How the concert industry works
It seems like there's an awful lot of curiousity about how concerts at the Alerus Center works, particularly because of the losses suffered in the concert fund. So I did a little Googling around to see if I could learn anything about the concert industry and stumbled on this splendid volume, available for preview on Google Books.
Here's some bibliographical info: Marie Connolly and Alan B. Krueger, "Rockonomics: The Economics of Popular Music," Handbook of the Economics of Art and Culture, Vol. 1, eds. V.A. Ginsburgh and D. Throsby (Elsevier B.V., 2006).
Contractual arrangements between bands, promoters and record labels are heterogenous, but the typical contract resembles a book contract, with an initial advance and then royalties if sales exceed a certain level. The typical contract between a band and a concert promoter is most easily illustrated with a hypothetical example. Consider an agreement covering a single concert.* The band receives a "guaranteed advance" -- e.g., equal to the first $100,000 of ticket sales, and then, before additional revenue is distributed, the promoter recovers his expenses and a "guaranteed profit" -- say $50,000 for expenses and $22,500 for profit. The expenses could include advertising, rent for the venue, costs of unloading the equipment, etc. The band also has expenses (e.g., travel), which it pays for out of its income. The promoter and the band split any ticket revenue above the guarantee plus expenses and minimum profit (above $172,500 in this case), usually with the band receiving 85 percent and the promoter receiving 15 percent of these revenues. The band's guaranteed advance and percent of revenue after expenses is higher for bands with greater bargaining power.
In its negotiation with the promoter, the band (or its manager on the band's behalf) agrees to the concert price, which naturally affects the amount of revenue collected. In addition, the band usually receives 100 percent of merchandise sales (e.g., T-shirts) that take place at the concert.** The venue usually receives the beer and parking revenue. An interesting economic question is why contracts for concerts take this form. Because the parties receive revenue from the sources for which they are most responsible -- the band and promoter from ticket sales, the band from merchandise sales, and the venue for parking and food -- it is possible that this division of revenue streams provide optimal incentives for efficient provision.
Promoters contract with a ticket distributor to distribute tickets. Tickets may also be distributed directly by the venue box office and by the band to its fan club. By far the largest ticket distributor is Ticketmaster. Ticketmaster also has exclusive arrangements to distribute tickets for some venues. Ticketmaster fees are usually around 10 percent of the list price. Unknown to the consumer, in some cases the venue, promoter or performers receive a portion of this fee, depending on their contract.
* It is interesting to note that as promoters have become more consolidated, more bands have signed nationwide tours with a single promoter.
** In some cases, the band will be required to give a proportion (e.g., 30 percent) of the merchandise sales to the venue for the right to sell there, however.
The authors also note that the growth concert prices have exceeded inflation overall and, since 1997, the growth in prices for movies, theaters and sports.
Some concert promoters say the increased cost of production -- for example, pyrotechnics and insurance -- as a reason for higher prices. Some blame the monopolization in the concert promotion industry, but the authors found little financial evidence of this in the United States. Additionally, concerts have risen in cost in Canada and Europe about the same period.
On the other hand, the "capacity utilization rate," or the percentage of available seats that are sold have dropped over the last two decades, dropping from 90 percent in the late 1980s to a little more than 75 percent in 2003. The biggest drop was for concerts in bigger venues. In other words, concerts at big stadiums are getting smaller crowds. (Sound familiar to anyone?)
Alan Krueger of Princeton University, one of the authors above, also has an interesting paper online called "The Economics of Real Superstars: The Market for Rock Concerts in the Material World." (Haha.)
The rock & roll industry has undergone profound economic changes in recent years. After growing mildly faster than overall consumer price inflation – and in unison with other entertainment events – the price of concert tickets exploded from 1996 to 2003. The average ticket price increased 82 percent from 1996 to 2003, while the CPI increased 17 percent. Moreover, the number of tickets sold, fraction of seats in the venue sold, and number of shows performed by star performers have all trended slowly downward for more than a decade. These trends are consistent with the industry becoming more monopolized. The question is, why?...
He then comes up with several theories, including:
- Higher costs of production. Krueger is skeptical that insurance, labor, pyrotechnics and such could've caused costs to grow so quickly.
- Monopolization among concert promoters. Again, he's not sure the data supports this.
- MP3s reducing music sales and hurting artists. He likes this theory but admits the data isn't conclusive.
An interesting anecdote comes from Bruce Springsteen and Tom Petty who apparently saw revenues soar because they had lower ticket prices.
For an amusing chart, go to page 35 of the PDF. It shows who's ticket prices have grown the most. The Rolling Stones are the worst, followed by Madonna, Billy Joel/Elton John and U2. No word on Neil Diamond.
Google also uncovered a page about concert promotion costs, that looks at the business from the promoter's point of view:
Booking a venue for the the show is your first step, of course, and it is also likely to be one of your largest costs. Keep in mind: some venues may let you have the space for free, and other venues you may cut you a break if you book your shows in their place exclusively. If you're delivering a packed house every time, don't forget the venue is cleaning up at the bar thanks to all of the people you're bringing through the door, so don't be afraid to try and negotiate a deal if you have a proven track record. You can also reduce venue booking costs in some cases by booking your show on an "off" night - say, a Monday. Be careful, though -- off nights are off nights for a reason, this isn't always a good deal.
Posted by: Tu-Uyen on 4/07/2009 at 4:51 PM | Comments (4) | Permalink
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