“HP will discontinue operations for webOS devices, specifically the TouchPad and webOS phones. The devices have not met internal milestones and financial targets. HP will continue to explore options to optimize the value of webOS software going forward. “

My first thought was that I should check to see whether I can get one of those TouchPads, first released just a little over a month ago to the market, at a bargain basement discount. My father is an avid browser of the web but struggles with using a keyboard or clicking a mouse. At the right price, a tablet offers him a preferable computing alternative. I was far from alone. HP dropped the price of the TouchPad Tablet with 16GB Memory to $99.99 and the TouchPad Tablet with 32GB Memory to $149.99. Best Buy online sold out quickly and remains sold out today:

TouchPads sold out at Best Buy Online

Source: BestBuy.com

Lines immediately formed outside of Best Buy stores in San Francisco, CA that still had TouchPads in stock. I just called a local Best Buy to inquire about availability of the TouchPad. The recorded message began with an introduction stating that the store had sold out of TouchPads and had no plans to sell any more of them. Even retailers in the United Kingdom quickly sold out of HP TouchPads.

Clearly, consumers think these products are a steal compared to the $500 or so they would otherwise pay for competing products like Apple’s iPad, Samsung Galaxy, or RIM’s Playbook. These consumers are not concerned that they are buying a product with an operating system that has reached the end of its life and may not be supported for long. Moreover, commentary on the product indicates the TouchPad is an inferior product. From CNET (before an update to account for the product cancellation):

“The TouchPad would have made a great competitor for the original iPad, but its design, features, and speed put it behind today’s crop of tablet heavyweights.”

So what pricing lesson does this event teach us? eWeek.com addresses this question on page 2 of its article “RIM Reaffirms PlayBook Commitment After TouchPad Fire Sale.” Firstly, tablets cost $300-500 to build, so HP’s firesale is priced to clear out product – great for consumers, bad for business. The rush to buy at firesale prices affirms consumer expectations that such deals will not be seen again anytime soon. The iPad has sold about 30 million units to-date, so it does not appear Apple (AAPL) has a pricing problem relative to the competition. Competitors could consider undercutting Apple prices to gain some market share, but one analyst thinks it would take a 30% discount to compete with iPad on price. At a $350 price point, such a competitor is most likely going to lose money.

I see the opportunity in multiple layers:

1. Somewhere below $300 is a price where consumers are willing to trade features for price. A “stripped down” tablet, perhaps focused on a few common tasks like email and web browsing could be a big hit with a lower tier of the market. This product could also be made slightly smaller, slightly slower, etc…
2. Additional sales could come from selling a cheap product that offers additional products and services to enhance the value of the software and provide recurring revenue streams. eWeek.com mentions something similar regarding Amazon.com’s pending tablet offering. Also see “What HP’s TouchPad fire sale tells iPad rivals.”
3. Similar to the last point, a low-cost tablet bundled with wireless services, television programming, Netflix (NFLX) subscriptions, etc… could be a huge hit.

In other words, Apple is likely to remain the feature-function leader for quite some time. HP demonstrated that when cheap enough, a large number of consumers are willing to settle for less. The competitor that matches production costs with a low-priced, “budget” offering could have the best chance to compete.

The additional challenge in this marketplace is the proliferation of hardware at many different form factors converging with the increasing ability to pack more features into less. This dynamic blurs distinctions across devices – for example, my suggestions above could end up looking like a cell phone on steroids, a mini-tablet not much different than a netbook with a larger screen, etc.. – and keeps marketers and product managers on their toes trying to manage product cannibalization as well as all the many cross-competitive pressures.

Exit row seats are the most expensive at $20 per reservation. Exit row seating provides extra leg room. Zone 1 seats are located toward the front of the coach section and offer priority boarding privileges. The first rows in this section cost $15 while the remaining rows in Zone 1 cost $13. All remaining coach seats cost $6 to reserve in advance.

