Freakonomics Radio - 597. Why Do Your Eyeglasses Cost $1,000?

Episode Date: July 18, 2024

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).

Here's a riddle for you. Name an item that is both a medical device and a fashion accessory. An item that may cost $50 to make, but often sells for over $1,000. An item that was invented eight centuries ago, has improved billions of lives, and yet many people who need it don't have it, especially children. Have you figured it out? The item I'm talking about here is the pair of eyeglasses sitting right now on my face and maybe yours too. This episode and the episode next week also are about the economics of the eyeglass industry. Does that sound boring? It isn't boring.

What we learned while making these episodes is that the eyewear industry is fascinating and strange. What you see is often not what you get. It is a unique and resilient industry, in the words of one research firm, with global annual revenues of around $150 billion, and it's growing fast, not just because more people need glasses these days,

but because we are paying more. In the U.S., the biggest market in the world, a pair of simple prescription glasses costs on average around $350. It is an industry with many players, but one is much bigger than the rest. They're called Essilor Luxottica. They are the result of a 2018 merger between the French lens manufacturer Essilor and the Italian frame maker Luxottica. You've probably never heard of Essilor Luxottica, but you certainly

know the brands they partner with. Armani, Chanel, Coach, Michael Kors, on and on and on. But Essilor Luxottica goes way, way beyond luxury. They own LensCrafters and Pearl Vision, Vision Express and Oliver Peoples. They own Sunglass Hut, as well as Ray-Ban and Oakley. They even own iMed, the second biggest vision insurer in the U.S. So you get the picture. They have full control over prices, and that's just a license to mint money from them. Let me say right up front that Essilor Luxottica

would not speak with us for this series, but other people did. Industry analysts and rival manufacturers, optometrists and economists, historians, and a government regulator who had this to say. The margins, even by luxury goods standards, are obscene. Why is a technology that's been around for centuries still so expensive?

We'll tell you why, and we will tell you much more about this strange, fascinating industry beginning now. This is Freakonomics Radio, the podcast that explores the hidden side of everything, with your host, Stephen Dubner. Have you ever wondered about the history of eyeglasses? I have. So we called up this man. Yes, hello.

I'm Neil Handley, and I am the curator of the British Optical Association Museum at the College of Optometrists. Handley's museum is in central London. A stone's throw from Trafalgar Square. And the museum's purpose is what? The purpose is to outline the history and development of optometry services to help people conserve their vision and to make the most of the eyes that they've been given. Okay, so let's have some optical history. Where should we start? There was a rudimentary understanding of the principles of optics very much in the ancient world, particularly in the Arab world. But it seems that that knowledge did not result in any device

for correcting vision until about the year 1000. And why do you think that was? Well, there were various explanations put forward as to why it wasn't necessary to correct vision. For example, in an ancient society where you have slavery, if you cannot read, a literate slave will read to you. If you are insufficiently sighted to work in the fields, they will give you a sedentary activity instead, using your hands perhaps to spin or to make pots. There's even some evidence that people with extreme myopia may have been introduced to others of the same condition so that they could interbreed a bit like breeding racehorses so that these people could work in the scriptoria doing the minute illustrations

on illuminated manuscripts. Myopia, by the way, is when you see well close up, but not at a distance. Presbyopia is when you can't see as well close up. That happens to most of us after age 40. Handley says the first vision-correcting device was called a reading stone. The reading stone is a bit like your present-day desk magnifier. It's something which is held in direct contact with the item being viewed. If you have a page on the table, you lay it flat and you place the reading stone on top of it. And your eye is at some distance from it, but it is performing that enlarging function. In the late 13th century, friars and priests in Italy began to wear primitive spectacles that sat on the nose.

For the next 400 years or so, that's what glasses were, a handheld device without arms or temples, the part of the glasses we know today that hold the frames in place. In these early days, spectacles were primarily associated with clergy and scholars, but not exclusively. It is quite revealing about how many early modern paintings show glasses in a quite negative depiction. Government officials, tax collectors, money changers are shown with spectacles, often counting coins, and they're entering the exact amounts of money into a ledger. And you, the viewer, are supposed to look at this with resentment and think, oh my goodness, if only they would turn a blind eye to the money that I owe.

For the person wearing glasses, there was a double whammy. Already you didn't see very well on your own, and by correcting your vision, you were suspected of trafficking in something nefarious. What we often see in early art are representations of the devil wearing spectacles. They start to take on this magical connotation whereby glasses allow you to see the things that you shouldn't see. Another reason why people were reluctant to wear spectacles was because they were so closely associated with aging. You have paintings in which a pair of spectacles are shown alongside a skull.

The symbolism of that is quite clear. By now, there were spectacle makers in Italy and elsewhere in Europe, and they figured it was time for some better public relations. The French medieval spectacle makers felt it was necessary to rehabilitate spectacle wearing. And the best way to do that is to have a celebrity figurehead. And they alighted upon Saint Jerome, who had many advantages, one being that he was long dead, and so they didn't have to pay for his services. But he was recognized as one of the foremost of the early church fathers.

