What Do Bosses Want?

The New York Times paywall is here. Felix Salmon has the details, and what looks like the definitive critique:

What does all this mean for the New York Times Company? I can’t see how it’s good. The paywall is certainly being set high enough that a lot of regular readers will not subscribe. These are readers who would normally link to the NYT from their blogs, who would tweet NYT articles, who would post those articles on Facebook, and so on. As a result, not only will traffic from these readers decline, but so will all their referral traffic, too. The NYT makes more than $300 million a year in digital ad revenue, so even a modest decline in pageviews, relative to what the site could have generated sans paywall, can mean many millions of dollars foregone. On top of that, the paywall itself cost somewhere over $40 million to develop.

Against all that, how much revenue will the paywall bring in?... extra revenues of $24 million per year.

$24 million is a minuscule amount for the New York Times company as a whole; it’s dwarfed not only by total revenues but even by those total digital advertising revenues of more than $300 million a year. ... So by my back-of-the-envelope math, the paywall won’t even cover its own development costs for a good two years, and beyond that will never generate enough money to really make a difference to NYTCo revenues. ... I just can’t see how this move makes any kind of financial sense for the NYT. The upside is limited; the downside is that it ceases to be the paper of record for the world. Who would take that bet?

(For the record, in the past couple weeks I devoted a few idle moments to considering just how much I would pay for digital access to the NYT, and decided that $15 a month was just about my upper limit. But in fact I won't pay it, since top news stories will continue to be free on the iPhone.)

What makes this bad decision so interesting is how many other companies seem to make the same kind of bad decisions. And in particular, how completely they overlook the value of the kind of free marketing and brand development that Salmon describes in the first paragraph.

For instance, here's an interesting new working paper by Yi Qian on the effect of counterfeit goods on clothing brands, which finds

heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales.

In other words, when someone buys a rip-off pair of Manohlo Blahniks, they may be foregoing a purchase of an authentic pair. But maybe not. And either way, their visible endorsement of the brand increases its appeal to others in a way that the company would otherwise have to spend scarce advertising dollars to achieve. Not surprising, it's the high-end brands that benefit on net from counterfeiters, since purchasers of counterfeit goods are less likely to be able to afford the real thing and the brand identity is more valuable. This is consistent with other research I've seen suggesting that in some cases, the advertising effect outweighs the substitution effect even at the level of the individual consumer -- buying a counterfeit handbag (or illegally downloading a piece of music, or whatever) makes a person more likely to subsequently buy that item legally.

(Qian is also co-author of this fascinating survey of the economics of counterfeiting, which identifies a remarkably broad range of theoretical and empirical cases where laxer IP protections turn out to benefit sellers. For instance, there's evidence that academic journals were able to charge higher prices as a result of the widespread availability of photocopiers starting in the 1980s, because the greater value of journals to subscribers who were now able to make copies of articles outweighed the loss of sales to people who read the copies.)

Sellers of branded goods can't be unaware of this research, or at least of these general effects. Yet we see sellers of branded goods going to ridiculous lengths to strengthen IP proections, even sellers of high-end goods who are least likely to be harmed by infringement. In effect, these companies, like the New York Times, are going to great lengths to deprive themselves of free advertising. It's almost like they put a higher value on controlling their brand, than on profiting from it.

Which they probably do.

It makes one think about the Marxist literature on the labor process, and the idea that for capitalists, maximizing the surplus they extract from workers is secondary to maintaining the conditions under which surplus can be extracted at all. This is Stephen Marglin's argument in his classic article What Do Bosses Do? -- that the factory system was not initially adopted because it was any more technically efficient than alternative forms of worker-controlled production, but because of the strategic leverage it gave the owner of capital. He quotes a contemporary article in The Spectator observing that worker-managed cooperatives were competitive with capitalist enterprises:

Associations of workmmen could manage shops, mills and all forms of industry with success, and the immensely improved the conditions of the men, but then they did not leave a clear place for the masters. That was a defect...

Similarly, bloggers and social media may successfully generate immense traffic for the Times, and counterfeiters may successfully build the value of the brands they rip off; but the owners of these properties may not be (only) confused when they object, since this uncontrolled activity has a less of a clear place for the masters.

As Kalecki famously said,

"Discipline in the factories" and "political stability" are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound.

Profits come second to power. So when the results of productive labor aren't appropriated as private property, the class instinct of the bosses of the information industries must tell them this is unsound, even if it's more immediately profitable than the alternative. As Kalecki says in the same essay, "The fundamentals of capitalist ethics require that 'you shall earn your bread in sweat' -- unless you happen to have private means." That, I suspect, is fundamentally why the Sulzbergers et al. object to free ice cream, even when they can make more money by giving it away than by selling it.