A House Divided - PRS for Music

A House Divided

The economics of discounting tickets

Economic Insight

Prepared by Will Page,

Chief Economist, PRS for Music

and Stewart McKie, freelance consultant

About Stewart McKie

Stewart McKie is a freelance consultant, having

recently graduated with first class honours from

LSE and with distinction from Strathclyde

Business School. He has previously worked with

PRS for Music, contributing to Adding up the

Industry 2009 and 2010 and also the Wallet

Share Insight Paper earlier this year.

Disclaimer:

This report has been prepared on the basis of information in the

public domain and from other sources by Will Page at PRS for

Music and Stewart McKie and is provided to intended recipients

for information purposes only and should not be relied on for

any other purpose. The report should not be reproduced,

transmitted or disclosed to any other person without the

consent of the PRS for Music or its licensors. For further enquiries,

information, and to request permissions, please contact:

press@prsformusic.com. The opinions expressed in this report

are, unless otherwise indicated, the authors’ own and do not

necessarily constitute the view of the Management or the Boards

of MCPS, PRS or any associated company.

Issue 24

16.12.11

www.prsformusic.com/economics

PRS for Music represents 85,000 songwriters,

composers and music publishers in the UK and

protects the rights of international songwriters

through over 150 arrangements with international

bodies.

Page 1 of 11

The economics of scarcity can help

explain both the decline of recorded

music revenues and the success of the

live sector. The former lacks scarcity in

a digital age; we could consume all the

iTunes downloads on the web today

and they would still be there tomorrow.

The latter possesses both scarcity, in

that there are only so many tickets for

a show, and excludability, in that you

have security guards to enforce ticketed

entry. This has enabled live to increase

the supply of events and, in response,

demand has continued to grow.

So, when Live Nation announced a

partnership with Groupon to

aggressively discount distressed

inventory tickets online at the last

minute, the industry was sharply

divided in its view. Nothing unusual

there; there is always a debate about

introducing variable pricing to the live

industry. However, the debate has

intensified. While discounting has

been part of the sector for some

time, Groupon entices a last minute

discounting culture that attracts

customers like moths to a light,

and that didn’t previously exist.

We draw upon recent case studies of

the live sector using Groupon to sell

distressed inventory tickets for Britney

Spears and Bon Jovi in the UK, as well

as the use of variable pricing and

market segmentation by The Eagles

in the US. We then turn to the

economics, and develop a yield

management model for promoters to

consider before choosing Groupon. We

conclude by considering the outlook for

the UK live music sector as well as

shedding light on situations where art

and commerce don’t mix: fair prices as

opposed to variable prices.

While discounted tickets have long been a part of live music industry, Live Nation’s

recent deal with Groupon has sharply divided opinion on this practice.

Here we explore case studies and relevant economic concepts to inform the debate,

especially when dealing with empty seats, or ‘distressed inventory’.

Much hinges upon how positively you view the health of the live music industry,

but equally we should understand when art and commerce don’t mix.

‘For those of you in the cheap seats I'd like ya to clap your hands to

this one; the rest of you can just rattle your jewellery!’ - John Lennon

Page 2 of 11

A house divided: the pros and cons of Groupon ticketing

On 9 May 2011, Live Nation announced a deal with online discount

operators Groupon to sell tickets under GrouponLive for the US

market. The brand was launched in time for the summer concert

season and offered fans exclusive deals on Live Nation events and at

venues using Ticketmaster. Live Nation Entertainment president and

CEO Michael Rapino stated: ‘GrouponLive represents a new channel

to drive value for fans, while helping artists to reach ever larger

audiences’. Pricing would be determined by the artist or venue, and

AEG Live quickly followed suit by using Groupon to market slow-

selling Bon Jovi tickets.

The idea was that Groupon could introduce a discount culture in the

live sector to address empty seats. Rapino told US Congress in 2010

that 40 percent of seats go unsold. He also noted that ancillary sales

average $12 to $14 per head as concertgoers spend on food,

beverage and merchandise. Therefore, Groupon not only has the

potential to generate something out of nothing as some seats would

have been otherwise empty. Indeed, discounting tickets might mean

more ancillary spend on items as consumers shift their budget round.

However, as is often claimed, discount sites attract coupon-cutters

who rarely spend more than the minimum required to participate in

the offer.

There are plenty of critics of Groupon. Festival Republic chief Melvin

Benn recently told BBC Radio 1 that he expects an increasing number

of live music promoters to start using Groupon

style discount sites. Benn observed: ‘In tough

economic times people will look at varying ways

of pricing their tickets’. However, he added that

in his own business within the festival space he'd

be too concerned about consumers starting to

expect last minute discounts, and therefore

damaging early sales, to go the Groupon route.

