Early Indications February 2010: Ticket Punching

February 27, 2010
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As one surveys the landscape of industries whose business models have
been transformed by the Internet, airline ticketing and travel agents
invariably come in near the top of the list. Southwest was at the
forefront of air carriers that offloaded customer service from call
centers to web browsers, reinforcing their lead in lean operating
budgets. At-home check-in is routine at most U.S. airlines, reducing
both costs and wait times.

For all the change that the Net brought to the distribution of airline
tickets, however, its impact on ticket pricing is difficult to tease
out from other macro forces such as increased security screening, fuel
prices, labor agreements and disagreements, and the transparency
afforded by online travel sites such as Expedia or Travelocity. In
addition, while Priceline has its niche, the effect of name-your-price
on the larger sector has not been widely discussed.

Compared to event ticketing, however, airline tickets appear to be a
coherent, rational universe


As one surveys the landscape of industries whose business models have
been transformed by the Internet, airline ticketing and travel agents
invariably come in near the top of the list. Southwest was at the
forefront of air carriers that offloaded customer service from call
centers to web browsers, reinforcing their lead in lean operating
budgets. At-home check-in is routine at most U.S. airlines, reducing
both costs and wait times.

For all the change that the Net brought to the distribution of airline
tickets, however, its impact on ticket pricing is difficult to tease
out from other macro forces such as increased security screening, fuel
prices, labor agreements and disagreements, and the transparency
afforded by online travel sites such as Expedia or Travelocity. In
addition, while Priceline has its niche, the effect of name-your-price
on the larger sector has not been widely discussed.

Compared to event ticketing, however, airline tickets appear to be a
coherent, rational universe. Although the recent controversy
surrounding the Live Nation merger with Ticketmaster has focused some
attention on the industry, much remains gray area. (A notable
exception to the rule is John Seabrook’s excellent New Yorker piece in
the August 10/17, 2009 issue, entitled “The Price of the Ticket.”)

Artists whose product revenue stream has been decimated by online file
sharing are now in effect giving away recorded music to drive interest
in the tour, which can get very big very fast. John Mayer, for example, has approved the posting of 80 live shows in the Internet Archive; fans of New Orleans favorites TheRadiators have uploaded over 1,000 shows, while Boston’s Guster, a staple of the college circuit, has 331 shows up. The three most financially successful rock tours of all time — by the Rolling Stones, U2, and the Police — have all grossed more than $350 million
apiece. As thought-provoking as the music industry is, that’s all we can say about it for the moment. Given that this is a newsletter and not a dissertation, I’m going to narrow scope still further and explore sports ticket pricing, a subset of event pricing with its own
peculiar dynamics.

Particular shows on music tours are relatively fungible: it was more
convenient for people to see Springsteen in State College last year
than two hours away in Hershey 11 nights later, but the two
experiences were reasonably equivalent. Sports tickets, however, are
far more time-sensitive, as there will likely be only one game per
season with a particular matchup’s unique characteristics. If I can’t
see, say the Cleveland Indians host the Boston Red Sox on Saturday
June 10, flying a few hundred miles to see the Yankees play in Detroit
won’t satisfy my demand curve, nor will Sunday’s Indians-Sox afternoon
game be a functional replacement for Saturday night’s experience.

Sports marketing is unique in the nature of its competitive framework,
from a business strategy perspective: in most cities, a franchise
holds a monopoly, competing for fans’ dollars and emotional investment
with concerts, dinner out, or college sports. Even though the Chicago
Bears and Green Bay Packers compete on the field and in their
conference, the businesses really do not do so.

Given the unique challenges of sports marketing — stars vs. teams,
championships vs. laser shows and dance squads, injuries and “off the
field issues” — it’s no surprise that ticket pricing occupies a place
of central importance in the industry. In this domain, rapid and
substantial changes have accumulated in the past 5 to 10 years. When
the economy was more robust, annual ticket price increases were a way
of life in many markets. When a new star was signed, or the venue was
improved, the team typically passed the revenue load onto the fan
base. (We won’t touch the hairball of issues related to stadium
financing).

Even more important than revenue maximization, however, is the issue
of risk management. Baseball’s season is long; a team can be out of
contention, and just plain stinking up the joint, by July. If club
ownership cannot sell a critical mass of season tickets in the winter,
the task of extracting revenue gets extremely difficult in the long
months of summer. It’s also much easier to sell wholesale than
retail: in round numbers, assume a 25,000-seat field and 80 games.
That’s 2 million seats if they’re sold one at a time, versus 10,000
pairs of season tickets (not counting nosebleed and bleacher seats).
The bundle scenario is 200 times simpler; teams also group games into
batches of 5 or 10 that mix in visits from both losers and
front-runners: if you live in Kansas City, for example, and want to
see the Yankees or Red Sox visit, you almost certainly will have to
watch (or at least own a ticket to) the historically bumbling Orioles,
the Oakland club, or another also-ran.

This pricing strategy moves risk from the club to the fans, who
traditionally could only give or sell the tickets to private contacts;
going to the public market with secondary tickets was illegal. That
status changed in the past decade, as first eBay then StubHub (itself
now owned by eBay) and a number of other businesses matched buyers and
sellers in ways and at a scale that ticket scalpers (or touts, as
they’re known in the UK) could not. the Internet also helps drive
both buyers and sellers to the market: the payoff for scale is
liquidity.

