Watch Media: Win-Win or Zero Sum

With this article I'd like to discuss information economics and some principles from the field of information economics which can help us think a little bit about watch media (blogs, magazines, etc).*   We'll discuss watch media revenue and where it comes from.  There are a few different models that we might see at play in watch industry media and I'm going to try to explore whether the models we're seeing are "win win" or "zero sum."  

Under a win-win arrangement, media and manufacturers (brands) are both winning at the same time. In a zero sum arrangement, brands are benefiting from the activity of watch media at the cost of the the media themselves. I'll also offer a "case study" of Hodinkee in which I'll present some data suggesting that this outlet does matter when it comes to luxury watch interest.  I'll share some estimates that  quantify exactly the ways in which Hodinkee matters and I'll discuss the role of Silicon Valley in the creation of Hodinkee and ask whether this was a win-win or zero sum arrangement.

Information Economics

Let's begin with a discussion of some principles from the field of information economics. Information is a pure public good. It is nonrival, which means that if I consume a piece of information, then that piece of information is still there for you to consume as well, unlike an apple. It is also non-excludable, so you can't prevent people from accessing information. Historically, there's been an attempt to prevent the distribution of information through tools such as copyright and the like, but it is more or less impossible to prevent people from talking about and sharing information. Because of non-excludability, information tends to be underproduced because you can't profit off of it.  Exclusion is typically a precondition to profit (ie if you don't pay you don't have access).  Information is highly valuable to society, though, because once it is created everyone can potentially benefit from it. 

Historically, advertising has served as a subsidy to information producers. Third parties (not the consumers or the producers of the information necessarily) pay for the creation of the information. Pre-internet, advertising was an effective means to ensure adequate information production.  Now, the advertising model is, by and large, failing and dying because intermediaries like Google and Facebook, have made advertising cheap and plentiful. Advertising venues are unlimited on the Internet, so the price of advertising is very low and many, many different kinds of media outlets struggle to survive off of advertising. It is fair to conclude that the advertising model is presently insufficient for most watch media outlets. 

Media also sometimes employ a subscriber model. You don't see a whole lot of that happening in watch media, although there is some of it. It is a little bit more common in Europe with outlets like Europa Star. There is also the possibility of a subsidy from the government.  As far as I can tell, none of that is happening in the United States when it comes to private media. Some subsidies are available in Europe. I'm going to return to that subject.  

Finally, there is the retail option.  By and large this is what almost all media outlets covering the watch industry rely upon.  When watch media sell timepieces to readership, though, there are associated issues of conflict  of interest. This can also produce discomfort on the part of watch media consumers. More on this later. 

Mostly Zero Sum

I was thinking about these topics before I listened to a podcast on Fifth Wrist Radio which provided some insights into the topic. The guest was Ariel Adams, who owns Ablogtowatch. That's his media property, and there were a few things he observed that are worth considering. Here are his observations (quoted from the pod):

• "The average sort of mentality in the watch industry is to take advantage as much as possible and they don't see the value in media."
• "Watch brands, for example, they play a game, they'll call it a strategy, but it's a game of how to get the most amount of what they call earned media versus paid media"
• "Sometimes brands used to tell me like there would be these lavish watch is like $400,000 .. we sold one and the client referenced ablogtowatch and they sent me like a bottle of champagne"

Adams has vast experience in this area and observes that the watch brand strategy is to get coverage and discussion of your releases that you don't have to pay for directly. 

It is important to note that Adams said he would have far preferred commission on the sale of any watches he discusses on his media property. That seems to be the direction where many media outlets are headed. Selling watches directly can be very fun. Designing and collaborating with brands is also fun.  Brands themselves prefer that kind of financial arrangement, in which watch media outlets serve as dealers. It fits within their business model of working with dealers, sending inventory to them, and letting the dealers profit off of timepiece sales. 

Market Expansion Through Media

Let's now turn to a "case study" of Hodinkee.  Adams seems to imply that the volume of advertising that is paid for by the luxury watch brands is not adequate to cover the cost of information production by media outlets.  This suggests that media outlets might face a "zero sum" situation where the brands benefit from watch media coverage but they're not really paying for it. One way to think about Hodinkee, within the context of Adams' comments, is as a multiyear earned media project subsidized by venture capitalists in the United States. There is a lot of compelling information created by that particular media outlet which benefits the industry, but the industry didn't have to pay, particularly in the early years. Of course, that's exactly the definition of earned media. 

