MUSIC PERFORMANCEWhere Musicians Make Money

Estimated Pre-tax Gross Income, Top 35 Touring Artists, 2002• Rank Artist Concerts Recordings Publishing Income• 1 Paul McCartney $64.9 $2.2 $2.2 $72.1• 2 The Rolling Stones 39.6 0.9 2.2 44.0• 3 Dave Matthews Band 27.9 0.0 2.5 31.3• 4 Celine Dion 22.4 3.1 0.9 31.1• 5 Eminem 5.5 10.4 3.8 28.9• 6 Cher 26.2 0.5 0.0 26.7• 7 Bruce Springsteen 17.9 2.2 4.5 24.8• 8 Jay-Z 0.7 12.7 0.7 22.7• 9 Ozzy Osbourne 3.8 0.2 0.5 22.5• 10 Elton John 20.2 0.9 1.3 22.4• 11 The Eagles 15.1 0.7 1.4 17.6• 12 Jimmy Buffett 13.7 0.2 0.5 14.4• 13 Billy Joel 16.0 0.0 1.0 17.0• 14 Neil Diamond 16.5 0.0 0.3 16.8• 15 Aerosmith 11.6 1.0 0.8 16.5• 16 Crosby, Stills, Nash & Young 15.7 0.0 0.3 16.0• 17 Creed 10.9 1.1 1.6 13.4• 18 Rush 13.4 0.0 0.0 13.4• 19 Linkin Park 1.7 4.7 6.3 13.1• 20 The Who 12.6 0.0 0.0 12.6• 21 Red Hot Chili Peppers 6.1 3.4 2.7 12.1• 22 Brian "Baby" Williams 0.2 2.7 0.9 11.8• 23 Nsync 7.7 0.5 0.9 9.4• 24 Barry Manilow 8.0 1.2 0.0 9.2• 25 Britney Spears 5.5 1.8 1.0 9.1• 26 Alan Jackson 4.6 3.0 1.4 9.0• 27 Rod Stewart 6.6 1.4 0.8 8.8• 28 Andrea Bocelli 8.1 0.2 0.4 8.7• 29 Brooks and Dunn 6.7 0.4 1.4 8.1• 30 Enrique Iglesias 4.4 1.5 1.7 7.6• 31 Tom Petty 6.6 0.2 0.7 7.5• 32 Tool 7.3 0.0 0.0 7.4• 33 Kid Rock 3.4 0.8 1.3 7.0• 34 Kenny Chesney 5.8 1.1 0.1 7.0• 35 Santana 6.0 0.0 0.7 6.9

Publishing, Recordings, and Performance

Live Performance Contracts• Bands/artists hire manager to represent them in exchange

for a share of their earnings• Manager contracts with promoter(s) to promote live

concerts• The promoter

• Secures a venue• Advertises the event• Makes other arrangements

• Record labels may promote concert tours

Typical Contract with Promoter• Band/artist receives a guaranteed advance

• Say, the first $100,000 in ticket sales • Band pays travel and other expenses

• Promoter then recovers expenses and guaranteed profit• Say, $50,000 expenses and $22,500 profit• Expenses include advertising, rent for the venue, costs of

unloading equipment, etc.

• Band and promoter split remaining revenue• Typically 85% to band and 15% to promoter

• Bands with greater bargaining power get higher advances and % revenues after expenses

Revenue Sharing• Band or manager negotiate ticket price with promoter

affecting total revenue• Band receives 100% of merchandise sales

• T-shirts, CDs, etc.

• Venue keeps concession and parking revenue• This division of revenue may be efficient

• Ticket revenue to band and promoter• Merchandise to band• Concessions to venue

• Each party receives revenues from the sources for which it is most responsible.

Ticket Sales• Promoter contracts with a ticket distributor to sell tickets

• Ticketmaster is the largest distributor • charging fees of about 10% of the ticket price• In some cases, this fee may be shared with the venue, promoter, or

band/artist, depending on contract

• Venue’s box office and band’s fan club may also sell tickets

• Tickets are often sold on a secondary market by unregistered scalpers, sellers on Internet sites like ebay, and ticket brokers.