So his moral character was without question. He had gone into the desert and found a lion that was limping with a fawn in its paw, pulled out the fawn and become the friend to this wild beast. So he was a benevolent, compassionate figure who was kind to animals, which is a great image for a caring profession. But he was also the ultimate scholar because he had translated the Vulgate version of the Bible from Greek into Latin. And the idea was that if only he had had access to spectacles, which he most certainly didn't because he died in the 4th century, then it would have been a very worthy use of them to translate the word of God itself. The early eyeglasses were simple magnifiers,

much like the reading glasses you can buy today in a drugstore without a prescription. Those are useful for people with presbyopia. Concave lenses, which helped people with myopia, also made an appearance around the 13th century, although myopia itself wasn't really understood until the 16th century. By the 17th century, it was possible to walk into a shop and buy eyeglasses. London was certainly one of the leading cities for this new concept of the spectacle shop. You could actually go to a retail premises and buy a pair of glasses

that most likely had been made on the premises. How customized were they? They were anything but customized when it came to their optical performance. It wasn't possible to grind the lens to a set power. So they generally classified the finished products as either young glasses or old glasses. By the 18th century, eyeglasses had frames with temples that gripped the side of the head. This made it possible to wear them all day long. And now glasses were no

longer just a medical device, but also a statement. If you are wealthy, you could have your spectacles made out of silver as opposed to out of iron. And there is a flourishing export market in America. It wasn't possible to obtain spectacles unless another ship arrived with a consignment of them. And some Americans, of whom the most famous is probably Benjamin Franklin, came over to London, lived here for 15 years, and had a profitable sideline in sending spectacles back to Philadelphia. We got a print in our collection here at the museum of merchants landing in the new world, and they haven't even got off the beach. They literally just waded out of the water,

and they've opened a packing crate full of spectacles. And that's what people are trading on the beach, because these were so in demand and so hard to get hold of. Any idea of what the markup was like back then? because these were so in demand and so hard to get hold of. Any idea of what the markup was like back then? I couldn't give you a percentage figure for the markup, but the retail price to the consumer was still generally cheaper than today. And that's because, of course, we don't have any brand names at this point, and they're still not seen as a luxury product per se. They're still something that's largely functional.

It's worth identifying the historical reasons why the price of spectacles has relatively increased. You had the growth of a professional eye care service, and it is those professional fees for the sight test and for the individual dispensing of the spectacles that is added therefore the cost of technology in eyewear? Is the average pair of eyeglasses today substantially more technologically advanced than it was 50 or 100 years ago? You can have on the one hand your simple ready readers that you can pick up from a dollar store through to the very high performanceperformance lenses with specialist coatings, and much more recently, the development of wearable technologies, augmented reality eyewear, spectacle-mounted cameras and audio devices, such that your spectacles are no longer just a vision aid, but in fact, a multi-purpose device.

So there's no such thing as a pair of glasses anymore. So yes, there are a number of reasons that a pair of glasses today might cost more than they did in Ben Franklin's day, adjusting for inflation, of course. On the other hand, if you think about eyewear as technology, most technologies get cheaper over time, especially with something that for the most part hasn't changed all that much. There is a set of frames and a pair of lenses, no moving parts, no need for electricity or Wi-Fi. All of this makes glasses relatively

simple to manufacture. When something is simple to manufacture, the barrier to entry in the industry is low. So you would expect to see a lot of competition, which drives prices down. And there are a lot of players in the eyeglass industry, especially a lot of small players. But when it comes to big players, when it comes to the big engine that really drives the industry, there's only one. It's the number one lens and frames manufacturers, which is a vertically integrated player operating from manufacturing to optical retailing. That is Cédric Rossi. He's French. Also an equity research analyst at the Parisian investment bank, Brian Garnier. I've been covering the optics industry for 15 years now. And I'm also covering the fashion groups like H&M, Inditex, Montclair, the sporting goods brands like Adidas, Nike, and so on.

And what does Rossi mean when he talks about the optics industry as a vertically integrated player? When you are a vertically integrated player, you master every step within the value chain. When you master and you control 100% of the value chain, I think you have two very good examples, Hermès and Louis Vuitton. Louis Vuitton, 100% of their products are sold into a Louis Vuitton store. You cannot buy Louis Vuitton products outside of Louis Vuitton stores. In IWARE, it's pretty much similar. When you are a 100% vertically integrated player, you control manufacturing, supply chain, distribution, customer experience. Then you will also control how you want the industry to evolve. And Essilor Luxottica does

