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…