The value of virtual ghettos and virtual suburbs, part #2

On Monday I commented on danah boyd's new paper on the class divide on Facebook / MySpace. I suggested that danah's observation that upper/middle class/rich kids have moved to Facebook and lower class/poor kids have stayed on MySpace may not justify the widespread presumption that Facebook is therefore the more valuable site, or Rupert Murdoch's ostensible attempts to swap MySpace for 25% of Yahoo!*. This post is my attempt to explore that theme further.

Many people have tried to make sense of the fact that music concert promoters sell their tickets way below market rates. Tickets go on sale; they sell out immediately; and then they reappear on eBay at huge mark-ups. Why, the question goes, don't the promoters simply charge the market rate rather than letting the surplus accrue to touts?

Economists are currently keen on the theory that the promoters have worked out that people who are sensitive to the price of tickets will nonetheless buy a lot of t-shirts and other paraphernalia.  (This, for example, is the explanation put forward in Stephen Landsburg's wonderful Armchair Economist.) This explanation seems decreasingly empirically satisfying. As the gap between the face value of concert tickets and the prices they command for resale on the secondary market accelerates beyond what can be explained by any credible number of t-shirt sales, a new explanation appears necessary.

The high end of the scale is not, perhaps, proof of the average gap between face value and resale value of concert tickets, but just as an indication of the scale of the disparity recent sell-out concerts (BBC) have included Arctic Monkeys - £24 tickets reselling for £270 - Kylie Minogue - tickets reselling at "five times face value" - and Glastonbury 2005 which saw tickets initially sold for £129 resell for £700. Live8 in 2005 also became infamous when organiser Bob Geldof slammed ticket resellers.

The question to address is why promoters are willing to sell tickets for far less than they are worth. Pure altruism must be considered, but rejected immediately in most cases - while Bob Geldof, like the BBC more recently, seemed to genuinely believe it morally justified to squander the value of concert tickets via a lottery, commercially-minded music rights holders are not generally known for this approach. Put simply, if rights-holders were genuinely concerned merely with getting music into the hands of fans they'd stop suing them for downloading music online.

If tickets list at £35, sell out and then half of them resell at £100 promoters are paying audiences £33 a head to attend their concerts. It is interesting, I think, to consider why. The "cheap tickets more t-shirts" theory falls over if t-shirt  (etc) sales cease to account for the balance. So instead I'm toying with the theory that the promoters are paying younger, poorer concert-goers £33 a head to attend concerts as a marketing gamble that hopes to get a critical mass of Gladwell-type mavens and connectors through the doors and "tip" the band's popularity. It won't work for every band, or even most bands. It's a gamble. But promoters have calculated that these opinion-formers are most likely to show up at that price point and that only by getting those opinion-formers through the door do they stand any chance of the band tipping. That marketing gamble might explain why they don't just sell the tickets for £100. They simply can't recover the potential upside of the bet - which, if it comes off, will generate millions in future music sales - merely by optimising the price of the concert itself.

My theory is slightly corroborated by very established bands putting ticket prices up to what look superficially like the market rate as they've already "tipped" as far as they're ever going to - recent Rolling Stones and Barbara Streisand tickets, for example, have been notably expensive with the latter touching $1,200 face value. But it is somewhat dented by equally established bands doing nothing of the sort (the forthcoming Prince concert in London is plugged as his very last greatest hits tour but the face value of tickets is a mere £31.21. That said, Prince has no record company to satisfy and may be aiming to maximise something other than profit).

Back to MySpace, and the value of Fox's beleaguered social network. MySpace is about music - music is the hook that got people onto the site in the first place. We know opinion formers are there - that's the best theory we have for how the site took off in the first place. And now we know that a lot of the people who can't afford £100 concert tickets are going to be there too. I theorise that, for music promoters, these opinion formers are a goldmine - the guys who can tip a band from obscurity to superstardom and are worth a marketing cost of £33 per concert-goer to find. That sort of influence (probably) isn't limited to music. Everyone wants to sell things to the rich kids, sure. But to get the rich kids to care, they've got to sell them to the cool kids first. Which means it's not time to write off MySpace just yet and, as Umair says, pitying the people on MySpace may be badly missing the point.

*There's lots of reasons not to swap MySpace for 25% of Yahoo!. This is me exploring just one of them, not denying the existence or importance of all the others.

Comments

[Paul Sweeney]

Great point. Perhaps opinion makers/gatekeepers to the wider middle audience go to concerts thus driving record sales, I wonder does the same logic apply to smaller venues or do they just drive press coverage?

[Seamus McCauley]

Hi Paul - according to my theory it's a gamble that you'll catch opinion formers at any given event so you'd have the same (per capita) chance of success fishing for mavens at a gig with a hundred people as a gig with 10,000. It's just guesswork though, perhaps the opinion-formers are especially keen on a particular size of venue.