He concluded, ‘People would come to expect it

year on year and it would damage the viability of

the festival in the long-term’.

Britney and Bon Jovi

Despite lack of consensus, there has been enough experimentation

with Groupon deals to consider recent activities with Britney Spears

and Bon Jovi as case studies. Each display contrasting results, but we

should be wary of the benefit of hindsight when learning from them.

For example, when ticketing inventory becomes distressed and artist

guarantees have already been paid, the textbook solutions can often

take a back seat when the deadline-driven reality of cutting your

losses and maintaining relationships looms large.

On 27 October 2011, Pollstar reported that Britney Spears was in

danger of bombing in Birmingham when her show at the

16,000-capacity LG Arena on 30 October appeared to be falling way

short of selling out and UK media jumped on the story. Special offers

such as £30 tickets, almost half the £55 top price, and two extra

tickets for anyone who bought 10, helped to stimulate sales.

The cut-price £30 ticket deal was brokered by tour promoter

Live Nation with Groupon.

Live Nation told The Mercury newspaper: ‘Offering a discounted

deal on Groupon is not a reflection of the quality or status or sales

of a show but rather segmented marketing and a way to reach new

and additional consumers.’ When The Mercury went to press it wasn’t

possible to gauge if the Birmingham sales were an indication that

Britney’s UK tour wasn’t doing well. A spokesman for Manchester

Evening News Arena told The Mercury that its 6 November show was

close to selling out its 16,000 seats, but several websites were

offering discounted tickets for her London show. Anecdotal reports

suggest that several thousand Britney Spears tickets were eventually

sold through discounted routes, demonstrating the merits of such a

route when faced with distressed inventory.

On 25 June 2011, Bon Jovi gave their first live show in Edinburgh

in over 25 years. Interestingly, the show was promoted as a great

Father's Day gift, yet the demand for tickets was not enough to fill

out Murrayfield Stadium. Groupon ran with the promotion of ‘get

half way there’, offering £25 tickets – half the face value. Multiple

purchases were available to a single buyer, with rumours of them

appearing on secondary markets soon after, and tickets were

available for collection the day before the concert.

However, the demand for the discounted

tickets was overshadowed by the press

coverage. On 10 July, The Daily Record reported:

‘Groupon in “dodgy” gig deal as fans are given

tickets with restricted views’, as customers who

thought they were purchasing tickets with a

face value of £50 found themselves in

restricted view areas with a face value of just

£15. Whilst refunds were offered, this news was

followed by a probe into Groupon by consumer watchdog Which?,

following reports of more misleading deals. Moreover, there were

numerous anecdotes that many fans felt ripped off by the band, and

not Groupon, due to the different prices. Finally, the show did not

sell out.

Getting to grips with the economics

With this crash course in the Groupon debate now behind us, we

turn to the economics. The purpose is to draw upon an established

economic tool kit to inform the debate over the pros and cons of

discounting tickets. In this section, we will offer a refresher on

scarcity, an illustration of market segmentation and variable pricing,

develop a framework for yield management and price anchoring,

and introduce game theory to inform the discount decision-making

process. We will then conclude by considering the upside and

downside risks to the live music sector going forward.

‘GrouponLive represents

a new channel to drive

value for fans, while

helping artists to reach

ever larger audiences’.

Page 3 of11

The economics of scarcity, and why it’s so valuable to music

The concept of scarcity is illustrated below using a matrix defining

economic goods. At the top-left, a ‘private good’ is excludable, where

the owner of the good can deny others access, and also scarce, in

that if I consume it, you can’t. A ‘public good’, like national defence,

is non-excludable and non-scarce, as you cannot prevent a particular

person from its protection, and the benefits of that person getting

protected doesn’t interfere with your own. A ‘common good’, like fish

stocks, is scarce but nonexcludable, hence the ‘Tragedy of the

Commons’ as fishermen drain the sea of fish. Finally, a ‘toll good’ is

characterised by excludability yet no scarcity, such as a bridge toll,

where my use doesn’t affect yours but we both have to pay or face

being excluded.

Below, we have transposed this matrix onto the music industry.

A private good used to be a CD, as there was a security guard in the

store meaning you had to pay and if I purchased it you couldn’t. The

dual effect of digital media removing scarcity and peer-to-peer (P2P)

eroding excludability has pushed recorded music towards a public

good. A concert ticket is scarce and excludable as it retains private

good properties, and thanks to this the live industry, has doubled in

size in less than a decade. Bottom left in the matrix, broadcast

licensing introduces a ‘toll’, where a broadcasters’ consumption of

media does not affect anyone else’s, yet the license forces an

element of excludability in its access. Finally, to complete this matrix

a common good could be a free-for-all, open air live music event

with the threat of ‘tragedy’ should it be cancelled due to

overcrowding and lack of regulation.