seem to have that kind of control. We'll get more into that as we go along. But first, if we want to understand how glasses became a fashion accessory and how even non-fashion glasses got so expensive, we need to do just a little bit more history. And for that, we go to a woman named Jessica Glasscock. I am an eyeglass wearer. I am a fashion historian and I am a weird sunglasses enthusiast. She is also the author of a book called Making a Spectacle, Fashionable History of Glasses. She lectures at Parsons School of Design in New York, and she used to work as a researcher at the Metropolitan Museum of Art's Costume Institute. Right now, I am wearing my go-to pair of glasses. I should really have more pairs of glasses as someone who's written a book on the topic, but I'm actually wearing a fairly exotic prescription that has a prism in it. And so my eyeglasses are very expensive even before

we get to the frames. I know whereof Jessica Glasscock speaks. I, too, have a somewhat complicated eyeglass prescription, including a prism lens, which helps the left and right eyes align a single image. The frames that I'm wearing are a pair of Anna Sui glasses from, I think, about 2012, and they have rhinestones and they are a pretty color. I like for my glasses to have a bit of pizzazz, especially if you're wearing them every day. Pizzazz and a prism and a nicely made frame, that is a recipe for a $1,000 pair of glasses. I would say as someone who wears a complex prescription that you can't put a price on having good vision. So it is a long-term investment. Compared to a high fashion handbag,

I think high fashion eyewear is actually quite a bargain. Glasscock says that high fashion eyewear got started in the 1950s when manufacturers began to collaborate with fashion designers. American Optical collaborated with Schiaparelli, did a lens with feather eyelashes. You have this moment in the 1970s where you start to see a ton of licensing of everything by fashion designers. Halston's doing towels, Pierre Cardin's doing cookware, and eyewear is one of those things. And the rate seemed to be a rate of six to seven percent of return on the sales of those glasses. It's really at the end of the 80s when Armani goes to make a deal with Luxottica and they create a different structuring of how the fashion eyewear collaboration is going to work. So what was this new structure and how did this

new kind of deal work? It was very hard for me to locate numbers, money, like what the deal was this is another feature of the eyewear industry luxottica especially has never gone out of its way to discuss its business and many smaller players are privately held so they don't have to disclose much there's also the fact that eyewear is one of those old-fashioned manufacturing industries where the elbows are sharp and no firm wants to do their rivals any favors by talking about suppliers and deal structures. But I know with Armani specifically, rather than have just a simple licensing deal where one assumes the eyewear maker comes to the designer and says, we think these three frames look like you. And the designer's like, yes. And then they go and

make them and they stamp the name on it. This was different. They created a company for Armani to sell their glasses and had this very intimate involvement of Armani at the time to really articulate like what is the eyewear vision of Armani? And that's where it takes off. They start making these kinds of deals with other designers. Some of the other eyewear companies that still had a lot of money and power in the system start to make similar deals. You just get a real shift in the structure. You heard Glasscock mention there when some of the other eyewear companies still had a lot of money and power. Luxottica, and now Essilor Luxottica, have consolidated much of the industry's money and power. It is by far the biggest eyewear firm in the world in terms of properties, revenues, and employees. They've got locations around the globe, and everywhere they go,

they control as many links in the industry as they're able, from the optometrists who give eye exams to the labs that make lenses and the stores where glasses are sold, even the optical insurance, as I mentioned earlier. By the way, Essilor Luxottica still makes Armani branded glasses, along with glasses designed with Ferrari, Prada, Tiffany, Tory Burch. They also make licensing deals with people like Roger Federer. You might think these high-profile luxury glasses would drive most of the profits at Essilor Luxottica, but that is not the case. Here again is the industry analyst Cedric Rossi. It's a bit counterintuitive, but Ray-Ban has by far the most profitable brand in the portfolio. Ray-Ban is primarily a sunglass brand. They were first made

in the 1930s by Bausch & Lomb, an American firm that's best known today for their contact lenses. Ray-Bans were designed to help airline pilots fight the glare of the sun. They had a long heyday. Maybe you remember Tom Cruise wearing them and risky business. But by the 1990s, they were cheaply made and you could buy a pair for $19 at a gas station. But then Luxottica bought Bausch & Lomb's sunglass business and repositioned Ray-Ban as a luxury brand. Today, it is considered the biggest eyewear brand in the world. And why are Ray-Bans so profitable? Because the industrial process is quite easy. It's just a matter of putting acetate and plastic into molds. And so you can produce hundreds and hundreds of pairs

every hour. In other words, Ray-Bans are pretty basic. Other luxury brands are trickier to manufacture with different materials and more complex designs. But there's another reason why a brand that is owned by Essilor Luxottica, like Ray-Ban, is more profitable than a brand they license, like Ferrari. You need to share the profit because it's a license. So you need to pay royalties and a marketing contribution back to the licensor. How substantial are those royalties? It ranges from 5% to 15% of revenues generated by the license. And then you have a marketing contribution that is also paid by SEL or Luxetica to licensors.

