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Archive for the ‘Music’ Category

SXSW is in full gear right now in Austin.  As both a Texan and a music fan, SXSW holds a special place for me (and I’m sad to be missing out on the magic).  Jazz Fest in New Orleans is the only thing I’ve experienced that seems to come close to the same magic, and I say that as someone who has been to around 20 different music festivals.

What makes SXSW so unique and great isn’t the headliners.  In many ways, those have been an unwelcome recent addition to the affair.  SXSW is about the undiscovered talent – undiscovered by you, undiscovered by me, and undiscovered by the major labels.

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Patronage for the Arts

Someone asked me earlier this year to finish the sentence, “2013: The Year of _____.”  My response, “2013: The Year of Video.”  Of course, with most of the year  behind us now, some may disagree with my a priori assessment, but I had three trends in mind that still seem to be signaling something:

  • Facebook is no longer cool.  It suffers from the same problem as your mother’s  jeans.  Instagram has become the new platform for youth culture.  A whole generation is learning to communicate as much in images as words.  Proof point #2: Snapchat.
  • The launch of Instagram Video sent a shockwave through social networks.  Poor Vine.  Now that some of the initial buzz has worn off, Instagram Video seems more incremental than revolutionary, but regardless, the short-form video continues to hold allure and encourage experimentation among both consumers and businesses.
  • Product placements aren’t just for Hollywood anymore.  Talenthouse has built a platform for promotional campaigns that can tap the long tail of digital media creatives.  Multi-channel YouTube networks have launched services like Fullscreen’s Gorilla and Maker Studios’ MakerMADE, and new tools, such as Fuisz, are emerging to enable more monetization options from video interactivity.

At a time when marketers are throwing around buzzwords like “authenticity” and “engagement,” online video has become one of the most attractive channels for reaching consumers (and I don’t mean YouTube channels).  Could video also hold the promise of a fair shake in the Internet age for artists?

The music video for Hood Party by Fat Tony provides an excellent illustration for what I have in mind.  What if Fat Tony had been able to connect with Google before making that video?  This is a company already paying to promote products like Google+, Google Hangout, and Google Music at music festivals and other events.  It’s a safe bet the company would also have been willing to pay something see their product appear in that video (along with H-town’s Bun B) instead the fictitious “Froogal.”

Fat Tony may not be the biggest name in hip hop, but he has a unique voice and a persona to which his fans can relate to better than some mega-Hova-superstar.  That’s authentic, and for the audience he reaches, it drives more substantive engagement than anything Kanye West can offer.

Nonetheless, Tony’s audience remains relatively small.  It’s too costly for Google to seek out, identify and negotiate deals with enough artists like Tony to reach a compellingly large audience.  What if someone else could aggregate those audiences instead and facilitate the transaction like a clearing house at a stock exchange?

As the means of production have become more accessible, creative stars have proliferated.  Even though their individual luminosity may be modest at best, as constellations they could be brighter than any other one star alone.  Surely there is a viable business for anyone who can broker the relationships and lower the transaction costs from connecting brands and all those creatives.  Corporate sponsorship, however unappealing that may sound, could be the new patronage for the digital era.

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Like many others, last week I waded into the emotionally charged debate set off by the blog post from NPR intern Emily White and the subsequent response from David Lowery.

I found myself conflicted. As a music fan, I was somewhat alarmed and really disappointed by Emily’s admission to piracy, but as a self-professed member of the Free Culture movement and fan of the Creative Commons, I despised the way David developed his argument, manipulating the truth and using scare tactics.

In both cases, I found the authors distracted from their central points with ancillary comments that set off the fire storm. I won’t get into the problems I have with David’s arguments, but I agree with his conclusions – artists are due some compensation for their creative works; piracy is wrong and illegal, and music fans should feel a moral obligation to pay for music, not pirate it.

