The Velvet Rope Economy

Introduction

Under the baking hot sun of an Orlando morning in August, the line at SeaWorld snakes its way past the turnstiles and into the distance toward the vast parking lots. Sweat pours down the faces and backs of the dads, while the moms vainly try to calm screaming toddlers and entertain their fidgety older siblings. Gum sticks to the kids’ sneakers as parents shell out money for one more bottle of water and the loudspeakers announce yet another delay for the Dolphins Up-Close Tour. When visitors finally arrive at the front of the line, groups are quickly hustled past the dolphin pools, only enabling the weary tourists to briefly touch the captive creatures.

Two miles away, the cast of characters is the same but the atmosphere is completely different. Here, at an oasis called Discovery Cove, parents lounge on daybeds and kids play in hammocks amid lush landscaping. Lines are nowhere to be seen, and there are even private cabanas complete with towel service and fridges stocked with snacks and beverages by an artificial beach. When they are ready, families depart for a personalized Dolphin Swim Experience, with an individual trainer as their guide.

At Discovery Cove, parents and children wade into the dolphin pool, where the boldest visitors can take hold of a dolphin’s dorsal fin and go for a gentle ride. Teenagers can break off from the group as part of the “Trainer for a Day” package, complete with feedings with dolphins, a behind-the-scenes tour, and the opportunity to shadow employees. Other options include a chance to wade beside otters, hand-feed parrots and toucans, or go snorkeling with tropical fish and rays. Both parks are owned by SeaWorld, so Discovery Cove’s guests can always hop over to the traditional park for old favorites like the dolphin show. And, for an extra fee, they can skip SeaWorld’s lines and reserve the best seats in the house to see the marine mammals.

While thousands of visitors a day throng SeaWorld, daily attendance at Discovery Cove is capped at 1,300. Why? To create an exclusive experience that an affluent family of four is willing to pay up to $1,240 for, more than three times what a visit to SeaWorld would cost. And for SeaWorld, a publicly traded company that has been battered by criticism from animal rights activists, Discovery Cove is a cash cow. So while long waits are a feature of the traditional park, at Discovery Cove there are expanded offerings aimed at a tiny slice of visitors. In 2017, the upscale park began offering its most adventurous guests the chance to swim with sharks for an extra $109 per person, or with stingrays for $59. “With no lines throughout the park, you can plan your adventure at your own pace,” Discovery Cove’s website promises.

This pattern—a Versailles-like world of pampering for a privileged few on one side of the velvet rope, a mad scramble for basic service for everyone else—is being repeated in one sphere of American society after another. At Yankee Stadium, holders of elite Legends tickets enter through a separate door, enjoy a private dining room with gourmet food in addition to the usual franks and popcorn, and are ushered to seats that sell for $1,000 or more, located along the first- and third-base lines. Occupants of the Legends Suite never come into contact with other people attending the game if they don’t want to, whether they are far away in the bleachers or sitting in slightly less expensive mid-tier boxes a few yards back. Nor can the other fans sitting further away walk down to the field for autographs or a sight of their favorite player at bat like in the old days. The new Yankee Stadium that opened in 2009 was designed with a moat that prevents anyone except Legends seat holders from getting close to the field near home plate. What was once a quintessentially communal, American experience—going to a baseball game—has become another archetype of what I call the Velvet Rope Economy. And behind the scenes, among the purveyors of elite experiences, the business of building Velvet Ropes has never been better. It’s driven by straightforward economics—as more wealth accumulates in fewer hands, attracting this wealthy contingent is essential if profits are to grow.

But this book is about more than business or economics. The rise of the Velvet Rope Economy threatens to worsen the divisiveness that plagues our politics and culture today. After all, if you never actually encounter people from a different class or social background, it’s much easier to demonize them. “With growing inequality, there is an attempt by the affluent to buy their way out of public spaces and services in favor of something better and often more exclusive,” said Michael J. Sandel, a professor of political philosophy at Harvard. Sandel examined these issues in his 2012 book, What Money Can’t Buy: The Moral Limits of Markets, and the trend has only gathered steam since then. As a result, he said, “it becomes harder to think of ourselves as citizens engaged in a common project and in a shared way of life. This has contributed to the growing polarization of American life and the erosion of community.”

The political and social repercussions of the spreading Velvet Rope go beyond symbolism and rhetoric—they have a real impact on government policies and fiscal priorities. For instance, when corporate decision makers, members of Congress, and especially the political donor class routinely bypass traffic jams and deteriorating trains and buses and get to the airport via a luxury helicopter service like Blade, the political impetus to improve public transit systems fades. The ease of catching a commercial flight at the deluxe new private terminal at Los Angeles International Airport—the first of its kind in America, with a $4,500 annual membership plus a $3,000 fee per trip—makes it that much easier for those who can afford it to forget about the decrepit main terminal, with its claustrophobic hallways and overcrowded waiting areas. Similarly, if wealthier consumers can jump the line at the hospital and see specialists before everyone else or employ high-priced counselors to gain special access to the Ivy League universities, health care and education reform become much less pressing. The name for the American system of government, a republic, comes from the Latin res publica, or public things. As the public sector is replaced by private services aimed at the elite, the very foundation of the republic is eroded.