And it can be 7% to 12% or 13% of sales. I see. And how do those fees compare to other luxury licensing that isn't eyewear? The one that is pretty much similar to eyewear, I would say fragrances. You have a very good example, which has a significant share in the US, which is a French company called Interparfum. You also have L'Oreal. And actually, royalty conditions are pretty much similar to eyewear. Rossi says there is another reason why these high-end licensing deals are less profitable for Essilor Luxottica.

The human intervention on the high-end frames sometimes is higher. There are a lot of steps within the industrial process. So that's why sometimes for a pair of Chanel or a pair of Tiffany's, the profit margin is lower than for Ray-Ban or Oakley. Oakley is another sunglass brand with its own interesting Luxottica history. Luxottica was founded in 1961 by Leonardo Del Vecchio in Agordo, Italy. He was one of five children who had grown up very poor. When their father died, Leonardo had to be sent to an orphanage. He became, at age 14, an apprentice to a metal engraver, and he later worked on eyeglass frames. He opened his own workshop in his 20s. Delvecchio was, as evidenced by the Ray-Ban and Armani

stories we've already heard, a sharp and aggressive operator with a huge appetite for growth. In 2001, he bought the big U.S. retailer Sunglass Hut. At the time, Oakley was the hottest name in sunglasses. According to reporting in The Guardian, one of Delvecchio's first moves with Sunglass Hut was to require all his suppliers to lower their prices. Oakley declined. Soon after, Sunglass Hut stopped selling Oakley sunglasses, and Luxottica began making Ray-Bans that looked an awful lot like Oakley's signature sunglasses. There was a legal fight. There was a big drop in Oakley's signature sunglasses. There was a legal fight. There was a big drop in Oakley's share price. And in the end, Luxottica bought Oakley for around $2 billion.

Leonardo Del Vecchio had won again. Del Vecchio died in 2022. His New York Times obituary by Jonathan Kandel is absolutely fascinating and was a big inspiration for this series. The empire Delvecchio left behind is massive. Given the nature of this industry, it's not easy to come up with accurate market share numbers. Cedric Rossi says Essilor Luxottica owns roughly a quarter of the global market in prescription eyeglasses and more than half the market in lenses. Do numbers like these start tipping into the realm of monopoly? When Essilor and Luxottica merged in 2018, neither the Federal Trade Commission in the

U.S. nor the European Commission in the EU stopped them. Was that a mistake? It obviously should have been blocked. That's coming up after the break. I'm Stephen Dubner, and this is Freakonomics Radio. Essilor Luxottica is the biggest eyewear company in the world, and they practice extreme vertical integration. Does that make it a monopoly? What is a monopoly, anyway? I think it's a loose definition. You know what, when you see it, they have a lot of market power.

They can charge prices well above their costs and not a lot of competition for what they're doing. That is Ryan McDevitt, an economist at Duke University. I focus on a field called industrial organization. That's kind of a clunky way of saying I look at how firms compete with one another, how markets are set up, and that plays into things like regulation. How do we regulate monopolies in the United States? So antitrust is a part of my field. When McDevitt looks at the eyewear industry, does he see a monopoly? Not at all if we talk about corrective vision broadly. I mean, no one has a monopoly on eyeglasses. It's a commodity. It's been around for hundreds of years.

But if you look at narrower segments, luxury eyeglasses, then something like Lazotica, they do have some market power. Can you describe the size of their market power? Lazotica is something like a $100 billion market cap company. And when you're selling pretty much Can you describe the size of their market power? Luxottica is doing so well that McDevitt has used the firm as a case study for his MBA students. My first day of a business school class, we talk about value creation and capture. That's the fundamental thing a company is trying to do to make money. And they create value at Lexotica by offering choices to customers. If you think back, you know, in the 50s and 60s, it was a clunky medical device. Dorky black frames, revenge of the nerds, maybe $5 at a time to buy that.

Nothing special. And they realized that this could be more of a fashion accessory. Like you see throughout fashion, that people pay a premium for better looking eyewear. And that's what they started to do. If I were to ask you to give me a general number for Essilor Luxottica markup on glasses. Can you put a number on that? I've seen numbers as high as like a thousand percent, just massive, massive markups. But if I had to do a little consulting exercise in my head, like you do for a McKinsey or Bain interview, I would say something like, I can't believe those things cost more than 20 bucks to manufacture.

