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I Love Rock ‘N’ Roll (Part 1)…

March 30th, 2009 · 4 Comments
Incentives · Music Biz

I’m surprised that it’s taken me this long to write a post on the music industry, since it’s something that is near and dear to my heart. (Note: I intend this to be the first in a series, coming soon to a web site near you…) I started researching the media industry in general when I was an undergrad RA at Harvard Business School, and I think that economists could have a lot to say in the universe of creative industries. However, these industries typically don’t get as much attention from economists as do “traditional” industries such as automobiles or timber or whatnot. Unlike me, other economists don’t seem to care that the creative industries are more fun. 🙂 I even taught an undergrad economics tutorial entitled “Sex, Drugs and Rock ‘n’ Roll”, and I am the marketing coordinator for a Boston-based band called The Self-Proclaimed Rockstars. (I was even given the business cards to prove it.)

My general conclusion is that the small-scale (read, local) music scene in Boston is just asking to be a case study in incentives. Why, you ask? Well, let’s look at the situation:

The basic rundown of the music scene in Boston is as follows: As a band, you get booked through promoters who get assigned to book days at various venues. (In other words, promoters are not venue-specific, but they do get their own days to book.) As a customer, you either buy a ticket in advance or at the door for a little extra cash. (The number of spots left at the door then depends on how many tickets are sold.) Since there are usually multiple bands booked on any given night, the dude at the door asks you who you are there to see. You tell door dude, and he puts a tick mark down next to the band that you say. As a band, you are given an allotment of tickets to sell, usually with a face value of somewhere in the $10 range. On the day of the show, you have to either give back the tickets or the equivalent amount in cash. For example, say you are allotted 50 tickets with a face value of $10 each. You then have to give back $500, 50 tickets, or some combination thereof. You get paid an amount (usually $5 for a $10 ticket) for each fan that gets a tick mark on door dude’s sheet, and the promoter gets the rest. (Technically some might go to the venue, but it doesn’t really matter for the purposes of this discussion. Even if the venue doesn’t get any of this revenue, it’s still happy because people are coming in and buying drinks.) The promoters usually advise bands to try to sell the tickets in advance because it makes people more likely to actually show up. (Psychologically speaking, this is a true statement, both because it makes the marginal cost of showing up $0 if you’ve already paid for a ticket and because people don’t fully internalize the concept of sunk costs.)

The theory here is that the revenue sharing between the promoter and the bands should align incentives, since both parties have an incentive to get more people to show up. (Roughly speaking, both the band and the promoter get $5 for each extra person that shows up.) Technically, this should even be a better system than giving all $10 to either the band or the promoter unilaterally. Why is that? Consider the concept that is is more than twice as hard to get twice as many people to come to a show. It’s pretty likely that this is the case, since you have your “low hanging fruit” loyal fans that you get first, and then it takes more and more convincing/marketing/etc. to get each additional person. Therefore, because of this extra effort required, you would need to be compensated more than twice as much to make it worth it to get twice as many people to show up. To summarize, offering $10 per attendee would result in less than twice the number of attendees as there would be with a reward of $5. Now consider the situation with the $5 for the band and $5 for the promoter. IF (and this is a big if) the promoter is as good at getting people to show up as the bands, this should incent both the band and the promoter to get their low hanging fruit up until the point that $5 isn’t worth the effort anymore. Therefore, the $5/$5 split should result in a larger overall crowd than a $10/$0 split. (In the long-term, a large crowd is likely the goal for all parties involved.)

So why this this problematic? A few points:

  • If you read the description closely, you will notice that the promoter gets the entire $10 if a ticket is sold and not used. It should then not be terribly surprising that the promoters encourage advance ticket sales. However, since the sale of the ticket takes away a spot that would have been available at the door, the band faces a tradeoff in terms of whether it is worth it to sell a ticket to someone who is on the fence about coming- if they buy a ticket and don’t come, it gets the band $0 and takes away a door spot that could have gotten the band $5.
  • The promoters by and large don’t work nearly as hard to, well, promote, as the bands do. This is likely the case because the bands care about their long-term fan bases in addition to just their revenue from the show in question, and it results in an inefficient incentive system. (Note that the promoter should also technically care about the fan bases of the bands that he books, since there is at least a reasonable chance that they will want to be booked with him again at some point in the future, so a band being bigger in the long term also benefits the promoter.)
  • The bands generally don’t trust the venues/promoters to record the numbers accurately and not try to cheat them out of their hard-earned cash. This problem persists because it is difficult to verify that the door dude’s count is in fact accurate. In a practical sense, you aren’t going to work as hard to get your $5 per person if you think that part of that $5 is getting cheated away.
  • The tick mark system gives the bands that are booked together an incentive to compete rather than cooperate, even though cooperation is likely in their long-term best interests. (More on this in a follow up post.)