As a reflection of the attitudes of her generation, Emily’s lack of attachment to the the physical mediums of music (e.g. CD’s) and preference for a limitless stream of digital content a-la Spotify was telling. The music industry should be listening; this is the markets telling you its demands. Her point was lost, however, because she admitted to piracy while remaining fully unaware of her actions and their implications. Ripping a CD you didn’t pay for is as much piracy as downloading from Pirate Bay. It’s just another form of P2P.

It would seem Emily has rationalized her actions as something other than piracy; I don’t think she or anyone else (reasonable) is saying piracy is ok. The real debate, as I understand it, centers on enforcement, not unlike the illegal immigration debate in thew news of late. Does it make sense to go after individual fans for file sharing or might everyone be better off spending less on lawyers and more on developing legitimate paid alternatives to piracy?

The music industry is in disruption; it’s not the only industry that has been disrupted by digital distribution. Unfortunately, sometimes “creative destruction” destroys more than it creates. At the macro level, this is how the free market works. At the micro level, real people are hurt in the process. As Keynes said, in the long term, we’re all dead.

Everyone affected by the music industry disruption would be better served to invest resources in the productive pursuit of new sources of value rather than expend resources on unproductive attempts to hold onto the past. I feel for the artist that has to work a second job or give up entirely on a career in music because he or she can’t make money, but none of us are simply entitled to make money from following our passions. It’s a lucky privilege for a very few.

Lots of people toil away at jobs they dislike, and this notion of career mobility, that is a modern phenomenon. It used to be that you became a farmer because your father was a farmer. Choice (too much of it anyway) has contributed to the general ethos of complacency and entitlement that is now catching up with generations of Americans (mine included). (Of course, people still aren’t taking responsibility; it’s the economy.)

Finding the new business models for making money from music requires first acknowledging that there simply may not be as much money in recorded music as there once was. I don’t know that this merits any great alarm or mourning; digital distribution changed the value chain, and other value added services are now in demand instead. The same thing has happened across countless industries throughout economic history.

Keep in mind that the recorded music industry is also a modern phenomenon. Musicians have been making music for thousands of years without worrying whether someone was buying or pirating their CD’s. Music will survive even this industry disruption. (Come to think of it, shouldn’t the purists be welcoming this change as expunging some of the corrupting influence of commercial interests on art?)

I still believe musicians have a right to control their works and realize a return on their investment of creativity. No one, however, is in a position to say how much compensation they are owed (at least not in a free market), and one cannot just expect recorded music to contribute the same returns as before.

The quickest and surest way to combat piracy at the individual level is to offer legitimate alternatives at an attractive price point given the consumer’s “job-to-be-done.” (Of course this still means using the legal system to prosecute large scale piracy where the cost/benefit makes more sense.)  Although I only have anecdotal evidence to prove it, I believe the majority of piracy happens at the edges of nonconsumption – individuals that otherwise would never have bought a particular CD at the regular price but might be willing to pay a price closer to the actual marginal cost of distributing another digital copy, which is to say something near zero.

What might artists and musicians learn from TED, where so much of the content is given away for free? Instead of fighting fans on piracy, how might artists take control over their creative works back from labels and record companies as OK Go and Louis C.K. did?  Opportunities to make money are still out there, if you don’t let yourself be distracted by the ones that have already passed us by.

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Festival season is in full swing again so I’m back to thinking about music and the music industry.

In March I made my annual haj back to Austin for SXSW.  Contrary to the commonly held belief in San Francisco, South By is a music festival, not a tech conference.  Well, it’s that too, but the music came first, and the music is still the best part.  Unfortunately, some of the best music is now actually to be heard during the tech conference, at after parties hosted by tech companies, before the throngs of hipsters arrive for the final 5 days of the music festival.

SXSW used to be about music discovery (here is my favorite discovery), hundreds of venues hosting showcases all around downtown.  Even the popular food trucks would set up speakers and amps.  Over time, it has grown into something else (just like the tech conference which has enjoyed a halo effect from Twitter’s successful promo there in 2007).