That risk management comes at a financial price: while bad teams are
pleased to offload future tickets to possibly worthless games onto
often long-suffering fan bases, good teams leave millions of dollars
to be claimed by secondary sellers, including “ticket brokers” such as
Ace Tickets in Boston. The Red Sox have sold out 550 games in a row,
so many of those season ticket-holders can sell single-game tickets at
a substantial profit — a profit that could be going to the club, but
only if the club held inventory longer and thus rebalanced the risk.
Nobody knows in March what a September matchup (even with the hated
Yankees) might be worth: injuries, the economy, other teams’ level of
play, trades, and other factors determine interest and demand in the
weeks before, not 6 months out.

Bill Simmons, an ESPN blogger, noted NBA owners’ behavior in this
regard, particularly when good but expensive players are traded in
mid-season to augment an already losing record in the hopes of earning
a higher pick in the next season’s draft of new players. As he noted
last week,

“Does [a terrible record and some bad luck] mean they’re lowering
ticket prices for the rest of the year then? Nope. Over the past five
years, half the league’s franchises crapped on their season-ticket
holders at least once with mismanagement, salary dumping and/or
tanking for lottery picks. Along with the Wizards, the following fan
bases have reached a breaking point with their respective teams:
Sixers, Pistons, Pacers, Nets, Knicks, Suns, Clippers, Warriors and
Timberwolves. Depending on how the summer of 2010 works out, we could
be adding Cavs, Heat, Raptors, Hawks and/or Grizzlies fans to that
list. And four other teams have tried to put out a quality product but
still hemorrhaged money this season: New Orleans, Milwaukee, Charlotte
and San Antonio. (Yes, I just mentioned 19 of the 30 NBA teams. You
counted correctly.)”

Enabling fans to buy single-game tickets to desirable games is not in
the clubs’ interests, yet secondary markets make precisely that
practice possible. As Simmons noted, “Teams depend on season-ticket
revenue because it’s guaranteed income. With the current setup, I
could skip getting season tickets, then use stubhub.com, ebay.com and
even team-endorsed ticket sites to cherry-pick choice seats for six or
seven big games per season. So if the NBA wants to keep me (or you, or
anyone) as a customer, it needs to prevent me from sampling instead of
buying. . . . . They don’t want me for seven games. They want me for
all of them.” But as ticket prices go inexorably up to support
sometimes ill-advised player contracts, the fans’ incentive to buy
season tickets goes down, whether one is an individual, one of four
buddies who split a set, or a law firm writing off the tickets as
client entertainment.

The unique and time-sensitive nature of a sports ticket makes it
behave very much like a call option in a financial market (see Happel
and Jennings, “Creating a Futures Market for Major Event Tickets:
Problems and Prospects,” Cato Journal 21 (Winter 2002), pp. 443-461).
The value of a ticket is highly contingent, as we have noted, which
means it is an ideal candidate for hedging behaviors. Teams already
do this by emphasizing season ticket sales, creating both technical
lock-in and what Simmons more euphemistically calls “the illusion of
regret” in which fans buy seats for yet another year because they
might miss out on something good. The utility of StubHub in this
regard has led to Major League Baseball striking a deal with the
reseller, giving a fans a reputable outlet for both buying and selling
tickets: fraud is a common concern on both sides of the transaction.
In response, will sports follow the lead of airlines and go
ticketless? No time soon, I don’t believe.

Some clubs have experimented with dynamic ticket pricing. A startup
called Qcue helped the San Francisco Giants baseball team increase
attendance in about 2,000 seats inside the 42,000-seat stadium. For
an unappealing matchup, possibly made worse by bad weather, tickets
were as low as $5. When an eagerly awaited game, however, lined up
Randy Johnson (a future Hall of Famer) against the New York Mets and
Johan Santana (a potential HoF electee), the same seat was $33. In
such a scenario, the fan wins and the club gets its full share of
market value. Stadiums could be full every night, but bad teams will
no longer be able to charge the regret-inducing prices they currently
do. That outcome could potentially upset competitive balance: bad
teams might have less revenue from full houses than they currently do
from nearly empty ones. But they might also make more, and the
fairness issue would be more adequately addressed: the clubs would
collect a much closer approximation of what the experience was worth
to the buyer. For the franchises, would this arrangement be a bonanza
or a beatdown?

The answer would likely depend on how well the clubs hedged their
position. To that end, it’s not difficult to imagine a futures market
for sports tickets much like YooNew used to provide. Clubs could also develop community relationships at various price tiers, fillingthe park with $5 Boy Scouts or youth soccer leagues when the matchupwas for whatever reason unfavorable, as opposed to the business
entertainers, celebrities, and politicians who show up for must-see
games. StubHub, like eBay, has a rich opportunity for data mining to
tell teams how historic pricing patterns have emerged from given
preconditions: stars getting hot, stars getting hurt, day versus night
games, various playoff implications, regional economic and
unemployment trends, and the like.

As labor disputes loom in pro basketball and football, as mobile phone
television traffic becomes more pervasive, as demographics continue to
shift, as social media evolves, and as dissatisfaction with ticket
prices mounts, it seems inevitable that sports ticket pricing is ripe
for some transformations and potentially dramatic disruptions much
like those that altered the travel and music landscape. In this
Olympic and World Cup year, we’ll be watching for clues that might
point the ways forward.

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