AI transcript
0:00:03 [MUSIC PLAYING]
0:00:05 Here’s a riddle for you.
0:00:07 Name an item that is both a medical device
0:00:13 and a fashion accessory, an item that may cost $50 to make,
0:00:16 but often sells for over $1,000.
0:00:19 An item that was invented eight centuries ago
0:00:22 has improved billions of lives, and yet, many people
0:00:26 who need it don’t have it, especially children.
0:00:28 Have you figured it out?
0:00:32 The item I’m talking about here is the pair of eyeglasses
0:00:36 sitting right now on my face and maybe yours too.
0:00:38 This episode and the episode next week
0:00:42 also are about the economics of the eyeglass industry.
0:00:45 Does that sound boring?
0:00:46 It isn’t boring.
0:00:48 What we learned while making these episodes
0:00:52 is that the eyewear industry is fascinating and strange.
0:00:55 What you see is often not what you get.
0:00:58 It is a unique and resilient industry,
0:01:00 in the words of one research firm,
0:01:04 with global annual revenues of around $150 billion.
0:01:07 And it’s growing fast, not just because more people
0:01:10 need glasses these days, but because we are paying more.
0:01:13 In the US, the biggest market in the world,
0:01:15 a pair of simple prescription glasses
0:01:18 costs, on average, around $350.
0:01:20 It is an industry with many players,
0:01:23 but one is much bigger than the rest.
0:01:26 They’re called Estelor Luxatica.
0:01:28 They are the result of a 2018 merger
0:01:31 between the French lens manufacturer, Estelor,
0:01:34 and the Italian frame maker, Luxatica.
0:01:37 You’ve probably never heard of Estelor Luxatica,
0:01:40 but you certainly know the brands they partner with.
0:01:44 Armani, Chanel, Coach, Michael Kors, on and on and on.
0:01:48 But Estelor Luxatica goes way, way beyond luxury.
0:01:51 They own lens crafters and pearl vision,
0:01:54 Vision Express, and Oliver Peoples.
0:01:58 They own sunglass hut, as well as Rayban and Oakley.
0:02:00 They even own iMed,
0:02:03 the second biggest vision insurer in the US.
0:02:05 So, you get the picture.
0:02:08 – They have full control over prices,
0:02:10 and that’s just a license to mint money for them.
0:02:12 – Let me say right up front
0:02:15 that Estelor Luxatica would not speak with us
0:02:18 for the series, but other people did.
0:02:21 Industry analysts and rival manufacturers,
0:02:23 optometrists and economists,
0:02:26 historians, and a government regulator,
0:02:28 who had this to say.
0:02:31 – The margins, even by luxury good standards, are obscene.
0:02:34 – Why is a technology that’s been around for centuries
0:02:37 still so expensive?
0:02:40 We’ll tell you why, and we will tell you much more
0:02:43 about this strange, fascinating industry beginning now.
0:02:48 (upbeat music)
0:02:50 (clinking)
0:02:57 – This is Freakonomics Radio,
0:03:01 the podcast that explores the hidden side of everything,
0:03:03 with your host, Stephen Dubner.
0:03:06 (upbeat music)
0:03:15 – Have you ever wondered about the history of eyeglasses?
0:03:17 I have.
0:03:19 So we called up this man.
0:03:21 – Yes, hello, I’m Neil Handley,
0:03:24 and I am the curator of the British Optical Association
0:03:27 Museum at the College of Optometrists.
0:03:29 – Handley’s museum is in central London.
0:03:32 – A stone’s throw from Trafalgar Square.
0:03:34 – And the museum’s purpose is what?
0:03:39 – The purpose is to outline the history and development
0:03:45 of optometry services to help people conserve their vision
0:03:49 and to make the most of the eyes that they’ve been given.
0:03:52 – Okay, so let’s have some optical history.
0:03:53 Where should we start?
0:03:56 – There was a rudimentary understanding
0:03:58 of the principles of optics,
0:04:00 very much in the ancient world,
0:04:02 particularly in the Arab world,
0:04:06 but it seems that that knowledge did not result
0:04:10 in any device for correcting vision
0:04:12 until about the year 1000.
0:04:14 – And why do you think that was?
0:04:16 – Well, there were various explanations put forward
0:04:21 as to why it wasn’t necessary to correct vision.
0:04:24 For example, in an ancient society where you have slavery,
0:04:28 if you cannot read, a literate slave will read to you.
0:04:33 If you are insufficiently cited to work in the fields,
0:04:38 they will give you a sedentary activity instead,
0:04:41 using your hands perhaps to spin or to make pots.
0:04:46 There’s even some evidence that people with extreme myopia
0:04:51 may have been introduced to others of the same condition
0:04:53 so that they could interbreed,
0:04:55 a bit like breeding race horses,
0:04:58 so that these people could work in the scriptoria,
0:05:02 doing the minute illustrations on illuminated manuscripts.
0:05:07 – Myopia, by the way, is when you see well close up,
0:05:09 but not at a distance.
0:05:12 Presbyopia is when you can’t see as well close up.
0:05:15 That happens to most of us after age 40.
0:05:18 Handley says the first vision correcting device
0:05:20 was called a reading stone.
0:05:22 – The reading stone is a bit like
0:05:25 your present day desk magnifier.
0:05:28 It’s something which is held in direct contact
0:05:30 with the item being viewed.
0:05:33 If you have a page on the table, you lay it flat
0:05:37 and you place the reading stone on top of it.
0:05:40 And your eye is at some distance from it,
0:05:44 but it is performing that enlarging function.
0:05:48 – In the late 13th century, friars and priests in Italy
0:05:52 began to wear primitive spectacles that sat on the nose.
0:05:56 For the next 400 years or so, that’s what glasses were,
0:05:59 a handheld device without arms or temples,
0:06:00 the part of the glasses we know today
0:06:03 that hold the frames in place.
0:06:04 In these early days,
0:06:07 spectacles were primarily associated
0:06:10 with clergy and scholars, but not exclusively.
0:06:15 – It is quite revealing about how many early modern paintings
0:06:20 show glasses in a quite negative depiction.
0:06:25 Government officials, tax collectors, money changes
0:06:30 are shown with spectacles, often counting coins
0:06:32 and they’re entering the exact amounts of money
0:06:35 into a ledger and you, the viewer,
0:06:38 are supposed to look at this with resentment
0:06:40 and think, oh my goodness,
0:06:44 if only they would turn a blind eye to the money that I owe.
0:06:48 – For the person wearing glasses, there was double whammy.
0:06:50 Already you didn’t see very well on your own
0:06:52 and by correcting your vision,
0:06:56 you were suspected of trafficking in something nefarious.
0:06:59 – What we often see in early arts
0:07:03 are representations of the devil wearing spectacles.
0:07:07 They start to take on this magical connotation
0:07:09 whereby glasses allow you to see the things
0:07:11 that you shouldn’t see.
0:07:16 Another reason why people were reluctant to wear spectacles
0:07:21 was because they were so closely associated with aging.
0:07:24 You have paintings in which a pair of spectacles
0:07:26 are shown alongside a skull.
0:07:28 The symbolism of that is quite clear.
0:07:31 By now, there were spectacle makers in Italy
0:07:33 and elsewhere in Europe
0:07:34 and they figured it was time
0:07:37 for some better public relations.
0:07:39 – The French medieval spectacle makers felt
0:07:44 it was necessary to rehabilitate spectacle wearing
0:07:45 and the best way to do that
0:07:49 is to have a celebrity figurehead
0:07:52 and they alighted upon Saint Jerome
0:07:53 who had many advantages,
0:07:55 one being that he was long dead
0:07:58 and so they didn’t have to pay for his services
0:08:01 but he was recognized as one of the foremost
0:08:03 of the early church fathers.
0:08:07 So his moral character was without question.
0:08:10 He had gone into the desert and found a lion
0:08:13 that was limping with a fawn in its paw,
0:08:16 pulled out the fawn and become the friend
0:08:17 to this wild beast.
0:08:21 So he was a benevolent, compassionate figure
0:08:23 who was kind to animals,
0:08:27 which is a great image for a caring profession
0:08:29 but he was also the ultimate scholar
0:08:31 because he had translated the Vulgate version
0:08:34 of the Bible from Greek into Latin.
0:08:38 And the idea was that if only he had had access
0:08:41 to spectacles, which he most certainly didn’t
0:08:43 ’cause he died in the fourth century,
0:08:47 then it would have been a very worthy use of them
0:08:50 to translate the word of God itself.
0:08:53 – The early eyeglasses were simple magnifiers,
0:08:55 much like the reading glasses you can buy today
0:08:58 in a drugstore without a prescription.
0:09:00 Those are useful for people with presbyopia,
0:09:03 concave lenses, which helped people with myopia,
0:09:05 also made an appearance around the 13th century,
0:09:08 although myopia itself wasn’t really understood
0:09:11 until the 16th century.
0:09:13 By the 17th century, it was possible
0:09:16 to walk into a shop and buy eyeglasses.
0:09:20 – London was certainly one of the leading cities
0:09:23 for this new concept of the spectacle shop.
0:09:26 You can actually go to a retail premises
0:09:28 and buy a pair of glasses
0:09:31 that most likely had been made on the premises.
0:09:32 – How customized were they?
0:09:35 – They were anything but customized
0:09:37 when it came to their optical performance.
0:09:42 It wasn’t possible to grind the lens to a set power.
0:09:46 So they generally classified the finished products
0:09:49 as either young glasses or old glasses.
0:09:52 – By the 18th century, eyeglasses had frames
0:09:55 with temples that gripped the side of the head.
0:09:58 This made it possible to wear them all day long.
0:10:02 And now glasses were no longer just a medical device,
0:10:04 but also a statement.
0:10:06 – If you were wealthy, you could have your spectacles
0:10:11 made out of silver as opposed to out of iron.
0:10:15 And there is a flourishing export market.
0:10:20 In America, it wasn’t possible to obtain spectacles
0:10:24 unless another ship arrived with a consignment of them.
0:10:28 And some Americans of whom the most famous
0:10:32 is probably Benjamin Franklin came over to London,
0:10:34 lived here for 15 years
0:10:36 and had a profitable sideline
0:10:40 in sending spectacles back to Philadelphia.
0:10:43 We got a print in our collection here at the museum
0:10:47 of merchants landing in the new world
0:10:50 and they haven’t even got off the beach.
0:10:53 They’re literally just waded out of the water
0:10:57 and they’ve opened a packing crate full of spectacles.
0:11:00 And that’s what people are trading on the beach
0:11:02 because these were so in demand
0:11:05 and so hard to get hold of.
0:11:07 – Any idea of what the markup was like back then?
0:11:12 – I couldn’t give you a percentage figure for the markup,
0:11:16 but the retail price to the consumer
0:11:20 was still generally cheaper than today.
0:11:21 And that’s because of course,
0:11:24 we don’t have any brand names at this point
0:11:28 and they’re still not seen as a luxury product per se.
0:11:31 They’re still something that’s largely functional.
0:11:35 It’s worth identifying the historical reasons
0:11:40 why the price of spectacles has relatively increased.
0:11:45 You had the growth of a professional eye care service
0:11:51 and it is those professional fees for the site test
0:11:56 and for the individual dispensing of the spectacles
0:11:59 that is added to the cost of the frame.
0:12:02 – And what about the use
0:12:06 and therefore the cost of technology in eyewear?
0:12:10 Is the average pair of eyeglasses today substantially
0:12:13 more technologically advanced than it was 50 or 100 years ago?
0:12:15 – You can have on the one hand,
0:12:18 your simple ready readers that you can pick up
0:12:23 from a dollar store through to the very high performance
0:12:26 lenses with specialist coatings
0:12:28 and much more recently,
0:12:32 the development of wearable technologies,
0:12:34 augmented reality eyewear,
0:12:37 spectacle mounted cameras and audio devices
0:12:40 such that your spectacles are no longer just a vision aid,
0:12:44 but in fact, a multi-purpose device.
0:12:47 So there’s no such thing as a pair of glasses anymore.
0:12:51 – So yes, there are a number of reasons
0:12:53 that a pair of glasses today might cost more
0:12:56 than they did in Ben Franklin’s day,
0:12:58 adjusting for inflation, of course.
0:13:02 On the other hand, if you think about eyewear as technology,
0:13:06 most technologies get cheaper over time,
0:13:08 especially with something that for the most part
0:13:09 hasn’t changed all that much.
0:13:12 There is a set of frames and a pair of lenses,
0:13:17 no moving parts, no need for electricity or wifi.
0:13:21 All of this makes glasses relatively simple to manufacture.
0:13:23 When something is simple to manufacture,
0:13:26 the barrier to entry in the industry is low.
0:13:29 So you would expect to see a lot of competition,
0:13:33 which drives prices down.
0:13:36 And there are a lot of players in the eyeglass industry,
0:13:37 especially a lot of small players,
0:13:40 but when it comes to big players,
0:13:41 when it comes to the big engine
0:13:45 that really drives the industry, there’s only one.
0:13:49 – It’s the number one lens and frames manufacturers,
0:13:51 which is a vertically integrated player
0:13:55 operating from manufacturing to optical retailing.
0:13:57 – That is Cedric Rossi.
0:14:01 He’s French, also an equity research analyst
0:14:04 at the Parisian Investment Bank, Brian Garnier.
0:14:07 – I’ve been covering the optics industry for 15 years now,
0:14:10 and I’m also covering the fashion groups
0:14:14 like HEM, Inditex, Moncler, the sporting goods brands
0:14:16 like Adidas, Nike, and so on.
0:14:17 – And what does Rossi mean when he talks about
0:14:21 the optics industry as a vertically integrated player?
0:14:23 – When you are a vertically integrated player,
0:14:26 you master every step within the value chain.
0:14:30 When you master and you control 100% of the value chain,
0:14:32 I think you have two very good examples,
0:14:33 Hermes and Louis Vuitton.
0:14:35 Louis Vuitton, 100% of their products
0:14:37 are sold into a Louis Vuitton store.
0:14:39 You cannot buy Louis Vuitton products
0:14:41 outside of Louis Vuitton stores.
0:14:43 In Iowa, it’s pretty much similar.
0:14:46 When you are a 100% vertically integrated player,
0:14:50 you control manufacturing, supply chain,
0:14:52 distribution, customer experience,
0:14:55 then you will also control how you want
0:14:56 the industry to evolve.
0:15:00 – And SLR Luxotica does seem to have that kind of control.
0:15:03 We’ll get more into that as we go along.
0:15:06 But first, if we want to understand how glasses
0:15:08 became a fashion accessory
0:15:12 and how even non-fashion glasses got so expensive,
0:15:14 we need to do just a little bit more history.
0:15:19 And for that, we go to a woman named Jessica Glasscock.
0:15:21 – I am an eyeglass wearer.
0:15:23 I am a fashion historian
0:15:28 and I am a weird sunglasses enthusiast.
0:15:30 – She is also the author of a book
0:15:31 called Making a Spectacle,
0:15:33 Fashionable History of Glasses.
