LCD Soundsystem, Ticket Pricing, and IPOs

LCD Soundsystem is one of my favorite bands, and the favorite band of Stone Soup guest blogger Thomas. Unfortunately, they will no longer be producing music together, and planned a final, farewell show at Madison Square Garden. This farewell show is the subject of much media frenzy because, apparently, no one was able to get tickets for it. One Slate writer recounts her experience trying/failing to get tickets:

At 11 a.m. on Friday, Feb. 11, Ticketmaster was scheduled to put tickets to the show on sale. At exactly 10:50 a.m. on Friday, I went to Ticketmaster’s site and set up the appropriate purchase page. At 10:58, I started refreshing constantly. At 11, poised and ready, I got … nothing. The site said there were no tickets available. I reloaded the page madly, and then tried with a new browser window. No tickets. Not even in the nosebleed section.

Twitter was abuzz with chatter on how it was impossible to obtain LCD Soundsystem tickets. The Onion’s AV Club joked, “Anyone who’s glanced at their Twitter feeds this morning knows that the inability to purchase tickets to LCD Soundsystem’s Madison Square Garden farewell show rivals Mubarak’s exit for topic du jour.”$50 tickets appeared shortly thereafter for thousands of dollars apiece on reseller websites like StubHub. As the Slate article explains, and as the LCD Soundsystem frontman James Murphy ranted about, the problem was caused by scalpers who used computer programs to circumvent Ticketmaster’s [pathetic?] Captcha system and snap up all the tickets within seconds of release. A few pre-sales, and hold-backs from the band and venue, may have reduced the actual ticket supply. The illegality of paperless tickets (in New York)–where fans must present the purchasing credit card on the night of the concert–eliminated one method of solving the scalping problem. Anyway, Murphy mitigated the problem by announcing the band would play four additional shows at Terminal 5 before the MSG concert, which he hoped would depress ticket prices for the MSG show and, in an ideal world, screw over the scalpers a little bit.

A lot of people have mourned the naivete of James Murphy, and called for an auction-based system where fans could buy tickets closer to their actual value. Matthew Yglesias writes:

Optimal allocation of LCD Soundsystem tickets requires demand-responsive ticket pricing. But good rock bands are not composed of narrow-minded amoral profit-maximizers. Consequently, they’re motivated to price tickets at a lower level than the market will bear leading, in turn, to middlemen getting the rents. What’s needed is a way for bands to price tickets at demand-responsive levels in a way that’s consistent with the norm that the guys in a cool band shouldn’t be narrow-minded profit-maximizers. The best solution here, I think, is charity. Someone (Bono?) needs to set up a trust fund to which bands will allocate the excess revenues that accumulate when the market price of concert tickets exceeds the “fair” price as determined by the bands’ moral intuitions. In that case, instead of a situation where “[t]ickets with a face value of $49.50 were going for 12 times that” on a secondary market you’d have a scenario where tickets are going for $500 and $450 out of that goes to the trust fund. The fund could take the money and give it to poor people in Africa and India.

In fact, I don’t think there’s anything suboptimal about the ticket pricing. The goal of selling tickets is not merely to make money, or even to ensure your fans can see you, but to generate buzz about your music/record and in so doing increase sales. Buzz is created when there is high demand for a scarce product–when tickets are unobtainable, not when the price is set high enough that just enough people buy them to fill the venue.

Felix Salmon blogs about this (coincidentally I had the same idea and started writing this post on the 17th, but I was too lazy to finish it, and he published it on the 19th) and compares it to IPO pricing.

People sympathetic to the band, like Rob Cox, claim that LCD Soundsystem and its promoters didn’t understand the economics of scarcity when they put the MSG tickets on sale. I, by contrast, think they understood the economics of scarcity all too well — and successfully used it to generate buzz and publicity. What really happened here, I think, is akin to the IPO of theglobe.com back in 1998, where the supply of new shares was so tiny that the price soared from $9 to $97 on the first day of trading. In turn, that generated lots of headlines, and ensured that the number of people who had heard of the website increased by orders of magnitude.