For years, purists and Austinites have decried the coruption of what made SXSW great, as commercial interests set up shop in hopes some of the cool factor would rub off on their brands.  This year it seemed to hit a tipping point (and not the kind to which Gladwell was referring).

Yes, there were still over 2,000 bands playing over a mere 5 days.  Yes, the hot dog stands and food trucks were still hosting showcases.  Yes, the hipster watching did not disappoint.

But everything was much more headliner driven.  The lines were outrageous, and surviving without a wristband or badge, as I did the first time I went to SXSW, was almost unthinkable. The RSVP list to Fader Fort filled up in mere hours (just like Coachella, even after doubling capacity this year with two weekends of the same music).

I found myself with lots of downtime during the day and conflicting showcases at night that I wanted to see because lineups had been stacked to draw crowds, not actually showcase new talent.  I discovered more new music listening to Earbits this year than I did going to shows at the actual festival.

SXSW was bound to change and evolve so no lamenting what has been lost (although I do hope next year they get back a bit more of the South By mojo).  I use the SXSW festival to illustrate a point about the health of the music industry.

Music festivals are a booming business right now, and that should be instructive to the rest of the music industry.  The industry is worried about album sales, but people are spending $200 to $400 for general admission tickets for each of the music festivals being held this year all around the US (maybe the festival numbers are in the hundreds by now).  That doesn’t include travel, lodging, food, alcohol, and merchandise. Why?

Everyone in the music industry to read The Experience Economy by Joseph Pine.  I read it some years back, and the book itself was published in 1999, perhaps a little before it’s time.  The future of music is in creating shared emotional experiences.  Records, 8-tracks, tapes, CD’s – those were all part of a products centered business model.  The logical evolution is music as a services (e.g. soundtracks) and then experiences.

That’s why Amon Tobin’s show is so impressive, even if I find the actual music mediocre (I’ve seen his set twice now but would never buy the album) and why Girl Talk can play the same mash-ups of other people’s music but the crowd still goes wild when the stage crew throws out some balloons and confetti.  The experience is why people argue that vinyl is better even if the science says otherwise.  I suspect it’s also why mind altering substances and music have been so highly correlated since even before Woodstock (correlation not being equal to causation, I won’t speculate whether people seek to enhance the music with drugs or drugs with the music).

When people go to a music festival, they are seeking out an emotional, shared experience through sensory stimulation.  The experiencing self is looking to create fond memories with others – friends, the artists, the audience.  Why else would they suffer so many of discomforts that go along with the typical festival?

The value of the festival is in the combination of three key elements: emotion (a happy one), experience (musical performances), and sociality (with other people).  For some, the music is actually secondary.

Learning from the contemporary success of festivals, how else might the music experience be enhanced to deliver more value to the consumer (fans) and more willingness to pay (for whatever)?  Lights and visuals have been done.  What about smell for an even more profound emotional association?  What could technology offer to share the experience with others asynchronously?

In the end, music is performance art.  In fact, for most of human history, music was likely participatory art, taking on the character of performance only much later.  (Maybe we should actually get back to that participatory format.)   Audio recording and playback is a modern concept, but regardless of the state of technology, the purpose of music has not changed.

Music still has an important part to play in life.  The technology and our capabilities have changed, dramatically in recent years.  The old business models won’t work anymore, but the demand hasn’t gone anywhere.  There is still value in music.  Someone will figure out how to capture it, and it will be those who appreciate its connection to emotion, experience, and sociality.

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Just yesterday I had a very brief Twitter exchange with Grant McCracken that centered on an HBR article he had written.  Grant was gracious to even acknowledge and reply to my tweet since I don’t really have the credentials to criticize a published author, respected academic and experienced consultant.  (Please excuse the use of the more familiar first name; it represents no claim to true familiarity.)  I suppose all is fair in love, war, and the pursuit of knowledge.

