Live Nation has various business lines associated with live music and live events. They are pursuing a strategy of vertical integration, trying to find synergies between the various parts of their business. On the concerts business side, the vertical integration strategy has been tried multiple times with little success. Will this time be any different? John Malone seems to think so. Liberty Media has been buying more Live Nation shares.
Let’s start with an overview of the ticketing industry.
I would characterize Ticketmaster as mostly a technology company. Technology companies can usually earn high returns on capital over extended periods of time because it is difficult for competitors to copy the technology and to recreate economies of scale. However, like all technology companies, a competitor with superior business execution can dethrone the market leader and cause disruptive shifts in the industry. In Ticketmaster’s early days, it did exact that to Ticketron, the #1 player at the time. Ticketmaster had a better business plan than Ticketron because it used convenience fees as a profit center. Ticketmaster would charge higher convenience fees than Ticketron and split the profits with the venues. Ticketron refused to engage in this business practice, ensuring its own demise. While consumers could avoid service fees by going to the venue’s box office instead of Ticketmaster, consumers spoke with their wallet and paid for convenience. In some cases, consumers had little choice because the travel time to the box office would not have made sense.
The practice of gouging consumers on convenience fees angers many consumers and continues to do so today. Part of Ticketmaster’s business model is to shield its clients (venues) from negative publicity. In reality, venues are just as complicit as Ticketmaster in charging high prices for convenience fees. As the industry evolved, artists and promoters would also share in the convenience fees.
One of the biggest problems in the live events industry is that the industry does a poor job at pricing tickets.
Whenever tickets are underpriced, ticket scalping occurs. Various parties will arbitrage the difference between the face value of a ticket and what consumers are actually willing to pay. The “arbitrageurs” generally consist of:
- Highly sophisticated scalpers and ticket brokers with automated “bots”. They have computerized systems designed to essentially jump to the front of the line. For hot events, they will be the first ones to buy up the best seats. There is a technological arms race between scalpers and ticketing companies such as Ticketmaster. Historically, the scalpers have always been winning.
- Less sophisticated scalpers. Ticketmaster’s anti-scalping efforts may be putting a dent into their profitability. The twoplustwo poker forum has a “ask me anything” discussion thread from a one-man ticket broker.
- Casual fans who scalp on the side. They may buy the maximum number of tickets allowed (4/8) and sell the excess tickets that they don’t need.
- Insiders who supply ticket brokers with prime seats. These may be artists, the artists’ managers (who may sell tickets without their client’s knowledge), box office employees, the music label, etc. etc.
Whenever tickets are overpriced, there will be unsold seats. This means that the promoter fails to maximize profits for the live event.
Systemic reasons why tickets are mispriced
In general, music artists do not want to be seen as engaging in the price gouging of their fans. They may not want to sell tickets with a face value of several hundred dollars. In reality, many artists will quietly sell very expensive tickets while avoiding the appearance of doing so. The way the current system generally works is this:
- The majority of the best seats in a venue will be tied up in “holdbacks”. Tickets are set aside for the artist (who may sell them to ticket brokers), the music label, etc. etc.
- There will be a ticket presale to members of a band’s fanclub. Anybody who pays the membership fee will be eligible to buy presale tickets.
- Credit card companies give perks to their customers in the form of being able to buy tickets via exclusive presales.
- The first “onsale” then occurs, which is the first time that the tickets are officially sold to the broad public. There are various reasons as to why these tickets may be sold at a (small) discount to their market value.
- A small number of “Platinum” “VIP” tickets will also be available for sale. These are tickets to good seats with something else thrown in: exclusive merchandise, shorter lines, backstage access, meet and greets, etc. These tickets are basically a form of “dynamic pricing”. Their price adjusts based on supply and demand. Because these seats are better than other seats in the same section, they are sold at a large premium. If there is little demand, platinum tickets can be repacked as normal tickets and sold like normal tickets.
- Over time, more tickets are released onto the primary ticket market (e.g. Ticketmaster). Intentionally restricting the supply of tickets creates a (false) impression of scarcity. This tactic may generate favorable press as the media may report that the show sold out in minutes.