0:15:36 She lectures at Parsons School of Design in New York
0:15:38 and she used to work as a researcher
0:15:41 at the Metropolitan Museum of Arts Costume Institute.
0:15:45 – Right now, I am wearing my go-to pair of glasses.
0:15:48 I should really have more pairs of glasses
0:15:50 as someone who’s written a book on the topic,
0:15:54 but I’m actually wearing a fairly exotic prescription
0:15:55 that has a prism in it.
0:15:58 And so my eyeglasses are very expensive
0:16:01 even before we get to the frames.
0:16:04 – I know where of Jessica Glasscock speaks.
0:16:07 I too have a somewhat complicated eyeglass prescription
0:16:09 including a prism lens,
0:16:13 which helps the left and right eyes align a single image.
0:16:15 – The frames that I’m wearing
0:16:19 are a pair of Anna Sui glasses
0:16:21 from I think about 2012
0:16:26 and they have rhinestones and they are a pretty color.
0:16:30 I like for my glasses to have a bit of pizzazz,
0:16:32 especially if you’re wearing them every day.
0:16:37 – Pizzazz and a prism and a nicely made frame.
0:16:41 That is a recipe for $1,000 pair of glasses.
0:16:44 – I would say as someone who wears a complex prescription
0:16:48 that you can’t put a price on having good vision.
0:16:50 So it is a long-term investment.
0:16:54 Compared to a high fashion handbag,
0:16:57 I think high fashion eyewear is actually quite a bargain.
0:17:00 – Glasscock says that high fashion eyewear
0:17:02 got started in the 1950s
0:17:04 when manufacturers began to collaborate
0:17:06 with fashion designers.
0:17:09 – American Optical collaborated with Scapparelli,
0:17:13 did a lens with feather eyelashes.
0:17:15 You have this moment in the 1970s
0:17:19 where you start to see a ton of licensing
0:17:22 of everything by fashion designers.
0:17:26 Halston’s doing towels, Pierre Cardan’s doing cookware
0:17:29 and eyewear is one of those things.
0:17:34 And the rate seemed to be a rate of 6% to 7%
0:17:38 of return on the sales of those glasses.
0:17:41 It’s really at the end of the 80s
0:17:44 when Armani goes to make a deal with Lexotica
0:17:47 and they create a different structuring
0:17:52 of how the fashion eyewear collaboration is gonna work.
0:17:54 – So what was this new structure
0:17:57 and how did this new kind of deal work?
0:18:01 It was very hard for me to locate numbers, money,
0:18:04 like what the deal was.
0:18:07 – This is another feature of the eyewear industry.
0:18:10 Lexotica especially has never gone out of its way
0:18:11 to discuss its business
0:18:15 and many smaller players are privately held
0:18:17 so they don’t have to disclose much.
0:18:19 There’s also the fact that eyewear
0:18:22 is one of those old fashioned manufacturing industries
0:18:24 where the elbows are sharp
0:18:27 and no firm wants to do their rivals any favors
0:18:30 by talking about suppliers and deal structures.
0:18:33 – But I know with Armani specifically
0:18:36 rather than have just a simple licensing deal
0:18:39 where one assumes the eyewear maker comes to the designer
0:18:43 and says, “We think these three frames look like you.”
0:18:45 And the designer’s like, “Yes.”
0:18:46 And then they go and make them
0:18:47 and they stamp the name on it.
0:18:49 This was different.
0:18:54 They created a company for Armani to sell their glasses
0:18:58 and had this very intimate involvement of Armani at the time
0:19:03 to really articulate like what is the eyewear vision of Armani?
0:19:07 And that’s where it takes off.
0:19:09 They start making these kinds of deals with other designers,
0:19:11 some of the other eyewear companies
0:19:14 that still had a lot of money in power in the system
0:19:16 start to make similar deals.
0:19:18 You just get a real shift in the structure.
0:19:20 – You heard Glasscock mentioned there
0:19:22 when some of the other eyewear companies
0:19:25 still had a lot of money and power.
0:19:28 Luxotica and now Eselor Luxotica
0:19:32 have consolidated much of the industry’s money and power.
0:19:35 It is by far the biggest eyewear firm in the world
0:19:39 in terms of properties, revenues and employees.
0:19:42 They’ve got locations around the globe and everywhere they go
0:19:45 they control as many links in the industry as they’re able
0:19:48 from the optometrists who give eye exams
0:19:51 to the labs that make lenses
0:19:53 and the stores where glasses are sold
0:19:57 even the optical insurance as I mentioned earlier.
0:20:01 By the way, Eselor Luxotica still makes Armani branded glasses
0:20:05 along with glasses designed with Ferrari, Prada, Tiffany,
0:20:08 Tori Birch, they also make licensing deals
0:20:10 with people like Roger Federer.
0:20:13 You might think these high profile luxury glasses
0:20:18 would drive most of the profits at Eselor Luxotica
0:20:19 but that is not the case.
0:20:22 Here again is the industry analyst Cedric Rossi.
0:20:25 It’s a bit counterintuitive but Rayban has by far
0:20:28 the most profitable brand in the portfolio.
0:20:30 Rayban is primarily a sunglass brand.
0:20:34 They were first made in the 1930s by Bouch and Long,
0:20:36 an American firm that’s best known today
0:20:38 for their contact lenses.
0:20:40 Raybans were designed to help airline pilots
0:20:42 fight the glare of the sun.
0:20:44 They had a long heyday.
0:20:46 Maybe you remember Tom Cruise wearing them
0:20:49 and Risky Business but by the 1990s
0:20:52 they were cheaply made and you could buy a pair
0:20:54 for $19 at a gas station.
0:20:58 But then Luxotica bought Bouch and Long’s sunglass business
0:21:02 and repositioned Rayban as a luxury brand.
0:21:06 Today, it is considered the biggest eyewear brand
0:21:07 in the world.
0:21:10 And why are Raybans so profitable?
0:21:13 – Because the industrial process is quite easy.
0:21:15 It’s just a matter of putting acetate
0:21:16 and plastic into molds.
0:21:19 And so you can produce hundreds and hundreds
0:21:21 of pairs every hour.
0:21:23 – In other words, Raybans are pretty basic.
0:21:26 Other luxury brands are trickier to manufacture
0:21:30 with different materials and more complex designs.
0:21:33 But there’s another reason why a brand that is owned
0:21:36 by Eselor Luxotica like Rayban is more profitable
0:21:40 than a brand they license like Ferrari.
0:21:42 – You need to share the profit because it’s a license.
0:21:45 So you need to pay royalties and a marketing contribution
0:21:47 back to the licensor.
0:21:49 – How substantial are those royalties?
0:21:53 – It ranges from five to 15% of revenues
0:21:54 generated by the license.
0:21:56 And then you have a marketing contribution
0:22:00 that is also paid by Eselor Luxotica to licensors
0:22:03 and it can be seven to 12 or 13% of sales.
0:22:04 – I see.
0:22:07 And how do those fees compare to other luxury licensing
0:22:09 that isn’t eyewear?
0:22:11 – The one that is pretty much similar to eyewear,
0:22:12 I would say fragrances.
0:22:14 You have a very good example
0:22:16 which has a significant share in the US,
0:22:18 which is a French company called Interparfin.
0:22:20 You also have L’Oréal.
0:22:22 And actually, royalty conditions are pretty much similar
0:22:23 to eyewear.
0:22:26 – Rossi says there is another reason
0:22:28 why these high-end licensing deals
0:22:31 are less profitable for Eselor Luxotica.
0:22:34 – The human intervention on high-end frames
0:22:36 sometimes is higher.
0:22:39 There are a lot of steps within the industrial process.
0:22:42 So that’s why sometimes for a pair of Chanel
0:22:43 or a pair of Tiffany’s,
0:22:46 the profit margin is lower than for Eban or Oakley.
0:22:49 – Oakley is another sunglass brand
0:22:52 with its own interesting Luxotica history.
0:22:54 Luxotica was founded in 1961
0:22:58 by Leonardo Del Vecchio in Agordo, Italy.
0:23:01 He was one of five children who had grown up very poor
0:23:03 when their father died,
0:23:06 Leonardo had to be sent to an orphanage.
0:23:11 He became at age 14 an apprentice to a metal engraver
0:23:13 and he later worked on eyeglass frames.
0:23:16 He opened his own workshop in his 20s.
0:23:19 Del Vecchio was, as evidenced by the Ray-Ban
0:23:22 and Armani stories we’ve already heard,
0:23:24 a sharp and aggressive operator
0:23:27 with a huge appetite for growth.
0:23:32 In 2001, he bought the big US retailer Sunglass Hut.
0:23:37 At the time, Oakley was the hottest name in sunglasses.
0:23:39 According to reporting in The Guardian,
0:23:43 one of Del Vecchio’s first moves with Sunglass Hut
0:23:48 was to require all his suppliers to lower their prices.
0:23:50 Oakley declined.
0:23:55 Soon after, Sunglass Hut stopped selling Oakley sunglasses
0:23:59 and Luxotica began making Ray-Bans
0:24:04 that looked an awful lot like Oakley’s signature sunglasses.
0:24:06 There was a legal fight,
0:24:09 there was a big drop in Oakley’s share price
0:24:12 and in the end, Luxotica bought Oakley
0:24:15 for around $2 billion.
0:24:18 Leonardo Del Vecchio had won again.
0:24:21 Del Vecchio died in 2022.
0:24:24 His New York Times obituary by Jonathan Candel
0:24:26 is absolutely fascinating
0:24:29 and was a big inspiration for this series.
0:24:34 The empire Del Vecchio left behind is massive.
0:24:36 Given the nature of this industry,
0:24:40 it’s not easy to come up with accurate market share numbers.
0:24:44 Cedric Rossi says S.L.O.R. Luxotica owns roughly a quarter
0:24:47 of the global market in prescription eyeglasses
0:24:49 and more than half the market in lenses.
0:24:54 Do numbers like these start tipping into the realm of monopoly?
0:24:58 When S.L.O.R. and Luxotica merged in 2018,
0:25:00 neither the Federal Trade Commission in the US
0:25:05 nor the European Commission in the EU stopped them.
0:25:06 Was that a mistake?
0:25:08 – It obviously should have been blocked.
0:25:10 – It’s coming up after the break.
0:25:13 I’m Stephen Dubner and this is Freakonomics Radio.
0:25:27 S.L.O.R. Luxotica is the biggest eyewear company in the world
0:25:30 and they practice extreme vertical integration.
0:25:33 Does that make it a monopoly?
0:25:35 What is a monopoly anyway?
0:25:36 – I think it’s a loose definition.
0:25:39 You know what, when you see it, they have a lot of market power.
0:25:41 They can charge prices well above their costs
0:25:44 and not a lot of competition for what they’re doing.
0:25:49 – That is Ryan McDevitt, an economist at Duke University.
0:25:51 – I focus on a field called industrial organization.
0:25:53 It’s kind of a clunky way of saying,
0:25:55 I look at how firms compete with one another,
0:25:56 how markets are set up,
0:25:58 and that plays into things like regulation.
0:26:00 How do we regulate monopolies in the United States?
0:26:02 So antitrust is a part of my field.
0:26:05 – When McDevitt looks at the eyewear industry,
0:26:07 does he see a monopoly?
0:26:09 – Not at all if we talk about corrective vision broadly.
0:26:11 I mean, no one has a monopoly on eyeglasses.
0:26:14 It’s a commodity, it’s been around for hundreds of years.
0:26:18 But if you look at narrower segments, luxury eyeglasses,
0:26:20 then some like Luxotica, they do have some market power.
0:26:24 – Can you describe the size of their market power?
0:26:25 – Luxotica is something like
0:26:27 a hundred billion dollar market cap company.
0:26:29 And when you’re selling pretty much just eyeglasses,
0:26:31 that seems like a very large number to me.
0:26:33 There’s that much money to be made in eyeglasses.
0:26:35 And it’s something like 25 billion in revenue,
0:26:37 maybe five billion in profits.
0:26:39 So they’re doing very, very well.
0:26:41 – Luxotica is doing so well
0:26:44 that McDevitt has used the firm as a case study
0:26:46 for his MBA students.
0:26:48 – My first day of a business school class,
0:26:50 we talk about value creation and capture.
0:26:52 That’s the fundamental thing a company’s trying to do
0:26:53 to make money.
0:26:54 And they create value at Luxotica
0:26:57 by offering choices to customers.
0:26:59 If you think back, you know, in the ’50s and ’60s,
0:27:01 it was a clunky medical device.
0:27:04 Dorky black frames, revenge on the nerds,
0:27:07 maybe $5 at the time to buy that, nothing special.
0:27:09 And they realized that this could be
0:27:10 more of a fashion accessory.
0:27:12 Like you see throughout fashion,
0:27:15 that people pay a premium for better looking eyewear.
0:27:16 And that’s what they started to do.
0:27:20 – If I were to ask you to give me a general number
0:27:24 for Esolor Luxotica markup on glasses,
0:27:26 can you put a number on that?
0:27:28 – I’ve seen numbers as high as like 1,000%,
0:27:30 just massive, massive markups.
0:27:34 But if I had to do a little consulting exercise in my head
0:27:36 like you do for a McKinsey or Bain interview,
0:27:37 I would say something like,
0:27:39 I can’t believe those things cost
0:27:41 more than 20 bucks to manufacture.
0:27:44 You’re probably retailing for about $500.
0:27:48 And then along the way, you’re adding some cost.
0:27:52 I would guess looking at relative cash flow to revenue,
0:27:55 I would say it’s something like an 80% markup.
0:27:58 – And how hard does that make your heartbeat
0:27:59 as a business school professor?
0:28:00 That’s a pretty good number.
0:28:02 – This is very attractive.
0:28:04 But if you’re gonna say, what should I go into?
0:28:06 This is gonna be a tough industry to crack
0:28:09 because they’ve dominated every step.
0:28:10 They’ve done their homework.
0:28:14 They are well-positioned to extract a lot of income
0:28:16 from every step of the production process.
0:28:20 – It does make you wonder,
0:28:23 since S.L.O.R. Luxatica is such a giant
0:28:25 in the global eyewear industry,
0:28:30 why was the merger between S.L.O.R. and Luxatica not blocked?
0:28:33 Regulators in the U.S. and Europe especially
0:28:36 have been pushing back against over consolidation
0:28:39 in various industries, particularly the tech sectors,
0:28:41 because some critics feel that the consolidation
0:28:45 has gotten really out of hand, critics like Tim Woo.
0:28:49 – There was a collective delusion going on
0:28:51 in antitrust in the 2010s,
0:28:53 where everybody had drunk the Kool-Aid
0:28:56 and convinced themselves that vertical mergers
0:28:57 were never a problem.
0:28:59 – Woo is a law professor at Columbia,
0:29:02 who has worked in the Obama and Biden administrations
0:29:05 on competition policy and antitrust.
0:29:08 – We were crazy in the 2010s.