You're probably retailing for about $500. And then, you know, along the way, you're adding some costs. I would guess looking at relative cash flow to revenue, I would say it's something like an 80% markup. And how hard does that make your heartbeat as a business school professor? That's a pretty good number. This is very attractive. But if you're going to say, what should I go into? This is going to be a tough industry to crack because they've dominated every step. They've done their homework. They are well positioned to extract a lot of income from every step of the production process. It does make you wonder, since Essilor Luxottica is such a giant in the global eyewear industry, why was the merger between Essilor and Luxottica not blocked? Regulators in the U.S. and Europe especially

have been pushing back against over-consolidation in various industries, particularly the tech sectors, because some critics feel that the consolidation has gotten really out of hand. Critics like Tim Wu. There was a collective delusion going on in antitrust in the 2010s where everybody had drunk the Kool-Aid and convinced themselves that vertical mergers were never a problem. Wu is a law professor at Columbia who has worked in the Obama and Biden administrations on competition policy and antitrust. We were crazy in the 2010s. Somehow we let Zillow buy Trulia. We let Zillow buy Streety's. We bought everybody. But the most egregious thing, I think, in that era is when we let Google buy Waze, the two leading mapping companies combining under one roof. you know, sounds like a merger to Monopoly. Some of the reasoning was that Google is what you use when you want to see what's around you,

and Waze is what you use when you want to figure out where you're going. So they're not really competitors. That was the level of logic that was going on in the 2010s. That is some fine hair splitting. That was a bad period for antitrust. That was also a period during which many of the big tech platforms that many people are concerned about now were getting started. Had Google and Facebook started in a different era, like let's say today, would it have been a very different outcome? I think it would be a very different story.

The 2010s is when the tech platforms consolidated their power by buying their competitors with no government intervention. I went to the study of the tech mergers from about 08 till 2018. And there were in that period over a thousand tech acquisitions and a grand total of one challenge from the government, which led to a consent decree, not even blocking. What was that one? That was airline booking software, which Google was buying. So they made sure that Google would share it with a few people. But everything else, free pass. Do you think the Estelor Luxottica merger shouldn't have been allowed,

at least in the US and maybe even in Europe? It obviously should have been blocked. That was the byproduct of another error. and we look back at that and like, how did you let that one go? Imagine if in the luxury bag industry like Hermes and Louis Vuitton, if they were all actually the same company. That's kind of the trick here with Luxottica is they own all the brands people think are competing brands like Ray-Ban and Oakley,

and they sort of mimic competition. Tim Wu was a key architect of a 2021 Biden initiative called Executive Order on Promoting Competition in the American Economy. It argues that many industries have become too concentrated, and it pushes the Department of Justice and the Federal Trade Commission to be more aggressive in enforcing antitrust laws. In over 75% of U.S. industries, the White House noted, a smaller number of large companies now control more of the business than they did 20 years ago. These kinds of numbers support the argument that the U.S. economy has become a winner-take-most economy with leverage begetting more leverage. that the U.S. economy has become a winner-take-most economy with leverage begetting more leverage.

Tim Wu published a book about this in 2018 called The Curse of Bigness, Antitrust in the New Gilded Age. In the late 19th century, where it all starts, there was a period where everyone thought that corporations could do no wrong and the trust movement built itself into something quite powerful. Would you define what you're talking about back then by a trust? Because it's probably not what most people think when they hear that word today.

A trust is an old-fashioned word for a monopoly. No, a trust is something invented by Standard Oil. It was a device by which all the companies in an industry would agree to become one company. The trust was the byproduct of an industry-wide merger. And was there any federal government oversight or interest in that notion at the time? Not until they passed the Sherman Act in 1890. There's these long cycles of monopoly, frustration, or anger. And then after a while, it goes too far, and then people are like,

well, maybe private industry is not too bad. The high points of distrust in private industry were the 1910s, and that's Theodore Roosevelt, Taft, and Woodrow Wilson. The late 1930s and 40s and 50s, which is FDR. And Eisenhower, kind of surprisingly, was a big antitrust guy. And then the 70s, another big period of suspicion under Nixon, which might seem a little surprising. And then you go into this long winter from the 80s onwards, coinciding with Reagan and movies like Wall Street and Greed is Good kind of period. That lasts about 40 years. I think we're in the core of a major anti-monopoly revitalization

right now in the Biden administration. Reading the New York Times and even the Wall Street Journal, one gets the distinct impression that yes, as you just said, the Biden administration is all in on antitrust, and you were part of that movement for a while in D.C. But how much effect is that movement actually having? I mean, there's calls for breakups of big tech firms. There's calls for less consolidation in a variety of industries. But I'm seeing very little actual effect. Is there something I'm

missing? Yes. You're not paying attention to mergers, which are the key of economic consolidation. Collectively, the FTC and Justice have blocked over 40 mergers, maybe over 50 mergers at this point. The greater issue is the deterrence effect. It's a totally different environment right now versus, say, 2010. I think in an earlier era, Facebook would have maybe tried to buy Snapchat or TikTok. But the merger situation, if you ask anyone on Wall Street, they say, yeah, it's a different story. We know our merger is going to be blocked. We're also in the, we meaning my former employer, the federal government, is in the midst of trying to do something, break up, tame almost every single big tech company, Amazon, Apple, Facebook, Google. Those cases aren't finished.