Most travelers consider the middle seat of plane the equivalent of hell in the sky. However, on AirTran middle seats actually get reserved BEFORE the supply of aisle and window seats run dry! I would expect such behavior only if middle seats actually cost (a lot?) less to reserve than aisle and window seats AND passengers are charged even when the airline assigns the seat.

The graphic below shows a sample grid for selecting a seat on an AirTran flight. The text bubble provides basic information about any seat of interest. Note that numerous middle seats are reserved even though windows and aisle seats are available on either side. That is, these seats are most likely reserved by solo travelers who are free to choose any seat in coach. (It is possible that AirTran has blocked these seats, but I am at a loss to provide a rational explanation for such a policy).

Grid for reserving a seat on a typical AirTran flight

Source: AirTran
(Click for a larger view)

I have not been able to figure out why a solo passenger would pay $6 to reserve a middle seat when it is flanked by available aisle and window seats for the same price. However, I do know that under such conditions a person who prefers aisle and window seats to middle seats should consider saving money and taking his/her chances with the random assignment process.

For example, in the case above, there are only five middle seats available outside of Zone 1 and the exit row. There are 23 aisle and window seats available (the text bubble covers a few of them). Thus, assuming a purely random process and assuming that AirTran sells no more tickets, a passenger has an 82% chance of getting the (presumed) higher quality seating for free. Otherwise, a passenger could pay $6 to avoid the 18% chance of getting the dreaded middle seat. The “expected value” of this choice is a mere $1.08, well below the $6 the airline charges. (Conceptually, if you are unlucky enough to draw the middle seat, you could pay $6 to switch to an aisle or window). Personally, I am willing to take my chances with the random assignment with these odds and costs!

Only passengers who are trying to keep a party seated together should be willing to pay a non-zero price for the middle seat. If there are enough people who think like I do, AirTran will increase revenues in the above situation by reducing the price of the seats in relative over-supply, in this case, the window and aisle seats. Otherwise, most passengers reviewing their options will choose to wait what for a seat assignment at the time of boarding.

Having said all that, my choice might change for a red-eye flight or after flying four times in a row in a middle seat!

General news
ChannelWeb: “Amazon Gives In To Publisher’s Demands For Higher E-Book Prices”
BusinessWeek: “Amazon’s E-Book Price Reversal: A Mixed Blessing” – considers the impact of pricing on demand for e-readers and e-books.

Opinion
The Big Money (Marion Maneker): “Amazon’s Self-Defeating War on Publishers”
Tobias Buckell: “Why my books are no longer for sale via Amazon”

Maneker recognizes that sales of e-books will inevitably dominate sales of physical books and recommends the following:

“There is…a compromise that might benefit all parties. Amazon has been pushing the Kindle to heavy users of frontlist books. But the agency terms offer an opportunity for backlist books that gives everybody a win. With the agency model, a backlist book becomes a goldmine for publishers, authors, Amazon and Apple. Priced at $9.99, the publisher receives pretty much the same amount of money under agency terms as it would have for the wholesale book. Still protecting their preferred terms for electronic books, the publishers could maintain their 20-25% of net receipts formula for author royalties because the author would be getting more money ($1.75 vs. $1.05 in paperback royalties on a $13.95 physical paperback). Leaving the publisher with $5.25 in margin, more than they’d get from the physical paperback. When you include the savings in paper, printing and binding, freight and warehousing, the margin jumps even more.

This detente would flood the book market with titles that have stood the test of time where demand remains strong–a good incentive for Kindle and iPad buyers–while protecting the physical book distribution business. It would also buy publishers some time to divest the distribution assets that will inevitably erode as e-book selling takes off.”

Buckell write an extremely long piece, but it is worth the read given it comes from a concerned author. He laments that Amazon is attempting to abuse its market power to fix prices and thwart publishers’ ability to implement dynamic pricing. Buckell also describes process of making books in extraordinary detail. He explains his interest in writing this piece in personal terms:

“I’m not trying to exhort anyone to do anything, but to explain the situation I’m in, and to educate. I’m seeing a lot of people state things with certainty (points I try to knock down above) who have no involvement in the trade.