0:29:10 Somehow we led S.L.O.R. by Trulia,
0:29:13 we led S.L.O.R. by Streeties, we bought everybody,
0:29:16 but the most egregious thing I think in that era
0:29:19 is when we let Google buy Waze,
0:29:21 the two leading mapping companies
0:29:26 combining under one roof sounds like a merger to monopoly.
0:29:29 Some of the reasoning was that Google is what you use
0:29:31 when you wanna see what surrounds you,
0:29:32 and Waze is what you use
0:29:34 when you wanna figure out where you’re going.
0:29:36 So they’re not really competitors.
0:29:40 That was the level of logic that was going on in the 2010s.
0:29:42 – That is some fine hair splitting.
0:29:44 – That was a bad period for antitrust.
0:29:45 – That was also a period during which many
0:29:48 of the big tech platforms that many people
0:29:50 are concerned about now were getting started.
0:29:54 Had Google and Facebook started in a different era,
0:29:55 like let’s say today,
0:29:56 would it have been a very different outcome?
0:29:58 – I think it’d be a very different story.
0:30:02 The 2010s is when the tech platforms consolidated
0:30:04 their power by buying their competitors
0:30:06 with no government intervention.
0:30:09 I went to the study of the tech mergers
0:30:12 from about ’08 till 2018,
0:30:17 and there were in that period over 1,000 tech acquisitions
0:30:21 and a grand total of one challenge from the government
0:30:24 which led to a consent decree, not even blocking.
0:30:25 – What was that one?
0:30:28 – That was airline booking software,
0:30:29 which Google was buying.
0:30:32 So they made sure that Google would share it
0:30:35 with a few people, but everything else free pass.
0:30:38 – Do you think the SLR Luxotica merger
0:30:40 shouldn’t have been allowed at least in the U.S.
0:30:42 and maybe even in Europe?
0:30:43 – It obviously should have been blocked.
0:30:45 That was the byproduct of another era,
0:30:46 and we look back at that and like,
0:30:48 how did you let that one go?
0:30:50 Imagine if in the luxury bag industry
0:30:53 like Hermé and Louis Vuitton,
0:30:54 if they were all actually the same company,
0:30:56 that’s kind of the trick here with Luxotica
0:30:58 is they owned all the brands people think
0:31:01 are competing brands like Ray-Ban and Oakley
0:31:04 and they sort of mimic competition.
0:31:11 – Tim Wu was a key architect of a 2021 Biden initiative
0:31:14 called Executive Order on Promoting Competition
0:31:16 in the American Economy.
0:31:20 It argues that many industries have become too concentrated
0:31:21 and it pushes the Department of Justice
0:31:24 and the Federal Trade Commission to be more aggressive
0:31:27 in enforcing antitrust laws.
0:31:32 In over 75% of U.S. industries, the White House noted,
0:31:34 a smaller number of large companies
0:31:35 now control more of the business
0:31:37 than they did 20 years ago.
0:31:40 These kinds of numbers support the argument
0:31:45 that the U.S. economy has become a winner-take-most economy
0:31:48 with leverage begetting more leverage.
0:31:51 Tim Wu published a book about this in 2018
0:31:53 called The Curse of Bigness,
0:31:56 Antitrust in the New Gilded Age.
0:31:58 In the late 19th century, where it all starts,
0:32:00 there was a period where everyone thought
0:32:02 that corporations could do no wrong
0:32:04 and the trust movement built itself
0:32:06 into something quite powerful.
0:32:09 – Would you define what you’re talking about back then
0:32:12 by a trust because it’s probably not what most people think
0:32:14 when they hear that word today.
0:32:16 – A trust is an old-fashioned word for a monopoly.
0:32:20 No, a trust is something invented by standard oil.
0:32:24 It was a device by which all the companies
0:32:26 in the industry would agree to become one company.
0:32:31 The trust was the byproduct of an industry-wide merger.
0:32:33 – And was there any federal government oversight
0:32:36 or interest in that notion at the time?
0:32:40 – Not until they passed the Sherman Act in 1890.
0:32:45 There’s these long cycles of monopoly frustration or anger.
0:32:48 And then after a while, it goes too far
0:32:49 and then people are like, well,
0:32:51 maybe private industry is not too bad.
0:32:55 The high points of distrust in private industry
0:32:59 were the 1910s, and that’s Theodore Roosevelt,
0:33:01 Taft and Woodrow Wilson.
0:33:06 The late 1930s and ’40s and ’50s, which is FDR.
0:33:08 And Eisenhower, kind of surprisingly,
0:33:10 was a big antitrust guy.
0:33:13 And then the ’70s, another big period of suspicion
0:33:16 under Nixon, which might seem a little surprising.
0:33:18 And then you go into this long winter
0:33:21 from the ’80s onwards, coinciding with Reagan
0:33:25 and movies like Wall Street and Greed is Good, kind of period.
0:33:28 That lasts about 40 years.
0:33:30 I think we’re in the core of a major
0:33:33 anti-monopoly revitalization right now
0:33:35 in the Biden administration.
0:33:38 – Reading The New York Times and even the Wall Street Journal,
0:33:40 one gets the distinct impression that, yes,
0:33:41 as you just said, the Biden administration
0:33:44 is all in on antitrust.
0:33:48 And you were part of that movement for a while in DC.
0:33:53 – But how much effect is that movement actually having?
0:33:57 I mean, there’s calls for breakups of big tech firms.
0:34:00 There’s calls for less consolidation
0:34:01 in a variety of industries.
0:34:04 But I’m seeing very little actual effect.
0:34:05 Is there something I’m missing?
0:34:08 – Yes, you’re not paying attention to mergers,
0:34:12 which are the key of economic consolidation.
0:34:14 Collectively, the FTC and justice
0:34:18 have blocked over 40 mergers, maybe over 50 mergers
0:34:19 at this point.
0:34:22 The greater issue is the deterrence effect.
0:34:24 It’s a totally different environment
0:34:27 right now versus say, 2010.
0:34:29 I think in an earlier era,
0:34:31 Facebook would have maybe tried to buy Snapchat
0:34:34 or TikTok, but the merger situation,
0:34:35 if you ask anyone on Wall Street,
0:34:37 they say, yeah, it’s a different story.
0:34:39 We know our mergers can be blocked.
0:34:42 We’re also in the, we meaning my former employer,
0:34:44 the federal government, is in the midst
0:34:48 of trying to do something, break up, tame,
0:34:50 almost every single big tech company,
0:34:53 Amazon, Apple, Facebook, Google.
0:34:55 Those cases aren’t finished.
0:34:56 The remedies aren’t done.
0:35:00 But I think that’s gonna have a long-term effect.
0:35:03 The way AT&T and IBM have gone,
0:35:07 I wouldn’t say the economy has become FDR-advised.
0:35:10 But to say nothing’s happening, I think it’s totally wrong.
0:35:14 – There is a brand new piece of evidence
0:35:17 for Tim Wu’s argument that the current administration
0:35:19 is more aggressive than in the recent past.
0:35:23 Earlier this month, the FTC voted to block a merger
0:35:25 between the mattress maker, Tempur Sealy,
0:35:28 and the retailer, Mattress Firm.
0:35:31 So how does Wu think about competition
0:35:34 or the lack thereof in the eyeglass industry?
0:35:36 In the New York Times obituary
0:35:39 of Luxottica founder, Leonardo Del Vecchio,
0:35:43 Wu is quoted as calling the firm’s profit margins
0:35:45 relatively obscene.
0:35:49 I asked him if he stands by that characterization.
0:35:52 – Yeah, I think relatively obscene is a good one.
0:35:55 The margins, even by luxury good standards, are obscene.
0:35:59 I also would add that even relatively more normal,
0:36:02 not the high-end luxury, but the medium luxury eyeglasses
0:36:05 are also extraordinarily expensive.
0:36:07 And they have a well-armored Citadel
0:36:09 that keeps the prices up.
0:36:12 It has to compare itself with other obscene margin takers
0:36:14 like the pharmaceutical drug industry.
0:36:15 At least they have the defense
0:36:17 that they are improving their products.
0:36:20 – And I care, you’re saying can’t make that argument.
0:36:21 – I mean, do we really think glasses
0:36:24 are any different now than 10 years ago?
0:36:26 Maybe in the lenses, but the frames?
0:36:28 I don’t know, if they have, I’d like to hear it.
0:36:30 – I mean, I’ve asked this question
0:36:32 and I am told that the technology of lenses
0:36:35 is pretty good and continues to get better.
0:36:37 – It actually reminds me a little bit
0:36:40 of the aerospace industry and airplanes.
0:36:42 The aerospace industry is constantly saying
0:36:43 they’ve made all these enormous innovations,
0:36:47 but if you compare an airplane in the 1960s
0:36:50 and a computer in the 1960s, and you look at today,
0:36:52 I mean, the computers have undergone
0:36:54 several exponential changes.
0:36:57 The airplane is pretty much the same.
0:36:59 I don’t want to say there’s been no innovation,
0:37:01 but there is a difference between these disruptively
0:37:03 big leap industries and the ones
0:37:05 that incrementally improve their products.
0:37:08 I remember an internal executive saying
0:37:11 that the cost of eyeglasses, you know,
0:37:14 the frames and the plastic and everything,
0:37:17 it tops out at about $20 for the best versions of them.
0:37:20 And then you’re able to sell them for hundreds of dollars.
0:37:21 They throw brands onto them
0:37:24 and sometimes much as, you know, 800 bucks.
0:37:27 – When you look at all the gigantic industries
0:37:31 in the world and when you look at the financialization
0:37:35 of just about everything, is the eyeglass industry
0:37:36 even worth worrying about?
0:37:41 I mean, it’s relatively small and a lot of eyeglasses,
0:37:42 the vast majority in this country,
0:37:45 are sold for relatively low prices
0:37:47 at places like Walmart and Costco.
0:37:49 So couldn’t you argue that, you know,
0:37:52 the market is just fine, that even though Luxotica
0:37:55 has a big tie-up with Eselor,
0:37:56 that there’s still enough competition
0:38:00 and affordable pricing to not worry so much about,
0:38:04 or would you rather look at the industry as an example
0:38:05 of, yeah, if you overlook this
0:38:08 and you overlook the next 10 and then they get bigger
0:38:10 and bigger and they cause a real fundamental,
0:38:14 structural, economic and governmental problem.
0:38:17 – Yeah, I think it’s ridiculous to ignore an industry
0:38:20 ’cause it’s not as big as like big tech.
0:38:22 You need to have a policy that is serious
0:38:26 about market power wherever those problems may occur.
0:38:28 If it’s like concrete mixers in New York City,
0:38:31 it may be just millions, billions of dollars,
0:38:33 but, you know, it affects housing prices.
0:38:36 Everyone’s feeling the pinch a little bit right now
0:38:38 with prices and eyeglasses are something
0:38:39 a lot of people need.
0:38:42 So not just symbolism, but I think government needs
0:38:44 to be serious about every industry
0:38:48 that has illegitimate, illegal market power
0:38:50 and not say, well, these guys are only a couple billion
0:38:52 dollars, so let that one ride.
0:38:55 – You say illegitimate, illegal, but it was legal.
0:38:57 Maybe illegitimate in your eyes,
0:38:59 but I mean, this was approved.
0:39:02 – It wasn’t approved, they just didn’t act on it.
0:39:04 And I think maybe we should undo it.
0:39:07 The fact they didn’t bring suit
0:39:08 doesn’t mean it wasn’t illegal.
0:39:11 The Clayton Act says that mergers
0:39:14 that substantially less in competition
0:39:15 are a violation of the law.
0:39:18 And we’ve started looking back at some of the things
0:39:21 we let go in the 2010s and say, you know,
0:39:23 the law was actually originally written
0:39:25 to look backwards, not forwards.
0:39:26 I don’t know if many people know this,
0:39:27 the government is trying to undo
0:39:29 the Instagram Facebook merger.
0:39:31 And I think it’s about time to look back
0:39:32 at some of the other mergers.
0:39:34 Keep your eye on Ticketmaster Live Nation,
0:39:35 they might try and undo that too.
0:39:41 – Indeed, not long after we spoke with Tim Wu,
0:39:43 the Justice Department and 30 state
0:39:47 and district attorneys general sued Ticketmaster
0:39:49 and its parent company, Live Nation,
0:39:53 for quote, monopolization and other unlawful conduct
0:39:55 that thwarts competition in markets
0:39:57 across the live entertainment industry.
0:40:02 Should this lawsuit make Estelor Luxatica nervous?
0:40:04 The fact is that the eyewear industry
0:40:07 isn’t as concentrated as the live event industry.
0:40:10 And it’s also the case that Estelor Luxatica
0:40:12 has a new challenger.
0:40:16 So far, they’ve only got 2% of US market share,
0:40:18 but they haven’t been around long
0:40:20 and they are growing fast.
0:40:23 – When we had this idea to sell eyewear
0:40:27 for a fraction of the cost, people love that idea.
0:40:29 Low cost, but high style.
0:40:33 After the break, the eyeglass disruptor, Warby Parker.
0:40:36 I’m Stephen Dubner, this is Freakonomics Radio.
0:40:37 We’ll be right back.
0:40:46 When we were speaking with Tim Wu
0:40:50 about the ebbs and flows of antitrust fervor in the US,
0:40:53 he mentioned one change that did intersect
0:40:55 with the eyeglass industry.
0:40:57 In the ’70s, which was a period
0:41:01 of very pronounced anti-monopoly activity,
0:41:03 even under Nixon, the government decided
0:41:05 that it could improve the industry,
0:41:08 maybe encourage more competition.
0:41:11 If you could get a prescription from your eye doctor,
0:41:13 which you could then take to somebody else
0:41:15 to make your eyeglasses with,
0:41:18 the government decided that they wanted to split
0:41:23 the business of eye examinations from selling eyeglasses.
0:41:28 And Warby Parker is the direct beneficiary of that rule.
0:41:30 Warby Parker is the eyeglass startup
0:41:32 we mentioned right before the break.
0:41:34 It may have taken a couple of decades,
0:41:36 and it may have taken the invention of the internet,
0:41:38 but they realized that eyeglasses
0:41:41 don’t actually cost very much money to make,
0:41:45 so they could sell for a fraction of the current price.
0:41:47 I’m very dissatisfied with the state of competition
0:41:50 in eyeglasses, but I have to say that Warby Parker
0:41:52 is an exception to that dissatisfaction,
0:41:55 and I think is an example of what we should be doing.
0:41:58 – Okay, so let’s hear from them directly.
0:41:59 – Neil Blumenthal, I’m the co-founder
0:42:01 and co-CEO of Warby Parker.
0:42:03 – Okay, Dave, I have a feeling it might sound similar
0:42:04 with a different name.
0:42:08 – I’m Dave Gilboa, co-founder and co-CEO of Warby Parker.
0:42:11 – Gilboa, Blumenthal, and two other founders,
0:42:13 Andrew Hunt and Jeff Rader,
0:42:14 were all getting their MBAs
0:42:17 at the University of Pennsylvania’s Wharton School
0:42:19 when they started Warby Parker.
0:42:21 Through personal experience,
0:42:23 they had come to think that eyeglass prices
0:42:25 were in general exorbitant,
0:42:28 and they saw a business opportunity.