The remedies aren't done. But I think that's going to have a long-term effect the way AT&T and IBM have gone, I wouldn't say the economy has become FDR-adized, but to say nothing's happening, I think is totally wrong. There is a brand new piece of evidence for Tim Wu's argument that the current administration is more aggressive than in the recent past. Earlier this month, the FTC voted to block a merger between the mattress maker Tempur-Sealy and the retailer Mattress Firm. So how does Wu think about competition or the lack thereof in the eyeglass industry? In the New York Times obituary of Luxottica founder Leonardo Del Vecchio, Wu is quoted as calling the firm's profit margins relatively obscene.

I asked him if he stands by that characterization. Yeah, I think relatively obscene is a good one. The margins, even by luxury good standards, are obscene. I also would add that even relatively more normal, not the high-end luxury, but the medium luxury eyeglasses are also extraordinarily expensive. And, you know, they have a well-armored citadel that keeps the prices up. It has to compare itself with other obscene margin takers like the pharmaceutical drug industry. At least they have the defense that they are improving their products. And eye care, you're saying, can't make that argument?

I mean, do we really think glasses are any different now than 10 years ago? Maybe in the lenses, but the frames? I don't know. If they have, I'd like to hear it. I mean, I've asked this question, and I am told that the technology of lenses is pretty good and continues to get better. It actually reminds me a little bit of the aerospace industry and airplanes. The aerospace industry is constantly saying they've made all these enormous innovations. But if you compare an airplane in the 1960s and a computer in the 1960s, and you look at today, I mean, the computers have undergone several exponential changes. The airplane is pretty much the same.

I don't want to say there's been no innovation, but there is a difference between these disruptively big leap industries and the ones that incrementally improve their products. I remember an internal executive saying that the cost of eyeglasses, the frames and the plastic and everything, it tops out at about $20 for the best versions of them. And then you're able to sell them for hundreds of dollars. They throw brands onto them and sometimes as much as 800 bucks.

When you look at all the gigantic industries in the world, and when you look at the financialization of just about everything, is the eyeglass industry even worth worrying about? I mean, it's relatively small and a lot of eyeglasses, the vast majority in this country, are sold for relatively low prices at places like Walmart and Costco. So couldn't you argue that the market is just fine, that even though Luxottica has a big tie-up with Essilor, that there's still enough competition and affordable pricing to not worry so much about? Or would you rather look at the industry as an example of, yeah, if you overlook this and

you overlook the next 10, and then they get bigger and bigger and they cause a real fundamental, structural, economic, and governmental problem? Yeah, I think it's ridiculous to ignore an industry because it's not as big as like big tech. You need to have a policy that is serious about market power, wherever those problems may occur. If it's like concrete mixers in New York City, it may be just millions instead of billions of dollars, but it affects housing prices. Everyone's feeling the pinch a little bit right now with prices, well, these guys are only a couple billion dollars, so let that one ride. You say illegitimate, illegal, but it was legal. Maybe illegitimate in your eyes, but I mean, this was approved.

It wasn't approved. They just didn't act on it. And I think maybe we should undo it. The fact they didn't bring suit doesn't mean it wasn't illegal. The Clayton Act says that mergers that substantially lessen competition are a violation of the law. And we've started looking back at some of the things we let go in the 2010s and say, you know, the law was actually originally written to look backwards, not forwards. I don't know many people know this.

The government is trying to undo the Instagram-Facebook merger. And I think it's about time to look back at some of the other mergers. Keep your eye on Ticketmaster Live Nation. They might try and undo that, too. Indeed, not long after we spoke with Tim Wu, the Justice Department, and 30 state and district attorneys general sued Ticketmaster and its parent company, Live Nation, for, quote, monopolization and other unlawful conduct that thwarts competition in markets across the live entertainment industry. Should this lawsuit make Estelor Luxottica nervous? The fact is that the eyewear industry isn't as concentrated as the live event industry. And it's also the case that Estelor Loxotica has a new challenger.

So far, they've only got 2% of U.S. market share, but they haven't been around long and they are growing fast. When we had this idea to sell eyewear for a fraction of the cost, people loved that idea. Low cost, but high style. After the break, the eyeglass disruptor, Warby Parker. I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back. When we were speaking with Tim Wu about the ebbs and flows of antitrust fervor in the U.S., he mentioned one change that did intersect with the eyeglass industry. In the 70s, which was a period of very pronounced anti-monopoly activity, even under Nixon, the government decided that it could improve the industry,

maybe encourage more competition. If you could get a prescription from your eye doctor, which you could then take to somebody else to make your eyeglasses with, the government decided that they wanted to split the business of eye examinations from selling eyeglasses. And Warby Parker is the direct beneficiary of that rule. Warby Parker is the eyeglass startup we mentioned right before the break. It may have taken a couple decades, and it may have taken the invention of the internet, but they realized that eyeglasses don't actually cost very much money to make, so they could sell for a fraction of the current price. I'm very dissatisfied