[botogol]

Your theory may be a part of it - but it's not sufficient, as is doesn't explain why the same phenomonen is observed in non-music events - eg Wimbledon, who employ a ballot, or the RFU (rugby) who sell tickets via clubs, in both cases well below market prices. I don't think they are trying to capture opinion formers.

I suspect a social, non-economic cause. For some reason society has ascribed a whole system of moral judgements on the selling of tickets, values that are absent from (say) selling cars or antiques. Selling a ticket at a high price is seen as wrong, and *reselling* it at a high price seen as almost unforgivable (wheras reselling an antique at a profit is clever).

I suspect it may be as simple as that: social pressures force organisers to sell tickets more cheaply than they could, for fear of social disapproval.

It may not be a bad economic strategy - social disapporoval could - in the long term - destroy the business, but...

[Seamus McCauley]

Botogol - Good point. Rugby and tennis tickets also sell below market rates and then get resold. I can think of two ways in which that's accounted for by more-or-less the same model

(1) the organisers or rugby and tennis events aren't trying to maximise profits in the same way that band promoters are. One of their biggest drivers is to find the very best players so that, e.g. England will win the next world cup. They're not directly competing for ticket revenues, they're competing for attention from future sportsmen and they're competing for that with other sports and all other forms of entertainment. If that's their aim, they need to set ticket prices at the rate that breaks even and generates the greatest possible interest in their sport.

(2) Maybe sports organisers are also looking at a bigger marketing picture and have worked out that no-one would watch tennis on TV or go to minor rugby games if there was really no chance they could ever afford to go to Twickers/Wimbledon to see their team in the big final.

But I like your argument that social disapproval is a factor - bands that take the short-term upside of charging £500 for their concerts may well be losing more long-term revenues than they gain as people turn away.

Thx for your insights.

[Rick]

> "a marketing gamble that hopes to get a critical mass of Gladwell-type mavens and connectors through the doors and 'tip' the band's popularity."

Maybe with the Arctic Monkeys, but Kylie reached her tipping point a decade ago and ascended into the role of Pop Goddess five years later. She can pack out Wembley Arena at any price (fuelled by the affluent, pink pound earning 20-30somethings that make up the majority of her audience), and she certainly doesn't need to attract more attention - she already has a gallery at the V&A dedicated to her.

I also don't get the impression that greed is something Kylie would be ashamed to admit to. So why is she selling tickets at a fifth of their market value?

On the one hand: I would argue that market convention plays a role. If concert tickets are usually about x, then a star might get bad press for selling them for 5x, even though that may well be what they are worth. No one likes to feel like they're being exploited.

A second reasoning may be restricted demand. You can't sell 10,000 tickets at £100, but if 9,900 are already sold at £10 -- and tickets are scarce -- a true fan might fork out £100 to secure a ticket through other means. This doesn't mean the concert organisers could ever have sold all of the tickets for £1m.

Perhaps the concert organisers could better serve their interests by selling the first 5,000 tickets at £10 -- to those price sensitive enough to be in the queue from the start -- and then 5,000 at £100 to those who are price blind.

[Seamus McCauley]

Rick - there's certainly a theory that theatres need to sell out their most expensive seats somehow because otherwise people will just buy the cheap seats and then move to the unoccupied, better seats just before the performance. Probably holds for concerts too.

And...in practice, concerts do seem to sell out in the way you suggest. People with more time commit their time to getting the tickets first and cheap; people with more money just buy them at auction later. The mystery is why promoters let the value of the latter phenomenon be captured by the secondary market rather than capturing it themselves.

Alex Tabarrok has posited before that in reality the high prices we see on eBay are wholly unrepresentative of any large-scale demand and that if sellers (in his example of Xboxs, which also appear superficially underpriced) tried to raise their prices much they'd see that mass demand wasn't really there. Or in other words: you can sell a lot of concert tickets at £50. A tiny handful of those will resell at £100 on eBay. But if you tried to raise the cover price to £55, many people would stay home and your venue would be half empty. It's compelling, because if sellers can't quite judge the right price but know that it's sensitive you might see the very thing we do. (See Alex's argument at Tim Harford's Slate column here: http://www.slate.com/id/2132988)

[Rick]

I wasn't suggesting the more expensive tickets would be better, just more expensive. And indeed this is how tickets seem to sell at the moment - I just don't think it makes sense for concert promoters to outsource the mark-up to ebay.

[botogol]

coming back to this for a second bite: ticket sellers for concerts could learn a lot from cheap airlines, who have the software needed to dynamically adjust pricing according to time, demand, website-enquiry rates and so on, to extract every last bit of value they can from each puchaser.