0:42:31 Warby Parker sought to distinguish themselves in two ways.
0:42:34 They would sell glasses strictly online
0:42:37 and at low prices, starting at $95.
0:42:40 – We were trying to introduce a little more transparency,
0:42:43 a little more simplicity into the market.
0:42:44 – That’s Blumenthal.
0:42:47 – When you walk into your typical optical shop,
0:42:49 there’s no price tags.
0:42:50 You have no idea what a frame costs.
0:42:53 You have no idea what the lenses cost,
0:42:55 and you’re constantly getting upsold.
0:42:57 Oh, you should get this lens material
0:42:58 instead of this other one.
0:43:00 You should get this lens coating.
0:43:05 And consumers have no idea about the differences.
0:43:06 When there’s information asymmetry,
0:43:08 that’s not good for consumers.
0:43:10 So we wanted to simplify things.
0:43:15 Hey, $95 acetate frames with polycarbonate lenses
0:43:18 with anti-reflective, anti-scratch coatings.
0:43:20 These are premium lenses already,
0:43:22 and it’s basically all that you need
0:43:25 to be super happy to have great visual acuity
0:43:27 and to look great.
0:43:29 – So if you are SLR Luxatica,
0:43:32 how do you defend routinely pricing glasses
0:43:36 at $800, $1,000, $1,200?
0:43:39 – You’d probably have to get their perspective,
0:43:41 but when we spoke to consumers,
0:43:44 often they would allude to the brand name
0:43:46 and the logo that was on the frames.
0:43:48 Most consumers didn’t realize
0:43:52 that eyewear was made by somebody who was paying a fee
0:43:54 just to put the logo on it.
0:43:56 – But how much could that licensing fee be
0:43:58 on a pair of, let’s say $1,000 glasses?
0:44:01 Maybe $100, $200, maybe?
0:44:03 – Exactly, probably 10 to 20%.
0:44:06 – But there’s still a lot of other markup there then, yes?
0:44:09 – Exactly, which is what really attracted us
0:44:10 to the market.
0:44:12 When we looked at these unit economics–
0:44:13 – When you say unit economics,
0:44:14 you mean what it actually costs
0:44:16 to make a pair of frames and a pair of lenses?
0:44:19 – Right, they were being sold for about 10x
0:44:23 the cost to manufacture, if not more, sometimes 20x.
0:44:27 And what we found was that there was wholesale markup
0:44:30 and then a retail markup that was often three to five x.
0:44:32 And that’s what made it so attractive to us
0:44:35 to design our own frames, manufacture them,
0:44:36 and then sell direct to customers.
0:44:38 ‘Cause we would just take that retail markup
0:44:40 and pass it on to consumers
0:44:43 ’cause there’s just one less hand in the cookie jar.
0:44:44 And actually a funny story
0:44:48 when we were thinking about our pricing strategy,
0:44:52 we thought we could sell our glasses at $45.
0:44:54 And we went to the head of the marketing department
0:44:55 at Wharton who was a pricing expert.
0:44:57 – Can I take a guess what that person said?
0:45:00 That’s too cheap, people won’t think they’re any good.
0:45:02 – Exactly, and that didn’t even cross our minds.
0:45:04 We thought, lower price better.
0:45:06 We went into his office,
0:45:09 we had a beautiful PowerPoint presentation.
0:45:12 We said, we’re gonna transform the optical industry,
0:45:15 we’re gonna charge $45 for $500 glasses.
0:45:17 And he said, sorry, that’s just not gonna work.
0:45:18 And we’re like, wait,
0:45:20 we didn’t even show you all these graphs.
0:45:21 They all go up and to the right.
0:45:24 He said, it’s outside the realm of believability
0:45:26 that you could sell the same quality
0:45:27 for a 10th of the price.
0:45:31 – Were you worried that even at $95,
0:45:34 your brand would be perceived as not good enough medically
0:45:35 if they were that cheap?
0:45:36 – It’s certainly something
0:45:38 that we spent a lot of time discussing.
0:45:42 We surveyed a lot of potential eyewear consumers
0:45:44 and found that at very low price points,
0:45:47 there was quite a bit of skepticism around the quality
0:45:50 and the durability of those products.
0:45:53 We found that the propensity to buy increased
0:45:57 until we reached $100 and then kind of fell off the cliff.
0:46:00 When we landed on $95 instead of $45,
0:46:02 there was still a bit of skepticism.
0:46:05 But then when we started getting our initial prototypes
0:46:09 in and asking our friends and potential customers
0:46:11 to try on the glasses,
0:46:13 they were blown away by the quality.
0:46:15 And that’s when kind of the light bulbs went off
0:46:17 and said, we really need a mechanism
0:46:21 just to get as many glasses on people’s faces as possible.
0:46:23 And that’s when we came up with the home try-on.
0:46:24 – We came up with this idea
0:46:27 where we would ship people five pairs of glasses.
0:46:29 They would have five days to try it on at home.
0:46:30 And then if there was a pair they wanted,
0:46:33 we’d put in prescription lenses and send it to them.
0:46:37 The Warby Parker business model has worked.
0:46:40 The company went public in 2021.
0:46:43 Their market cap today is roughly $2 billion.
0:46:46 The starting price of their glasses is still $95,
0:46:50 but they have gone well beyond their internet beginnings.
0:46:52 By the end of 2024,
0:46:54 they’ll have nearly 300 brick and mortar stores
0:46:56 in the US and Canada.
0:46:59 They also give away millions of eyeglasses for free
0:47:00 to people who can’t afford them.
0:47:05 As do many eyewear companies, including Esselora Luxotica.
0:47:06 – We think that it’s nuts
0:47:08 that 800 years since glasses were invented
0:47:12 that not every human being on the planet has access
0:47:15 ’cause we know what it means to educational outcomes.
0:47:18 We know what it means to economic outcomes.
0:47:20 And it’s even more unforgivable
0:47:23 that in as wealthy of a country as the United States
0:47:25 that there are Americans that don’t have the glasses
0:47:27 they need to thrive.
0:47:28 – The fact that you’re able to give away so many
0:47:32 suggests that even $95 affords you plenty of room, yes?
0:47:35 – We do have some healthy margins.
0:47:37 – Can you discuss your margins overall?
0:47:38 That must be public, yeah.
0:47:41 – We just announced our Q1 earnings
0:47:44 and our gross margins were 56.8%.
0:47:45 – Wow.
0:47:48 – And that includes costs associated with our optometrists
0:47:51 and store buildouts and depreciation.
0:47:53 And so it’s kind of a reflection
0:47:56 that within this category we can offer prices
0:47:59 that are a fraction of what others are charging
0:48:01 and still maintain healthy margins.
0:48:04 – As I mentioned earlier,
0:48:07 Warby Parker only has around 2%
0:48:09 of the US eyewear market so far.
0:48:12 But Cedric Rossi, the French industry analyst
0:48:14 likes what the company is doing.
0:48:17 – I would say Warby Parker came up with a business model
0:48:20 that is a little bit like a steel or lexotica proof.
0:48:23 They don’t want to compete directly with a steel or lexotica
0:48:25 but they found a very interesting niche
0:48:28 which is a transparent price offering,
0:48:30 eyeglasses sold at a fair price,
0:48:33 but also with a huge fashion aspect.
0:48:36 – The original appeal though of Warby Parker
0:48:37 was also that it was online.
0:48:40 So they now have a lot of brick and mortar stores
0:48:43 which are as we know, much more expensive.
0:48:46 What do you think of that strategy for a company
0:48:48 that’s only got 2% of US market share
0:48:51 trying to compete with a giant like S-Lore lexotica?
0:48:54 – But don’t forget that you have still a 47%
0:48:57 of the eyewear market that is generated
0:48:59 by customers age 55 plus.
0:49:00 – Oh, wow.
0:49:02 – This customer base is not very familiar
0:49:04 with buying eyeglasses online.
0:49:07 First of all, Warby Parker also found out
0:49:10 that even the younger generations,
0:49:12 if you want to buy simple prescription glasses
0:49:15 when you are just affected by myopia,
0:49:17 then it’s very easy to download your prescription
0:49:19 and to buy eyeglasses online.
0:49:22 But as soon as it’s starting to be more complex,
0:49:27 it’s almost impossible to have a 100% online shopping journey.
0:49:29 As soon as they wanted to sell
0:49:31 more complex prescription lenses,
0:49:34 they came up with the decision to open stores.
0:49:37 – What market share would you expect Warby Parker
0:49:40 to have in the US in, let’s say, five years?
0:49:42 – They can at least double that share.
0:49:43 Last year, they started to invest
0:49:45 into the progressive lens category,
0:49:47 which is quite new for them.
0:49:50 – Okay, progressive lenses combine distance and close-up.
0:49:54 That is by nature an older consumer, yes?
0:49:55 – Exactly, because typically,
0:49:57 you start wearing progressive lenses
0:50:00 where you are affected by presbyopia,
0:50:02 starting at 40 years old plus.
0:50:04 So that’s also the beauty of this business.
0:50:08 You cannot escape from presbyopia eventually.
0:50:13 – Warby Parker has been branching out in other ways too,
0:50:16 including some in-house manufacturing
0:50:18 to eliminate yet another middleman.
0:50:20 They say they want to become
0:50:22 a holistic vision care company,
0:50:25 which sounds a bit like
0:50:29 the super vertically integrated S-Lore Luxatica.
0:50:33 And what do the Warby Parker founders think of S-Lore Luxatica?
0:50:35 – They’ve built a beautiful business.
0:50:38 The lens technology, the lens production,
0:50:42 the optical labs, the frame production,
0:50:46 the brand licensing, the retailing and distribution,
0:50:50 the vision insurance to drive people in,
0:50:55 software that they sell to third-party optical labs,
0:50:58 the software that they sell to other retailers
0:51:01 and independent optometric practices,
0:51:04 the equipment that they also sell.
0:51:06 It’s super impressive what they’ve built over decades.
0:51:09 – I have to say, Neil, I heard in your voice
0:51:12 as you were describing this intense vertical integration
0:51:15 of S-Lore Luxatica, a certain level of admiration.
0:51:18 Do you have similar aspirations?
0:51:21 Would you like to be the S-Lore Luxatica
0:51:25 of the year 2035 or 2045?
0:51:26 – I think there’s…
0:51:27 – Although now that I ask the question,
0:51:29 I realize it may be dangerous to ask someone to admit
0:51:32 that they want to become a near monopolist, but anyway.
0:51:36 – You know, the MBA in me admires the business, no doubt,
0:51:41 admires the founder of Luxatica, Leonardo Del Vecchio,
0:51:44 is one of the world’s best entrepreneurs.
0:51:49 He was incredibly ambitious and started with nothing
0:51:51 and built one of the biggest companies in the world
0:51:53 in any category.
0:51:55 They’ve done that largely through acquisition
0:51:59 and consolidation and they’ve leveraged their scale
0:52:03 to drive really meaningful profits for their company.
0:52:06 We believe that we can continue to invest
0:52:10 in our own brand without requiring acquisitions
0:52:13 and consolidation and we believe
0:52:16 that we can deliver very healthy margins
0:52:20 while leaving some extra dollars in our customer’s pocket.
0:52:23 – I would guess, but please correct me if I’m wrong,
0:52:25 that a firm like yours, Warby Parker,
0:52:28 has benefited at least on one dimension.
0:52:32 They drove the prices of eyeglasses really high
0:52:36 and established a floor that was so far
0:52:39 above what was realistic from the producer’s side
0:52:42 that it left an awful lot of room for you.
0:52:45 So you must be kind of grateful for that, yeah?
0:52:47 – Absolutely, you can’t be a disruptor
0:52:49 if there’s not an incumbent.
0:52:54 – Coming up next time, part two,
0:52:57 let’s not forget that behind every pair of eyeglasses
0:52:59 is an eye doctor.
0:53:01 – An eyeball fixer-upper I used to like
0:53:02 to consider myself.
0:53:05 – We will hear about the global rise of myopia.
0:53:08 – We’re gonna see half of the global population
0:53:11 being myopic. – And the rise of China
0:53:13 as an eyeglass market.
0:53:17 (speaking in foreign language)
0:53:21 – Also, the politics of runaway consolidation.
0:53:23 – It’s a huge cost to the American situation
0:53:25 to have corporate control of government.
0:53:27 – That’s next time on the show.
0:53:29 Until then, take care of yourself.
0:53:32 And if you can, someone else too.
0:53:35 Freakonomics Radio is produced by Stitcher and Renbud Radio.
0:53:38 You can find our entire archive on any podcast app.
0:53:41 Also at Freakonomics.com where we publish transcripts
0:53:42 and show notes.
0:53:45 This episode was produced by Morgan Levy.
0:53:47 Our staff also includes Alina Cullman,
0:53:50 Augusta Chapman, Dalvin Aboagy, Eleanor Osborne,
0:53:52 Elsa Hernandez, Gabriel Roth, Greg Rippin,
0:53:55 Jasmine Klinger, Jeremy Johnston, Julie Kanfer,
0:53:58 Lyric Bowditch, Neil Caruth, Rebecca Lee Douglas,
0:54:01 Sarah Lilly, Teo Jacobs, and Zach Lipinski.
0:54:04 Our theme song is “Mr. Fortune” by the Hitchhikers.
0:54:07 Our composer is Luis Guerra.
0:54:09 As always, thank you for listening.
0:54:11 (upbeat music)
0:54:13 – It’s been a great experience.
0:54:14 As I was saying to Morgan and Rip,
0:54:16 that’s my first time in a recording studios.
0:54:18 – I’m glad your first one wasn’t a bad one.
0:54:20 – No, no, it was a very good experience.
0:54:22 – Okay, au revoir.
0:54:23 (camera clicks)
0:54:26 (upbeat music)
0:54:29 – The Freakonomics Radio Network,
0:54:30 the hidden side of everything.
0:54:34 (upbeat music)
0:54:35 – Stitcher.
0:54:37 (gentle music)
0:54:47 [BLANK_AUDIO]
0:00:05 Here’s a riddle for you.
0:00:07 Name an item that is both a medical device
0:00:13 and a fashion accessory, an item that may cost $50 to make,
0:00:16 but often sells for over $1,000.
0:00:19 An item that was invented eight centuries ago
0:00:22 has improved billions of lives, and yet, many people
0:00:26 who need it don’t have it, especially children.
0:00:28 Have you figured it out?
0:00:32 The item I’m talking about here is the pair of eyeglasses
0:00:36 sitting right now on my face and maybe yours too.
0:00:38 This episode and the episode next week
0:00:42 also are about the economics of the eyeglass industry.
0:00:45 Does that sound boring?
0:00:46 It isn’t boring.
0:00:48 What we learned while making these episodes
0:00:52 is that the eyewear industry is fascinating and strange.
0:00:55 What you see is often not what you get.
0:00:58 It is a unique and resilient industry,
0:01:00 in the words of one research firm,
0:01:04 with global annual revenues of around $150 billion.