with the state of competition in eyeglasses, but I have to say that Warby Parker is an exception to that dissatisfaction and I think is an example of what we should be doing. Okay, so let's hear from them directly. Neil Blumenthal, I'm the co-founder and co-CEO of Warby Parker. Okay, Dave, I have a feeling it might sound similar with a different name. I'm Dave Gilboa, co-founder and co-CEO of Warby Parker. Gilboa, Blumenthal, and two other founders, Andrew Hunt and Jeff Rader, were all getting their MBAs at the University of Pennsylvania's Wharton School when they started Warby Parker. Through personal experience, they had come to think that eyeglass prices were, in general, exorbitant, and they saw a business opportunity.

Warby Parker sought to distinguish themselves in two ways. They would sell glasses strictly online and at low prices, starting at $95. We were trying to introduce a little more transparency, a little more simplicity into the market. That's Blumenthal. When you walk into your typical optical shop, there's no price tags. You have no idea what a frame costs. You have no idea what the lenses cost.

And you're constantly getting upsold. Oh, you should get this lens material instead of this other one. You should get this lens coating. And consumers have no idea about the differences. When there's information asymmetry, that's not good for consumers. So we wanted to simplify things. Hey, $95 acetate frames with polycarbonate lenses, with anti-reflective, anti-scratch

coatings. These are premium lenses already. And it's basically all that you need to be super happy, to have great visual acuity and to look great. So if you are Essilor Luxottica, how do you defend routinely pricing glasses at $800, $1,000, $1,200? You probably have to get their perspective. But when we spoke to consumers, often they would allude to the brand name and the logo that was on the frames. Most consumers didn't realize that that eyewear was made by somebody who was paying a fee just to put the logo on it. But how much could that licensing fee be on a pair of,

let's say, $1,000 glasses? Maybe $100, $200, maybe? Exactly, probably 10 to 20%. But there's still a lot of other markup there then, maybe? Exactly. Probably 10 to 20 percent. But there's still a lot of other markup there then, yes? Exactly. Which is what really attracted us to the market. Like when we looked at these unit economics. When you say unit economics, you mean what it actually costs to make a pair of frames and a pair of lenses? Right. They were being sold for about 10x the cost to manufacture, if not more, sometimes 20x. And what we found was that there was wholesale markup, and then a retail markup that was often three to five X. And that's what made it so attractive to us to design our own frames, manufacture them, and then sell direct to customers. Because we

would just take that retail markup and pass it on to consumers because there's just one less hand in the cookie jar. And actually, a funny story, when we were thinking about our pricing strategy, we thought we could sell our glasses at $45. And we went to the head of the marketing department at Wharton, who is a pricing expert. Can I take a guess what that person said? That's too cheap. People won't't even cross our minds. We thought like lower price better. We went into his office. We have a beautiful PowerPoint presentation. We said, we're going to transform the optical industry. We're going to charge $45 for $500 glasses. And he said, sorry, that's just not going to work.

And we're like, wait, we didn't even show you all these graphs. They all go up and to the right. He said, it's outside the realm of believability that you could sell the same quality for a 10th of the price. Were you worried that even at $95, your brand would be perceived as not good enough medically if they were that cheap? It's certainly something that we spent a lot of time discussing. We surveyed a lot of potential eyewear consumers and found that at very low price points, there was quite a bit of skepticism around the quality and the durability of those products. We found that the propensity to buy increased until we reached $100 and then kind of fell off a cliff. When we landed on $95 instead of $45, there was still a bit of skepticism. But then when we started getting our initial prototypes in and asking our friends and potential customers to try on the glasses, they were blown away by the quality.

And that's when kind of the light bulbs went off and said, we really need a mechanism just to get as many glasses on people's faces as possible. And that's when we came up with the home try-on. We came up with this idea where we would ship people five pairs of glasses. They would have five days to try it on at home. And then if there was a pair they wanted, we'd put in prescription lenses and send it to them. The Warby Parker business model has worked. The company went public in 2021. Their market cap today is roughly $2 billion. The starting price of their glasses is still $95, but they have gone well beyond their internet beginnings.

By the end of 2024, they'll have nearly 300 brick-and-mortar stores in the U.S. and Canada. They also give away millions of eyeglasses for free to people who can't afford them, as do many eyewear companies, including Essilor Luxottica. We think that it's nuts that 800 years since glasses were invented that not every human being on the planet has access because we know what it means to educational outcomes. We know what it means to economic outcomes. And it's even more unforgivable that in as wealthy of a country as the United States that there are Americans that don't have the glasses they need to thrive. The fact that you're able to give away so many

suggests that even $95 affords you plenty of room, yes? We do have some healthy margins. Can you discuss your margins overall? That must be public, yeah? We just announced our Q1 earnings, and our gross margins were 56.8%. Wow. And that includes costs associated with our optometrists and store build-outs and depreciation. And so it's kind of a reflection that within this category, we can offer prices that are a fraction of what others are charging and still maintain healthy margins. As I mentioned earlier, Warby Parker only has around 2% of the U.S. eyewear market so far, but Cédric Rossi, the French industry analyst, likes what the company is doing.