Take Nick Hanauer, a Seattle entrepreneur worth hundreds of millions of dollars. Money provides him a private version of E-ZPass, enabling him to zip past the everyday obstacles the rest of us have to contend with. “This is my life, I see it everywhere,” said Hanauer. “I haven’t waited in a line in ten years.” Hanauer doesn’t deal with TSA lines—or even commercial airports. Indeed, as the first person to invest in Amazon from outside the family of its founder, Jeff Bezos, Hanauer now gets around in his own personal Dassault Falcon 900LX jet, which retails for $43 million. He shared Bezos’s vision of the internet’s potential a quarter of a century ago, and thanks to that early stake and other similarly prescient investments, Hanauer now inhabits an economic stratosphere. But for all his wealth, Hanauer said he has a gnawing fear that the widening gulf between economic winners like himself and ordinary Americans is unsustainable. “If you’re not genuinely concerned about the future of the United States, you are not paying attention,” he said. If inequality continues to worsen, he fears the country could face civil disorder or even revolution.

Hanauer may fly private, but for ordinary Americans, nowhere are the workings of the Velvet Rope Economy on more obvious display than at a cruising altitude of 36,000 feet. While elite fliers in the front of the plane enjoy more and more lavish amenities—flat beds, cashmere blankets, even a shower on some flights—for everyone else air travel increasingly resembles something out of Hieronymus Bosch’s grisly palette. In order to expand business and first class cabins, airlines have reduced the space between seats in coach to sardine-can-like proportions, and even shrunk the thickness of the seat cushions. Meanwhile, with boarding now staggered into nine separate groups on airlines like American, fliers without elite status are condemned to force their bulging carry-on suitcases into overhead compartments in order to avoid the $25 fee for checked bags. By the time Basic Economy fliers reach their seats, finding room for carry-ons is impossible. Flight attendants nickname them Group Nines, because they board after everyone else and frequently are furious about their last-place status.

In recent years, the practice of sorting and separating customers into tiers has spread far beyond the world of jets, cruise ships, and hotels to reshape nearly every aspect of American life. No corner of society is immune, with caste-like divisions appearing in realms like education where the rhetoric of egalitarianism was once the order of the day. The rise of the Velvet Rope Economy marks an end to the great democratization of American life in the post–World War II era. As the jet set faded and budget airlines were born, the rapid growth of the economy created a vast middle class, and in places like airports and theme parks even the very privileged rubbed shoulders with everyone else. Now the pendulum is swinging rapidly in the opposite direction.

On board the latest Norwegian cruise ships, the kind of rigid class distinctions famous from the era of the Titanic have staged a comeback. A couple might save for years to celebrate their twenty-fifth anniversary with a cruise, only to find that the best views aren’t included. Those are reserved for travelers in the Haven, a ship-within-a-ship off-limits to most guests, where the most privileged passengers have the most desirable decks to themselves. On board ship, the Haven itself is hidden behind a locked door but the special treatment is hardly a secret. “Be pampered throughout your cruise,” Norwegian promises in its marketing pitch for the Haven. “Skip the lines and be personally escorted on and off the ship at the pier and at ports-of-call.” For companies able to profit from this system, the rewards are immense. The Haven is among the fastest-growing offerings at Norwegian. And Discovery Cove helped private equity giant Blackstone Group earn $1.7 billion on its investment in SeaWorld, nearly triple what the firm put in.

Sometimes, the edge provided by entrée inside the rope is small. In the Legends suite at Yankee Stadium, fans can still enjoy a beer in the bottom of the ninth inning. For everyone else at the ballpark alcohol is cut off after the seventh inning stretch. Or at the airport, instead of racing from one terminal to another to catch a connecting flight, Delta’s Surprise-and-Delight service ferries the most elite frequent fliers directly between planes in a Porsche.

To be sure, there are worse fates in America than having to schlep on foot from one terminal to another at the airport, or waiting for hours in line at Walt Disney World while the FastPass+ holders fly by. Nearly 40  million Americans lived in poverty in 2017, equivalent to 12.3 percent of the population. Just over 17 percent of children lived in households that earned less than $25,465, the income threshold for what the government defines as the poverty line for a family of four. But as we shall see, the Velvet Rope doesn’t merely delight the wealthy—it also exacerbates the isolation and abandonment of the poor.

And the ability to pay to slip past the Velvet Rope can sometimes mean the difference between life and death. In California, private firefighters sent by insurers saved the vineyards and estates of a fortunate few during the recent spate of wildfires even as neighboring homes were reduced to ashes. For $50,000, private health care consultants can steer cancer patients into potentially lifesaving clinical trials.