Public, private, common and toll goods in economic theory

Scarce Private good

(e.g. food, furniture)

Common good

(e.g. the ﬁsh in the sea)

Public good

(e.g. national defense)

Excludable Non-excludable

Non-scarce Toll good

(e.g. bridge toll)

Public, private, common and toll goods in the music industry

Scarce Private good

(e.g. concert ticket)

Common good

(e.g. free open air concert)

Public good

(e.g. P2P)

Excludable Non-excludable

Non-scarce Toll good

(e.g. broadcast licence)

Page 4 of 11

Introducing market segmentation

Let’s now consider the initial pricing strategy where supply is scarce,

where market conditions do not change over time and where demand

is known. This allows us to consider the impact of single pricing and

market segmentation – different prices for different tickets.

To sell total supply Z, we have two options. In the first approach,

Price

could be charged to all consumers; known as a single price

approach. The revenue in the market would be the pink box. The

second approach is, where possible, three different prices can be

charged: Price

for the VIP seats, then Price

for the premier fan

club and Price

for the cheap seats.

We can see how single pricing for different products can result in

distressed inventory. Tickets towards the back of the O2 arena are

valued by consumers less than tickets slightly forward at the same

price. If a single price is charged, it will reflect the average value of

the tickets. Distressed inventory of lower quality tickets (for their

sale price) is therefore a symptom of insufficient market

segmentation. The more price points, the closer each ticket can

be to its valuation by consumers; the lower distressed inventory

we have.

Subsequently, the advantage of market segmentation is that greater

revenue is extracted, captured by the purple area, leaving the

remainder consumer surplus as the white triangles above the purple

area. If every consumer’s willingness to pay could be known, perhaps

through an auction, then all white areas of surplus could be

removed. It is worth noting that the benefit of extracting additional

revenue may not be split between the promoter and the artist.

Depending upon the promoter’s contract to acquire the performance,

there may be no additional benefit to the artist if the promoter has

paid a significant guarantee and/or has a high royalty rate. This is an

important point when we consider motivations for and against

discounting.

Price of

ticket

Quantity of tickets

Demand

Price

Introducing market segmentation

Enter variable pricing

A more realistic model is dynamic, where it is difficult to accurately

price concerts. The diagram below illustrates the concept. First, each

event is unique – there is no directly comparable event now or in the

future. The artist may not have toured there recently, and other

artists who have may have a very different customer base. Second,

demand fluctuates over time, particularly where the sales window for

a concert is long, such as festivals and big tours; enough time for

wallet size and preferences to change.

Page 5 of 11

Price of

ticket

Price

Supply

Price

Demand

High

Demand

Expected

Demand

Low

Quantity of ticketsX Y

How can we price in a dynamic world?

Let’s run through the implications of a fixed price throughout the

sales window. The price initially set is Price

because Demand

Expected

is estimated, with tickets available Y. It is not known how different

consumers currently value the event or will do throughout the sales

window. For simplicity, there is no market segmentation; we assume

a single price is charged.

However, demand may not have been estimated correctly, or

demand may change over time to Demand

High

or Demand

Low

Given Demand

High

the event is in a low-price world, where the

promoter has underpriced the show, given what the market is willing

to pay. Consequently, the price set is too low; Y tickets are sold at

price Price

, where they could have sold out at Price

, meaning

potential revenue has been missed, equal to the pink box.

If Demand

Low

is the actual demand curve, the event is in a high-price

world, where the promoter overvalues the show, given what the

market is willing to pay. The price set is too high, and X tickets are

sold at Price

, with excess stock Y – X, known as distressed

inventory, offered to consumers towards the end of the sales

window. If this distressed inventory is not sold, the expected revenue

foregone is equal to the purple box.

Page 6 of 11

The Eagles fly with variable pricing

The Eagles were the first band ever to charge $100 for a

ticket sixteen years ago and they are once again pioneering

ticket strategies. On 24 February 2011, Bloomberg reported

that The Eagles were raising prices on prime seats, making

the cheap ones cheaper and squeezing scalpers. The band’s

27 April show in Sacramento, California used Live Nation’s

dynamic ticketing service that mimics airlines’ approach –

a first for a major group. By setting 10 prices based on

anticipated demand, instead of the usual two to five, The

Eagles were selling seats closer to what they fetch on resale

sites such as eBay and StubHub.