- The promoter may design the tour with some elasticity in supply. If demand is high, the promoter may open up more sections of the venue to increase the number of seats. The promoter may also schedule additional dates in a city.
- Tickets are generally sold several months in advance of the event. Closer to the event date, some fans may have a change in plans and realize that they cannot attend the concert. There are various ways in which they can try to resell their ticket.
The artist has a great deal of influence on ticket pricing. Some artists prefer to underprice their tickets for various reasons:
- A minority of artists want tickets to be affordable because they feel like it’s the right thing to do.
- They prefer playing to a full house.
- To maintain their brand, they don’t want to be seen as engaging in “price gouging”. (In reality, many artists sell tickets at very high prices.) So, there may be a small batch of tickets available at lower than market price.
Ironically, trying to give fans affordable ticket often creates the most problems with scalping. For scalpers, tickets that are obviously underpriced presents less risk and more room for profit.
As you can see, there are various avenues in which a scalper can obtain a ticket. Naturally, they will try to find ways to buy undervalued tickets. Many scalpers will join fan clubs and buy the maximum number of tickets allowed (whereas many true fans will buy what they actually need). They will sign up for credit cards to take advantage of credit card perks. More sophisticated scalpers will use automated bots to buy up the best seats during the first onsale. Later, the bots cherry pick the seats that are released over time.
For major league sports events, scalpers will take advantage of:
- Season ticket pricing versus buying individual tickets.
- Sports teams that charge the same price for every regular season game. Games vary in demand. More popular games tend to be the first game of a season, games versus rival teams, a star player’s retirement game, games that determine playoff positioning, etc. etc.
- Short-term spikes in demand that are likely to die off over time. Sometimes, news will cause an immediate spike in demand for a game that will die off quickly. Some scalpers (or “ticket brokers”) will engage in the short selling of tickers, or “spec” (speculative) selling, taking advantage of phenomena that cause ticket prices to drop over time.
Short selling of tickets also occurs in the music business. Some ticket brokers will list tickets for “sold out” shows, planning to buy tickets later on as more tickets are released or as fans need to sell their tickets because they are unable to make a show. The short selling of tickets is currently largely unregulated. Occasionally, brokers that are unable to cover their short sales will refund the customer’s money and not deliver the tickets. This infuriates consumers as they essentially lose money and miss out on an event that they were looking forward to for months. Some consumers may even have booked a plane ticket and hotel to see a show, only to find out that the ticket broker failed to deliver tickets.
Pricing tickets is generally very difficult. One of the major problems is that so many things can happen in the months leading up to an event. For sports teams, overpriced tickets is an issue if the team loses a lot of games and isn’t going to make the playoffs. Many sports teams will use ticket brokers as a way to sell tickets below face value, selling large blocks of tickets at a discount. If they were to sell tickets below face value themselves, they might annoy fans who paid full price for their tickets.
Secondary ticketing can mean many things. Often, it is a term used to confuse the consumer. Sometimes industry participants do not want the consumer to know that:
- Artists often scalp their own tickets.
- Most of the tickets on the secondary market are really primary tickets resold via an intermediary (e.g. ticket broker).
Secondary ticket markets usually consist of ticket brokers with a smaller amount of legitimate fan to fan sales. Some market participants want to trick the consumer into thinking that the opposite is true. For example, here is an example of a StubHub Google ad:
If ticket brokers are considered to be fans too, then I suppose that StubHub is a place where fans buy and sell tickets. Ticket marketplaces should be very careful that they do not engage in deceptive advertising. Ticketing shenanigans anger consumers. Politicians and district attorneys may target large corporations to try to win votes.
Value creation in secondary ticketing
Currently, Ticketmaster has a system which integrates both primary and secondary ticketing into a single user interface and a single system. In my opinion, this creates value in various ways.
- Fraud. By having secondary ticketing on the same platform, Ticketmaster can get rid of the fraud problems that plague other ticket marketplaces like StubHub. StubHub expends substantial effort in making consumers whole when a seller fails to deliver genuine tickets. StubHub will have employees meet fans outside the venue to deliver tickets equal to or better than the ones the fan bought.