Today I felt compelled to develop my argument at bit further than 160 140 characters and hence this post.  Keep in mind there may only be a distinction without a difference between Grant and I; I am coming at this issue as a music fan only, not with a more circumspect ethnographic/anthropological perspective or the years of experience as a music writer that Simon Reynolds has (the latter of which might actually be more of a burden in the context of a paradigm shift).

The question I think Grant and I are exploring is, “Is innovation in pop music really on the decline?”  I feel the answer is no, as I suspect Grant does too, but my reasoning is different.

The Long Tail

Pop music is being displaced by indie music to such effect that my indie music snob friends have a name for it: mindie (mainstream + indie).  The Big 4 are losing their grip on power.  Some of the brightest stars in the recent music firmament have come from a comparably small label.  Top 40 has become formulaic.  Sure, club bangers will still sell because they still have their place, but now much more other music has its place as well.  In terms of innovation and what music does for culture and society, the long tail is the new pop.

By now most people are familiar enough with the concept of the long tail first introduced by Chris Anderson that is has entered popular lexicon.  While Anderson explored the economic implications, the long tail is a social phenomenon as well.  Small, spatially or temporally separate communities are able to form around interests and connect in way that before were prohibitively costly or difficult.  This is as true of furries as it is of eclectic tastes in music.

What music does for culture and society (credit Grant McCracken)

The means of music production and distribution have become accessible to the masses enabling much more experimentation.  Not everything is going to be good but that’s how innovation works.  You try something, fail, learn, try again, fail, try again . . . hence the Silicon Valley adage, “Hurry up and fail so that you can succeed sooner.”  With more experimentation comes more variety and more choice for the music consumers, the fans.

When I was in high school and college, big time music fans and festival goers wore hemp necklaces and traded bootleg tapes in the tradition of The Dead, and punk rockers and rude boys copied song lyrics on the school photocopier.  It was all too much effort for most people so radio ruled.

Now, discovering and sharing music is so much easier everyone is participating in ways they never did before.  People aren’t dependent on terrestrial radio to get turned on to new music.  There has been a boom in the festival scene, and Bonnaroo is booking acts far removed from Phish and Widespread Panic (although Widespread brought the festival to a beautiful close this year if I don’t say so myself).  As Perry Farrell noted at the recent Spotify party, reaching 1 million people with your music is doable in ways it never was before.

I have to admit, I haven’t listened to terrestrial radio in a long time so I’m not sure what really does or does not get a lot of play, but I’m pretty sure Skrillex isn’t getting  play time on your average pop radio station.  Has his music been any less influential? Is it any less innovative?  Are the crowds any smaller for it?  He’s still on the cover of SPIN.  Popular is being redefined, not by payola and the “powers that be” but by the fans who are connecting with the music and one another in totally new ways.

Take the  juggalos as another example.  Scary perhaps but no less an American subculture created from music.  I can’t say I really understand it or if I think it is really a good or bad thing that it exists.  It seems as though being a juggalo has given them a way to overcome the intense social isolation and resentment that inspired the tragedy at Columbine years ago, without having to act out the violent imagery of the scare-core rap they all enjoy.  The point here is that trends are still finding expression in sound, style and sensibility, however alarming they may be.

Maybe Reynolds feels that there’s no value, no meaning, cultural significance or social purpose to these new forms of music; it’s all vapid at best or deranged at worst.  I haven’t had a chance to read his book.  If so, he’s just as out of touch with youth culture as MTV.  I wasn’t around to hear it, but I would venture to speculate the older generation were as dismissive of Woodstock hippies as Fox News has been of the Occupy Wall Street movement and others were of PLUR and the rave scene.  This is a paradigm shift none of us are likely to really understand except in retrospect.

This post wouldn’t be complete without also defining the terms we’ve been using: pop and innovation.  (I suppose if I was a better debater I would have defined my terms upfront but copying and pasting it all to rearrange this post is so much effort.)