The evidence of this trend isn’t merely anecdotal, either: the richest one percent of Americans live nearly fifteen years longer on average than the poorest one percent, according to a 2016 study in the Journal of the American Medical Association. And that disparity is increasing, with life expectancy rising by 2.5 years for the wealthiest top 5 percent of Americans between 2001 and 2014, while barely changing for the bottom 5 percent over the same period.

Whatever the arena in contemporary life—health care, education, work, travel and leisure—on the right side of the rope is a friction-free existence where, for a price, needs are anticipated and catered to. Red tape is cut, lines are jumped, appointments are secured, and doors are opened. On the other side of the Velvet Rope, friction is practically the defining characteristic, with middle- and working-class Americans facing an increasingly Darwinian fight for a decent seat on the plane, a place in line with their kids at the amusement park, a college scholarship, or a doctor’s appointment.

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Of course, there have long been different classes for travelers and varying standards of service for customers, whether in more traditional European societies or in the same America that promised a more egalitarian life. At times in the past, the stratification was even more dramatic than it is today. In the mid-1800s, French railroads avoided putting roofs on third class wagons to force any passengers who could afford second class seats to cough up a few extra francs. In turn, second class wasn’t made too comfortable to increase the allure of first. “The companies, having proved almost cruel to third-class passengers and mean to second-class ones, become lavish in dealing with first-class passengers,” wrote Jules Dupuit, a pioneering economist in nineteenth-century France. “Having refused the poor what is necessary, they give the rich what is superfluous.”

Dupuit was one of the first economists to identify what his modern counterparts call price discrimination. This describes how companies can charge different amounts for nearly identical products that cost the same to produce. In the process, they can extract the maximum price from those willing to pay the most, without sacrificing sales to customers who can’t afford to pay as much. But even the wealthiest consumers don’t want to pay any more than they absolutely have to, and they certainly don’t want to find out someone else paid less for nearly the same thing. Not only will that leave your best customers feeling ripped off, it will also prompt them to desert you for your competitors.

The solution for businesses is product differentiation—but this basic element of modern marketing isn’t as straightforward as it first appears. Edward Chamberlin, the Harvard economist who coined the term in 1933, was among the earliest in the field to test his ideas using actual experiments, rather than theorizing as earlier economists like Adam Smith or David Ricardo did. Expanding upon Dupuit’s ideas, Chamberlin showed how differentiating a product doesn’t necessarily mean altering the product itself—it can be as simple as a change in how it is wrapped, when and where it is sold, or how many can be bought at one time. All that matters is that buyers perceive a difference.

And with the rise of mass markets, advertising, and increased competition in the twentieth century (much of Dupuit’s work focused on monopolies), sellers needed to start differentiating their products to a much greater extent. This principle doesn’t just apply to luxury goods: McDonald’s has been adding and pulling the McRib from store menus practically since it was first offered in the 1980s to increase the appeal of an otherwise unremarkable BBQ-flavored pork sandwich. Although it never really disappeared, in 2017 McDonald’s announced the “return” of the McRib on the thirty-fifth anniversary of its introduction, even providing fans with a McRib Locator website to track it down locally.

Altering products to capture what’s known as a price premium is especially critical when providers are offering very similar goods or services in competitive markets—think airline tickets or credit cards or insurance. The actual amount of differentiation can vary— after all, tickets on a train aren’t really that different. Even if some might travel in greater comfort, first-, second-, and third-class passengers all arrive in the same place at the same time. The challenge is that different customers seek different things from the same item; a few are looking for a particular feature or style, some want to think they own something unique, and many just want the lowest price. Therefore, each group is willing to pay a different amount. By segmenting their markets, companies can successfully target all of these cohorts individually without sacrificing profit margins by having to design each item from scratch.

Some segments of the market behave differently from others, however. When the product is a commodity like gasoline, and not much can be done to vary it, the main differentiator is price. Cheaper goods and mass market products are largely selected on the basis of price, but sellers have more room to raise prices—and therefore increase profits—when two factors come into play. The first, as we have said, is by differentiating the product in the first place, introducing an Apple tablet with a bigger screen at a higher price, say, or adding the extra layer of foam in Casper’s new, more expensive line of mattresses. The second and even more powerful condition is when fundamental limits on capacity come into play.

There are only so many slots for admission at Stanford or Harvard—and you either get in or you don’t. The supply of courtside tickets at basketball arenas and front-row seats at football games is similarly limited, no matter how new or big the stadium might be. And although almost no one in the health care world wants to discuss it openly, the same goes for access to top surgeons or specialists in rare diseases. As we shall see, when these two factors—product differentiation and capacity constraints—are combined, the sky becomes the limit in terms of what sellers can charge, what buyers with the means will pay, and the profits that can be earned.