A lot of readers are going to take this out on authors, and I wanted to basically show my homework to explain things that people may not be aware of. People toss out prices of what eBooks ‘should be’ who’ve never even stopped to understand how the math of something like this works. They demand things they’d never demand of a jacket salesman, just because they think economics and supply and demand and volume don’t apply to eBooks. They do.

Seriously. I’ve thought about these things a lot. Mostly because I have a novel series that has not been renewed, and I keep running the numbers to see if I could write it as an eBook, and when I run these numbers, I come up looking at making a few thousand dollars for half a year’s worth of work based on how eBook sell now. Yes, there are a few J.A. Konrath’s selling well on Amazon, but as I’ve linked, other authors aren’t automagically selling thousands of eBooks there. Most who follow these footsteps sell hundreds. Not everyone becomes JK Rowling.”

The last point reminds me of Nassim Taleb’s “The Roots of Unfairness: the Black Swan in Arts and Literature“. Taleb notes that artists and writers work in a field where a few successful people take the majority of the rewards in the industry. He attributes this situation to largely unrecognized random events (luck!) that are highly improbably but have large impact (“Black Swans”). Moreover, he observes:

“The occurrence of the Winner-Take-All effect in any form of intellectual production has been accelerating along with the speed of reproduction and communications.”

So, ironically, e-books will continue the democratization of publishing and reading (through convenience, easy access, and low costs), but the percentage of winners may narrow further even while providing those winners more wealth than ever.

Here is the intro and program description provided by the program’s website:

“Companies leave millions, sometimes billions, of dollars on the table every year through sub-optimal pricing practices. The current abundance of customer data, in the context of increased global competition and the instant information sharing made possible by the internet, requires companies to not only set the right prices, but to continually monitor and refine pricing.

The four-day Pricing program at the UC Berkeley Center for Executive Education equips managers with proven techniques for assessing, formulating, and monitoring pricing strategies. Participants will learn several powerful principles of pricing, and will explore innovative approaches that take full advantage of the rapid changes brought about by the information age. The tools developed in this course will enable participants to fully integrate the 3Cs of pricing (Customers, Competitors, and Costs) into the best price for your products.

At the end of the program, participants will be awarded a certificate of completion by the UC Berkeley Center for Executive Education.”

As I did my best to conceal my complete and utter shock and dismay, I casually observed that the brownie is the same price as the muffin ($1.99 vs $2.00). I was summarily informed that “the ingredients are different. They just use different ingredients. And the muffin is really good.” My overt protest shut down at that point, but my inner pricing analyst began gnashing away on the logic of this tragic situation.

Eating establishments typically use bundling to entice consumers to buy additional food that they otherwise would not have purchased separately, either because of price or (temporary) appetite constraints “at the moment or at the margin.” This technique is profitable when the complementary product has a high enough margin such that the effective discount applied to the extra food item still results in a positive overall margin.

In the case of the brownie vs. the muffin, I can only assume that the cost of the ingredients of the brownie are higher than those of the muffin (assuming no difference in labor and spoilage costs, etc..). If so, then all my earlier substitutions have caused Establishment X to lose some untold amount of profit (likely very small).

It was not in my interest to provide unsolicited pricing advice in this case since I am the consumer. However, if Establishment X hired Ahan Analytics, LLC for pricing consultations, I would likely recommend increasing the price of the brownie. Let’s assume a 25 cent increase still leaves the muffins with higher margins. This price increase would serve multiple purposes which should lead to higher overall profits:

1. Drive consumers who are indifferent between muffins and brownies to buy the more profitable muffins.
2. Extract more money out of consumers who strongly prefer the brownie and are willing to pay accordingly. I am biased on this point because I believe the brownie is at least ten times better than the muffin, and the slightly higher price would not discourage my purchase of the brownie by itself.
3. Eliminate confusion about the relative value of the brownies vs. the muffins in the sandwich meal.
4. Provide an opportunity to offer a brownie option for the sandwich meal at a slightly higher price.

