Ticket Brokers as Market Makers
Tech Crunch had a great article on Trent Reznor’s recent war on Ticket Brokers.
People seem to understand that things have fluctuating prices based on supply and demand (like stocks, or gold, or ice cream). But when it comes to event tickets people ignore the realities of supply and demand and talk about fairness. Anyone who tries to sell tickets for a profit is greedy. Or, as Nine Inch Nails’ Trent Reznor says today, ticket resellers are parasites.
People pay big dollars for premium events like the Super Bowl and certain concerts. But they pay it to middle man ticket brokers, lovingly referred to as scalpers. Ticket brokers are really just market makers. They risk capital, hold inventory, and place bets that they’ll be able to make a living on the spread.
Pricing tickets is very, very hard. Demand for an event peaks just before it occurs, then falls to zero as it begins, like food that has gone bad. Changes in the economy have a dramatic impact on ticket prices, too. A good ticket broker is thinking about the quality of the event, the date of the event, the venue, the seat locations and the state of the local economy when pricing tickets. And if they do it wrong, they eat their inventory and take a loss.
Working at yoonew has given me a lot of exposure into the ticket industry – and it really isn’t unlike Wall Street in many ways. A couple points I’d like to elaborate on.
A Ticket has “Optionality”
A ticket will trade like an option. It has optionality to it since after the event, it “expires”, and some can choose whether to excerise their option to go. Therefore it will decay going into the event as the “premium” drains out. A ticket broker who has to hold long inventory of something that behaves like an out of the money call option is only shooting himself in the foot if he doesn’t sell the tickets. Therefore real time pricing and market making technology is key for the industry and something yoonew is working on.
The only problem in the ticket industry is Ticketmaster getting too big
The way the ticket industry works is that Ticketmaster sets up an auction in order to get tickets sold quickly. Face value is basically equivalent to a stock’s IPO price – that’s it. Therefore as Ticketmaster grows and expands into the secondary market there are some questionable conflicts of interest beginning to arise most notably around TicketsNow, the broker they bought a couple years back to compete with StubHub. There is a “chinese wall” in the ticket industry, and just like on Wall Street and the market will improve as the industry begins to realize this. Since Ticketmaster RUNS the primary market any horizontal growth is somewhat dangerous.