Two trading firms, one of them an established Wall Street player and the other a Midwest upstart, are each about to premiere a sophisticated new financial tool: a box-office futures exchange that would allow Hollywood studios and others to hedge against the box-office performance of movies, similar to the way farmers swap corn or wheat futures to protect themselves from crop failures.

The Cantor Exchange, formed by New York firm Cantor Fitzgerald and set to launch in April, last week demonstrated its system to 90 Hollywood executives in a packed Century City hotel conference room….

…On Wednesday, Indiana company Veriana Networks, which says its management includes “veterans of the Chicago exchange community,” unveiled the Trend Exchange, its own rival futures exchange for box-office receipts.

These are exactly the kind of novel risk management marketplaces that will continue to emerge over the next 5 to 10 years as technology enables robust, easy and cost-effective trading and settlement mechanisms and data (which is the raw material of any exchange or risk management toolkit) continues to grow in size, richness and availability across every sector of the economy. Indeed the greatest impediment to the development of such markets is cultural: there is still an irrational, sometime hysterical, aversion to any risk management tool that is non-traditional and can be characterized as gambling. Of course gambling, trading and hedging are indistinguishable in practice and can only be differentiated in context, and really only represent differences in intent. As such, it is very difficult to proscribe one while allowing the other(s). There are however reasonably good, tried and tested regulatory frameworks that have been developed over decades to manage unhealthy practices (insider trading, market abuse, etc.) in traded markets for outcomes and commodities. Using these, regulators should be happy to quickly approve as many new marketplaces or exchanges as creative entrepreneurs and traders invent and let a thousand flowers bloom. I don’t think it is for the regulators to second-guess who might be interested in trading such markets and why, as long as the market rules and framework are robust, transparent and participants are swiftly held accountable for any abusive behavior.

But that certainly isn’t the way the establishment sees things and even those that are developing new markets often see their market as an exceptional addition to the risk management landscape rather than a specific example of a more general case. (Although to be fair this may be simply a tactic to curry favor with the forces defending the status quo in order not to appear to be too heretical and so smooth approval for their specific new initiative.)

“The day that a widow or orphan bets against ‘Finding Nemo 3′ — that’s not a good day,” said Rob Swagger, Veriana’s chief executive.

Why? Why shouldn’t anyone be able to put their knowledge and insights to work to make a return. Why is it ok for a ‘widow or orphan’ to bet on GE’s future performance (by buying or selling their shares) but not to bet on the potential return of a film? It simply doesn’t make sense. Or the view that certain risks or outcomes are worthy of being traded and managed but not others?

Government authorities have generally approved only those futures exchanges that allow for the redistribution of a preexisting risk. Sports betting is not approved because, unlike a farmer selling a futures contract to offset losses from crop failure, neither party involved in the wager has an economic interest in the underlying event.

This statement is of course patently ridiculous. Many, many agricultural risk contracts are traded amongst principals who are neither producers nor end consumers, and to say that there is no ‘real world’ economic risks that could be managed via sports trading is just silly given that sports is an enormous, global business with hundreds of billions of dollars of capital at risk. And if that weren’t enough, it is happening anyways, with admittedly high risks of fraud and abuse. Wouldn’t it make more sense (in the context of protecting vulnerable market participants) to encourage regulated, robust, well monitored marketplaces rather than cling to the current Potemkin-esque prohibition? (Disclosure: I am a shareholder in Betfair.)

In any event, I can only endorse Cantor’s vision of creating a new, more vibrant and useful market for managing risk and structuring finance in the entertainment industry:

Now Cantor hopes for its exchange to be the first of many complex financing products for the entertainment industry. In one of the more ambitious plans, Jaycobs wants to team with filmmakers to create something like an initial public offering of stock in a specific film, staking out a potential new way to finance production.

And I hope they (and Trend Exchange,) working along side the CFTC are able to quickly illustrate that well-built and well-regulated marketplaces can mitigate the potential dangers while at the same time providing a powerful and useful set of tools for managing risk and generating returns. Perhaps this will help pry open the door to seeing more and more outcome markets develop of the course of the next several years.

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• A Futures Site Coming to Bet on Movie Ticket Sales (nytimes.com)
• Weather forecasting. (parkparadigm.com)

Anyhow, he voted for it:

In 2006, the Unlawful Internet Gambling Enforcement Act (UIGEA) was signed into law. This landmark legislation helps to cut off the flow of revenue to unlawful Internet gambling businesses. It outlaws receipt of checks, credit card charges, electronic funds transfers, and the like by such businesses. To do this, it enlists the assistance of banks, credit card issuers and other payment system participants to help stem the flow of gambling dollars.