The economic objective of variable pricing is to shift the

economic value from the brokers, who get the difference

between the face value and the resale value, to the primary

ticketing market where it can go to the artists, promoters

and venue operators. Tickets for The Eagles priced as high as

$250 were being used to reduce others to as little as $32,

the lowest for the band since 1980. Analysts point to this

case study to highlight ticketing changes that are now

possible due to the Live Nation merger with Ticketmaster.

Indeed, Live Nation’s deal with discounter Groupon should

be seen in a ‘see-saw’ context as the year prior saw them

work with Tickets Now to up-sell premium seats, thus

catering for both ends of the market.

Yield management: airlines and arenas

The term ‘yield management’ neatly merges the concept of scarcity and

pricing for live music ticketing by adjusting price to demand over time.

There are three essential conditions for yield management:

• There is a ﬁxed amount of resources available for sale

• The resources sold are perishable

• Different customers are willing to pay a different price

for the same resources

It is best known in the airline industry where capacity is regarded as ﬁxed.

Changing what aircraft ﬂies a certain service based on the demand is the

exception rather than the rule. When the aircraft departs, the unsold

seats cannot generate any revenue and thus can be said to have perished.

Airlines use statistical software to monitor how seats are being reserved

and react accordingly, for example by offering discounts when it appears

that seats will remain unsold.

We have worked with Oxera, an economic consultancy, to develop a

simple illustration of yield management applied to ticketing. The diagram

below illustrates two forms of pricing and their impacts on total revenues.

The ﬁrst form is a ﬁxed-price system and the second is a system where

prices follow a yield management curve.

One of the key beneﬁts of yield management is that it can permit a

promoter to sell capacity that would otherwise remain unsold. This can

be seen in the diagram below by imagining that the last ten attendees

have a willingness to pay of £60. They would not choose to buy a ticket

under the ﬁxed-price system, but would under the yield-managed system.

This system may therefore be win-win, since it increases revenues for the

promoter as well as increasing consumer satisfaction.

Pricing too high in a fixed price world can create distressed inventory.

Inventory must either go unsold, or be sold off at a large discount,

given that such tickets are unlikely to be sold before the end of the

sales window. Provided marginal costs are covered, some money is

better than none. Unfortunately, this means trading off potential

return to reduce risk by under-pricing the remaining stock.

Again, given that tickets usually sell from the furthest forward

backwards, we’re often left with the lower quality tickets as

distressed inventory, although the mix of distressed ticket inventory

can include better quality tickets that are significantly overpriced by

the promoter or undervalued by the customer.

An alternative is a variable pricing mechanism, where prices fluctuate

with underlying demand patterns. If demand begins strongly, prices

can be raised; when demand is sluggish, prices can fall to allow the

gradual sale of inventory. As will be explored in the next section, the

airline industry is well known for doing this.

First, let’s understand a variable pricing and market segmentation

success story closer to home with a recent case study from the US

rock band The Eagles.

The issue of risk can also be seen in the diagram above from the fact that,

under this form of yield management, the total revenue curve is above that

of the total revenue with a ﬁxed-price regime, until the show is sold out.

The break-even points BEP

and BEP

show where the concert’s revenue

covers all expenses of putting the concert on for yield management

and ﬁxed price respectively. This break-even point is reached at a lower

quantity of tickets for yield management (BEP

) than ﬁxed price (BEP

If all tickets sell out, both yield management and ﬁxed price lead to the

same proﬁt, but if only 3000 are sold, the concert makes a loss under

a ﬁxed price system. Yield management may therefore provide a cash-

ﬂow beneﬁt to promoters, in that while the revenue is the same under

both scenarios, the cash is front-loaded and the risk of a loss is therefore

reduced. Finally, in interpreting the chart, it is worth differentiating yield

management (the blue curve) versus the reality of Groupon, which is a

cliff-edge reaction to the ﬁxed price (purple line).

This form of yield management may also match most closely with the

consumers’ willingness to pay. Dedicated fans are most likely to secure

a ticket well in advance and hence pay the associated price associated

with that. Despite this, there is an incentive to wait for the chance of a

discounted ticket. However, yield management can also be conducted in

a way where prices can either increase or decrease. If the model was such

that prices only increased, as is often the case in airline ticketing, then there

would be no incentive to wait before purchase. A further issue is that this

form of yield management relies on the ability to limit the functioning of

secondary markets, such as eBay, hindering the ability to charge different

prices to consumers. In airline pricing, the fact that passengers are named

on their non-transferable tickets helps to facilitate yield management.

Price anchoring: where perception drives valuation

Our last concept is price anchoring. This is where people focus on one piece

of information during decision-making, known in academia as a focusing

illusion. Most notably, people are seen to overestimate income’s effect on

happiness, undervaluing other aspects.