0:01:07 And it’s growing fast, not just because more people
0:01:10 need glasses these days, but because we are paying more.
0:01:13 In the US, the biggest market in the world,
0:01:15 a pair of simple prescription glasses
0:01:18 costs, on average, around $350.
0:01:20 It is an industry with many players,
0:01:23 but one is much bigger than the rest.
0:01:26 They’re called Estelor Luxatica.
0:01:28 They are the result of a 2018 merger
0:01:31 between the French lens manufacturer, Estelor,
0:01:34 and the Italian frame maker, Luxatica.
0:01:37 You’ve probably never heard of Estelor Luxatica,
0:01:40 but you certainly know the brands they partner with.
0:01:44 Armani, Chanel, Coach, Michael Kors, on and on and on.
0:01:48 But Estelor Luxatica goes way, way beyond luxury.
0:01:51 They own lens crafters and pearl vision,
0:01:54 Vision Express, and Oliver Peoples.
0:01:58 They own sunglass hut, as well as Rayban and Oakley.
0:02:00 They even own iMed,
0:02:03 the second biggest vision insurer in the US.
0:02:05 So, you get the picture.
0:02:08 – They have full control over prices,
0:02:10 and that’s just a license to mint money for them.
0:02:12 – Let me say right up front
0:02:15 that Estelor Luxatica would not speak with us
0:02:18 for the series, but other people did.
0:02:21 Industry analysts and rival manufacturers,
0:02:23 optometrists and economists,
0:02:26 historians, and a government regulator,
0:02:28 who had this to say.
0:02:31 – The margins, even by luxury good standards, are obscene.
0:02:34 – Why is a technology that’s been around for centuries
0:02:37 still so expensive?
0:02:40 We’ll tell you why, and we will tell you much more
0:02:43 about this strange, fascinating industry beginning now.
0:02:48 (upbeat music)
0:02:50 (clinking)
0:02:57 – This is Freakonomics Radio,
0:03:01 the podcast that explores the hidden side of everything,
0:03:03 with your host, Stephen Dubner.
0:03:06 (upbeat music)
0:03:15 – Have you ever wondered about the history of eyeglasses?
0:03:17 I have.
0:03:19 So we called up this man.
0:03:21 – Yes, hello, I’m Neil Handley,
0:03:24 and I am the curator of the British Optical Association
0:03:27 Museum at the College of Optometrists.
0:03:29 – Handley’s museum is in central London.
0:03:32 – A stone’s throw from Trafalgar Square.
0:03:34 – And the museum’s purpose is what?
0:03:39 – The purpose is to outline the history and development
0:03:45 of optometry services to help people conserve their vision
0:03:49 and to make the most of the eyes that they’ve been given.
0:03:52 – Okay, so let’s have some optical history.
0:03:53 Where should we start?
0:03:56 – There was a rudimentary understanding
0:03:58 of the principles of optics,
0:04:00 very much in the ancient world,
0:04:02 particularly in the Arab world,
0:04:06 but it seems that that knowledge did not result
0:04:10 in any device for correcting vision
0:04:12 until about the year 1000.
0:04:14 – And why do you think that was?
0:04:16 – Well, there were various explanations put forward
0:04:21 as to why it wasn’t necessary to correct vision.
0:04:24 For example, in an ancient society where you have slavery,
0:04:28 if you cannot read, a literate slave will read to you.
0:04:33 If you are insufficiently cited to work in the fields,
0:04:38 they will give you a sedentary activity instead,
0:04:41 using your hands perhaps to spin or to make pots.
0:04:46 There’s even some evidence that people with extreme myopia
0:04:51 may have been introduced to others of the same condition
0:04:53 so that they could interbreed,
0:04:55 a bit like breeding race horses,
0:04:58 so that these people could work in the scriptoria,
0:05:02 doing the minute illustrations on illuminated manuscripts.
0:05:07 – Myopia, by the way, is when you see well close up,
0:05:09 but not at a distance.
0:05:12 Presbyopia is when you can’t see as well close up.
0:05:15 That happens to most of us after age 40.
0:05:18 Handley says the first vision correcting device
0:05:20 was called a reading stone.
0:05:22 – The reading stone is a bit like
0:05:25 your present day desk magnifier.
0:05:28 It’s something which is held in direct contact
0:05:30 with the item being viewed.
0:05:33 If you have a page on the table, you lay it flat
0:05:37 and you place the reading stone on top of it.
0:05:40 And your eye is at some distance from it,
0:05:44 but it is performing that enlarging function.
0:05:48 – In the late 13th century, friars and priests in Italy
0:05:52 began to wear primitive spectacles that sat on the nose.
0:05:56 For the next 400 years or so, that’s what glasses were,
0:05:59 a handheld device without arms or temples,
0:06:00 the part of the glasses we know today
0:06:03 that hold the frames in place.
0:06:04 In these early days,
0:06:07 spectacles were primarily associated
0:06:10 with clergy and scholars, but not exclusively.
0:06:15 – It is quite revealing about how many early modern paintings
0:06:20 show glasses in a quite negative depiction.
0:06:25 Government officials, tax collectors, money changes
0:06:30 are shown with spectacles, often counting coins
0:06:32 and they’re entering the exact amounts of money
0:06:35 into a ledger and you, the viewer,
0:06:38 are supposed to look at this with resentment
0:06:40 and think, oh my goodness,
0:06:44 if only they would turn a blind eye to the money that I owe.
0:06:48 – For the person wearing glasses, there was double whammy.
0:06:50 Already you didn’t see very well on your own
0:06:52 and by correcting your vision,
0:06:56 you were suspected of trafficking in something nefarious.
0:06:59 – What we often see in early arts
0:07:03 are representations of the devil wearing spectacles.
0:07:07 They start to take on this magical connotation
0:07:09 whereby glasses allow you to see the things
0:07:11 that you shouldn’t see.
0:07:16 Another reason why people were reluctant to wear spectacles
0:07:21 was because they were so closely associated with aging.
0:07:24 You have paintings in which a pair of spectacles
0:07:26 are shown alongside a skull.
0:07:28 The symbolism of that is quite clear.
0:07:31 By now, there were spectacle makers in Italy
0:07:33 and elsewhere in Europe
0:07:34 and they figured it was time
0:07:37 for some better public relations.
0:07:39 – The French medieval spectacle makers felt
0:07:44 it was necessary to rehabilitate spectacle wearing
0:07:45 and the best way to do that
0:07:49 is to have a celebrity figurehead
0:07:52 and they alighted upon Saint Jerome
0:07:53 who had many advantages,
0:07:55 one being that he was long dead
0:07:58 and so they didn’t have to pay for his services
0:08:01 but he was recognized as one of the foremost
0:08:03 of the early church fathers.
0:08:07 So his moral character was without question.
0:08:10 He had gone into the desert and found a lion
0:08:13 that was limping with a fawn in its paw,
0:08:16 pulled out the fawn and become the friend
0:08:17 to this wild beast.
0:08:21 So he was a benevolent, compassionate figure
0:08:23 who was kind to animals,
0:08:27 which is a great image for a caring profession
0:08:29 but he was also the ultimate scholar
0:08:31 because he had translated the Vulgate version
0:08:34 of the Bible from Greek into Latin.
0:08:38 And the idea was that if only he had had access
0:08:41 to spectacles, which he most certainly didn’t
0:08:43 ’cause he died in the fourth century,
0:08:47 then it would have been a very worthy use of them
0:08:50 to translate the word of God itself.
0:08:53 – The early eyeglasses were simple magnifiers,
0:08:55 much like the reading glasses you can buy today
0:08:58 in a drugstore without a prescription.
0:09:00 Those are useful for people with presbyopia,
0:09:03 concave lenses, which helped people with myopia,
0:09:05 also made an appearance around the 13th century,
0:09:08 although myopia itself wasn’t really understood
0:09:11 until the 16th century.
0:09:13 By the 17th century, it was possible
0:09:16 to walk into a shop and buy eyeglasses.
0:09:20 – London was certainly one of the leading cities
0:09:23 for this new concept of the spectacle shop.
0:09:26 You can actually go to a retail premises
0:09:28 and buy a pair of glasses
0:09:31 that most likely had been made on the premises.
0:09:32 – How customized were they?
0:09:35 – They were anything but customized
0:09:37 when it came to their optical performance.
0:09:42 It wasn’t possible to grind the lens to a set power.
0:09:46 So they generally classified the finished products
0:09:49 as either young glasses or old glasses.
0:09:52 – By the 18th century, eyeglasses had frames
0:09:55 with temples that gripped the side of the head.
0:09:58 This made it possible to wear them all day long.
0:10:02 And now glasses were no longer just a medical device,
0:10:04 but also a statement.
0:10:06 – If you were wealthy, you could have your spectacles
0:10:11 made out of silver as opposed to out of iron.
0:10:15 And there is a flourishing export market.
0:10:20 In America, it wasn’t possible to obtain spectacles
0:10:24 unless another ship arrived with a consignment of them.
0:10:28 And some Americans of whom the most famous
0:10:32 is probably Benjamin Franklin came over to London,
0:10:34 lived here for 15 years
0:10:36 and had a profitable sideline
0:10:40 in sending spectacles back to Philadelphia.
0:10:43 We got a print in our collection here at the museum
0:10:47 of merchants landing in the new world
0:10:50 and they haven’t even got off the beach.
0:10:53 They’re literally just waded out of the water
0:10:57 and they’ve opened a packing crate full of spectacles.
0:11:00 And that’s what people are trading on the beach
0:11:02 because these were so in demand
0:11:05 and so hard to get hold of.
0:11:07 – Any idea of what the markup was like back then?
0:11:12 – I couldn’t give you a percentage figure for the markup,
0:11:16 but the retail price to the consumer
0:11:20 was still generally cheaper than today.
0:11:21 And that’s because of course,
0:11:24 we don’t have any brand names at this point
0:11:28 and they’re still not seen as a luxury product per se.
0:11:31 They’re still something that’s largely functional.
0:11:35 It’s worth identifying the historical reasons
0:11:40 why the price of spectacles has relatively increased.
0:11:45 You had the growth of a professional eye care service
0:11:51 and it is those professional fees for the site test
0:11:56 and for the individual dispensing of the spectacles
0:11:59 that is added to the cost of the frame.
0:12:02 – And what about the use
0:12:06 and therefore the cost of technology in eyewear?
0:12:10 Is the average pair of eyeglasses today substantially
0:12:13 more technologically advanced than it was 50 or 100 years ago?
0:12:15 – You can have on the one hand,
0:12:18 your simple ready readers that you can pick up
0:12:23 from a dollar store through to the very high performance
0:12:26 lenses with specialist coatings
0:12:28 and much more recently,
0:12:32 the development of wearable technologies,
0:12:34 augmented reality eyewear,
0:12:37 spectacle mounted cameras and audio devices
0:12:40 such that your spectacles are no longer just a vision aid,
0:12:44 but in fact, a multi-purpose device.
0:12:47 So there’s no such thing as a pair of glasses anymore.
0:12:51 – So yes, there are a number of reasons
0:12:53 that a pair of glasses today might cost more
0:12:56 than they did in Ben Franklin’s day,
0:12:58 adjusting for inflation, of course.
0:13:02 On the other hand, if you think about eyewear as technology,
0:13:06 most technologies get cheaper over time,
0:13:08 especially with something that for the most part
0:13:09 hasn’t changed all that much.
0:13:12 There is a set of frames and a pair of lenses,
0:13:17 no moving parts, no need for electricity or wifi.
0:13:21 All of this makes glasses relatively simple to manufacture.
0:13:23 When something is simple to manufacture,
0:13:26 the barrier to entry in the industry is low.
0:13:29 So you would expect to see a lot of competition,
0:13:33 which drives prices down.
0:13:36 And there are a lot of players in the eyeglass industry,
0:13:37 especially a lot of small players,
0:13:40 but when it comes to big players,
0:13:41 when it comes to the big engine
0:13:45 that really drives the industry, there’s only one.
0:13:49 – It’s the number one lens and frames manufacturers,
0:13:51 which is a vertically integrated player
0:13:55 operating from manufacturing to optical retailing.
0:13:57 – That is Cedric Rossi.
0:14:01 He’s French, also an equity research analyst
0:14:04 at the Parisian Investment Bank, Brian Garnier.
0:14:07 – I’ve been covering the optics industry for 15 years now,
0:14:10 and I’m also covering the fashion groups
0:14:14 like HEM, Inditex, Moncler, the sporting goods brands
0:14:16 like Adidas, Nike, and so on.
0:14:17 – And what does Rossi mean when he talks about
0:14:21 the optics industry as a vertically integrated player?
0:14:23 – When you are a vertically integrated player,
0:14:26 you master every step within the value chain.
0:14:30 When you master and you control 100% of the value chain,
0:14:32 I think you have two very good examples,
0:14:33 Hermes and Louis Vuitton.
0:14:35 Louis Vuitton, 100% of their products
0:14:37 are sold into a Louis Vuitton store.
0:14:39 You cannot buy Louis Vuitton products
0:14:41 outside of Louis Vuitton stores.
0:14:43 In Iowa, it’s pretty much similar.
0:14:46 When you are a 100% vertically integrated player,
0:14:50 you control manufacturing, supply chain,
0:14:52 distribution, customer experience,
0:14:55 then you will also control how you want
0:14:56 the industry to evolve.
0:15:00 – And SLR Luxotica does seem to have that kind of control.
0:15:03 We’ll get more into that as we go along.
0:15:06 But first, if we want to understand how glasses
0:15:08 became a fashion accessory
0:15:12 and how even non-fashion glasses got so expensive,
0:15:14 we need to do just a little bit more history.
0:15:19 And for that, we go to a woman named Jessica Glasscock.
0:15:21 – I am an eyeglass wearer.
0:15:23 I am a fashion historian
0:15:28 and I am a weird sunglasses enthusiast.
0:15:30 – She is also the author of a book
0:15:31 called Making a Spectacle,
0:15:33 Fashionable History of Glasses.
0:15:36 She lectures at Parsons School of Design in New York
0:15:38 and she used to work as a researcher
0:15:41 at the Metropolitan Museum of Arts Costume Institute.
0:15:45 – Right now, I am wearing my go-to pair of glasses.
0:15:48 I should really have more pairs of glasses
0:15:50 as someone who’s written a book on the topic,
0:15:54 but I’m actually wearing a fairly exotic prescription
0:15:55 that has a prism in it.
0:15:58 And so my eyeglasses are very expensive
0:16:01 even before we get to the frames.
0:16:04 – I know where of Jessica Glasscock speaks.
0:16:07 I too have a somewhat complicated eyeglass prescription
0:16:09 including a prism lens,
0:16:13 which helps the left and right eyes align a single image.
0:16:15 – The frames that I’m wearing
0:16:19 are a pair of Anna Sui glasses
0:16:21 from I think about 2012
0:16:26 and they have rhinestones and they are a pretty color.
0:16:30 I like for my glasses to have a bit of pizzazz,
0:16:32 especially if you’re wearing them every day.
0:16:37 – Pizzazz and a prism and a nicely made frame.