This is about knowing all of the hard evidence about the byproducts of gambling – crime, corruption, family breakdown, suicide, bankruptcy – and not hearing our country’s leaders speaking out.

Where are the political leaders from both sides of the aisle? Religious leaders? Advocates for children, the poor and the elderly? Their silence is deafening.

It is time for Americans leaders to step forward and address the proliferation of gambling.

(Now replace gambling with banking and maybe we’re talking…UIBEA anyone? LOL)

Anyhow, as widely reported about a month ago, it now seems that the tide is turning, lead by Financial Services Committee Chairman Barney Frank – although I’m not really 100% why other than perhaps that the government needs the money more than it needs to pander to the anti-gambling minority? Or perhaps the gambling oligopolists have decided now they are ready to compete in this market? No idea. Or maybe the message on the absurdity of prohibition coming from the Park Paradigm has worked its magic! (Sure, it could happen…ok probably not.)

I was also pleasantly surprised to learn from (an excellent and newly discovered blog) Zerobeta, that Delaware was thinking about legalizing sports gambling (picking up on an ESPN article):

The newly elected Markell, who has spent the past several weeks listening to proponents of gambling as well its opponents, is much more of a pragmatist than a betting revolutionary. He hasn’t been to Vegas in nearly 15 years and almost never hits the race track/casinos (called racinos) in his home state. But the way he sees it is this: Delaware already allows horse racing and slots. And with the state currently $700M in the hole, offering the Pats minus-six over the Jets when bettors come by to drop a nickel in the slots isn’t amoral. As he told me a couple months ago, “you can’t really be half-pregnant.”

How refreshing. Legalize. Regulate. Tax. The best way to address Mr. Wolf’s concerns, not prohibition. And for those of you who want to trade the probability of this outcome, head over here to InTrade (HT to Chuck for the pointer.)

(Disclaimer: As some of you may know, I am an investor in Betfair and so have an interest in a free and regulated US market (given the current legislation Betfair does not trade in the US in compliance with all federal and state regulations.) However I would hope that those who know me and even regular readers know that my views on the subject are not driven by this investment. Indeed I would say this investment was driven by my views.)

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• Representative vows to put online gambling back in play (arstechnica.com)
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Financial services and mobile computing are a match made in heaven, and the only thing that is surprising about the flurry of activity in this sector over the past 12-24 months is that it took so long. The fact that some of the earliest and most ambitious ventures in this area emerged in developing countries speaks volumes to the fundamental inertia and resistance to change and innovation in large corporations (in particular financial services firms and US/European telecom operators in this case.) People may laugh at the hysterical self-immolating attitude of the traditional media and entertainment industry, but well…you know – ‘glass houses’ and all that…

But things are starting to move. I wrote about BoA’s iPhone offering 18 months ago – the first banking app – and was impressed this week when I saw Nokia invest $70 million in Obopay. (Although I have to admit feeling a tinge of regret, as Obopay has been on our investment radar screen about a year or so now, but we just didn’t yet have the capital to pursue this (and other promising deals.) Like in most walks of life, many potential investors prefer the psychological safety of buying a big brand – whether directly (think of the billions pissed away buying banking stakes waaay too soon) or with the giant private equity or hedge fund groups; as the saying goes, “no one ever got fired for buying IBM’) Anyhow, I’m pleased to announce that one of the companies we have invested in, GnuTrade, has recently announced the first financial gaming app for the iPhone:

The innovative web app, which is featured on the Apple website, gives iPhone users an instant view of how financial markets are performing, and lets them place simple bets on whether prices will rise or fall. The app complements gnuTrade’s acclaimed web-based trading platform (www.gnuTrade.com), using its signature graphics to show live market price action, but via a handy touch-screen device.

Why are we excited about this? Well it brings together three big things: increased consumer interest and awareness of financial markets, mobile computing and mobile/p2p gaming. And all of this in a simple-to-understand, easy-to-use, oh-so-not-wall-street/city kind of way. GnuTrade is definitely not your father’s Oldsmobile so to speak. It’s social. It’s fun. It’s about not looking down your nose at people who are interested but are intimidated by traditional banks and brokers and spread ‘trading’ firms. It’s about prizes and play money or real money (only if you live where this is allowed of course.) GnuTrade is a digitally native markets company: they were early on Facebook (become a fan here), they are the UK’s most prolific twitterer (62,000 updates! follow them @gnutrade), and they have a pretty neat set of widgets if you are interested in adding some markets info to your blog or website – basically they ‘get it.’