So, coming back to the case study framework, what would you do if you were a business-savvy band? Personally, I would ask myself how much value there is in the name recognition of the venue. For example, people used to go to Max’s Kansas City or CBGB in New York just as much because of the brand of the venue as because of the specific bands that were playing. It would be worth it for my band to sacrifice some short-term revenue and deal with the promoter in order to get an opportunity to win over new fans who happen to be at the venue. If the name recognition of potential venues is not high enough to be relevant, I would set up shop in an abandoned barn, promote to my fan base, keep all the door revenue and sell drinks with a zero markup as an additional incentive for people to attend. This would result in a Pareto improvement over other options, since both the band and the fans would be made better off. (No, I do not care about the welfare of the promoter or the venue, and yes, I realize that there are insurance, technology and security concerns to consider. But I still argue that there would be an overall improvement available.)

If more bands could figure out how to organize in this way, it would serve as a kick in the pants to the venues and promoters to more thoroughly support their artists in order to keep their business, but until then, complacency is kind of a bitch. What would you do? Also, anybody know of a good barn somewhere?

Stay tuned for Part 2…

Tags: Incentives · Music Biz

4 responses so far ↓

  • 1 Pfloyd // Mar 30, 2009 at 4:27 pm

    This is why “pay-to-play” scams like this tend to be frowned upon by serious musicians. I’m a musician myself and have NO incentive to engage in these activities. I live in Omaha and these things tend to only be adopted by younger and less experienced bands.

    What you are describing is a sort of spin-off to the straight pay-to-play wherein the band is “sold” the tickets by the promoter (that is, pay for the tickets out of pocket) and are thus responsible for their sale and eat the costs of those tickets they don’t sale. In this way the promoter is guaranteed their revenue regardless of attendance. It sounds like the approach you are describing is a softer version of this but with the added sneakiness of the promoter being able to leverage additional profit and the cost of additional risk.

    Something that goes on around here is generally bands being paid directly from the door revenue. That is, a doorman collects a cover charge and the band or bands is paid directly from that revenue and, generally speaking, the venue does not take a cut of that unless it is “prestigious” and thus incurs higher operating costs.

    I feel this puts a greater deal of incentive into the bands themselves to do self-promotion for manifold reasons but mainly they are paid directly based on attendance and are also likely to be re-booked by the venue if the venue brings in a lot of drink revenue. Of course the “market failure” of this approach is that the bands most often divide the revenue from the show equally, even if their performance or promotional efforts were not equal in value, but most willingly agree to this situation as it proves to be far more profitable for everyone involved as opposed to the “pay-to-play” approach or any variation thereof.

  • 2 BradyDale // Mar 31, 2009 at 9:56 am

    In the art world, there’s a famous story of this place in Providence called Fort Thunder. The Fort kind of became an art movement unto itself, but it started by basically trying to be what you recommend above. It was a two story warehouse and a RISD student rented it so he could live upstairs and host music shows downstairs without having to screw with the bar scene. Actually, he opted not to have booze at his shows because he didn’t like the vibe it created, but, otherwise: the same. That’s why they called it Fort Thunder. Cuz they got LOUD.
    Anyway, it worked out really well. In fact, it ended up having additional benefits by creating this whole broad community and (for lack of a better term) mutually beneficial groove for everyone involved with the Fort.
    Interesting story.
    The Fort, sadly, is long gone now, though.
    Development came to Providence. Que sera sera.

  • 3 Krzysztof Wiszniewski // Jun 18, 2009 at 6:54 pm

    My advice would be to bypass the promoters and deal directly with the venues, if at all feasible.

    The way I’ve done it for years here in Warsaw, was to book a night at a club with the understanding that I’d be responsible for dealing with the other bands and promoting the show and that we would receive all the ticket revenue, but typically we’d be liable for certain costs associated with staging the show (typically this would mean paying the sound and lighting engineer, sometimes also security).

    The standard agreement between us and the other bands was that we would take the costs of the show (including an agreed budget from promotion) off the top and divide the remainder equally (except for a couple of times when we were contacted by a fledgeling band just looking for someone to open for, who were usually surprised to receive any cut at all – even though it was a smaller one).

    This could be upgraded to include advance sales (we usually did not bother with these) by further agreeing that each band is entitled to 100% of its advance sales, once the costs of the show were covered (which would provide incentive to sell as much as possible). In this case, only the sales at the door would be subject to a split.

    If booking through a promoter is inevitable, I’d insist on the revenue splits being fixed from the start, subject to the possible exclusion of advance sales by a given band. Certainly I would not allow for the promoter to receive 100% of “unattributed” income and I am inclined to question a promoter’s right to any cut (save the standard 10% of gross booking agent’s fee) unless he actively participates in promoting a given show.

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