Rockonomics

by Alan B Krueger

  Taylor Swift is also experimenting with another innovation that could further clip the wings of the secondary market: slow ticketing. If an entire tour sells out in a matter of minutes, the tickets were probably grossly underpriced. Moreover, some fans who were unclear of their plans when tickets originally went on sale might decide later on that they would like to attend the show, and they might be willing to pay more for their tickets than fans who bought the moment that tickets went on sale—and they might even be more dedicated fans. Such fans have no choice but to seek tickets in the secondary market; indeed, this is one of the reasons there is a secondary market.

  So instead of releasing all tickets at once, Taylor Swift released them gradually over time for her Reputation Tour. Fans were able to obtain tickets long after the initial launch. “We’d like to sell the last ticket to her concert when she takes the stage each night,” David Marcus, Ticketmaster’s head of music, told Billboard.33 Eventually, this could also lead to more dynamic pricing, where prices vary depending on when tickets are purchased, like airplane seats. Using these innovations, Taylor Swift was able to reduce the secondary market and capture some of the revenue that would otherwise go to scalpers and ticket brokers. According to Marcus, only 3 percent of Taylor Swift tickets made it to the secondary market in her Reputation Tour, compared with 30 percent in her 1989 Tour, which used more traditional distribution methods.

  Shawn “Jay-Z” Carter has also used slow ticketing, combined with more aggressive ticket pricing for upfront seats, for his 4:44 Tour in late 2017. Jay-Z sold a total of 426,441 tickets for his thirty-two-date tour, grossing $44.7 million in box office ticket sales plus another $4 million in revenue for platinum VIP tickets. The average gate was about $1.5 million per show, up substantially from his thirty-three-date Blueprint 3 Tour in 2009–10, which grossed $33.1 million from 439,540 tickets sold for an average of $1.0 million in revenue per show.34

  One should expect more innovations in concert ticketing in the future, as the industry continues to evolve from a block party to a commercial market, and as technology enables artists to have a closer connection to their fans and to price-discriminate to maximize revenue.

  Beware of Costs

  One of the most insightful ideas in economics regarding how industries evolve over time is known as Baumol’s cost disease.35 My late colleagues William Baumol and William Bowen developed the idea. The idea is very simple. Some industries have rapid productivity growth, so more output can be produced with less labor input (think manufacturing), while other industries have slow or stagnant productivity growth (think hospitals and universities). The cost for consumers of purchasing goods or services produced in the stagnant sector will rise relative to those costs in the high-productivity growth sector over time. This dynamic can partly explain why the growth in health care and education costs is squeezing out other spending and putting pressure on families’ and governments’ budgets.

  In their original work, Baumol and Bowen used live music as their quintessential example of a sector with stagnant productivity. They noted that it takes just as much time and effort for musicians to perform a Schubert string quartet today as it did two hundred years ago. Yet musicians are paid more today than they were two hundred years ago, because they have the option of working in other sectors, where productivity has increased. In other words, the fact that a violinist could work at General Motors has increased violinists’ pay over time, even though they still are not paid very well. The higher labor costs put upward pressure on prices for live performances and make classical music relatively more expensive for consumers today than it was 150 years ago compared to manufactured goods, which can be produced with less labor. This logic can explain why TV sets and computers have seen rapid price declines, while tickets to Carnegie Hall have become more expensive.

  This notion of Baumol’s cost disease is fraught when it comes to practical applications in music today, however. New technologies, such as digital recording and streaming, have greatly changed the quality and quantity of output in the music industry. And new technologies, such as synthesizers and sound tuners, are continually changing the nature and quality of music produced. Even for live events, better speakers and microphones have improved the productivity of musicians.

  Still, the basic insight—that one needs to be cognizant of production costs—is powerful, and readily seen in live entertainment. “Sure, concerts generate a lot of revenue,” Rob Levine, a freelance writer for Billboard, told me, “but they also generate a lot of costs.”36 Accountant Michael Lorick told me that touring costs “add up quickly.”37 Profit is not guaranteed. Out-of-control costs can devastate touring profits. In addition, the artist’s manager, agent, and business manager typically take a combined 30 percent of the artist’s income. Artists have to watch their costs. A rival manager told me a possibly apocryphal (although he firmly believed it) story about a top band spending exorbitantly to prepare for a tour. The band and more than a hundred members of its crew all stayed in an expensive hotel in Florida to rehearse before the start of the tour. (Typically, the crew would be booked into a lower-cost hotel.) When it came time to hit the road, no one remembered to check the crew out, so the tour was charged with extra expenses.

  Managers’ incentives also affect costs. If a band does well, its manager does well. If the manager’s commission is 15 or 20 percent of revenue net of costs, the manager, in effect, subsidizes the band’s touring costs because the manager’s commission is reduced if costs are higher. For this reason, the manager may resist throwing expensive after-show parties for the band while it is on the road. The manager, however, does not want to be overly vigilant in constraining the band. If a superstar band feels mistreated, it could easily find another manager. No one wants to be the person to tell Bono that a novel idea he has for a new stage design is too expensive. Several managers have told me that artists tend to be “capricious.” The life of a rock and roll star comes with few guardrails.

