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Music Performance

Music Performance. Where 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

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Music Performance

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  1. Music Performance Where Musicians Make Money

  2. 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 12.70.7 22.7 • 9 OzzyOsbourne 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 0.88.8 • 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 1.10.1 7.0 • 35 Santana 6.0 0.0 0.7 6.9

  3. Publishing, Recordings, and Performance

  4. 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

  5. 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

  6. 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.

  7. 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.

  8. 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.

  9. 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

  10. Annual Gross Revenue of Top 100 Tours in Billions of U.S. Dollars Source: Pollstar, NIPA.

  11. Ticket Sales of #1 Tours in $millions Source: Pollstar, NIPA.

  12. Average Ticket Price, Top 100 Tours

  13. Tour Revenue, Price and Quantity Estimates, North America Revenue in $100 million; Price in nominal $; Quantity in millions. Source: Pollstar, NIPA

  14. Are Superstars on the Decline in Live Performance? 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.

  15. 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

  16. 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

  17. 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

  18. 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 by 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?

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