Internet Realigns Market for Tickets

By Steven Pearlstein
Friday, October 6, 2006; D01

For years, tickets to plays, sporting events, rock concerts and opera performances have been badly mispriced.

When rock concerts sell out five minutes after tickets go on sale, that's a pretty good sign that prices were too low, at least in an economic sense. And when the entire upper balcony of the theater is empty, that's a pretty good indication the seats were priced too high. While nobody actually believes that a front-row seat to see the Nationals play the Yankees or the Mets has the same value as the same seat to see a game against the Padres, the price printed on the tickets is the same.

The sponsors of these events were well aware of the mispricing. But there wasn't much they could do about it.

First, it was difficult, if not impossible, to figure out what the "right" price should be, particularly weeks or months ahead. Will the visiting team be in first place or last? Will a play be praised or panned by the critics on opening night?

Second, the natural instinct to maximize revenue was often constrained by noneconomic considerations. The idea that tickets to a Redskins game or a Streisand concert would be beyond the reach of a middle-class household seems to bring out the egalitarian instincts in the American psyche. Because many of these events are held at publicly subsidized venues, or enjoy the status of government-sanctioned monopolies, the economic risk of underpricing tickets had to be weighed against the political and public-relations risk of appearing to be price gouging.

For those and other reasons, team owners, rock promoters and theater owners generally settled on a strategy of setting ticket prices within a narrow range, on the theory that overpricing the less-desirable events and underpricing the hot tickets would cancel each other out. Season tickets became a way to get fans to the games they didn't want to attend for the privilege of having the best seats to the ones they did. More recently, many raised ticket prices surreptitiously through "handling charges" by ticket agents that were kicked back to them.

But lately this pricing model is coming unraveled, thanks largely to the Internet.

Click on eBay or StubHub or RazorGator, and you can probably buy or sell a ticket to anything you want, at a market price. This "secondary" market in tickets is now estimated at $2 billion to $10 billion annually, with some tickets changing hands repeatedly.

For years, the sports and entertainment industries tried to hold back the tide with anti-scalping laws and lawsuits to enforce the "no resale" provisions included in the fine print of every ticket. Leading the charge was Ticketmaster, the biggest ticket agency, which is the exclusive agent for about 70 percent of the major sports teams, rock promoters and theater venues.

But after years of watching customers, speculators and online services rake in the money they were leaving on the table, the industry has decided to embrace the secondary market and the concept of variable, or dynamic, pricing.

Some sports teams are now charging higher prices for weekend games, or contests against the most popular teams, while using "reverse auctions" that continually lower ticket prices for less desirable seats as game day approaches.

Rock promoters have begun to sell their best tickets through online auctions that have generated ticket prices in the hundreds and even thousands of dollars.

Several sports teams, including the Redskins, Wizards and Capitals, have signed "sponsorship" deals with StubHub to serve as an authorized secondary market for its tickets. Meanwhile, Ticketmaster is moving quickly to leverage its dominant position by striking deals with existing clients to become the "exclusive" market for secondary sales.

While it's unclear how all this will shake out, my guess is that sports teams, promoters and venues will wind up the winners. Without the old constraints, they will be able to sell the best tickets to the hottest events for many times the old fixed price, both directly and through the secondary market. This windfall should be more than enough to cover the inevitable decline in the average price for less desirable tickets.

For consumers, the change will be a mixed blessing. Less desirable tickets will be cheaper, while hot ones will be more expensive but easier to come by if you're willing to pay the price. Season and series ticket-holders will find it easier to unload the tickets they never wanted anyway, or find someone to buy their ticket when the Yo-Yo Ma concert turns out to conflict with back-to-school night.

But the biggest winner of all may turn out to be Ticketmaster. That giant already boasts operating margins of 25 percent from the original sale of tickets. Now it will have the opportunity to take another, even-more-profitable bite of the apple when tickets change hands. Not surprisingly, Ticketmaster is pushing legislation to make it illegal to buy or sell a ticket through any online marketplace not authorized by the original seller. Even without such legislation, Ticketmaster has begun to "turn off" tickets resold elsewhere by invalidating the bar codes.

By providing a more open, transparent and flexible marketplace for tickets, the Internet is making the market for live sports and entertainment more efficient. But the paradox is that in doing so, it may wind up strengthening the hand of the teams and the venues and the superstars who already dominate the industry, making it less rather than more competitive.