Now the iPhone app is definitely not perfect. First of all it is a web app (runs in Safari) as Apple does not (yet?) allow ‘betting’ applications in the AppStore (to get the app for free on your iPhone, simply enter http://iphone.gnutrade.com on your iPhone’s Safari browser, and add the app to your homescreen.) Secondly, it’s beta so it has bugs (feedback and constructive criticism welcomed – send to @gnutrade for example) and thirdly – unless you have a blisteringly fast 3G connection – I would stick to wifi only for now.

They also have a very cool and fun beta application called NewsPools (similar to HubDub for example) that I for one would love to see on the iPhone (are you listening Lieven? ) And while you are at it, let’s see a market on when (what year say) the US will wake up and legalize, regulate and tax online gambling!

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• There’s Gold In Them iPhone (apps) (textually.org)
• Art of Dying Industries (inechmad.com)

U.S. lawmaker to push repeal of online gambling ban (Reuters)

All part of giving the folks at Citi and BoA and elsewhere the tools needed to rebuild their balance sheets by leveraging their new capital in new assets….*(fictional(?) future press release)

But joking aside, I can only applaud this apparent breach in congressional insanity, having long railed at the ridiculousness and sheer hypocrisy of the current state of US law with respect to this industry. And indeed I always thought this day would come (February 2010, c. minute 4 in video, although in a dumb error, I changed my script from President Obama to Senator Obama at the last edit, as I thought reader/viewers in 2005 would find the former too far-fetched…)

Update: “U.S. could reap billions taxing Web gambling: study” (via Reuters) …duh!

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• Push to repeal US Internet Gambling Ban, vote could happen in March (inquisitr.com)

Was cleaning up my inbox earlier today and this interesting promotional offer caught my eye:

Flybe’s website goes on:

This year we wanted to go one step further to give you extra peace of mind. We will give passengers who book flights, car hire and hotels direct* with Flybe in January 2009 free of charge travel cancellation cover in the event of redundancy prior to travel. Offer excludes the self employed and those who have had less than 2 years continuous employment and who do not qualify for statutory redundancy pay as per Statutory Redundancy legislation.

It seemed potentially interesting as yet another example of risk management tools being given to consumers. So I thought it would be interesting to look at the fine print…

Ignoring the irony that the policy backing up this offer is underwritten by AIG UK Limited…I was pretty disappointed (but not surprised) by what I found. Firstly, you are only paid if you cancel your trip. This is totally lame. If you lose your job, you’ll likely be more inclined to take the holiday/family visit/etc. you have booked. Further I’m not sure everyone will realize they only get reimbursed if they cancel, (even though to be fair to flybe they make it clear that it is cancellation coverage…)

On the other hand, I guess if it were true redundancy insurance, you might have a serious adverse selection problem (and AIG would charge more?) even though the terms state that “at the time of booking your trip, you had no reason to believe that you would be made redundant” (does that exclude then everyone who works for a bank? or for AIG UK?)

Anyhow while this particular offer is more gimmick than substance (as opposed to the iTravel Let it Snow promotion underwritten by Weatherbill for example), I think it is indicative of a growing trend to providing consumers with granular risk management tools.

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• Flybe offers refunds for redundant passengers
• Flybe offers free job loss cover

yoonew is the world’s first futures exchange for event tickets. We have created a dynamic marketplace that helps online consumers save money and time when buying and selling tickets. Our real-time trading platform gives fans, traders, and resellers a safe and transparent place to trade tickets.
We are passionate about leveling the playing field and creating a fair marketplace where everyone has equal access to tickets. Our team focuses on building new product features that will bring transparency to markets where pricing information is not universally available. We help customers make more informed purchasing decisions so they are confident that their purchase or sale concluded at a fair price.