Price anchoring means people focus greatly on the price when valuing

the concert; a higher price is seen as a sign of higher quality. Consider a

price-anchoring case study; the market for university degrees. Recent

plans by the UK Government to privatise higher education saw Oxford and

Cambridge move ﬁrst in setting the perceived value of a degree to £9,000

per year. Rather than undercutting Oxford and Cambridge, competing

universities matched their fees, not wanting to be perceived as offering

an inferior good, with the result being that, arguably, education becomes

overpriced. Once you grab the concept of anchoring you can see it

everywhere, in the pricing of smartphones or in groceries.

The live industry operates in much the same way. Tickets are priced at a

value that promoters believe the public will pay for them, prices that are

in many ways self-perpetuating by being heavily inﬂuenced by the ticket

price of similar artists. As such, the public perceives the price of a ticket

to be X because the price of a comparable concert is similar. The effect of

discounting primary tickets in the public eye, such as through Groupon, is

that this perception is undermined. A prime example of this is Live Nation’s

discounting of amphitheatre tickets in the US in 2009, where heavy

demand for ‘no service fee Wednesdays’ saw a raft of other discounting

measures introduced. Live Nation sold more tickets, but the 2010 season

suffered dramatically with many waiting until tickets were once again

discounted. By undermining the perception of the face value of a face

ticket, Live Nation had effectively converted some of its ticket buyers from

face value payers to discount hawks.

So, rather than a conventional market competing prices downwards,

anchoring may give promoters the ability to increase the actual and

perceived value of the event, which if done right, will in turn sell more

tickets. As one venue owner explained, if you were to put a global

megastar in his arena for less than £40, fans will perceive it as a skeleton

show that lacks the necessary extravaganza and may not bother going.

Push the price above £50 and the fans come ﬂocking and you’re adding

a second night.

Page 7 of 11

Quantity of tickets

Revenue (£)

Price (£)

Yield management price

Break even line

Fixed price

revenue

Yield

management

revenue

300000

250000

200000

150000

100000

50000

Yield management for concert ticketing

120

140

100

1000 2000 3000

BEP

4000

The promoter’s dilemma

Tickets are predominantly ﬁxed-price with little market segmentation,

typically fewer than ﬁve price points across a venue. If sales are allowed

to continue without achieving the correct price points, this can result in

distressed inventory, and the need to discount quickly, often at the last

minute.

The sale of discount tickets provides consumers with value points better

matching their expectations. The discount sites provide promoters access

to a large market at short notice. While there is a value for promoters in

discounted ticket sites, this is not to say that the current ﬁxed, single price

strategy is best for the industry. The rational decision to use Groupon,

despite distressed inventory being a sign of coordination failure, shall be

termed the ‘promoter’s dilemma’. Our understanding here borrows from

the prisoner’s dilemma, a well known two-player, one-period game in

game theory, where players maximise their own expected return, given

the expected actions of other actors. In the absence of the ability to

coordinate, without future periods, and knowing the incentives of the other

prisoner, both prisoners confess and frame the other prisoner. However,

if they had been able to coordinate, both stay silent.

Similarly, promoters will weigh up the costs and beneﬁts of using Groupon.

In this hypothetical scenario, no other ‘player’ makes a decision, but the

promoter’s decision is inﬂuenced by single, ﬁxed price and the previous

deal made with the artist.

We can now work through the scenario that promoters face when dealing

with distressed inventory. Let’s say in a 2,000 capacity venue, only 30 to

50 percent sold with two weeks to go before the event. Groupon deals

are structured so that tickets are sold at half the face value and the online

discounter will keep approximately 35 percent of the net-of-VAT revenue,

passing approximately 65 percent back to the promoter. In terms of cutting

the losses, the promoter will see just over 25 percent of the original face

value, a scalable value that can be deemed worthy of the discount.

The math behind a typical Groupon deal is laid out in the table below.

Should the show be less than 30 percent sold with only two weeks to go,

then the ‘nuclear’ options of downsizing, postponement, and cancelling

can all be considered as an alternative to discounting. It should also be

understood that proﬁtability of ancillary revenue streams outside of

ticket sales are often higher, given the deals struck with artists. Where the

artist secures a higher percentage of ticket revenue, the incentive for the

promoter to pursue other revenue streams and spend less time worrying

about this dilemma is intensiﬁed.

