Alan Cross: How does the secondary market for concert tickets work?

* This is Part 3 of a three-part column.

There’s no such thing as a sold-out show. You can always find tickets if you know where to look, and if you’re willing to pay the price.

While the world buys up an estimated US$30 billion in concert tickets annually (we call this the primary market), the secondary market (where tickets purchased at face value can be found at markups many multiples of their original price) is worth at least US$8 billion globally. That means there’s a lot of scalping going on, ranging from big companies like StubHub to small-time players shouting “Who wants tickets?” outside a venue.

Here are five things that help explain what’s going on:

1. Let’s start at the very beginning. How are concert tickets priced in the first place?

Finding the right face value for a concert ticket is a tricky thing involving all manner of economic projections and guesswork. It goes something like this.

Ticketmaster (and we’ll use it because the company is the biggest seller of concert tickets in the known universe) signs deals with venues for selling tickets to their shows. This makes it the vendor and the venue the client.

The manager of an artist will then negotiate with a promoter about how much his or her act wants to make for a show. Part of those negotiations include the costs and potential profits associated with each venue on the tour. What is the seat inventory? What kind of demand will there be for that supply? What is the maximum potential box office gross for each date? That’s ultimately the bottom line of this exercise.

The promoter crunches numbers to determine how many tickets need to be sold at what price for the promoter to turn a profit. All manner of data is considered along with a healthy mix of voodoo and guesstimates. Anywhere from 30 to 50 per cent of the price of a ticket goes to covering the costs of the show. (Live Nation is exceedingly good at this, which is why they’re the biggest promotion company in the world.) Of the remainder, around 85 per cent goes to the performer and 15 per cent to the promoter.

The artist will then get an advance from the promoter to cover startup costs for the tour, which includes everything from designing the stage to hiring roadies to drive the trucks.

Ticketmaster is given information about ticket prices and on-sale dates. When it begins selling tickets, Ticketmaster adds service fees to cover its costs. A “venue fee” may also be added so that the building where the show is taking place is compensated for its costs, too. These fees vary from city to city, but they can add anywhere from 20 to 100 per cent to the final cost off a ticket.

This leads to an important under-reported function of Ticketmaster. Although it has nothing to do with setting the price of the concert ticket, it gets the blame for gouging fans. This is actually part of the deal. Ticketmaster acts as a deflector of criticism away from the act. It gets the majority of the blame for all the fees but actually gets a minority percentage of the cash collected. Fans get angry at Ticketmaster and not the act.

2. How do so many tickets end up on the secondary market?

The previous chapter in this series explains how bots work. These software programs are able to buy up vast numbers of tickets within seconds of them going on sale. Bot operators then offload their purchases to ticket brokers both big and small. A story broke last fall about a Quebec man who made millions through a frequent sellers program set up by StubHub.

But it’s not just big-time operators. The secondary market also serves as an insurance policy for everyday people. These days, tickets for a hot concert may go on sale up to a year in advance. You might buy, say, four tickets for that show. But when the appointed day approaches, you find yourself unable to use one or all of them because life has thrown up a roadblock. Rather than eat the cost of the tickets, why not put them up for sale? Just remember, though, that the professional resellers have way better data than you when it comes to pricing and timing.

Speaking of long lead times: Why are tickets sold up to a year in advance? First, an artist may be extra hot and will want to capitalize on the opportunity. Best scheduled a tour and sell tickets now before the heat dissipates. Second, money collected can be invested to earn interest in the interim. If you have a sold-out stadium show with a box office gross of $4 million, you can earn a tidy little profit even by dumping that cash into a 1 per cent savings account for a year.

Then there’s conspiratorial accusation: Acts and promoters that put their own allotment of tickets for shows — what’s known as “holdbacks” — on StubHub et al themselves to earn a little more money for themselves? Does this actually happen? Not officially, but…

3. Wait. Some tickets appear on secondary market sites long before they actually go on sale. How is that possible?

Those tickets do not exist. The entity placing that ad is merely offering a promise that such a ticket will be available. They’re confident enough in their sources that they’re willing to offer speculative buying. In other words, they’re just fishing. Even if you bite, you may end up with tickets in a slightly different location in the venue. Then again, maybe the broker won’t be able to secure tickets after all and the speculative buyers are left hanging — and maybe out of pocket, too.

4. How are tickets priced on the secondary market?

Guesstimates are based on supply and demand. Prices are also dynamic. If demand ramps up, secondary sellers will increase their prices. But maybe demand projections turn out to be wrong. Prices start to drop. In desperate situations, secondary sellers may even let their tickets go at below face value just to avoid cratering entirely. Supply-and-demand works both ways, so if you’re shopping on the secondary market, it may pay to monitor prices during the weeks leading up to the gig. About 50 per cent of the buying activity on the secondary market happens in the last 48 hours before the show.

5. If people are willing to pay scalpers’ prices, doesn’t this tell us something about how concert tickets are under-priced to begin with?

It seems so. But artists and promoters are loathe to charge too much for a ticket, lest they are accused of gouging fans. The industry is still lacking in meaningful market data when it comes to pricing tickets accordingly. Best let Ticketmaster and scalpers take the blame.

Besides, brokers act as kind of an insurance policy for the promoter. All the promoter cares about is that all the tickets for a show are sold. If 5,000 seats were bought up by a scalper and that entity isn’t able to sell any of those seats, the promoter doesn’t care. Those tickets still count as sold and the money is pocketed by the promoter and the act. (This, by the way, happens a lot in sports. A broker may buy up huge blocks of seats for August for a baseball team that’s expected to be a pennant contender. But if they tank in July and fall out of contention and demand for tickets drops, too bad. The team still has their money.)

So what’s the proper price for a concert ticket? Whatever brokers are getting in the last 24 hours before showtime. That’s usually higher than face value. But not always.

But then we must again consider the human angle. An act does not want to price a ticket too high for a young 17-year-old fan. You want that person in the venue to help create a lifelong fan. Charging that kid $200 for a ticket is ultimately going to be counter-productive. Again, best let Ticketmaster, the venue and the scalpers take all the blame.

There’s no easy solution to the problems surrounding buying concert tickets, but now at least you have an idea of the complexities involved. Will someone eventually figure out a way forward that benefits and protects everyone? I wouldn’t hold my breath.

Alan Cross is a broadcaster with 102.1 the Edge and a commentator for Global News.