0:16:41 That is a recipe for $1,000 pair of glasses.
0:16:44 – I would say as someone who wears a complex prescription
0:16:48 that you can’t put a price on having good vision.
0:16:50 So it is a long-term investment.
0:16:54 Compared to a high fashion handbag,
0:16:57 I think high fashion eyewear is actually quite a bargain.
0:17:00 – Glasscock says that high fashion eyewear
0:17:02 got started in the 1950s
0:17:04 when manufacturers began to collaborate
0:17:06 with fashion designers.
0:17:09 – American Optical collaborated with Scapparelli,
0:17:13 did a lens with feather eyelashes.
0:17:15 You have this moment in the 1970s
0:17:19 where you start to see a ton of licensing
0:17:22 of everything by fashion designers.
0:17:26 Halston’s doing towels, Pierre Cardan’s doing cookware
0:17:29 and eyewear is one of those things.
0:17:34 And the rate seemed to be a rate of 6% to 7%
0:17:38 of return on the sales of those glasses.
0:17:41 It’s really at the end of the 80s
0:17:44 when Armani goes to make a deal with Lexotica
0:17:47 and they create a different structuring
0:17:52 of how the fashion eyewear collaboration is gonna work.
0:17:54 – So what was this new structure
0:17:57 and how did this new kind of deal work?
0:18:01 It was very hard for me to locate numbers, money,
0:18:04 like what the deal was.
0:18:07 – This is another feature of the eyewear industry.
0:18:10 Lexotica especially has never gone out of its way
0:18:11 to discuss its business
0:18:15 and many smaller players are privately held
0:18:17 so they don’t have to disclose much.
0:18:19 There’s also the fact that eyewear
0:18:22 is one of those old fashioned manufacturing industries
0:18:24 where the elbows are sharp
0:18:27 and no firm wants to do their rivals any favors
0:18:30 by talking about suppliers and deal structures.
0:18:33 – But I know with Armani specifically
0:18:36 rather than have just a simple licensing deal
0:18:39 where one assumes the eyewear maker comes to the designer
0:18:43 and says, “We think these three frames look like you.”
0:18:45 And the designer’s like, “Yes.”
0:18:46 And then they go and make them
0:18:47 and they stamp the name on it.
0:18:49 This was different.
0:18:54 They created a company for Armani to sell their glasses
0:18:58 and had this very intimate involvement of Armani at the time
0:19:03 to really articulate like what is the eyewear vision of Armani?
0:19:07 And that’s where it takes off.
0:19:09 They start making these kinds of deals with other designers,
0:19:11 some of the other eyewear companies
0:19:14 that still had a lot of money in power in the system
0:19:16 start to make similar deals.
0:19:18 You just get a real shift in the structure.
0:19:20 – You heard Glasscock mentioned there
0:19:22 when some of the other eyewear companies
0:19:25 still had a lot of money and power.
0:19:28 Luxotica and now Eselor Luxotica
0:19:32 have consolidated much of the industry’s money and power.
0:19:35 It is by far the biggest eyewear firm in the world
0:19:39 in terms of properties, revenues and employees.
0:19:42 They’ve got locations around the globe and everywhere they go
0:19:45 they control as many links in the industry as they’re able
0:19:48 from the optometrists who give eye exams
0:19:51 to the labs that make lenses
0:19:53 and the stores where glasses are sold
0:19:57 even the optical insurance as I mentioned earlier.
0:20:01 By the way, Eselor Luxotica still makes Armani branded glasses
0:20:05 along with glasses designed with Ferrari, Prada, Tiffany,
0:20:08 Tori Birch, they also make licensing deals
0:20:10 with people like Roger Federer.
0:20:13 You might think these high profile luxury glasses
0:20:18 would drive most of the profits at Eselor Luxotica
0:20:19 but that is not the case.
0:20:22 Here again is the industry analyst Cedric Rossi.
0:20:25 It’s a bit counterintuitive but Rayban has by far
0:20:28 the most profitable brand in the portfolio.
0:20:30 Rayban is primarily a sunglass brand.
0:20:34 They were first made in the 1930s by Bouch and Long,
0:20:36 an American firm that’s best known today
0:20:38 for their contact lenses.
0:20:40 Raybans were designed to help airline pilots
0:20:42 fight the glare of the sun.
0:20:44 They had a long heyday.
0:20:46 Maybe you remember Tom Cruise wearing them
0:20:49 and Risky Business but by the 1990s
0:20:52 they were cheaply made and you could buy a pair
0:20:54 for $19 at a gas station.
0:20:58 But then Luxotica bought Bouch and Long’s sunglass business
0:21:02 and repositioned Rayban as a luxury brand.
0:21:06 Today, it is considered the biggest eyewear brand
0:21:07 in the world.
0:21:10 And why are Raybans so profitable?
0:21:13 – Because the industrial process is quite easy.
0:21:15 It’s just a matter of putting acetate
0:21:16 and plastic into molds.
0:21:19 And so you can produce hundreds and hundreds
0:21:21 of pairs every hour.
0:21:23 – In other words, Raybans are pretty basic.
0:21:26 Other luxury brands are trickier to manufacture
0:21:30 with different materials and more complex designs.
0:21:33 But there’s another reason why a brand that is owned
0:21:36 by Eselor Luxotica like Rayban is more profitable
0:21:40 than a brand they license like Ferrari.
0:21:42 – You need to share the profit because it’s a license.
0:21:45 So you need to pay royalties and a marketing contribution
0:21:47 back to the licensor.
0:21:49 – How substantial are those royalties?
0:21:53 – It ranges from five to 15% of revenues
0:21:54 generated by the license.
0:21:56 And then you have a marketing contribution
0:22:00 that is also paid by Eselor Luxotica to licensors
0:22:03 and it can be seven to 12 or 13% of sales.
0:22:04 – I see.
0:22:07 And how do those fees compare to other luxury licensing
0:22:09 that isn’t eyewear?
0:22:11 – The one that is pretty much similar to eyewear,
0:22:12 I would say fragrances.
0:22:14 You have a very good example
0:22:16 which has a significant share in the US,
0:22:18 which is a French company called Interparfin.
0:22:20 You also have L’Oréal.
0:22:22 And actually, royalty conditions are pretty much similar
0:22:23 to eyewear.
0:22:26 – Rossi says there is another reason
0:22:28 why these high-end licensing deals
0:22:31 are less profitable for Eselor Luxotica.
0:22:34 – The human intervention on high-end frames
0:22:36 sometimes is higher.
0:22:39 There are a lot of steps within the industrial process.
0:22:42 So that’s why sometimes for a pair of Chanel
0:22:43 or a pair of Tiffany’s,
0:22:46 the profit margin is lower than for Eban or Oakley.
0:22:49 – Oakley is another sunglass brand
0:22:52 with its own interesting Luxotica history.
0:22:54 Luxotica was founded in 1961
0:22:58 by Leonardo Del Vecchio in Agordo, Italy.
0:23:01 He was one of five children who had grown up very poor
0:23:03 when their father died,
0:23:06 Leonardo had to be sent to an orphanage.
0:23:11 He became at age 14 an apprentice to a metal engraver
0:23:13 and he later worked on eyeglass frames.
0:23:16 He opened his own workshop in his 20s.
0:23:19 Del Vecchio was, as evidenced by the Ray-Ban
0:23:22 and Armani stories we’ve already heard,
0:23:24 a sharp and aggressive operator
0:23:27 with a huge appetite for growth.
0:23:32 In 2001, he bought the big US retailer Sunglass Hut.
0:23:37 At the time, Oakley was the hottest name in sunglasses.
0:23:39 According to reporting in The Guardian,
0:23:43 one of Del Vecchio’s first moves with Sunglass Hut
0:23:48 was to require all his suppliers to lower their prices.
0:23:50 Oakley declined.
0:23:55 Soon after, Sunglass Hut stopped selling Oakley sunglasses
0:23:59 and Luxotica began making Ray-Bans
0:24:04 that looked an awful lot like Oakley’s signature sunglasses.
0:24:06 There was a legal fight,
0:24:09 there was a big drop in Oakley’s share price
0:24:12 and in the end, Luxotica bought Oakley
0:24:15 for around $2 billion.
0:24:18 Leonardo Del Vecchio had won again.
0:24:21 Del Vecchio died in 2022.
0:24:24 His New York Times obituary by Jonathan Candel
0:24:26 is absolutely fascinating
0:24:29 and was a big inspiration for this series.
0:24:34 The empire Del Vecchio left behind is massive.
0:24:36 Given the nature of this industry,
0:24:40 it’s not easy to come up with accurate market share numbers.
0:24:44 Cedric Rossi says S.L.O.R. Luxotica owns roughly a quarter
0:24:47 of the global market in prescription eyeglasses
0:24:49 and more than half the market in lenses.
0:24:54 Do numbers like these start tipping into the realm of monopoly?
0:24:58 When S.L.O.R. and Luxotica merged in 2018,
0:25:00 neither the Federal Trade Commission in the US
0:25:05 nor the European Commission in the EU stopped them.
0:25:06 Was that a mistake?
0:25:08 – It obviously should have been blocked.
0:25:10 – It’s coming up after the break.
0:25:13 I’m Stephen Dubner and this is Freakonomics Radio.
0:25:27 S.L.O.R. Luxotica is the biggest eyewear company in the world
0:25:30 and they practice extreme vertical integration.
0:25:33 Does that make it a monopoly?
0:25:35 What is a monopoly anyway?
0:25:36 – I think it’s a loose definition.
0:25:39 You know what, when you see it, they have a lot of market power.
0:25:41 They can charge prices well above their costs
0:25:44 and not a lot of competition for what they’re doing.
0:25:49 – That is Ryan McDevitt, an economist at Duke University.
0:25:51 – I focus on a field called industrial organization.
0:25:53 It’s kind of a clunky way of saying,
0:25:55 I look at how firms compete with one another,
0:25:56 how markets are set up,
0:25:58 and that plays into things like regulation.
0:26:00 How do we regulate monopolies in the United States?
0:26:02 So antitrust is a part of my field.
0:26:05 – When McDevitt looks at the eyewear industry,
0:26:07 does he see a monopoly?
0:26:09 – Not at all if we talk about corrective vision broadly.
0:26:11 I mean, no one has a monopoly on eyeglasses.
0:26:14 It’s a commodity, it’s been around for hundreds of years.
0:26:18 But if you look at narrower segments, luxury eyeglasses,
0:26:20 then some like Luxotica, they do have some market power.
0:26:24 – Can you describe the size of their market power?
0:26:25 – Luxotica is something like
0:26:27 a hundred billion dollar market cap company.
0:26:29 And when you’re selling pretty much just eyeglasses,
0:26:31 that seems like a very large number to me.
0:26:33 There’s that much money to be made in eyeglasses.
0:26:35 And it’s something like 25 billion in revenue,
0:26:37 maybe five billion in profits.
0:26:39 So they’re doing very, very well.
0:26:41 – Luxotica is doing so well
0:26:44 that McDevitt has used the firm as a case study
0:26:46 for his MBA students.
0:26:48 – My first day of a business school class,
0:26:50 we talk about value creation and capture.
0:26:52 That’s the fundamental thing a company’s trying to do
0:26:53 to make money.
0:26:54 And they create value at Luxotica
0:26:57 by offering choices to customers.
0:26:59 If you think back, you know, in the ’50s and ’60s,
0:27:01 it was a clunky medical device.
0:27:04 Dorky black frames, revenge on the nerds,
0:27:07 maybe $5 at the time to buy that, nothing special.
0:27:09 And they realized that this could be
0:27:10 more of a fashion accessory.
0:27:12 Like you see throughout fashion,
0:27:15 that people pay a premium for better looking eyewear.
0:27:16 And that’s what they started to do.
0:27:20 – If I were to ask you to give me a general number
0:27:24 for Esolor Luxotica markup on glasses,
0:27:26 can you put a number on that?
0:27:28 – I’ve seen numbers as high as like 1,000%,
0:27:30 just massive, massive markups.
0:27:34 But if I had to do a little consulting exercise in my head
0:27:36 like you do for a McKinsey or Bain interview,
0:27:37 I would say something like,
0:27:39 I can’t believe those things cost
0:27:41 more than 20 bucks to manufacture.
0:27:44 You’re probably retailing for about $500.
0:27:48 And then along the way, you’re adding some cost.
0:27:52 I would guess looking at relative cash flow to revenue,
0:27:55 I would say it’s something like an 80% markup.
0:27:58 – And how hard does that make your heartbeat
0:27:59 as a business school professor?
0:28:00 That’s a pretty good number.
0:28:02 – This is very attractive.
0:28:04 But if you’re gonna say, what should I go into?
0:28:06 This is gonna be a tough industry to crack
0:28:09 because they’ve dominated every step.
0:28:10 They’ve done their homework.
0:28:14 They are well-positioned to extract a lot of income
0:28:16 from every step of the production process.
0:28:20 – It does make you wonder,
0:28:23 since S.L.O.R. Luxatica is such a giant
0:28:25 in the global eyewear industry,
0:28:30 why was the merger between S.L.O.R. and Luxatica not blocked?
0:28:33 Regulators in the U.S. and Europe especially
0:28:36 have been pushing back against over consolidation
0:28:39 in various industries, particularly the tech sectors,
0:28:41 because some critics feel that the consolidation
0:28:45 has gotten really out of hand, critics like Tim Woo.
0:28:49 – There was a collective delusion going on
0:28:51 in antitrust in the 2010s,
0:28:53 where everybody had drunk the Kool-Aid
0:28:56 and convinced themselves that vertical mergers
0:28:57 were never a problem.
0:28:59 – Woo is a law professor at Columbia,
0:29:02 who has worked in the Obama and Biden administrations
0:29:05 on competition policy and antitrust.
0:29:08 – We were crazy in the 2010s.
0:29:10 Somehow we led S.L.O.R. by Trulia,
0:29:13 we led S.L.O.R. by Streeties, we bought everybody,
0:29:16 but the most egregious thing I think in that era
0:29:19 is when we let Google buy Waze,
0:29:21 the two leading mapping companies
0:29:26 combining under one roof sounds like a merger to monopoly.
0:29:29 Some of the reasoning was that Google is what you use
0:29:31 when you wanna see what surrounds you,
0:29:32 and Waze is what you use
0:29:34 when you wanna figure out where you’re going.
0:29:36 So they’re not really competitors.
0:29:40 That was the level of logic that was going on in the 2010s.
0:29:42 – That is some fine hair splitting.
0:29:44 – That was a bad period for antitrust.
0:29:45 – That was also a period during which many
0:29:48 of the big tech platforms that many people
0:29:50 are concerned about now were getting started.
0:29:54 Had Google and Facebook started in a different era,
0:29:55 like let’s say today,
0:29:56 would it have been a very different outcome?
0:29:58 – I think it’d be a very different story.
0:30:02 The 2010s is when the tech platforms consolidated
0:30:04 their power by buying their competitors
0:30:06 with no government intervention.