  One reason that ticket costs have been rising rapidly, as shown in Figure 6.1, is that production costs have risen rapidly. The rise in costs is mainly because staging and production for live entertainment have become more complex. Audiences have come to expect pyrotechnics, advanced videos, and stage risers. Even Paul McCartney provides such expensive extravagances in his shows.

  Most of the costs incurred from putting on a performance are fixed costs, meaning that they do not rise with the number of fans in the audience. This is true for pyrotechnics, for example. As a result, given the typical 85/15 (or 90/10) split between artists and promoters, the last 10 percent of tickets sold, Cliff Burnstein told me, are pure gravy in terms of profit, as the fixed costs have already been covered.

  The costs of concerts help explain why festivals have become so popular. Many of the fixed costs of a live event—including advertising, security, lighting, and setting up a stage—can be amortized over several performers in a festival. At a typical festival, the stage, for example, is used by multiple performers a day, for several days. By contrast, on tour the stage would require a couple of days to set up, be used for one show, then be disassembled, packed up, and transported to the next location.*2 A festival uses a stage more intensively, reducing costs per show.

  My point is that controlling costs is an important economic consideration for musicians. The idea that “you can’t always get what you want” was an economics principle long before the former London School of Economics student Mick Jagger used it in a Rolling Stones song. The most effective managers look for ways to minimize expenses and negotiate lower costs without jeopardizing the quality of the art musicians produce. As an industry, the music business has to continually adapt and create new technology to avoid Baumol’s disease.

  Merch

  Cliff Burnstein urged me to include a section in this book on merchandise, known in the trade as merch. He thought it so important that he arranged for me to meet with Q Pr
ime’s longtime merchandising man, Peter Lubin, for several hours in his midtown Manhattan offices.38 Lubin is a man in his mid-sixties and, oddly enough, does not share Burnstein’s enthusiasm for merchandise.

  “I promise you I don’t think I do anything interesting or that has mattered,” Lubin was quick to volunteer. Lubin has been working with top musicians to sell merch since the mid-1970s. For a merchandising man, Peter Lubin undersells. His past clients have included Pink Floyd, The Who, David Bowie, Def Leppard, AC/DC, Billy Joel, Nirvana, the Backstreet Boys, Prince, Van Halen, and many other superstars. If Michael Jackson was the King of Pop, Peter Lubin is arguably the King of Merch; in fact, Michael Jackson was once his client. Lubin boasts of the number of times that he has been fired by famous musicians—sometimes twice by the same artist. Switching merch agents seems inherent to the business, given the short duration of merch contracts. And, he adds, artists can be capricious.

  Lubin was full of economic insights. For example, not every superstar musician is a superstar of merch. Only a small number of superstars can move a lot of merchandise. As a result, merch amplifies superstar incomes for the biggest stars.*3 The challenge for Lubin is that merch is typically a small share of a superstar’s total income, and it is a distraction from the artist’s laser-like focus on creating innovative music. “Almost all of the acts that are big enough to make money in merch are so financially successful that, even though we’re not an insignificant number, we are small compared with everything else they are doing,” he explained. A merch superstar might make $1 million from merch sales over a couple of years, but he or she could make $20 million from touring, record sales, endorsements, and other activities.

  Nonetheless, artists review and approve all of the artwork that goes into their T-shirts and other wares, and are typically vigilant about ensuring that merch products do not conflict with the band’s carefully cultivated image. A band like AC/DC could review 250 pieces of art, from which it selects forty or more designs for shirts, hoodies, posters, and other products for a tour.

  An artist’s merch potential is measured in per capita sales. Elton John might sell $4 worth of merch per head at his concerts, while U2 might sell $15 to $20 per head, even though both have been arena headliners for decades. With few exceptions—such as Justin Bieber and One Direction—90 percent of musicians’ merch is sold on tour, not through online or retail sales. It is, therefore, straightforward to calculate the amount of merchandise an artist is likely to move: once you have an estimate of merch sales per capita, you simply multiply that by the number of fans expected to attend the artist’s concerts during the duration of the contract.

  The artist typically receives a 70 percent split of gross revenue (net of sales tax), although, as with everything else in the music business, precise details are negotiable. Like tours and record contracts, artists receive an advance for signing a merch contract against future income. The advance is recoupable, however.

  Fans buy merch because they want souvenirs to memorialize the event. Artists use merch to create brand identity and loyalty, and as a source of income. The Rolling Stones’ famous tongue and lips logo is an iconic image for the band’s identity and for selling merch. Lubin said the demand for merch is all about “I was there.” This is why T-shirts list all the cities and dates of a tour. Other items are designed specifically for one show or city, highlighting the venue, for example, to create a unique souvenir. Fans want to tell the world they were there, even as they document that they were there in Instagram and Twitter posts. To economists, this is an example of conspicuous consumption. The social aspect of merch strengthens bandwagon effects, which reinforce the superstar phenomenon.