Given I have plenty of other eating options in my lunch routine, I will not likely miss the chicken salad sandwich meal. I will just have to find solace in the “satisfaction” that on future visits, I will be purchasing the brownie at some discount to its, let’s say, “true price.”

“This action arises out of a dispute between NFA, on behalf of all owners of franchised Burger King restaurants in the United States (the Franchisees), and Burger King Corporation (BKC) concerning BKC’s actions in compelling the Franchisees to sell a food product known as the BK Double Cheese Burger (DCB) at no more than the maximum price of $1.00, and BKC’s claim that it has the legal right to dictate price points under the respective Franchise Agreements (the Franchise Agreements) previously entered into with the Franchisees – even if those prices are below the Franchisees’ cost and cause them to incur a loss on sale of the product.”

The core of the complaint is as follows:

“The provision of the Franchise Agreement at issue is Section 5, addressing ‘Standards of Uniformity of Operation.’ It provides that ‘BKC shall establish, and cause approved suppliers to the BKC System to reasonably comply with, product, service and equipment specifications.’

While these provisions address standards of uniformity for various operational issues, including menu items, hours, and uniforms, nothing states that BKC has the right to impose mandatory price points for product sold by the Franchisees. The dispute between the parties is triggered by the position recently taken by BKC, contrary to decades of practice, that the general language of Section 5 gives it the power to set prices for its independently owned franchises…Since at least the 1960′s (if not back to the beginning of the BKC franchise system itself), BKC never attempted to unilaterally impose or require a price point for products sold by Franchisees, and did not take the position it had the right to do so under the Franchise Agreements.

After the formation of [the NFA] and a Marketing Advisory Committee in 1989 and shortly thereafter, BKC did not attempt to set, much less enforce, mandatory price points for its franchisees without the agreement of a supermajority of the franchisees.”

Burger King has responded that “the litigation is ‘without merit,’ particularly after an earlier appeals court ruling this year showing the company had a right to require franchise owners to participate in its value menu promotions.”

The legal issues will likely get resolved by determining which contracts are legally binding and what are the conditions for enforcement. I am much more concerned with the strategic and economic issues.

The price cut on the DCB is dramatic; the drop from $2 to $1 positions the DCB below McDonald’s DCB priced at $1.19. The gross margin loss of -10% is significant; the DCB costs on average $1.10 to make. The complaint notes that no other item on the BKC value menu loses money. Based on this loss, franchisees rejected the first proposal in 2008 and rejected it twice by vote this year.

In “$1 deal may boost profits,” the Miami Herald describes an analysis generated by a franchisee that concludes that the $1 DCB is a money-loser:

“…financial models run by one Illinois franchisee and circulated among franchisees across the country suggest that [the $1 DCB] won’t drive enough sales to offset the margin pressure. The franchisee models suggest that the bottom line impact for restaurants would be a loss of between $489 and $930 depending on the percentage of total sales generated by the value menu.”

However, management has its own analysis (and assumptions) showing the $1 DCB is a winner. Again, from the Miami Herald:

“Based on numbers Burger King provided to franchisees, the company projects that the double cheeseburger will lead to a 5-percent increase in restaurant sales. That will translate into an increased bottom line profit of $365 per restaurant based on $105,000 in sales, according to the analysis.”

How could the franchisees and management come to completely different conclusions on the merits of this pricing strategy? Soda and fries make the difference. Soda and fries are higher-margin items. If the cheap DCBs generate extra sales traffic that buys soda and fries, then it is possible to make up the loss in profit from the DCB. In fact, BKC management is relying exactly on this dynamic. The McClatchy-Tribune reported on Nov 13, 2009:

“During an 18-month test, the $1 double cheeseburger had a negative impact on gross profit margin, Burger King said, but restaurants increased gross profit because consumers added high profit items like sodas and fries.”