- The concert promoter can drive fans to a secondary ticketing platform where the short selling of tickets is banned.
- Advertising. Ticket brokers and scalpers often spend a lot of money trying to attract customers (e.g. a few to several percent of the ticket price). The primary ticketing platform is itself a source of advertising for the secondary platform.
- Fans who are unable to attend an event want a safe, secure marketplace where they can conveniently sell their tickets.
- It reduces the amount of money lost to scalpers who add no value to the system.
Going forward, I think that more primary ticketing platforms will integrate secondary ticketing.
It will be interesting to see how much of the value generated will turn into profits for ticketing companies. What happened with convenience fees will likely happen with secondary ticketing revenues. The proceeds will be split between the artists/content creators, promoters, venues, and the ticketing company. Ticketmaster’s profitability will depend on its economies of scale and on its ability to execute better than its competitors. Currently, Ticketmaster is executing very well relative to AEG Live’s ticketing system (AXS). AXS has separate user interfaces for primary, Platnium/VIP, and secondary ticketing (via StubHub).
From Live Nation’s perspective, owning Ticketmaster allowed it to quickly execute on various initiatives.
- Paperless ticketing to combat scalping. Paperless ticketing is really an euphemism for non-transferable tickets. Fans must show ID and/or their credit card to gain access to the venue. By making tickets difficult to transfer, they are difficult to scalp. One estimate puts the reduction in scalping at 75%. However, the cure is probably worse than the disease. Parents cannot buy tickets for their kids (who don’t have credit cards). Many fans forget their ID at the venue gate. Some Live Nation execs publicly state that paperless tickets account for less than 0.01% of all Live Nation tickets.
- Combating scalping by making it difficult for bots to buy tickets. In practice, the scalpers generally win this technological arms race. Live Nation has failed to inflict damage on scalpers through the legal system.
- Dynamic pricing. While consumers have not responded positively to Ticketmaster’s auction system, the practice of Platinum/VIP seating is very common today.
- Scaling. Airlines implement scaling in the form of first class, business class, and economy class. For music events and sports, a venue can be divided up into multiple seating sections based on sightlines and distance to the stage. By creating more seating classes, the lowest class can be sold at a cheaper price than without scaling. Across the board, the face prices of the tickets are closer to market prices (the average price would be higher). When Live Nation executives talk about offering cheaper seats, I believe that they are generally referring to scaling.
- Integrating secondary ticket with primary ticketing.
- Collecting data to get better at pricing concerts (e.g. big data). Currently, Live Nation does not put that much emphasis on its tools.
- Ticketmaster could turn into a place where customers could discover concerts playing near them. Ticketmaster has the consumer’s email address and can ask for the consumer’s permission for marketing purposes. Emailing fans about other events that they might be interested in is another form of promotion.
- At checkout, Ticketmaster could become a marketplace where fans can be cross-sold on other items such as merchandise. In practice, it seems that fans actually buy very little merchandise at checkout (either because they own it, or because they can physically check out merchandise at the venue). Ticketmaster does try for affiliate marketing revenue for travel-related services for out-of-town fans.
- Ticketmaster could improve its image by moving towards all-in pricing that include hidden fees such as service charges. Both Ticketmaster and StubHub have tried all-in pricing only to later abandon it. Unfortunately, it seems that consumers fixate too much on displayed pricing versus actual pricing. The media does not help by continually reporting the face value of a ticket rather than the all-in price. However, Ticketmaster generally consolidates all of the hidden fees into a single service fee for Live Nation events. In a very very limited sense, Ticketmaster has been able to take a tiny step towards rehabilitating its public image.
- Promoting concerts via social media. Concertgoers can use the Facebook plugin to let their friends know that they are going to an event and to show friends where they will be seated. In practice, very few concertgoers use the Facebook integration.
With the benefit of hindsight, it’s obvious that many ideas did not work out in practice.
Further reading + Links
If you want to learn more about the ticketing industry, I recommend the book Ticket Masters: The Rise of the Concert Industry and How the Public Got Scalped.
*Disclosure: Long LMCA, which owns a lot of Live Nation (LYV).