The Cool Kids Lunch Table

In some sense, this entire conversation  makes no sense because we’re mixing concepts of pop and subculture.  By definition, a subculture is something other than popular culture – pop – so it might be argued that innovation in pop music isn’t on the decline since there’s never been all that much innovation in pop music to begin with.  The innovation happens on the edges of what’s popular, only later to be assumed into pop culture.  Grant makes reference to punk culture but with the exceptions of Rancid and Green Day, was punk ever really pop?

That might be where the greatest divide between Grant and I lies.  I deny that popular music is or ever really was, “great lab bench for our culture.”  I think the dissemination of cultural innovation happens in a way more similar to Malcolm Gladwell’s description in The Tipping Point.  If we accept this premise, then my argument above can be synthesized and made more simply: music and subcultures are still doing what they always have for society only now the effects are being amplified by social technologies.

Real Innovation

We also must be careful not to confuse innovation and originality.  Innovation is a new way of thinking that creates value.  Innovation does not require originality however. It can simply be a new perspective on something old and familiar that makes it fresh, more relevant or simply more accessible.  To quote Barbara Grizzuti Harrison, “There are no original ideas.”  (The irony is I remembered first hearing a quote to that effect somewhere else, from someone much further back in history. I thought it was Descartes but with a quick internet search could find nothing attributable to him so went with what was more accessible.  Great quotes can be like that.)

After the recent, tragic loss of probably the greatest innovator in my lifetime (and perhaps many lifetimes to come), I am reminded of the context in which the iPod was launched.  It wasn’t the first MP3 player on the market, and it didn’t introduce a revolutionary new technology per se.  Apple and Steve Jobs took what was already out there and combined in a novel way that was very compelling for consumers.  They created a simple, elegant, and revolutionary whole product.

Isn’t that what a mash-up essentially is?  Does anyone deny Greg Gillis‘s talent as a musician and innovator?  Watch Morgan Spurlock’s profile of him if you are a doubter.  Better yet, experience the electricity of one of his performances.  That  sort of visceral, emotional experience is what binds people together into subcultures.  It offers people the kind of social identity they crave, especially young people still trying to define who they are.

To be sure, I think this assessment of innovation is fairly consistent with the argument that Grant makes.  Where we might part ways is the notion that innovation in music has been crowded out by other forms of innovative media.  There is enough cognitive surplus to go around.  If anything, music is more important than ever.  In an always on, always connect world, with so much competing for our attention (read my blog!), the 24 hour news cycle and fretting about a generation that has lost its the ability to focus, fostering an emotional connection is essential, and emotionality is at the core of great music.

Rock On

Music will always play an important role in culture and society.  It has an expressive quality that is almost mysterious.  It inspires and imparts meaning.  We aren’t seeing a decline in innovation in music.  We are seeing a proliferation.  It’s a very exciting time in the music industry, full of disruption and opportunity.  I have no doubt that artists around the world are working on the anthems to which we will all march (or dance) together into the future.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary. -Steve Jobs, 1955-2011

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A Fungible Service

Spotify has created a lot of buzz with its US launch. Even though Rhapsody has been around for some time already, it looks like streaming is finally primed for mass adoption.  I’m unconvinced whether Spotify’s freemuim model should really be credited as the catalyst or if social trends have just progressed far enough  for people to embrace the idea of consuming music as a service rather than a product.

Regardless, the freemium model is a smart move for MOG, Rdio, Spotify and the rest because streaming is destined to become a commodity service.  Whoever can drive adoption the fastest and furthest, building the largest user base along the way, will come out in first in terms of revenues.  Update: Spotify seems to be excelling in the marketing department in general, and it’s paying off.  It’s not just their freemium model either, since that’s already been imitated; they’ve just been very successful at building buzz and they are forging valuable partnerships to promote their platform (I recently heard Radiolab podcast will have a playlist with music from their show).