More often than not, promoters work with artists on a long term basis,

which means decisions made today can affect relationships tomorrow, or

on the next tour. For example, SJM and other leading concert promoters

offer bands lifetime deals, and get involved over the lifecycle of an artist,

meaning promoters’ fortunes are often tied in with their artists. Game

theory also allows for multi-period games to be modelled which enables

the impact of actions over time to be understood. Introducing a discount

factor to a multi-period game implies that we value now more than the

future. In the context of ticketing, should a discount culture persist, or even

intensify, this would erode future revenues as the notion of a face value

would be lost and the perception of price anchoring would be undermined.

In the appendix, we offer a technical decision rule which can inform a

promoter of the tipping point, where the beneﬁts of discounting tickets

for a concert today off-set losses incurred by introducing the discounting

culture to future tours.

Consequently, Groupon makes sense when the beneﬁts outweigh the costs

over time. The beneﬁts however are likely to be front-loaded, and the scale

of the discount factor offered in the decision rule determines how costly

this route would be over the longer term as expectations and anchoring

drive future revenues down. The more promoters’ value the link with their

artists, and value income in the future, the less inclined they might be to

use Groupon.

This dilemma also reminds us of an important rule in ticketing; selling

inventory to capacity does not necessarily equal success. It may be better

to accept empty seats, keep prices high and monetise the ‘river of nickels’

which can be found in the ancillary revenue streams.

Moreover, recall the prisoner’s dilemma, where both prisoners couldn’t

coordinate to achieve the best outcome. Similarly, promoters make

rational decisions in an industry where coordination of segmentation and

pricing doesn’t take place.

Finally, a neat way of putting this isolated decision rule into a broader

context came from one promoter who said: ‘Groupon only makes sense

when your show stiffs and you’re staring down the barrel of a gun. As a

promoter, if you’re doing your job properly, you should never ﬁnd yourself

staring down the barrel of a gun’.

Discounting a £100 ticket with Groupon

Face value of a concert ticket

Groupon discount offer

Ticket receipt net of VAT

Of which Groupon keep 35%

Of which 65% passed to promoter

£100.00

£50.00

£41.67

£14.58

£27.08

Page 8 of 11

The prisoner's dilemma

Prisoner A stays silent Each serve three months Prisoner A: 2 years

Prisoner B: one month

Each serves a year

Prisoner B stays silent Prisoner B confesses

Prisoner A confesses Prisoner A: one month

Prisoner B: 2 years

The decision to discount depends on whether you’re long or short

One of the ﬁrst macroeconomic lectures a student will come across will

feature a demand and supply chart and display the impact of a recession

under rigid and ﬂexible prices. As demand shifts inward, a ﬂexible labour

market allows prices (wages) to fall, reducing the impact of the recession

on demand and helping restore the market to full employment. Rigid prices

and ﬁxed wages, on the other hand, intensify the impact of the contracting

economy and hinder the ability for the market to correct itself.

Not only does this theory illustrate the difference between classical and

Keynesian schools of thought, but it provides a neat backdrop to the

question of discounting tickets. That is, if live music has peaked or worse,

if it’s about to enter a downturn, then discounting tickets can help manage

the slide. Conversely, refusing to discount tickets can risk aggravating the

problem of empty seats even more. The debate over discounting hinges

on whether you perceive the fortunes of the live music industry as positive

(long) or negative (short) going forward.

It’s worth illustrating how high the

stakes are, by reminding ourselves of

the gravity-defying performance of live

music throughout the recession. Live has

not only increased the inventory but also

the ticket prices during the downturn

and still sold out. Hence, if you had been

thinking like a rational economist and cut

ticket prices in response to a downturn,

you would have foregone revenues. One

line of thought, explored in more depth

in a paper titled Wallet Share, is that people are cutting back on luxury

goods, such as short trips abroad and going to more concerts instead.

Nevertheless, as Melvin Benn mentioned earlier, the economic downturn

and ‘wallet squeeze’ will continue to adversely affect demand over the

medium term and the industry needs to take a view on this before debating

discounting.

Here, we will consider upside and downside risks, as well as contrasting

with other events industries to help develop that view:

A balanced view would favour a positive

outlook, due to the unprecedented

scale of technological advancements

impacting the live industry.

While Facebook is helping you buy tickets

today, it could be selling them to you

tomorrow. Similarly, festival technology

company Intellitix, which activated one

million Radio Frequency Identiﬁcation

(RFID) wristbands in North America this

summer, has developed cashless payment systems that will remove the

need for cash, cards and tokens in the UK next year. Sometimes it feels

like recorded music grabbed the lions’ share of digital innovations in the

last decade, and this decade will see it shift towards live. The economist's

hunch is that digital innovation plus scarcity equals growth.

When art and commerce don’t necessarily mix

Even if you are a proponent of Groupon style discounting, you still need

to balance rational expectations, as concert goers may well expect

further last minute discounts to appear next time round. While this might

work with clothing stores and beauty spas, it does not sit easily with the

intimate relationship of a band and their own fans.