In “Burger King’s battle cry: $1 burger,” the Chicago Tribune reports how the local optimization can invalidate the attractiveness of a mandatory $1 DCB promotion:

“John McNelis, president of the real estate division of Mirabile Investment Corp., owner of more than 40 Burger Kings in the Memphis, Tenn., area [states]: “…in some price-sensitive markets, you are just selling a bunch of double cheeseburgers…”

The cheap DCB pricing strategy works if soda and fries are “complementary products” to the DCB. However, if these products are truly complementary, then the more profitable pricing strategy is to make sure that DCB-buyers purchase soda and/or fries by bundling the products into one offering. In other words, customers can only buy the DCB for $1 if they also buy soda and/or fries for a price that generates a profit for the entire bundle. Without this bundle, BKC is using a loss-leader strategy in the hopes that the extra foot traffic will behave in a profitable way.

I suspect that BKC is not bundling the $1 DCB with soda and fries because the bundle would work counter to its efforts to attract increasingly price sensitive customers (high demand elasticity) and would obscure its price positioning versus McDonald’s. Putting the reported analyses aside, I suspect that when BKC runs its global optimization, it finds that it has enough markets with customers who will buy the bundle on its own merits. Absent profits, BKC could still justify the program based on customer retention in the hopes that customers stay loyal to the brand even after the money-losing promotion ends (a much shakier proposition in the highly competitive fast-food category). The franchisees run a series of local optimizations and find too many individual franchisees who lose money to make the program worthwhile as a mandatory offering. Apparently, there are enough of these profit-losing franchises to motivate the lawsuit (according to the class action complaint, about 75% of franchisees belong to the NFA). Indeed, the diversity of markets explains why most discount promotions amongst franchises include the caveat “at participating locations only.” The local optimization typically dominates the global optimization.

Burger King’s August 25th conference call to discuss fiscal fourth quarter 2009 earnings provides additional clues into management’s rationale for implementing a mandatory $1 price point for the DCB (quotes from the transcript provided by Seeking Alpha).

Management describes how it used controlled experiments to measure the potential success of a $1 DCB:

“…we have probably now well over 40 markets in the country that are on $1 Double Cheeseburger and we’ve actually seen a pretty steady check performance…And we’ve really been pleased with what our plans were for check dilution versus what’s really happening in those markets.

…there’s no question that the $1 Double Cheeseburger through its adoption in increasing amounts of markets in the U.S. has helped to improve traffic. So we have seen month-to-month-to-month improvements, a narrowing if you will on our traffic losses nationally and we have certainly seen the markets that have adopted the $1 Double Cheeseburger move into some very strong performance as it relates to traffic.”

Burger King management is eager to reduce losses in traffic. It is probably no surprise to anyone that discounting a burger by 50% will drive increased traffic. There is no indication here that the promotion is actually making money, only that it is losing less money than expected.

Again:

“…we modeled for some GPM [gross profit margin] dilution in the business case for $1 Double Cheeseburger but so far all the test markets have been outperforming in terms of GPM dilution. In other words it has not been as deep as we originally thought. What you really kind of see happening is the effect of this discounting is sort of offsetting the price increases that we’ve taken in the past which would kind of cause for the level check if you will that you’re seeing.”

There is no explanation here that sales of sodas and fries are specifically making up for the profit loss on DCBs. Instead, it seems that price increases on a variety menu items have given BKC the extra cushion it needs to justify using the DCB as a loss-leader. Management does not provide details on these price increases, but, in general, they seem odd given the existing competitive environment and sluggish economy. All together, it seems that traffic is the prime motivator for the promotion – with the assumption that short-term profit-losses will somehow give way to longer-term profit gains.

Finally, it seems competitive pressures are forcing Burger King to take extreme measures:

“…we have to be aggressive on value for the money. There’s no way you can turn on a television set and look at any retail brand in any space and not hear language that talks about price points and value. And we’re no different. Now our value for the money equation also includes talking about a superior tasting product with flame-fresh taste. It includes featuring our superior size versus McDonald’s on our Double Cheeseburger. And yes it’ll continue to pound on the $1 access.”