In time, the music library will cease to be a differentiator since it is not in a label’s best interest to be exclusive to any one streaming service.  Technology bugs will be worked out across all the platforms.  Last.fm will erode the perks of building a “walled garden” as it scrobbles its way to a consolidated data set of individual music preferences across devices and services, and Google+ is already pointing the way to more open social networks, in which network effects do not offer the same competitive advantage as before.  (Update: Now Facebook Music has jumped into the game with its partnership promiscuity.)  Stickiness will come only from the “collections” and playlists that users build up over time (perhaps some will show a preference for one UI over another), not something I would consider a defensible advantage.

Streaming music service providers will have to compete primarily on price or find another way to differentiate themselves.  You are already seeing this happen with the introduction of “radio” features, first with MOG, then Rdio (and now Spotify), to better compete with the likes of Pandora.  With music library and technology approximately equal (as experienced by most consumers), the battle lines will likely be drawn along two primary dimensions.

This is by no means a well researched perspective on the landscape, just a cursory treatment for consideration and discussion. Technology has been excluded because I don't feel informed enough to make an estimate.

Discovery

Listeners want to find new music; bands want to be discovered.  Facilitating discovery is what the Music Genome Project is all about.  Before, discovery happened mostly through some combination of radio airplay and friends gossiping.

The new approaches to discovery will apply emerging technologies to those old forms.  Algorithms will act like  radio DJ’s, presenting audiences with new music they might like based on what they have heard and requested already.  People will be presented with contextually relevant information about what their friends are listening to and liking as well, without even having to ask.

The advantage of an algorithm over a human is the ability to accrue more specific information about individual users and their social connections and pull from a larger library of music than any one real DJ can actually hope to know and recall in a lifetime.  (I think Slacker Radio is really about nostalgia, not any real advantage from human DJ’s.)  The challenge is preserving a sense of serendipity that comes from random connections and dealing with the (currently) very limited ability for computer programs to read human emotions.

Sociality

Sociality is not just another form of discovery.  Sociality refers to the shared experience of music.  “Social discovery,” is the intersection of the two, but for my purposes here, I am including that as part of discovery in general.

People are social animals, and they want to experience music together.  That is the unmet need that Turntable.fm filled.  Unless we were already physically together, I couldn’t listen to Pandora or iTunes with my friends.  Turntable.fm (and others since) made listening to music social again without the limitations of physical distance.  Update: Facebook Music has already done a lot to make music social again, enabling people to listen along with their Facebook friends when a song  appears in their ticker.  Unfortunately, listening still isn’t synchronized though.  What’s most notable here is that Facebook isn’t picking winners.  It has engaged a number of partners, many of them direct competitors, providing none a clear competitive advantage.

Positive psychology has shown the benefits of synchronized movement (also known as dancing).  We’re only just beginning to explore ways for people to dance together to digital music.  Surely still more opportunities exist.

Music can be profoundly emotional.   It provides a soundtrack to our lives and marks the sentiment of occasions.  Just look the role it plays in film and sports.  People connect emotionally with other sentient beings, not their computer speakers, but technology can help forge those connections by allowing users to tell stories about and with music.  That is what sociality is all about.

What kind of business will streaming music be?

What’s a streaming service provider to do if they’re core service offering is destined to be fungible? Choosing whether to be a product innovation, customer relationship, or infrastructure business will go a long well toward helping guide strategy.

Brainstorm the Possibilities: This does not actually represent any one business model out there. Rather, it explores some of the business model elements and possible sources for business model innovation. What's lost in the image are the notes behind each "Post-It."

Although it is where a great many companies start, product innovation seems like it will be the hardest to defend of the three.  Returning to the example of the radio feature, after MOG introduced its slider, it wasn’t long before Rdio had a radio button, and now Spotify has its equivalent.  Moreover, a streaming service that positions itself as in a product innovation business will be competing against the countless startups out there trying to shape the future of music as well.