A good example is Bruce Springsteen, who has been performing to his

fans around the world for more than thirty years. On 4 February 2009,

Rolling Stone reported that ‘Bruce Springsteen "Furious" At Ticketmaster,

Rails Against Live Nation Merger’. Ticketmaster was redirecting

Springsteen’s fans to its secondary site TicketsNow, which specialises in

up-selling tickets at above face value. They did this even when other seats

remained available at face value. ‘We condemn this practice,’ Springsteen

and his tour team said in an angry and emotional letter posted on his

ofﬁcial website.

Upside opportunities to the future of live music revolve around the

technology space, and the ability to get people off sofas and into

theatres. Developments such as the integration of Facebook and

Ticketmaster allow fans to see where their friends are sitting and buy

tickets accordingly. Similarly, Songkick is designed to ‘grow the size of

the overall pie’ by introducing you to shows that you want to see, and

the viral growth of this service, which is now integrated into Spotify,

can only be a plus for the industry over the medium term.

• 

Downside considerations revolve around the domination of live by

heritage acts in their 50s and 60s, which stiﬂes the stadium acts of the

future. BPI research showed that 2010 saw the number of breakthrough

acts – those who have surpassed 100,000 album sales for the ﬁrst

time – fall from an average of 25 to a new low of 17 – with X-Factor acts

increasingly prominent in that reduced list. Moreover, some bands that

might have been once been touted as tomorrow’s heritage acts have

seen their seven-ﬁgure album sales fall dramatically in recent times.

Considering the broader event economy includes (i) the phenomenal

growth of overseas events like Serbia’s Exit Festival which is dominated

by British, German, and Dutch festival-goers, (ii) football, where

watching live or in pubs, or even at your home stadium is common,

(iii) theatre, where discounting has always been present and (iv) tourism,

where statistical methods of yield management balance demand and

supply. Ignoring the strategies of events’ industries competing for

shrinking entertainment dollar risks undermining your own.

• 

Page 9 of 11

‘Groupon only makes sense when your

show stiffs and you’re staring down the

barrel of a gun. As a promoter, if you’re

doing your job properly, you should

never find yourself staring down the

barrel of a gun’

Whose ticket is it anyway?

There is however a ﬂip side to this notion of fair prices for the fans, which is

to consider if there is a fair allocation of risk.

For top-tier headline acts with strong bargaining power, the promoter’s

share of the gross has increasingly been squeezed in recent years, evolving

from a ﬁxed fee for the artist to offering them not only a minimum

guarantee but also a percentage break (after agreed show costs). The

artist split has also been increasing, to the point where it has even been

known to exceed the 100 percent show gross. Some major acts even

hire the local territorial promoter, keen to be associated with the artist's

proﬁle and business.

This obviously affects the risk-reward balance, as one person's gain will

be another’s pain. In this case, the gains of the artist lie in reducing risk

(upfront guarantees) while increasing total potential reward (higher

revenue shares). This obliges the promoter to develop creative solutions to

accommodate the higher risk and lower potential reward they now bear.

To some extent there is nothing new here: the booking fee has long been a

source of revenue for promoters squeezed by artist demands. At the margin

though, a shift in the risk-reward balance will force those on the losing

end towards what Mark Wienkes, analyst at Goldman Sachs, identiﬁed as

a ‘river of nickels’ strategy, seeking value wherever they can ﬁnd it. This

could be a diversiﬁcation play, where the promoter becomes the venue

owner and monetises everything from the bar to the car park - monies

that neither the artist, nor the songwriter for that matter, would see. It

could also involve up-selling on TicketsNow or it could extend to deep

discounting on Groupon.

Such strategies are a rational response to the increasing power of top-tier

acts. Economists often refer to a waterbed effect, where the application

of bargaining power on one side of the market results in a re-balancing

on the other side. If artists oppose ticketing practices like TicketsNow and

Groupon, the market solution would be for them to bear more risk and in

return have more control over the price of their performance, though there

is no real evidence of such a trend emerging.

The economics of concert ticketing should not be considered in isolation

however. A number of other factors also dominate the debate and no

matter how you explore ways to maximise revenues and reduce risk, ticket

price can never just be a numbers game. The imperfect science of price-

setting includes keeping a sharp eye on comparative artists, thus anchoring

occurs across tours, regions and genres, which goes some way to explaining

the exception of Lady Gaga pricing tickets at a level close to Madonna.