  Around forty merch items are typically available for sale at each show. This includes six staples—T-shirts, hoodies, hats, posters, programs, and mugs—which account for around 60 percent of total sales. The merchandiser will also ensure that a range of specialty items, such as lithographs or fashion clothing, is available so that fans can spend more money on merch if they so choose. It is a form of price discrimination, as fans with a greater willingness to pay can find items that might be more customized and appealing to them.

  The quality of merch has improved over time. Lubin proudly points out that the products available on tour today are generally the best they have ever been in terms of both quality and variety.

  Selling merchandise, however, is a “pull” rather than a “push” business. It is difficult or impossible to substantially increase an artist’s merch sales. A great merchandising program cannot transform an average merch band into a superstar merch band. An example of a big success might be raising an artist’s merch sales from $4 per head to $8 per head.

  Unlike record contracts, which often seek to lock artists down for seven albums and future works (as I discuss in Chapter 7), merch contracts are of short duration. The typical merch contract lasts for an album cycle, roughly eighteen months to three years. Lubin calls it an “at once business.” As a result, if an artist’s career takes off, he or she will quickly be able to negotiate a more generous merch deal. Although there are not many competitors, merch margins are modest, around 10 percent of gross revenue. With tight margins and short contracts, merch companies cannot afford to carry many losers. As a result, they look for acts with steady demand or upside potential. Rock and roll bands had predictable, durable audiences. The move to pop acts, who often have more ephemeral success and fickle fans, creates more volatility for merch sellers.

  There are big fixed costs associated with producing and delivering merch. “I have a store that is essentially open for two hours that moves from city to city,” Lubin said, “and any dollar I don’t get in a city, I never have an opportunity to get again.” His economics work out only for major acts. For bands that are not arena headliners—in other words, most bands—it makes economic sense for them to produce and market their own merch. Often a tour manager or crew member takes responsibility for transporting and selling merch at shows for artists below the top echelon. Dan Ryan, who played bass for Le Loup for three years and is now principal product manager for Amazon’s Alexa, told me that his band printed their own T-shirts to sell at their shows.39 Merch income is not inconsequential for smaller bands, who often use the cash to pay for gas and meals to make it from one gig to the next.

  The ideal merch client—which Lubin had in Def Leppard in 1982—is a band that is signed just before it takes off. In these cases, sales greatly exceed the amount forecasted. After Def Leppard released its Pyromania album in January 1983, for example, its tour expanded, and the scheduled ten theater shows in England were replaced by twenty-five arena shows, which were soon followed by a worldwide arena tour, greatly boosting merch sales. Lubin was also fortunate to be the merchandiser for Pink Floyd, Prince, and Michael Jackson “when they were having their turn as the biggest act in the world.”

  In the early days, merch was a cash business. Lubin regaled me with stories of flying back from concerts with hundreds of thousands of dollars, mostly in five-dollar bills, in his suitcase. Before a show, a star’s manager once told Lubin backstage at the Tokyo Dome in Japan that he heard that there were bags of cash in his business. “I don’t want you to get the wrong impression, I’m not asking you for a bag of money,” the manager said. “But if I find out that there are bags of money and I didn’t get one, I’d be really pissed.”

  The merch business has become much more turnkey. Venues provide concessionaires to sell merch during concerts. In a typical contract, the band pays a 25 to 30 percent commission on gross sales to the venue for the right to sell merch and for its services; the commission comes from the band’s 70 percent share. This leaves the merch company 30 percent of gross sales (net of sales tax), which must cover the cost of designing and procuring merchandise, transporting goods, and policing bootleggers. To make the numbers work, Lubin aims to keep his cost of supplies below 10 percent of gross.
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  A typical T-shirt that sells for $40 at a show costs about $3.50 to $4 to manufacture (disregarding design and transportation costs). If sales tax is $3, then $37 in revenue is left to be divided up. The band’s take (45 percent after venue commission) would be $16.65, and the venue’s share would be $9.25. This leaves the merchandiser with $11.10 to pay for the product, transport it from show to show, and cover other costs. After expenses, the merchandiser is lucky to net $4 from the sale of the T-shirt.

  With the ability to avoid paying band royalties and venue fees, bootleggers have a strong incentive to illegally sell unlicensed merch. This was a major problem at U.S. concerts until the mid-1980s, when a lawyer named Jules Zalon pioneered the practice of obtaining a court order to make John Doe seizures of illegal merchandise offered for sale within half a mile of the venue. Today, merchandisers and venues spend around 2 percent of gross revenue hiring off-duty police officers to prevent bootleggers from illegally selling unlicensed products. Bootlegging remains a serious problem for Internet sales, but most musicians earn most of their merch revenue from touring-related merchandise sales.

  A new development in the merch market is pop-up stores. Some major artists have begun the practice of setting up a store in a city for a short period of time to sell their merch. Kanye West, for example, has been a pioneer in pop-up stores, working with Bravado, Universal Music Group’s merchandising wing. Sometimes the novelty and sleekness of these shops enable them to become a flash hit.