Contract Enforcement• Moral hazard problems

• Artist is relatively uninformed• Promoter or ticket distributor keeps the records that determine the

artist’s earnings• Moral hazard occurs if the promoter cheats the artist by “lying”

about the revenues or expenses to the promoter’s benefit• Or if artists don’t show up for shows, show up late, abuse drugs

during shows or behave in ways that reduce the show’s quality

• In general, moral hazard occurs when a party to a contract changes its behavior after the contract is entered

• Contract enforcement depends on repeated transactions among parties who value their reputations.

Concert Promotion is Highly Concentrated

• In the 24 largest cities• Market shares of the top four firms total 90%• Within city HHI for promoters fell from 4,200 in 1986 to 2,800 in

2001

• Artists may be at a disadvantage• Less established artists lack bargaining power• Artist has less information

Annual Gross Revenue of Top 100 Tours in Billions of U.S. Dollars

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

3

Top 100

Audio PI

Source: Pollstar, NIPA.

Ticket Sales of #1 Tours in $millions

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

20

40

60

80

100

120

140

160

180

#1 Tours

Audio PI

1997The Rolling Stones 89.3

1998Elthon John 46.2

1999The Rolling Stones 64.7

2000Tina Turner 80.2

2001U2 109.7

2002Paul McCartney 103.3

2003Bruce Springsteen 115.9

2004Prince 87.4

2005The Rolling Stones 162.2

2006The Rolling Stones 138.5

2007The Police 133.2

2008Madonna 105.3

2009U2 123

2010Bon Jovi 108

2011U2 156

Source: Pollstar, NIPA.

Average Ticket Price, Top 100 Tours

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

20

40

60

80

100

120

Audio PI

Ticket Price

Tour Revenue, Price and Quantity Estimates, North America

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

20

40

60

80

100

120

140

Revenue

Price

Q Sales

Audio Q

Revenue in $100 million; Price in nominal $; Quantity in millions. Source: Pollstar, NIPA

Are Superstars on the Decline in Live Performance?

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

1

2

3

4

5

6

7

8

#1 Share %

#1 Share %

Top 1% of performers account for nearly 60% of ticket revenue in 2003

Top 5% of performers account for over 80% of ticket revenue

Leaving about 15% of ticket revenue for the other 95%

BUT, the share of North American ticket revenue accounted for by the # 1 tour is declining

Source: Pollstar; Rockonomics, fig. 4.4.

Pricing Issues• Characteristics of live performance

• High fixed cost and low marginal cost• An experience good whose quality is unknown until it is consumed• A ticket has zero value after the performance occurs• Seats vary in quality• Bands/artists sell complementary products

• Merchandise and recordings

Price Discrimination• Artists have market power since they sell differentiated

products• High and low price elasticity demanders can be sorted by

seat location• Marginal costs are below average costs• (PG-MC)/PG = -1/EL

• Price cost margin for a “good” seat depends on low price elasticity demanders

• (PB-MC)/PB = -1/EH • Price-cost margin for a “bad” seat depends on high price elasticity

demanders

Price Discrimination with Complementary Products• Effect of ticket price on demand for complementary

products adds a positive externality• (Pi-MC)/Pi + Xj = -1/Ei

• Or (Pi-MC)/Pi = -1/Ei – Xj

• The ticket price is reduced if more ticket sales increase sales of the complementary products• There is no incentive to reduce the ticket price for discriminatory

purposes below that associated with a sell-out• A fall in demand for the complementary good raises the ticket price

Some Pricing Puzzles• Price discrimination is surprisingly rare

• 75% charge a uniform price • Influenced by fairness concerns?

• Pricing often leads to excess demand for tickets, leading to scalping• Scalping occurs when speculators buy concert tickets in hopes of selling

them for a higher price on the secondary markets• Secondary markets include scalpers, licensed ticket brokers, and individuals

selling tickets on websites like ebay

• But only about one-third of concerts sell-out and may have excess demand

• Why don’t artists and promoters charge the market clearing price?• A concert is a social event, with consumers’ demands positively related (low

price draws bigger crowd, increases value of the experience)• Fairness? Is market-clearing price unfair?• Influenced by complementary products?