0:30:09 I went to the study of the tech mergers
0:30:12 from about ’08 till 2018,
0:30:17 and there were in that period over 1,000 tech acquisitions
0:30:21 and a grand total of one challenge from the government
0:30:24 which led to a consent decree, not even blocking.
0:30:25 – What was that one?
0:30:28 – That was airline booking software,
0:30:29 which Google was buying.
0:30:32 So they made sure that Google would share it
0:30:35 with a few people, but everything else free pass.
0:30:38 – Do you think the SLR Luxotica merger
0:30:40 shouldn’t have been allowed at least in the U.S.
0:30:42 and maybe even in Europe?
0:30:43 – It obviously should have been blocked.
0:30:45 That was the byproduct of another era,
0:30:46 and we look back at that and like,
0:30:48 how did you let that one go?
0:30:50 Imagine if in the luxury bag industry
0:30:53 like Hermé and Louis Vuitton,
0:30:54 if they were all actually the same company,
0:30:56 that’s kind of the trick here with Luxotica
0:30:58 is they owned all the brands people think
0:31:01 are competing brands like Ray-Ban and Oakley
0:31:04 and they sort of mimic competition.
0:31:11 – Tim Wu was a key architect of a 2021 Biden initiative
0:31:14 called Executive Order on Promoting Competition
0:31:16 in the American Economy.
0:31:20 It argues that many industries have become too concentrated
0:31:21 and it pushes the Department of Justice
0:31:24 and the Federal Trade Commission to be more aggressive
0:31:27 in enforcing antitrust laws.
0:31:32 In over 75% of U.S. industries, the White House noted,
0:31:34 a smaller number of large companies
0:31:35 now control more of the business
0:31:37 than they did 20 years ago.
0:31:40 These kinds of numbers support the argument
0:31:45 that the U.S. economy has become a winner-take-most economy
0:31:48 with leverage begetting more leverage.
0:31:51 Tim Wu published a book about this in 2018
0:31:53 called The Curse of Bigness,
0:31:56 Antitrust in the New Gilded Age.
0:31:58 In the late 19th century, where it all starts,
0:32:00 there was a period where everyone thought
0:32:02 that corporations could do no wrong
0:32:04 and the trust movement built itself
0:32:06 into something quite powerful.
0:32:09 – Would you define what you’re talking about back then
0:32:12 by a trust because it’s probably not what most people think
0:32:14 when they hear that word today.
0:32:16 – A trust is an old-fashioned word for a monopoly.
0:32:20 No, a trust is something invented by standard oil.
0:32:24 It was a device by which all the companies
0:32:26 in the industry would agree to become one company.
0:32:31 The trust was the byproduct of an industry-wide merger.
0:32:33 – And was there any federal government oversight
0:32:36 or interest in that notion at the time?
0:32:40 – Not until they passed the Sherman Act in 1890.
0:32:45 There’s these long cycles of monopoly frustration or anger.
0:32:48 And then after a while, it goes too far
0:32:49 and then people are like, well,
0:32:51 maybe private industry is not too bad.
0:32:55 The high points of distrust in private industry
0:32:59 were the 1910s, and that’s Theodore Roosevelt,
0:33:01 Taft and Woodrow Wilson.
0:33:06 The late 1930s and ’40s and ’50s, which is FDR.
0:33:08 And Eisenhower, kind of surprisingly,
0:33:10 was a big antitrust guy.
0:33:13 And then the ’70s, another big period of suspicion
0:33:16 under Nixon, which might seem a little surprising.
0:33:18 And then you go into this long winter
0:33:21 from the ’80s onwards, coinciding with Reagan
0:33:25 and movies like Wall Street and Greed is Good, kind of period.
0:33:28 That lasts about 40 years.
0:33:30 I think we’re in the core of a major
0:33:33 anti-monopoly revitalization right now
0:33:35 in the Biden administration.
0:33:38 – Reading The New York Times and even the Wall Street Journal,
0:33:40 one gets the distinct impression that, yes,
0:33:41 as you just said, the Biden administration
0:33:44 is all in on antitrust.
0:33:48 And you were part of that movement for a while in DC.
0:33:53 – But how much effect is that movement actually having?
0:33:57 I mean, there’s calls for breakups of big tech firms.
0:34:00 There’s calls for less consolidation
0:34:01 in a variety of industries.
0:34:04 But I’m seeing very little actual effect.
0:34:05 Is there something I’m missing?
0:34:08 – Yes, you’re not paying attention to mergers,
0:34:12 which are the key of economic consolidation.
0:34:14 Collectively, the FTC and justice
0:34:18 have blocked over 40 mergers, maybe over 50 mergers
0:34:19 at this point.
0:34:22 The greater issue is the deterrence effect.
0:34:24 It’s a totally different environment
0:34:27 right now versus say, 2010.
0:34:29 I think in an earlier era,
0:34:31 Facebook would have maybe tried to buy Snapchat
0:34:34 or TikTok, but the merger situation,
0:34:35 if you ask anyone on Wall Street,
0:34:37 they say, yeah, it’s a different story.
0:34:39 We know our mergers can be blocked.
0:34:42 We’re also in the, we meaning my former employer,
0:34:44 the federal government, is in the midst
0:34:48 of trying to do something, break up, tame,
0:34:50 almost every single big tech company,
0:34:53 Amazon, Apple, Facebook, Google.
0:34:55 Those cases aren’t finished.
0:34:56 The remedies aren’t done.
0:35:00 But I think that’s gonna have a long-term effect.
0:35:03 The way AT&T and IBM have gone,
0:35:07 I wouldn’t say the economy has become FDR-advised.
0:35:10 But to say nothing’s happening, I think it’s totally wrong.
0:35:14 – There is a brand new piece of evidence
0:35:17 for Tim Wu’s argument that the current administration
0:35:19 is more aggressive than in the recent past.
0:35:23 Earlier this month, the FTC voted to block a merger
0:35:25 between the mattress maker, Tempur Sealy,
0:35:28 and the retailer, Mattress Firm.
0:35:31 So how does Wu think about competition
0:35:34 or the lack thereof in the eyeglass industry?
0:35:36 In the New York Times obituary
0:35:39 of Luxottica founder, Leonardo Del Vecchio,
0:35:43 Wu is quoted as calling the firm’s profit margins
0:35:45 relatively obscene.
0:35:49 I asked him if he stands by that characterization.
0:35:52 – Yeah, I think relatively obscene is a good one.
0:35:55 The margins, even by luxury good standards, are obscene.
0:35:59 I also would add that even relatively more normal,
0:36:02 not the high-end luxury, but the medium luxury eyeglasses
0:36:05 are also extraordinarily expensive.
0:36:07 And they have a well-armored Citadel
0:36:09 that keeps the prices up.
0:36:12 It has to compare itself with other obscene margin takers
0:36:14 like the pharmaceutical drug industry.
0:36:15 At least they have the defense
0:36:17 that they are improving their products.
0:36:20 – And I care, you’re saying can’t make that argument.
0:36:21 – I mean, do we really think glasses
0:36:24 are any different now than 10 years ago?
0:36:26 Maybe in the lenses, but the frames?
0:36:28 I don’t know, if they have, I’d like to hear it.
0:36:30 – I mean, I’ve asked this question
0:36:32 and I am told that the technology of lenses
0:36:35 is pretty good and continues to get better.
0:36:37 – It actually reminds me a little bit
0:36:40 of the aerospace industry and airplanes.
0:36:42 The aerospace industry is constantly saying
0:36:43 they’ve made all these enormous innovations,
0:36:47 but if you compare an airplane in the 1960s
0:36:50 and a computer in the 1960s, and you look at today,
0:36:52 I mean, the computers have undergone
0:36:54 several exponential changes.
0:36:57 The airplane is pretty much the same.
0:36:59 I don’t want to say there’s been no innovation,
0:37:01 but there is a difference between these disruptively
0:37:03 big leap industries and the ones
0:37:05 that incrementally improve their products.
0:37:08 I remember an internal executive saying
0:37:11 that the cost of eyeglasses, you know,
0:37:14 the frames and the plastic and everything,
0:37:17 it tops out at about $20 for the best versions of them.
0:37:20 And then you’re able to sell them for hundreds of dollars.
0:37:21 They throw brands onto them
0:37:24 and sometimes much as, you know, 800 bucks.
0:37:27 – When you look at all the gigantic industries
0:37:31 in the world and when you look at the financialization
0:37:35 of just about everything, is the eyeglass industry
0:37:36 even worth worrying about?
0:37:41 I mean, it’s relatively small and a lot of eyeglasses,
0:37:42 the vast majority in this country,
0:37:45 are sold for relatively low prices
0:37:47 at places like Walmart and Costco.
0:37:49 So couldn’t you argue that, you know,
0:37:52 the market is just fine, that even though Luxotica
0:37:55 has a big tie-up with Eselor,
0:37:56 that there’s still enough competition
0:38:00 and affordable pricing to not worry so much about,
0:38:04 or would you rather look at the industry as an example
0:38:05 of, yeah, if you overlook this
0:38:08 and you overlook the next 10 and then they get bigger
0:38:10 and bigger and they cause a real fundamental,
0:38:14 structural, economic and governmental problem.
0:38:17 – Yeah, I think it’s ridiculous to ignore an industry
0:38:20 ’cause it’s not as big as like big tech.
0:38:22 You need to have a policy that is serious
0:38:26 about market power wherever those problems may occur.
0:38:28 If it’s like concrete mixers in New York City,
0:38:31 it may be just millions, billions of dollars,
0:38:33 but, you know, it affects housing prices.
0:38:36 Everyone’s feeling the pinch a little bit right now
0:38:38 with prices and eyeglasses are something
0:38:39 a lot of people need.
0:38:42 So not just symbolism, but I think government needs
0:38:44 to be serious about every industry
0:38:48 that has illegitimate, illegal market power
0:38:50 and not say, well, these guys are only a couple billion
0:38:52 dollars, so let that one ride.
0:38:55 – You say illegitimate, illegal, but it was legal.
0:38:57 Maybe illegitimate in your eyes,
0:38:59 but I mean, this was approved.
0:39:02 – It wasn’t approved, they just didn’t act on it.
0:39:04 And I think maybe we should undo it.
0:39:07 The fact they didn’t bring suit
0:39:08 doesn’t mean it wasn’t illegal.
0:39:11 The Clayton Act says that mergers
0:39:14 that substantially less in competition
0:39:15 are a violation of the law.
0:39:18 And we’ve started looking back at some of the things
0:39:21 we let go in the 2010s and say, you know,
0:39:23 the law was actually originally written
0:39:25 to look backwards, not forwards.
0:39:26 I don’t know if many people know this,
0:39:27 the government is trying to undo
0:39:29 the Instagram Facebook merger.
0:39:31 And I think it’s about time to look back
0:39:32 at some of the other mergers.
0:39:34 Keep your eye on Ticketmaster Live Nation,
0:39:35 they might try and undo that too.
0:39:41 – Indeed, not long after we spoke with Tim Wu,
0:39:43 the Justice Department and 30 state
0:39:47 and district attorneys general sued Ticketmaster
0:39:49 and its parent company, Live Nation,
0:39:53 for quote, monopolization and other unlawful conduct
0:39:55 that thwarts competition in markets
0:39:57 across the live entertainment industry.
0:40:02 Should this lawsuit make Estelor Luxatica nervous?
0:40:04 The fact is that the eyewear industry
0:40:07 isn’t as concentrated as the live event industry.
0:40:10 And it’s also the case that Estelor Luxatica
0:40:12 has a new challenger.
0:40:16 So far, they’ve only got 2% of US market share,
0:40:18 but they haven’t been around long
0:40:20 and they are growing fast.
0:40:23 – When we had this idea to sell eyewear
0:40:27 for a fraction of the cost, people love that idea.
0:40:29 Low cost, but high style.
0:40:33 After the break, the eyeglass disruptor, Warby Parker.
0:40:36 I’m Stephen Dubner, this is Freakonomics Radio.
0:40:37 We’ll be right back.
0:40:46 When we were speaking with Tim Wu
0:40:50 about the ebbs and flows of antitrust fervor in the US,
0:40:53 he mentioned one change that did intersect
0:40:55 with the eyeglass industry.
0:40:57 In the ’70s, which was a period
0:41:01 of very pronounced anti-monopoly activity,
0:41:03 even under Nixon, the government decided
0:41:05 that it could improve the industry,
0:41:08 maybe encourage more competition.
0:41:11 If you could get a prescription from your eye doctor,
0:41:13 which you could then take to somebody else
0:41:15 to make your eyeglasses with,
0:41:18 the government decided that they wanted to split
0:41:23 the business of eye examinations from selling eyeglasses.
0:41:28 And Warby Parker is the direct beneficiary of that rule.
0:41:30 Warby Parker is the eyeglass startup
0:41:32 we mentioned right before the break.
0:41:34 It may have taken a couple of decades,
0:41:36 and it may have taken the invention of the internet,
0:41:38 but they realized that eyeglasses
0:41:41 don’t actually cost very much money to make,
0:41:45 so they could sell for a fraction of the current price.
0:41:47 I’m very dissatisfied with the state of competition
0:41:50 in eyeglasses, but I have to say that Warby Parker
0:41:52 is an exception to that dissatisfaction,
0:41:55 and I think is an example of what we should be doing.
0:41:58 – Okay, so let’s hear from them directly.
0:41:59 – Neil Blumenthal, I’m the co-founder
0:42:01 and co-CEO of Warby Parker.
0:42:03 – Okay, Dave, I have a feeling it might sound similar
0:42:04 with a different name.
0:42:08 – I’m Dave Gilboa, co-founder and co-CEO of Warby Parker.
0:42:11 – Gilboa, Blumenthal, and two other founders,
0:42:13 Andrew Hunt and Jeff Rader,
0:42:14 were all getting their MBAs
0:42:17 at the University of Pennsylvania’s Wharton School
0:42:19 when they started Warby Parker.
0:42:21 Through personal experience,
0:42:23 they had come to think that eyeglass prices
0:42:25 were in general exorbitant,
0:42:28 and they saw a business opportunity.
0:42:31 Warby Parker sought to distinguish themselves in two ways.
0:42:34 They would sell glasses strictly online
0:42:37 and at low prices, starting at $95.
0:42:40 – We were trying to introduce a little more transparency,
0:42:43 a little more simplicity into the market.
0:42:44 – That’s Blumenthal.
0:42:47 – When you walk into your typical optical shop,
0:42:49 there’s no price tags.
0:42:50 You have no idea what a frame costs.
0:42:53 You have no idea what the lenses cost,
0:42:55 and you’re constantly getting upsold.
0:42:57 Oh, you should get this lens material
0:42:58 instead of this other one.
0:43:00 You should get this lens coating.
0:43:05 And consumers have no idea about the differences.
0:43:06 When there’s information asymmetry,
0:43:08 that’s not good for consumers.
0:43:10 So we wanted to simplify things.
0:43:15 Hey, $95 acetate frames with polycarbonate lenses
0:43:18 with anti-reflective, anti-scratch coatings.
