Wednesday, May 10, 2006

Rockonomics

[Added on 5/24: Ticketmaster changes its pricing strategy.]

The BBC has a story on the work of Alan Krueger, who is now being defined as a "Rockonomist." The article focuses on the soaring prices of music concerts over the past few years. Krueger blames on-line music (both legal and illegal):

He points out that sales of recorded music fell from 1999 to 2002, causing artists' income to decline. He believes record sales are down because many potential customers frequently download music free from the Web or copy CDs, either legally or illegally.

Professor Krueger said his view had prompted a mixed reaction. "I got some critical e-mails. There are some people who are big defenders of the free availability of the internet. But the general reaction that I got has been agreement."

Before the advent of illegal downloads, artists had an incentive to underprice their concerts, because bigger audiences translated into higher record sales, Professor Krueger argues.

But now, he says, the link between the two products has been severed, meaning that artists and their managers need to make more money from concerts and feel less constrained in setting ticket prices.

Professor Krueger says this tendency was spotted by David Bowie, who told the New York Times in 2002 that "music itself is going to become like running water or electricity".

Bowie has advised his fellow performers: "You'd better be prepared for doing a lot of touring, because that's really the only unique situation that's going to be left."

Certainly profits from recorded music have fallen, especially for big stars. However, there are still lots of sales of related merchandise that concerts can spur, as anyone who has ever bought a t-shirt at one can confirm, and that link is not destroyed by on-line distribution.

The question, then, is how much concerts actually spurred CD sales, as even the most prolific tours don't bring in more than 100,000 or so fans per city. (If you sold out Madison Square Garden for 5 shows, you'd get about 100,000.) Even if you assumed that 10% of them bought a CD that they wouldn't otherwise (and they are already fans or wouldn't be at the concert, so that sounds extremely generous), that'd be 10,000 extra CDs per city, per tour. Let's tour once per album, and hit 50 cities world-wide, and therefore generate 500,000 extra album sales as a result of the tour. (And that's being very generous.) Generally, even top stars don't earn much more than $2 per CD, so that'd be an extra $1,000,000 in profits to the band/manager as a result of convoyed album sales.

Now, concert prices have risen almost 9% a year from '96 to '03 , according to the BBC article. Now, it'd take a little more work than I want to give it now to be sure, but I'm guessing that the additional profits that the 83% cumulative increase in ticket prices generates drawfs the extra $1,000,000 in CD profits from pricing low....

I can't get behind this idea that on-line distribution is to blame for the increase in concert prices. As the BBC points out, sports ticket prices (and especially events like the Super Bowl or NCAA basketball tournament) have also been soaring in recent years, and they don't suffer lost convoyed goods sales due to the internet. Of course, I don't have my own story yet either....

That said, there's no denying that concert profits have soared in recent years, even if it's not due to the internet. And, in fairness, Alan Krueger is not the only one suggesting this link. Julie Mortimer and Alan Sorensen have come to a similar conclusion. From the abstract:
We outline a simple model illustrating these effects in the music industry, and test the model's implications using detailed data on weekly CD sales and individual concert performances for nearly 2,000 musical artists over a ten-year period. We show that while sales of recorded music declined after the introduction of file-sharing, concert revenues and the number of artists performing concerts increased dramatically. We examine whether these changes were most pronounced among artists or markets where file-sharing was likely to be most significant. Overall, the patterns in the data suggest that while file-sharing may have eroded profits from CD sales, it also increased the profitability of live performances.
(Emphasis added.) Not a definitive conclusion, but this paper looks good to me. So, I'm at a bit of a loss here for a better answer, although I just can't see the numbers working. Even if on-line distribution hadn't arrived, the gains in concert revenues/profits from the increase in concert prices has got to be much larger than the loss that would be suffered from reduced convoyed CD sales. And given this increase in concert pricing and the returns to it, an increase in the number of artists touring is perfectly rational.

So what is it?
Link

5 Comments:

Anonymous Everyday Economist said...

I think the basic connection you are missing may lie in who gets paid what from which distribution.

The RIAA gains the most from CD sales, the artists themselves make more from the concerts.

By depressing the ticket prices, the RIAA could boost CD sales, and keep the artists down. Now that CD sales are down due to file sharing, the RIAA has lost some of their control.

They are trying to pick up some slack in an area they have kept low.

My guess is, it has never been more profitable to be an artist. They are able to make more by producing more for the first time, hence the increase in number of concerts preformed.

But I'm no industry expert, this is just my sideline guess

5/24/2006 10:42 AM  
Blogger Tony Vallencourt said...

EE,

It is true that CD sales benefit the RIAA much more than concert sales do. And the artists earn very little from CD sales (the $2 I cite would only be for very established artists with strong bargaining power).

However, I don't think the RIAA has much control over ticket prices, so I don't think that would explain it either. I think the story I've heard that sounds closest to the truth (to me) is the one I talk about in the concert pricing post from today- underpricing is strategy designed to build long-term relationships with "common" fans and pricing low and creating long-lines for tickets served to get them into those who could wait in line all day for tix. The internet has changed that (not piracy and MP3s) so it no longer works.

Hence, concert prices are rising, and now Ticketmaster is starting to auction off good seats.

5/24/2006 5:42 PM  
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