MOG, with its roots in a social music network, seems to have aligned itself to a customer relationship business.  Deepening and extending the customer relationship will, of course, still depend on innovation, but being a fast follower can suffice.

Spotify seems to be competing as an infrastructure business with its ad supported offering, and I think that is where the mass market is today.  A customer relationship business will appeal only to the most fervent music fans who are willing to pay for the incremental value of greater customer intimacy (which comes at a greater cost to the service provider).

The open question in my mind is whether ads will generate enough profits for Spotify or if they will need to convert listeners to paying accounts and sell recordings to succeed.  It doesn’t seem to be working out that well for Pandora, and once users have to pay, I think both MOG and Rdio have a more compelling value proposition.  Time will tell.

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Burning Man sold out for the first time ever this year.  Every year, people put off their ticket purchases until the last minute because going to The Burn is such a significant investment of time and resources.

Those who could not commit early were left out, including some of the prominent DJ’s who are known for performing on the playa.  Many are upset, blaming scalpers who violate the Burning Man ethos with their unabashedly exploitative profit motive.

The Burning Man organization insists it has taken sufficient precautions to prevent scalpers from cornering the market, but why should they have to implement such special measures (whatever they are) to begin with?

Scalpers are a sign of an inefficient market.  Instead of limiting the number of tickets a person can purchase at one time based on their address, credit card, or retinal scan (yes, I’m being hyperbolic) can’t we design a more efficient market for event tickets that will remove any profit opportunity for the scalpers?

Let’s be honest, scalpers are adding no value to the transaction.  These aren’t brokers facilitating price discovery and connecting disparate pools of liquidity the way Wall Street is supposed to function.  They are exploiting the system for personal gain (the way Wall Street frequently actually does function).

Ticketmaster is catching on, but I don’t like the notion of prices actually going up.  Other examples seem like people are trying to apply the airline model to a new context, and I think that’s well intentioned but wrongheaded.  Prices start low, then gradually increase.  That makes sense when you are trying to differentiate between business travelers, who tend to book last minute with a higher willingness to pay, and casual or recreational travelers.

Allow me to offer what I think would be a better approach, better for fans and better at undermining the scalper’s business model.  I’ll describe my approach in the context of music concerts because those are the kinds of events nearest and dearest to me and happen to be in an industry going through a significant period of disruption.

First of all, start prices high and work your way down, not the other way around, which only encourages scalpers to scoop up tickets fast and early.   When tickets first go on sale, diehard fans are only other ones looking to buy as quickly as possible.  They don’t want to wait to coordinate with a bunch of people or see what else is going on that weekend.  Diehard fans will have the highest willingness to pay, and they are willing to accept the risk that plans will fall through for the option value of having a ticket in hand if the event sells out.  I’ll address why starting high and working your way down is NOT exploiting your biggest fans.

Scalpers are only going to be willing to pay up to the highest price they can charge a fan.  By starting high, you actually take those fans out of the market so the scalper has little to no opportunity to make a profit from reselling tickets.  Let me explain why starting with how this dutch auction style of dynamic pricing would work.

Assume for a minute that the music industry has good data on concert ticket sales.  You want to chart ticket sales over the time period they are on sale and run some statistical analysis to construct a model that will predict how many tickets you are likely to have sold on any given day prior to the actual concert.  (Note: I only know enough statistics to be dangerous. I also know enough from working with algorithmic traders and casually reading books like Supercrunchers to realize that there are quantitative minds out there much better equipped to work out the actual model that I am about to propose. What follows is an elementary model and easy enough for me to describe without working out the actual details of a quantitative model, but I am entirely convinced it is possible to model ticket sales and surely far less complex than the modeling done for fluid dynamics and climatology.)