TechCrunch did a write-up in early January and they got a lot of coverage in the run up to the recent Super Bowl game:

I’m not 100% convinced that they’ve nailed it but it is certainly a very interesting step in the right direction in terms of introducing modern (and useful) markets technology into the historically moribund market for live event tickets. Essentially, they are selling call options on tickets to major sporting events. Moreover they have taken an original and clever approach by – at least initially – focusing on major sporting events (like the Super Bowl) where the terminal value of the underlying is different depending on the buyer. ie If “your” team gets through to the game, the tickets are of more value to you. Of course, with a properly functioning secondary market (irrespective of whether on yoonew’s upcoming secondary exchange or another market – StubHub, etc.) financially this should be irrelevant – the ‘market’ value of the tickets depends only on the clearing price of the event once the participants are known. (ie Super Bowl tickets on balance will be worth more if two teams with big, passionate fan bases are playing as opposed to two teams from smaller markets; NY v New England more valuable than Kansas City vs Detroit for example.) So a ‘rational’ trader would try to buy the cheapest options – not necessarily the option on his team, especially if you could re-sell the option before delivery. (I’m not sure this is allowed, if not it should be.) Nonetheless, the (marketing) focus on ‘real’ end buyers (people that hope to take delivery, rather than just make a financial profit) is a good angle as it plays to the psychology of ‘hedging’ rather than speculating and should add heterogeneity to their risk book.

Notwithstanding the ridiculous US laws proscribing trading on sporting outcomes, there would also potentially be very interesting arbitrage and hedging opportunities (for both yoonew as the market-maker and their customers) with trading sports risk. For example (using the same teams as above) going long New England and NY to make the Super Bowl to hedge the extra cost of delivering tickets to this pairing (vs a less valuable team pairing.) Or going long the team in the host city (which would also probably be more valuable on delivery if they ended up playing.) I’m not sure if they have any plans to offer markets on European (or global) events – it would have been great for the recent Rugby World Cup, imagine if England fans could have bought (what would have been) cheap options on the final in Paris – but if they did they could use Betfair to manage their price risk today.

Longer term, ideally you would hope that sports teams and leagues would embrace this kind of market to help manage their own pricing risk. Instead of just selling tickets (in the primary market), they could sell options on tickets and use secondary markets to dynamically hedge their risk. For a team that didn’t sell out systematically, it would be a good way to monetize potentially empty seats and even for teams that sold out perennially it would allow them to be more aggressive in finding the ‘true’ equilibrium clearing price for a given seat. For investors it would be another potential (uncorrelated) asset class to trade and invest in. I wonder what the implied volatility curve on the NY Giants season would look like? Gamma trading based on the weekly game results anyone? The question is do the owners and managers of these teams understand how this could work to everyone’s benefit or will they stick to the old model of static seat prices and unoptimized revenue management?

I hope yoonew succeeds and helps to develop a more enlightened and efficient market for tickets in live events. One to watch.

Update:
All About Alpha has a look at yoonew.

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British MPs who oversee the Department for Culture, Media and Sport are a sensible bunch, with a keen eye for special pleading. But they’ve erred badly today. In a report on online ticket touting, the MPs have today given a strong recommendation for a levy on the resale of tickets for live events. (Report here.)

Resellers – and therefore punters – will be forced to pay this levy, and a levy collection agency would need to be established to distribute the tax. There’s no recommendation that the levy is returned to performers, as the MMF (Music Managers’ Forum) has proposed. As it stands, the levy will merely oil the machinery of the primary market: the promoters and their agents. This is a quite amazing stunt to pull off – and should serve as a wake-up call to everyone…

…there’s a very healthy after-market for tickets, sold through auction sites such as eBay and bulletin boards such as Gumtree and Craigslist. This is exactly what the internet is supposed to be good at: eliminating wrinkles caused by consumers having a lack of information. And it works very well.

Yet the major promoters have very nearly succeeded in banning this market outright. Instead they’ve won themselves a “right” not enjoyed by book authors, songwriters or composers – or even the RIAA! (Authors, publishers and record companies don’t get a cent from the second-hand sales of books and records.) …

The Committee said it wants the secondary market to continue, and declared itself reluctant to intervene. But it did so anyway, giving credence to a long laundry list of grievances raised by the mega-promoters, including Harvey Goldsmith. Goldsmith wants to extend his huge market power in the primary market by banning the secondary market, and does so by conflating issues such as fraud with touting. Of course, there’s already legislation in place to deal with fraud. But the ticketopolists want to fight fraud the cheap way: getting us to pay a tax, rather than using better technology or employing a few more people to check against abuse. And in this case, they’ve won an improbable victory.