In the end, BKC’s global optimization is apparently not convincing enough for the franchisees who are presumably more concerned with their individual local optimizations. Certainly, the NFA should not have filed its class action complaint if BKC’s market tests demonstrated comprehensive profit gains from a preponderance of successful local optimizations. A global optimization that delivers average profit gains across the system is insufficient to justify a franchise-wide, mandatory pricing strategy. If this averaging is indeed the true source of the conflict, it is akin to averaging the net worth of Bill Gates and your home town and concluding that your home town would be filled with millionaires if Mr. Gates moved in.

This lawsuit will be fascinating to follow as it could provide additional insights and clarity into BKC’s pricing strategy and the actual data used to justify it.

Demand Elasticity
Subway’s $5 footlong promotion was so popular, so fast, that it caused inventory shortages throughout the company. This surge in sales volume generated more revenue AND profits starting with the pioneering franchise: “…food costs did rise as a percentage of sales, but that was offset by the overall boost in volume and the increased productivity of …employees, who had less down time. Even after adding two new staffers, [franchisee] Frankel made money on each $5 sandwich.”

In other words, the footlong sandwich used relatively more expensive food than the typical sandwich, but sales volumes increased the proportion of time employees spent making sandwiches versus standing idle. The biggest bonus likely came from the incremental demand created by the promotion. The new demand created by the promotion directly added to revenues and profits. The lower pricing brought new customers to stores and (presumably) encouraged existing customers to buy more sandwiches. Subway discovered that these sandwiches have very high demand elasticity (for reasons described in the article), meaning that the percentage increase in demand was very high relative to the percentage change in price. The menu of higher pricing had prevented Subway from tapping into a hidden reservoir of demand. (Note that food service consultant Dean Dirks speculates that Subway’s promotion is actually a money-loser).

Controlled Experiments
Subway managed to execute this powerful pricing concept without analyzing past transaction data. Instead, Subway used the more direct approach of controlled experimentation.

Controlled experimentation allows a business to try out an idea in a well-defined place and time. This setup facilitates convenient data collection and fast analysis of the data. If the idea works in the controlled setting, then expand the trial into a slightly larger controlled setting. Repeat the process until the recipe for success (or failure) appears sufficiently confirmed and understood.

In Subway’s case, the numbers spoke loud and clear. Profits and revenues soared for Frankel soon after launching the promotion at his two franchises in Miami. It ran for a year before it was tried at another Florida location, this time in Ft. Lauderdale: “On the first day of the promotion, the store nearly ran out of bread and meat. Sales doubled.” Next, the promotion expanded throughout South Florida and met more success. Despite this winning record, Subway’s franchisee marketing board still voted down a proposal to expand the promotion nationwide. Additional successes from “Washington to Chicago” finally convinced the board to approve nationwide expansion.

Key Lessons
The article does not count how many controlled experiments Subway has run in the past that began successfully and yet ended in failure. We also do not know how many “bad” ideas the board must endure at every meeting. (Many stories about success in business suffer from “survivorship bias” where only proven winners make it to the front page and the losers of the past are long forgotten). However, a key lesson in this story is that ideas for change are strengthened when backed by evidence and data. Subway was fortunate to own an infrastructure conducive to running and maintaining controlled experiments and fortunate to stumble upon an idea whose success was so undeniable. Even if your business is not similarly fortunate, applying the lessons of pricing to demand and of generating evidence through experimentation will certainly drive measurable improvement in your business.

Businesses love captive audiences because they provide a marketplace full of consumers who care more about an experience than its price. Moreover, a captive audience typically has no good alternative to the products and services offered for the duration of its “stay.” During a recession or economic slowdown, a captive audience can be an important and effective tool for protecting price points and maintaining profits. In the case of the college football stadium, the price of admission is relatively low ($17), while the price of staying is relatively high (in the form of concessions, seat rentals, and other products).