The model will ultimately be a function of a number of variables, including the artist album sales in the last year, lifetime album sales, current place in the charts, population density of the area, venue capacity, time remaining until the concert, date and ticket price, and so on.  A better model will take into account demographic information about the artist’s fans since the effects of these variable is likely to bias the other variables if omitted.

In any event, the model will be an approximation of the expected behavior of people, an element of complexity that will render even the best model incapable of perfect prediction.  The model merely provides guide posts, some estimates for how many tickets you can expect to sell over a given time period and in total at a given price point (controlling for other explanatory variables of course).

Total estimated ticket sales over a series of price points will allow you to perform some portfolio optimization calculations about the right number of tickets to offer in each price tranche to ultimately sell out the venue while maximizing revenue (everyone prefers performing to a full house).  These values will be used to decide when to adjust prices downward under the dynamic pricing scheme I’ll continue to describe now.

Starting at a price of P1, you should expect to sell a quantity of Q1 tickets by day T1 (all the value coming from the model).  If day T1 arrives and you have not sold the quantity expected (within some range of tolerance), decrease the price by a predetermined increment, based on the demand elasticity predicted by the model, to get back on your “sell out” trajectory.  Hold the prices there until day T2, at which time you should have sold Q2 tickets (according to the model).  If still you have not, decrease the price by a larger increment to accelerate sales.

Backing up now, if on T1 you have sold significantly more than Q1 (outside the band of tolerance) then you keep the price where it is until you reach a time, Tn, when the quantity sold comes back into line with what the model predicted.

The purchasing decision of each fan is going to be a combination of their willingness to pay (“How much do I really want to see this show?”), their disposable income (which actually has an indirect effect by way of willingness to pay), and (this one is important) their estimation of everyone else’s willingness to pay.  I may be willing to pay $50, but if I think everyone else is only interested in paying $25, I will wait until prices get closer to this sell out price point before buying.  In effect, you are using the wisdom of crowds to set price.  All the elements are there: diversity of opinion, independence (outside of your small coterie of friends), decentralization, and aggregation.

A few people will buy high because their willingness to pay outweighs their estimates of others or because they just got their estimates wrong, but most are going to buy as soon as it hits the market clearing price – a sold out concert.  A few people may wait until it is too late to buy because they have a lower willingness to pay or they are just trying to game the system for a lower price; it won’t be because scalpers have artificially constrained supply.  For the majority, the porridge will be just right.

A scalper’s ability to make a profit would depend wholly on the ability to predict that equilibrium price, an impressive feat.  Buy too high, and the scalper will have to sell at a loss in most cases since the only buyers left are the ones that just waited too long (lower willingness to pay).  Buy too low, well, you can’t.  The concert has sold out and there are no tickets left for the scalper unless he wants to stand outside with a sign saying “Tickets needed.” (The argument could be made those “scalpers” actually are providing a service for people left holding unused tickets.)

A more efficient market means not only do fans get a better price, but artists, athletes, and performers, along with the hosting venues, promoters and ticketing agents, all get a better return on their contribution to the value chain.  No one is being exploited because when you aren’t dealing with life’s essentials, a fair price is whatever the buyer and seller agree to (it’s called capitalism).  Without the scalpers taking a cut, there is more left value to go around.  The total revenues can be pooled and then split according to an agreed payment schedule amongst everyone so everyone is similarly incentivized to maximize total revenues.  (The design of the payment schedule is another lengthy discussion and will be subject to lengthier negotiations, but the last point about incentives is what’s most important.)

For the fans that just don’t have the funds to buy early, this is an opportunity for the artist to build brand loyalty.  Allocate a tranche of tickets for your biggest fans.  Give them a redemption code with each album purchase worth one ticket pre-sale at a discounted price.  Forget the stick; offer a carrot for rejecting piracy.  The discount offered does not have to be extreme; just whatever seems reasonable to the artist for rewarding fans.

If you are a quant and think you can improve on the above, I’d love to hear about it.  Reach out on my about.me page or comment below.

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