The notion of one price for all was debunked years ago and to a large

extent the only people to beneﬁt have been the secondary market

operators, for whom it has until now been a one-way bet. Playing them at

their own game is the only way, but as the market shows signs of slowing

growth there is a risk in establishing patterns of discount behaviour. The

live industry should look to the airlines to learn how to manage capacity,

which will show that to win in this game you have to master the data

and mix it up. Perhaps, then, Live Nation's acquisition of media metrics

company BigChampagne illustrates the importance of harnessing data to

drive the sector forward, which can only mean fewer empty seats.

Page 10 of 11

Acknowledgments

Craig Wylie (Consultant Concert Promoter, Mean Fiddler), Greg Parmley (Intellitix), Steve Machin (Storm Crowd), Tim Chambers (LNE), Rory Sutherland

(Ogilvy), Kevin Leﬂar (Ofﬁcial Community), Paul Oxley (Oxera), John Sharkey (Glasgow SECC), Trish Gorman (Dean of the Jack Welch Management Institute),

Chris Deering (former president of Sony Europe), Matt Jones (Crowd Surge), Geoff Meall (Agency Group), Chris Carey (EMI Group), Gordon Masson (IQ

Magazine), Steve Parker (Audience and Live UK magazines), Manfred Tari ( Pop 100), Robbie Towns (Nesta), Kevin Leﬂar (Ofﬁcial Community), Deborah

Hyacinth (Universal Group), Pete Downton (Imagination Technologies), Dana al Salem and Nadim Tannous (Fan Shake), Joe Kennedy (Pandora) and Duncan

Gray (Oliver & Ohlbaum). Finally, thanks to PRS for Music colleagues, Robert Ashcroft, Gary Eggleton, Scott Taylor, Anita Awbi, Paul Nichols and Steve Cole.

Appendix: a decision rule for promoters

We introduce a technical decision rule for a one-period game. Importantly,

we make a number of assumptions to keep the model easy to use. First,

promoters would be able to sell a fraction of distressed inventory through

existing sales channels at the ﬁxed price, without using Groupon. Secondly,

all available stock is sold using Groupon. Thirdly, other than VAT and

royalty, there are no additional costs of using Groupon other than the

commission fee. We’re now ready to introduce the one-period model,

where promoters choose Groupon when the gross income is higher than

using existing sales channels.

However, as we’ve already discussed, this one-period model is not realistic,

for two reasons. First, promoters are interested in any effect that decisions

now will have on future income. Second, promoters are also interested

in any effect that current decisions now have on the relationship with

their artists.

Therefore, a multi-period model is provided below. We introduce a

discount factor which implies that money now is of a higher value than

money later. This discount factor is applied to the loss in future periods,

L, caused by the effect Groupon will have on driving expectations of

value down due to anchoring, and the rational expectations that such

discounting will continue. This means a potential inability to sell stock

at face value, because of the expectation it will be lower on Groupon

soon. One additional assumption is required to add to assumptions under

the one period model: the gap between periods is equal to retain

simplicity of the model.

One period model

Promoters will determine where to sell distressed inventory to maximise their income. They weigh up the costs and benefits of

two alternatives, using Groupon and using existing sales channels. Six variables are needed to map out the promoter’s income

from both alternatives.

D = Distressed inventory | c(VAT, Ro) = costs from VAT and royalty liabilities | P = face value of ticket

R = new value as a percentage of face value [0-1] | C = commission rate [0-1]

F = percentage of tickets sold if Groupon not used

In this one period model that ignores future events, a promoter would choose Groupon when the income for the current period G

exceeds the income from not discounting ESC

• Promoter’s income from using Groupon (G

• Promoter’s income from using existing sales channels (ESC

The promoter should use Groupon when they are likely not to sell many tickets otherwise (low F) and so long as they can

get good terms from Groupon (high R, low C)

Multi-period model

Promoters again determine where to sell distressed inventory to maximise their income, but under this model, their income is

considered over a longer time, and is likely tied up with the artist’s fortunes. As mentioned, two additional variables are needed

to map out the promoter’s income from the same two alternatives.

L = Loss in future period (1, 2, n) from Groupon | δ = discount factor [0-1]

A promoter should choose Groupon when the income across all periods from Groupon G

0-n

exceeds the income from not

discounting ESC

0-n

over the same periods.

• Promoter’s income from using Groupon (G

0-n

• Promoter’s income from using existing sales channels (ESC

0-n

The promoter should use Groupon when they are likely not to sell many tickets otherwise (low F) and so long as they

can get good terms from Groupon (high R, low C), but are unlikely to use Groupon when future income streams are still

important (high δ)

D(RP – CPR – c(VAT, Ro))

DF(P – c(VAT, Ro))

) – δ L

– δ

– […] – δ

(ESC

)

Page 11 of 11