Supply and demand for concert tickets aren’t static numbers which then get reflected in prices. There are complex feedback loops here too: scarcity and price mechanisms can feed back into increased demand for tickets. Certainly this story has meant a large increase in the number of people who know that LCD Soundsystem is playing its last-ever gig at MSG in April. It’s surely naive to think that all the second-order effects here were completely unintended.

In fact this occurs all the time in IPOs. For an investment bank (underwriter), setting the price for an IPO can be tricky because since there is no existing trading of shares, it can be hard to value the company and decide how much to pay for an unknown quantity. In a phenomenon called “underpricing”, the share of an IPO will tend to jump up significantly within the first day of trading, i.e. there is a large percentage difference between the “offer price” and the share price traded on the first day:

Since the 1960s, this ‘underpricing discount’ has averaged around 19% in the United States, suggesting that firms leave considerable amounts of money on the table. Underpricing has tended to fluctuate a great deal, averaging 21% in the 1960s, 12% in the 1970s, 16% in the 1980s, 21% in the 1990s, and 40% in the four years since 2000 (reflecting mostly the tail-end of the late 1990s internet boom). Clearly, underpricing is costly to a firm’s owners: shares sold for personal account are sold at too low a price, while the value of shares retained after the IPO is diluted. In dollar terms, IPO firms appear to leave many billions ‘on the table’ every year in the U.S. IPO market alone.

There are many theories rationalizing this apparently irrational phenomenon (many addressed in the paper linked to above), and they can also be made to apply to concert ticket pricing. Julian Franks argues that it is advantageous for the pre-IPO shareholders to underprice because it leads to oversubscription and rationing–an investment bank will have to reduce the block size of shares sold to their customers because so many of them want to purchase the IPO, and the bank wants to satisfy many customers. This rationing can create diffuse shareholder rights, and discrimination on who is sold large shares of the company. From a band’s point of view, cheap ticket prices may be better if you want the opportunity for poorer, younger, and more hip/exciting fans to predominate in the audience rather than wealthier, but more subdued fans–Brooklyn vs. Westchester. They’d rather have fans willing to camp out for tickets, than those who will only click a button to pay higher prices.

Underpricing is also beneficial for the underwriters of an IPO. The paper cites a study which “find[s] that overpricing (but not high levels of underpricing) lead to a decrease in the lead underwriter’s own stock market value, whereas moderate levels of underpricing are associated with an increase in stock market value”. One explanation is that underpricing and the subsequent rise in stock price enhances the reputation of the underwriter because the IPO went really well, and future companies will seek to go public with that underwriter. Similarly, a sold-out venue or sky-high ticket prices is much more beneficial to the reputation of a band manager or concert organizer than an event that is full, but with no additional demand for tickets.

So when LCD Soundsystem and other bands decide to offer their tickets at low face-value prices, they’re making a strategic economic decision that is mirrored by companies like VISA and I-banks like Goldman Sachs–hardly the stuff of charitable fools. Even if paperless tickets were made legal, or some perfect Captcha system emerged to prevent any scalper from purchasing a large quantity of tickets (but secondary markets like StubHub would still exist), bands and band managers would/should still endeavor to underprice their tickets.

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3 thoughts on “LCD Soundsystem, Ticket Pricing, and IPOs

  1. Nice post – I need to come here more often. My only question is…why would LCD Soundsystem be so interested in generating publicity for its last-ever show upon breaking up? To take slight issue with the analogy, theglobe.com didn’t exactly plan on being out of business as soon as it ultimately was…

    • Thanks for reading/commenting Szabla! I think you’re right that perhaps LCD Soundsystem did not have as much of an incentive in this particular case, it being their last show–though if people are right about the number of tickets held back by the band, perhaps they do benefit from higher re-sale ticket prices. The band members also may have simply been following their tradition/what other bands do of not having a smarter demand-responsive system (though I did read one conspiracy theory remarking how coincidental that Terminal 5 was open for preceding shows). Still, even without the band, it could still make sense for their impresario to underprice, for the reputation-enhancing effects discussed.

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