’d have to pay taxes on it and wouldn’t be able to afford the business class ticket.