0:43:20 These are premium lenses already,
0:43:22 and it’s basically all that you need
0:43:25 to be super happy to have great visual acuity
0:43:27 and to look great.
0:43:29 – So if you are SLR Luxatica,
0:43:32 how do you defend routinely pricing glasses
0:43:36 at $800, $1,000, $1,200?
0:43:39 – You’d probably have to get their perspective,
0:43:41 but when we spoke to consumers,
0:43:44 often they would allude to the brand name
0:43:46 and the logo that was on the frames.
0:43:48 Most consumers didn’t realize
0:43:52 that eyewear was made by somebody who was paying a fee
0:43:54 just to put the logo on it.
0:43:56 – But how much could that licensing fee be
0:43:58 on a pair of, let’s say $1,000 glasses?
0:44:01 Maybe $100, $200, maybe?
0:44:03 – Exactly, probably 10 to 20%.
0:44:06 – But there’s still a lot of other markup there then, yes?
0:44:09 – Exactly, which is what really attracted us
0:44:10 to the market.
0:44:12 When we looked at these unit economics–
0:44:13 – When you say unit economics,
0:44:14 you mean what it actually costs
0:44:16 to make a pair of frames and a pair of lenses?
0:44:19 – Right, they were being sold for about 10x
0:44:23 the cost to manufacture, if not more, sometimes 20x.
0:44:27 And what we found was that there was wholesale markup
0:44:30 and then a retail markup that was often three to five x.
0:44:32 And that’s what made it so attractive to us
0:44:35 to design our own frames, manufacture them,
0:44:36 and then sell direct to customers.
0:44:38 ‘Cause we would just take that retail markup
0:44:40 and pass it on to consumers
0:44:43 ’cause there’s just one less hand in the cookie jar.
0:44:44 And actually a funny story
0:44:48 when we were thinking about our pricing strategy,
0:44:52 we thought we could sell our glasses at $45.
0:44:54 And we went to the head of the marketing department
0:44:55 at Wharton who was a pricing expert.
0:44:57 – Can I take a guess what that person said?
0:45:00 That’s too cheap, people won’t think they’re any good.
0:45:02 – Exactly, and that didn’t even cross our minds.
0:45:04 We thought, lower price better.
0:45:06 We went into his office,
0:45:09 we had a beautiful PowerPoint presentation.
0:45:12 We said, we’re gonna transform the optical industry,
0:45:15 we’re gonna charge $45 for $500 glasses.
0:45:17 And he said, sorry, that’s just not gonna work.
0:45:18 And we’re like, wait,
0:45:20 we didn’t even show you all these graphs.
0:45:21 They all go up and to the right.
0:45:24 He said, it’s outside the realm of believability
0:45:26 that you could sell the same quality
0:45:27 for a 10th of the price.
0:45:31 – Were you worried that even at $95,
0:45:34 your brand would be perceived as not good enough medically
0:45:35 if they were that cheap?
0:45:36 – It’s certainly something
0:45:38 that we spent a lot of time discussing.
0:45:42 We surveyed a lot of potential eyewear consumers
0:45:44 and found that at very low price points,
0:45:47 there was quite a bit of skepticism around the quality
0:45:50 and the durability of those products.
0:45:53 We found that the propensity to buy increased
0:45:57 until we reached $100 and then kind of fell off the cliff.
0:46:00 When we landed on $95 instead of $45,
0:46:02 there was still a bit of skepticism.
0:46:05 But then when we started getting our initial prototypes
0:46:09 in and asking our friends and potential customers
0:46:11 to try on the glasses,
0:46:13 they were blown away by the quality.
0:46:15 And that’s when kind of the light bulbs went off
0:46:17 and said, we really need a mechanism
0:46:21 just to get as many glasses on people’s faces as possible.
0:46:23 And that’s when we came up with the home try-on.
0:46:24 – We came up with this idea
0:46:27 where we would ship people five pairs of glasses.
0:46:29 They would have five days to try it on at home.
0:46:30 And then if there was a pair they wanted,
0:46:33 we’d put in prescription lenses and send it to them.
0:46:37 The Warby Parker business model has worked.
0:46:40 The company went public in 2021.
0:46:43 Their market cap today is roughly $2 billion.
0:46:46 The starting price of their glasses is still $95,
0:46:50 but they have gone well beyond their internet beginnings.
0:46:52 By the end of 2024,
0:46:54 they’ll have nearly 300 brick and mortar stores
0:46:56 in the US and Canada.
0:46:59 They also give away millions of eyeglasses for free
0:47:00 to people who can’t afford them.
0:47:05 As do many eyewear companies, including Esselora Luxotica.
0:47:06 – We think that it’s nuts
0:47:08 that 800 years since glasses were invented
0:47:12 that not every human being on the planet has access
0:47:15 ’cause we know what it means to educational outcomes.
0:47:18 We know what it means to economic outcomes.
0:47:20 And it’s even more unforgivable
0:47:23 that in as wealthy of a country as the United States
0:47:25 that there are Americans that don’t have the glasses
0:47:27 they need to thrive.
0:47:28 – The fact that you’re able to give away so many
0:47:32 suggests that even $95 affords you plenty of room, yes?
0:47:35 – We do have some healthy margins.
0:47:37 – Can you discuss your margins overall?
0:47:38 That must be public, yeah.
0:47:41 – We just announced our Q1 earnings
0:47:44 and our gross margins were 56.8%.
0:47:45 – Wow.
0:47:48 – And that includes costs associated with our optometrists
0:47:51 and store buildouts and depreciation.
0:47:53 And so it’s kind of a reflection
0:47:56 that within this category we can offer prices
0:47:59 that are a fraction of what others are charging
0:48:01 and still maintain healthy margins.
0:48:04 – As I mentioned earlier,
0:48:07 Warby Parker only has around 2%
0:48:09 of the US eyewear market so far.
0:48:12 But Cedric Rossi, the French industry analyst
0:48:14 likes what the company is doing.
0:48:17 – I would say Warby Parker came up with a business model
0:48:20 that is a little bit like a steel or lexotica proof.
0:48:23 They don’t want to compete directly with a steel or lexotica
0:48:25 but they found a very interesting niche
0:48:28 which is a transparent price offering,
0:48:30 eyeglasses sold at a fair price,
0:48:33 but also with a huge fashion aspect.
0:48:36 – The original appeal though of Warby Parker
0:48:37 was also that it was online.
0:48:40 So they now have a lot of brick and mortar stores
0:48:43 which are as we know, much more expensive.
0:48:46 What do you think of that strategy for a company
0:48:48 that’s only got 2% of US market share
0:48:51 trying to compete with a giant like S-Lore lexotica?
0:48:54 – But don’t forget that you have still a 47%
0:48:57 of the eyewear market that is generated
0:48:59 by customers age 55 plus.
0:49:00 – Oh, wow.
0:49:02 – This customer base is not very familiar
0:49:04 with buying eyeglasses online.
0:49:07 First of all, Warby Parker also found out
0:49:10 that even the younger generations,
0:49:12 if you want to buy simple prescription glasses
0:49:15 when you are just affected by myopia,
0:49:17 then it’s very easy to download your prescription
0:49:19 and to buy eyeglasses online.
0:49:22 But as soon as it’s starting to be more complex,
0:49:27 it’s almost impossible to have a 100% online shopping journey.
0:49:29 As soon as they wanted to sell
0:49:31 more complex prescription lenses,
0:49:34 they came up with the decision to open stores.
0:49:37 – What market share would you expect Warby Parker
0:49:40 to have in the US in, let’s say, five years?
0:49:42 – They can at least double that share.
0:49:43 Last year, they started to invest
0:49:45 into the progressive lens category,
0:49:47 which is quite new for them.
0:49:50 – Okay, progressive lenses combine distance and close-up.
0:49:54 That is by nature an older consumer, yes?
0:49:55 – Exactly, because typically,
0:49:57 you start wearing progressive lenses
0:50:00 where you are affected by presbyopia,
0:50:02 starting at 40 years old plus.
0:50:04 So that’s also the beauty of this business.
0:50:08 You cannot escape from presbyopia eventually.
0:50:13 – Warby Parker has been branching out in other ways too,
0:50:16 including some in-house manufacturing
0:50:18 to eliminate yet another middleman.
0:50:20 They say they want to become
0:50:22 a holistic vision care company,
0:50:25 which sounds a bit like
0:50:29 the super vertically integrated S-Lore Luxatica.
0:50:33 And what do the Warby Parker founders think of S-Lore Luxatica?
0:50:35 – They’ve built a beautiful business.
0:50:38 The lens technology, the lens production,
0:50:42 the optical labs, the frame production,
0:50:46 the brand licensing, the retailing and distribution,
0:50:50 the vision insurance to drive people in,
0:50:55 software that they sell to third-party optical labs,
0:50:58 the software that they sell to other retailers
0:51:01 and independent optometric practices,
0:51:04 the equipment that they also sell.
0:51:06 It’s super impressive what they’ve built over decades.
0:51:09 – I have to say, Neil, I heard in your voice
0:51:12 as you were describing this intense vertical integration
0:51:15 of S-Lore Luxatica, a certain level of admiration.
0:51:18 Do you have similar aspirations?
0:51:21 Would you like to be the S-Lore Luxatica
0:51:25 of the year 2035 or 2045?
0:51:26 – I think there’s…
0:51:27 – Although now that I ask the question,
0:51:29 I realize it may be dangerous to ask someone to admit
0:51:32 that they want to become a near monopolist, but anyway.
0:51:36 – You know, the MBA in me admires the business, no doubt,
0:51:41 admires the founder of Luxatica, Leonardo Del Vecchio,
0:51:44 is one of the world’s best entrepreneurs.
0:51:49 He was incredibly ambitious and started with nothing
0:51:51 and built one of the biggest companies in the world
0:51:53 in any category.
0:51:55 They’ve done that largely through acquisition
0:51:59 and consolidation and they’ve leveraged their scale
0:52:03 to drive really meaningful profits for their company.
0:52:06 We believe that we can continue to invest
0:52:10 in our own brand without requiring acquisitions
0:52:13 and consolidation and we believe
0:52:16 that we can deliver very healthy margins
0:52:20 while leaving some extra dollars in our customer’s pocket.
0:52:23 – I would guess, but please correct me if I’m wrong,
0:52:25 that a firm like yours, Warby Parker,
0:52:28 has benefited at least on one dimension.
0:52:32 They drove the prices of eyeglasses really high
0:52:36 and established a floor that was so far
0:52:39 above what was realistic from the producer’s side
0:52:42 that it left an awful lot of room for you.
0:52:45 So you must be kind of grateful for that, yeah?
0:52:47 – Absolutely, you can’t be a disruptor
0:52:49 if there’s not an incumbent.
0:52:54 – Coming up next time, part two,
0:52:57 let’s not forget that behind every pair of eyeglasses
0:52:59 is an eye doctor.
0:53:01 – An eyeball fixer-upper I used to like
0:53:02 to consider myself.
0:53:05 – We will hear about the global rise of myopia.
0:53:08 – We’re gonna see half of the global population
0:53:11 being myopic. – And the rise of China
0:53:13 as an eyeglass market.
0:53:17 (speaking in foreign language)
0:53:21 – Also, the politics of runaway consolidation.
0:53:23 – It’s a huge cost to the American situation
0:53:25 to have corporate control of government.
0:53:27 – That’s next time on the show.
0:53:29 Until then, take care of yourself.
0:53:32 And if you can, someone else too.
0:53:35 Freakonomics Radio is produced by Stitcher and Renbud Radio.
0:53:38 You can find our entire archive on any podcast app.
0:53:41 Also at Freakonomics.com where we publish transcripts
0:53:42 and show notes.
0:53:45 This episode was produced by Morgan Levy.
0:53:47 Our staff also includes Alina Cullman,
0:53:50 Augusta Chapman, Dalvin Aboagy, Eleanor Osborne,
0:53:52 Elsa Hernandez, Gabriel Roth, Greg Rippin,
0:53:55 Jasmine Klinger, Jeremy Johnston, Julie Kanfer,
0:53:58 Lyric Bowditch, Neil Caruth, Rebecca Lee Douglas,
0:54:01 Sarah Lilly, Teo Jacobs, and Zach Lipinski.
0:54:04 Our theme song is “Mr. Fortune” by the Hitchhikers.
0:54:07 Our composer is Luis Guerra.
0:54:09 As always, thank you for listening.
0:54:11 (upbeat music)
0:54:13 – It’s been a great experience.
0:54:14 As I was saying to Morgan and Rip,
0:54:16 that’s my first time in a recording studios.
0:54:18 – I’m glad your first one wasn’t a bad one.
0:54:20 – No, no, it was a very good experience.
0:54:22 – Okay, au revoir.
0:54:23 (camera clicks)
0:54:26 (upbeat music)
0:54:29 – The Freakonomics Radio Network,
0:54:30 the hidden side of everything.
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0:54:37 (gentle music)
0:54:47 [BLANK_AUDIO]
A single company, EssilorLuxottica, owns so much of the eyewear industry that it’s hard to escape their gravitational pull — or their “obscene” markups. Should regulators do something? Can Warby Parker steal market share? And how did Ray-Bans become a luxury brand? (Part one of a two-part series.)
- SOURCES:
- Neil Blumenthal, co-founder and co-CEO of Warby Parker.
- Dave Gilboa, co-founder and co-CEO of Warby Parker.
- Jessica Glasscock, fashion historian and lecturer at the Parsons School of Design.
- Neil Handley, curator of the British Optical Association Museum at the College of Optometrists.
- Ryan McDevitt, professor of economics at Duke University.
- Cédric Rossi, equity research analyst at Bryan Garnier.
- Tim Wu, professor of law, science and technology at Columbia Law School.
- RESOURCES:
- “Leonardo Del Vecchio Dies at 87; Transformed Eyeglass Industry,” by Jonathan Kandell (The New York Times, 2022).
- Making a Spectacle: A Fashionable History of Glasses, by Jessica Glasscock (2021).
- “Dave Gilboa and Neil Blumenthal: A Vision for Business,” by Lucy Handley (CNBC, 2020).
- “The Roots of Big Tech Run Disturbingly Deep,” by Tim Wu and Stuart A. Thompson (The New York Times, 2019).
- “The Spectacular Power of Big Lens,” by Sam Knight (The Guardian, 2018).
- The Curse of Bigness: Antitrust in the New Gilded Age, by Tim Wu (2018).
- “Statement of the Federal Trade Commission Concerning the Proposed Acquisition of Luxottica Group S.p.A. by Essilor International (Compagnie Generale d’Optique) S.A.,” FTC File No. 171-0060 (2018).
- Cult Eyewear: The World’s Enduring Classics, by Neil Handley (2011).
- A Far-Sighted Man, by Luca Goldoni (1991).
- EXTRAS:
- “Direct-to-Consumer Mattresses,” by The Economics of Everyday Things (2024).
- “Are Two C.E.O.s Better Than One?” by Freakonomics Radio (2023).
- “Are We in a Mattress-Store Bubble?” by Freakonomics Radio (2016).