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29 Jul

Who’s the real customer?

Can you imagine life without music? I am sure you can’t, and good for you that streaming services like Spotify and Apple Music guarantee you 24x7 access to your favourite tracks. 

But an artist or a band must also earn money to keep creating them. And as consumers, we might think that access to streaming services like Spotify and Apple Music has made it easier for up-and-coming artists to distribute their music and earn revenue. 

But that is only partially true, as highlighted by Business Insider

“For instance, consider U2, which made $54.4 million and was the highest-paid musical act of the year in 2017, according to Billboard's annual Money Makers report. Of their total earnings, about 95%, or $52 million, came from touring, while less than 4% came from streaming and album sales.

Garth Brooks (who came in second on the list), owed about 89% of his earnings to touring, while Metallica (ranked third) raked in 71% of their earnings in the same way.”

Evidently, live tours form more than half of an artist or band’s revenue. In this light, how tickets are priced, what type of merchandise is sold, and what kind of marketing goes into generating sales for a live concert are all crucial pieces of the puzzle.

For today, I will focus on how ticketing for music concerts works.

Historically, till about the 1970s, the only way to score a concert ticket was to camp outside the venue. Once the booth opened, you had to run and get your ticket.

In India, too, one would have to queue at a ticket window outside venues like Rang Bhavan (DhobiTalao, Mumbai), which hosted bands like The Police in the 1980s.

In the USA, Ticketron was the sole computerized ticket management system operational from the 1960s until 1990. Ticketron’s business model was to install ticket dispensing kiosks at retail stores in cities. It charged consumers a small service fee for the tickets, which was then split with the retail location that hosted the kiosk.

Ticketron's kiosks made it more convenient to buy concert tickets. However, the convenience came at a cost to the buyer and the venue.

Ticket buyers paid a service charge of ~$0.50-$0.75 per ticket till the mid-1970s when Ticketron split with the retail locations that hosted the ticket vending kiosks.

The venues that partnered with Ticketron paid ~$0.25 per ticket sold, and they owed rental fees for kiosks on their premises.

While this process was an improvement over the frenzy that ensued with physical sales for tickets, it it still didn’t solve for the operational hassle faced by concert organizers. Organizing a concert required dealing with each venue, ticket vendor, and local promoter; coordinating all this was a pain.

But all of that changed with Ticketmaster.

Ticketmaster, which later bought Ticketron, changed how concert tickets were sold forever with its new approach to ticket sales.

Fred Rosen, the newly appointed CEO at Ticketmaster, was of the opinion that venues, not concertgoers, were his company’s real customers and flipped Ticketron’s business model on its head.

With the new model, instead of charging venues to use their ticketing system (ticket window/ kiosks), Ticketmaster offered to pay the venues with a cut of the service charges. In exchange, Ticketmaster became their exclusive ticketing platform.

The additional fees that Ticketmaster paid its venue partners were transferred to the end customer, thereby increasing ticket prices through a drip pricing strategy.

Drip pricing was a technique where only part of an item's price was advertised, with the total amount revealed at the end of the buying process.

The reason to employ a drip pricing strategy, Rosen cited, was that concertgoers were the least price-sensitive member of the ecosystem.  And they were certainly the most fragmented, least organized negotiators in the ecosystem.

Consequently, Ticketmaster went from selling ~$1m in tickets during Rosen’s first year in 1982 (~10% of Ticketron’s sales) to ~$600m in 1990 and nearly $2.5B in 1998, Rosen’s last year as CEO.

With the new business model, all stakeholders involved in organizing the concert — show promoters, venue owners, and some top-tier artists — suddenly had the incentive to demand a cut from ticket sales. Ticketmaster accommodated these demands, passing on the final price to customers who bought from the business.

Rosen justified the increased prices with —

“When you get through paying everybody, these things are expensive. They’re labour-intensive. There are a lot of people involved. And then the buildings get smarter because as you bring more efficiency they all want more.”

Essentially, Ticketmaster’s business approach incorporated the real cost of hosting concerts, even if it meant charging a higher price to the customer. This made the business model sustainable in the long term. But even though Ticketmaster has been operating profitably since 1977, it has had its fair share of controversies too. Most of these controversies have revolved around the pricing strategy employed by Ticketmaster to make money.

So, let’s quickly understand how Ticketmaster prices its tickets.

The face value of Ticketmaster tickets is determined by the artist or client. In addition to the face value price, venues and Ticketmaster add fees on top of this to pay for their services. Typically, fees added to a ticket's face value have included:

  • Facility charge – Charge added by the venue.
  • Delivery fee – Charges added dependent on the ticket delivery method and credit card processing fees.
  • Service fee – Sum of charges added based on the “agreement with each client (artists)” and the order processing fee. Ticketmaster “may earn a profit on the order processing fee.”

When a customer buys tickets from Ticketmaster, these fees are typically not included in the base price. But the total price displayed during the checkout process usually adds these service fees on top of the base price.

This is a common practice in the ticketing industry. The intentional separation of the service fee from the base price serves two purposes.

Firstly, it creates the illusion of a more affordable ticket price initially, making it seem more attractive to customers. Secondly, it gives the impression that Ticketmaster is the sole beneficiary of this fee.

In essence, Ticketmaster gets paid to be the customer's punching bag with its service fees, while some portion of these fees actually make their way back to the artist or venue and are not pocketed by Ticketmaster itself. And this tactic has become increasingly essential for artists to generate additional revenue from fans without drawing direct ire towards themselves. Instead of setting a higher face value of the ticket upfront, artists choose to set it lower and then earn from a portion of the service fees Ticketmaster charges.

Ticketmaster also earns its profit from these service fees. And it has a considerable moat as the venues exclusively sell all their tickets via the platform. In exchange, Ticketmaster pays them well, takes care of all the hassle involved in ticketing, and also keeps artists happy.

Ticketmaster’s way of operation reminded me of McDonald’s business strategy.

“We are not technically in the food business. We are in the real estate business.

The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”

— Former McDonald’s CFO, Harry J. Sonneborn

Like McDonald’s, which earns by making its franchise owners its real customers, Ticketmaster treats its venue partners, tour promoters, and artists as its customer.

With its business model, Ticketmaster successfully aligns the incentives of all stakeholders involved while continuing to service the customer who buys a ticket from them. In 2022, the business clocked a whopping annual revenue of $16.7B— a 166.11% growth from its revenue in 2021.

I have no good way to conclude this piece. But I'm hoping that it serves as a prelude to a larger theme I will be writing about next — where we will dig deeper into large scale events like music concerts, sports events, and their impact on the economy. Stay tuned!

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