I would say Warby Parker came up with a business model that is a little bit like SELOR Luxottica proof. They don't want to compete directly with SELOR Luxottica, but they found a very interesting niche, which is a transparent price offering, eyeglasses sold at a fair price, but also with a huge fashion aspect. The original appeal, though, of Warby Parker was also that it was online. So they now have a lot of brick and mortar stores, which are, as we know, much more expensive. What do you think of that strategy for a company that's only got 2% of U.S. market share trying to compete with a giant like Estee Lauder Luxottica? But don't forget that you have still 47% of the eyewear market

that is generated by customers age 55 plus. Oh, wow. This customer base is not very familiar with buying eyeglasses online, first of all. Warby Parker also found out that even the younger generations, if you want to buy simple prescription glasses when you are just affected by myopia, then it's very easy to download your prescription and to buy eyeglasses online. But as soon as it's starting to be more complex, it's almost impossible to have a 100% online shopping journey.

As soon as they wanted to sell more complex prescription lenses, they came up with the decision to open stores. What market share would you expect Warby Parker to have in the U.S. in, let's say, five years? They can at least double that share. Last year, they started to invest into the progressive lens category, which is quite new for them. Okay. Progressive lenses combine distance and close-up. That is, by nature, an older consumer, yes? Exactly, because typically you start wearing progressive lenses

where you are affected by presbyopia, starting at 40 years old plus. So that's also the beauty of this business. You cannot escape from presbyopia eventually. Warby Parker has been branching out in other ways too, including some in-house manufacturing to eliminate yet another middleman. They say they want to become a holistic vision care company,

which sounds a bit like the super vertically integrated Essilor Luxottica. And what do the Warby Parker founders think of Essilor Luxottica? They built a beautiful business. The lens technology, the lens production, the optical labs, the frame production, the brand licensing, the retailing and distribution, the vision insurance to drive people in, software that they sell to third-party optical labs, the software that they sell to other retailers and independent optometric practices, the equipment that they also sell. It's super impressive what they've built over decades. I have to say, Neil, I heard in your voice as you were describing this intense vertical integration of Essilor Luxottica, a certain level of admiration. Do you have similar aspirations? Would you like to be the Essilor Luxottica of the year 2035 or 2045?

I think there's... Although now that I asked the question, I realize it may be dangerous to ask someone to admit that they want to become a near monopolist. But anyway... You know, the MBA in me admires the business, no doubt. It admires the founder of Luxottica, Leonardo Del Vecchio, is one of the world's best entrepreneurs. He was incredibly ambitious and started with nothing and built one of the biggest companies in the world in any category. They've done that largely through acquisition and consolidation, and they've leveraged their scale to drive really meaningful profits for their company. We believe that we can continue to invest in our own brand without requiring acquisitions and consolidation.

And we believe that we can deliver very healthy margins while leaving some extra dollars in our customers' pocket. I would guess, but please correct me if I'm wrong, that a firm like yours, Warby Parker, has benefited at least on one dimension. They drove the prices of eyeglasses really high and established a floor that was so far above what was realistic from the producer's side that it left an awful lot of room for you. So you must be kind of grateful for that. Yeah, absolutely. You can't be a disruptor if there's not an incumbent.

Coming up next time, part two. Let's not forget that behind every pair of eyeglasses is an eye doctor. An eyeball fixer-upper, I used to like to consider myself. We will hear about the global rise of myopia. We're going to see half of the global population being myopic. And the rise of China as an eyeglass market. Essilor and Nuxotica opened a few schools to train opticians. Also, the politics of runaway consolidation.

It's a huge cost to the American situation to have corporate control of government. That's next time on the show. Until then, take care of yourself. And if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. You can find our entire archive on any podcast app. Also at Freakonomics.com where we publish transcripts and show notes. This episode was produced by Morgan Levy. Our staff also includes Alina Kullman, Augusta Chapman, Dalvin Abouaji, Eleanor Osborne, Elsa Hernandez, Gabriel Roth, Greg Rippin, Jasmine Klinger, Jeremy Johnston, Julie Kanfer, Lyric Bowditch, Neil Carruth, Rebecca Lee Douglas, Sarah Lilly, Tao Jacobs, and Zach Lipinski. Our theme song is Mr.

Fortune by The Hitchhikers. Our composer is Luis Guerra. As always, thank you for listening. It's been a great experience. As I was saying to Morgan and Rip, that's my first time in Recording Studios. I'm glad your first one wasn't a bad one. No, no, it was a very good experience. Okay, au revoir.

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