Investments in product quality can also help a business create a captive audience. Establishing a reputation for high quality products also translates into a strong brand name. A strong brand name consumes mind share in a marketplace – the captured audience – and constructs a higher barrier for competitors trying to win over customers. Most importantly, high product quality generates the goodwill in the marketplace that leads to the strong willingness to pay required to protect price points (and profits). These dynamics are particularly powerful during an economic slowdown where customers are extremely motivated to reduce expenditures.

There are a few required elements for high product quality to provide the kind of captured audience described here. Market and product analysis can verify how strongly a company scores on these elements.

1. “Good enough” is not sufficient to accomplish the customer’s goals.
2. Adequate substitute products do not exist and/or are extremely difficult to develop.
3. Investments to sustain high product quality are not prohibitive in cost.

Trina Solar understands these concepts. Trina Solar operates in an industry where projects cost a lot of money, project financing is tight, competing products are in high supply (quickly becoming commoditized), and pricing pressures abound. However, during its last earnings conference call, Trina Solar emphasized its advantage in this environment due to its reputation for high product quality, an extremely important characteristic in the solar marketplace. A substantial portion of Trina’s business has also been in small markets (Belgium and Italy) where it is considerably easier to construct the “captured audience.” Trina now looks to leverage its success into larger markets like China and the U.S. If the company continues to deliver on its promises of high quality (at lower costs even), it should continue to capture larger market share…and audiences.

In these examples the consumer is not paying money, but the companies providing the “free” services are leveraging the consumer’s contribution to generate revenues and profits from other sources, primarily advertising. We live in an economy based on exchange and very rarely is only one party the sole contributor to that exchange.

In “Can Twitter Be Saved?,” Mark Gimein writes that Twitter will collapse from the sheer volume of users and messages if users do not focus and reduce the number of their feeds, and if Twitter does not develop some automated tools for helping users filter out the garbage from the useful. Gimein’s description of the typical Twitter behavior strikes me as a classic tragedy of the commons scenario: users (herders) barrage their followers with messages in an effort to attract the limited and finite resource of attention (the pasture). Access to this attention is free and messages effortlessly accumulate for all to peruse, so it is no wonder that many users liberally sprinkle “Twitter-space” with chatter and, in parallel, follow as many users as possible in an effort to attract as large an audience as possible.

While charging for anything on the Internet is tantamount to heresy, Twitter may be forced to set up some kind of fee structure to have any hope of constructing a more useful (and efficient) experience as the number of users appears ready to engulf the entire planet. Here is one example of what Twitter can do (my own unsolicited advice):

1. Charge a small fee to join, say $10/year; perhaps even charge $50-100+/year for corporate accounts where identity is authenticated and validated by Twitter. This fee mainly captures some of the immense value that people get out of the service and provides some funds to develop the automated tools that Gimein recommends. It also gives users one extra sense of ownership and, perhaps, an incentive to act responsibly. Of course, venture funding could easily replace subscription funding but only in the short-term. Someday, Twitter will need to generate sustainable revenues from something (even if it is charity!).
2. Charge a very small fee for messaging. There are many ways to do this, but the fairest method would be to charge something like a penny for each tweet past some high daily or weekly threshold. This provides the financial incentive to focus messages.

One might reasonably ask why Facebook does not face a similar problem with a tragedy of the commons. I suggest that Facebook is not a commons where anyone can and will attempt to siphon off a user’s precious attention. On Facebook, users typically only accept links to friends and family and people one or two degrees separated from that closed network. Because users either know or know of everyone in their network, there is an automatic incentive to ration attention-grabbing activity. Users are their to share their lives and to participate in the lives of others. There exists a huge incentive to focus one’s network on the things that really matter in one’s life and not to drown those moments and memories with trivialities and incessant self-promotion. Facebook does not need pricing to encourage self-regulation: it has self-interest working in lockstep with group-interest.