Did Hodinkee and does Hodinkee generate value for the industry? Does it have an impact? My look at the data suggests that it does have a demonstrable, beneficial impact for the watch industry. So how do I come up with that conclusion? First, I gathered data on global Google search volume for the following brands: Rolex, Patek Philippe, Audemars Piguet, Vacheron Constantin, Omega, Oris, Longines and IWC.   I totaled the search counts across those watch brands.  I think of this as a measure of interest in the luxury watch industry. I also took global Google searches counts for Hodinkee itself. I lagged those one month.  

I will end up looking at how a fluctuation or a change in searches for Hodinkee, let's say in December of this year, impacts searches for the above group of luxury watch brands the next month (January in my example).   The reason I lag the Hodinkee searches is that there's a question of so-called reverse causality.  Is Hodinkee the dog and the industry the tail or vice versa? 

When you use lag timing, you're getting around that question because it is hard to believe that luxury watch searches in the future could cause Hodinkee searches today (there are no time machines).   The trend graph to the left shows the general upward trend in luxury watch industry over the past decade.  Accompanying that trend was an upswing in Hodinkee interest (the spike at the end of the series corresponds to the time when stories about a new multi-million dollar funding round was completed by Hodinkee).

Next is a graph of the results. I refer to this as a market-expansion graph because that is what the Google data sheds light on. On the horizontal axis is lagged Google searches for Hodinkee.

On the vertical axis I have searches one month later for luxury watch brands.  You can see that there's a positive relationship between those two measures. If we apply a technique called ordinary least squares regression, the equation we get has a positive coefficient of .58 on the Hodinkee search variable.  It is statistically significant.  The result implies that when people search for Hodinkee on Google, presumably go there and consume some articles, the next month we see more interest in luxury watch brands. The R-squared on this estimation is .54. An R-squared of .54 tells us is that 54% of the variation in luxury watch Google searches can be explained by Hodinkee searches from the prior month. That is a lot of the interest in luxury watches which can be explained by Hodinkee alone. A more finessed analysis of the data suggests that there's an 8X effect of Hodinkee on luxury watch brand interest. In other words, a 1% increase in Hodinkee searches this month would be associated with an 8% increase in luxury watch searches next month. This is what I mean by market expansion.

So the fact that Hodinkee was not able to profit off of this content purely through advertising paid for by the brands themselves (or any other advertiser really) suggests that the watch industry ecosystem functions with something like a zero sum game.  The brands gained interest from watch media, the VCs were paying, but Hodinkee was not earning corresponding revenue to cover the cost of media production. So the question I'll ask here is, did the luxury watch industry free ride on what Hodinkee was producing?  You could say that bringing Hodinkee "into the fold" as an authorized dealer was the industry's way of paying. If Hodinkee has advantageous AD contracts then that might be the subsidy that the industry is offering in exchange, but that would be something that no one would know without looking at those contracts. Also, just note that converting any watch media outlet to retail shifts all the risk off the brands because that is not a risky proposition for them. If the media outlet buys the watch inventory up front then you know the transaction is completed from the brand's perspective and all the risk is on the shoulders of the media outlet to actually sell those timepieces.   Another question one might ask is: is it fair to ask media outlets to bear that risk? 

The other question I'll ask is: why is there no Swiss state subsidy for Hodinkee or the watch media industry as a whole?  I found a 2014 report from the Swiss government which says that it paid 1.74 million Swiss francs in subsidies to media, presumably based in Switzerland. With more detailed data and a more detailed analysis, a case could be made that subsidizing watch media outlets is in the financial interest of the Swiss nation. Is a Swiss franc paid to watch media outlets who help promote the industry as a whole capable of generate a return for the Swiss government in terms of tax revenues? Is that something that the Swiss government should consider?

In conclusion, the evidence I have right now is that Hodinkee, in particular, but arguably the entire media ecosystem surrounding the watch industry, does expand the market. Is it a win win situation? There are steps moving in that direction involving retail distribution agreements with media outlets. But is it enough? Will the market expansion of the past decade continue and survive with the current arrangement and current preference of the brands for earned media? We will have to wait to see.

*This post is a new effort in which I offer text versions of the remarks from a show I post on IGTV (and do live on Saturday) called Watches this Week.  For that reason it may read as a bit less formal and more conversational.