I’ve only had the chance so far to read the summary or the report (but have printed out the whole c. 200 page pdf to read later) but I can’t for the life of me figure out how they managed to reach their final recommendations, which seem to contradict their own findings (!):

While the superficially obvious solution—of increasing ticket prices to whatever level the market will bear—might keep all the potential profit within the industry and effectively eliminate the secondary market, it would run counter to the industries’ pricing policies which aim to make tickets affordable by their grass roots and genuine fans upon whose continuing interest and attendance the long term wellbeing of the industries depends. [Give me a break!!! There are so many holes in this argument I don't know where to start...] We did not receive any evidence from the grass roots or fan bases complaining that they were unable to obtain or afford tickets for their chosen events…

…We also believe that the existing situation whereby large profits can be made on the secondary market with no benefit to the organisers or owners of the primary rights is unfair and must be addressed. [Why????? Change the primary market price if you think it is wrong!!!!] …

…We welcome the initiative of the Music Managers Forum to seek agreement for a voluntary scheme under which sellers of tickets in the secondary market would pay a proportion of the profit to the original organisers to be distributed in the same way as the original amount paid. In return, the organisers would recognise the legitimacy of the secondary seller and not seek to invalidate the ticket being sold. [So the secondary market participants pay the primary underwriters for their inability to correctly price and risk manage their inventory...wow. Wow! All I can say is I wish we had that kind of mechanism when I was underwriting bonds for a living!] Such a scheme would recognise the right of those in the entertainment and sports industries to a share in the profit made by others out of the events for which they are responsible in the same way that creators of artist works now benefit from sales of their works through resale royalties. We believe that a scheme of this kind offers the best chance of meeting the concerns of event organisers while still allowing the secondary market to operate unfettered and we strongly encourage all those involved to consider it seriously.

May I suggest an alternative model? A simple one. Liberalize and regulate the secondary market. Full stop. Fraud and manipulative and abusive trading is proscribed with both criminal and civil penalties depending on the situation (analogous to securities markets.) And the market decides. I guarantee you the world will not come to an end. Events will continue to be underwritten. Artists and performers will end up being fairly paid (sometimes a lot more, sometimes a bit less but closer to “fair market value” in all cases), consumers will be happier, and underwriters and distributors will make a decent living and innovation will thrive.

The crowning irony is that folks like Mr. Goldsmith would probably continue to be very successful – and the Sharpe Ratio of their business vastly improved – in such a new world. After all they still have their relationships which in an efficient electronic market paradigm generally become even more valuable insofar as they cannot be industrialized and yet can be monetized against a much more efficient infrastructure. But fear and habit are powerful ghosts…and change is well, scary. Like the recorded music industry before them, rather than clinging for dear life to the status quo, major promoters should be leveraging their position of market knowledge and leadership to participate and profit from change: partnering with and investing in innovative new participants and business models. And not leave it until it is too late.

I just wish I had know about the report. I would have liked to submit my Tickets & Markets Part 1 and Part 2 as evidence…

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The Sports Economist draws attention to an editorial over at ESPN:

TMQ’s Gregg Easterbrook, after a sensationalized introduction, asks an interesting question:

On Monday, sellers on StubHub were asking from $750 up to a rather comical $164,710 for tickets to the Ohio State-LSU game (the latter price is for a prime luxury-box seat). The season finale Giants-Patriots NFL game might be historic; on Monday, sellers on StubHub were offering tickets for $200 up to $26,000, depending on seat location or box quality. Once the NFL playoff pairings are known, scalper Web sites will come to life for those contests, too. The asking price is not always the selling price, of course. But bowl committees and NFL teams must be saying to themselves — if these seats really are worth hundreds or even thousands of dollars on the free market, we should be the ones pocketing that scratch. How long will it be until professional teams cut out the middle person and simply auction off tickets for whatever the market will bear?Any day now, the NFL is expected to announce a deal to affiliate all its teams with one online reseller, probably Ticketmaster or StubHub, formally acknowledging reselling as legitimate and bringing the NFL an expected annual fee in the $20 million range. This might be just the first step in converting sports-ticket selling into StubHub World.

If one thinks of tickets like shares of stock, it is unlikely that franchises will initially place 100% of each season’s seats by an electronic auction mechanism. But what percentage will be “placed,” and what percentage will be auctioned?

I think rich people in particular are willing to pay to sit in the same spot (”their” seats in some sense) near others that they recognize. The latter component may be modest, but it might also account for the some of the interest in prosecuting scalpers in the old days. Legal reselling increasingly puts that component at risk. This is a stretch, but one way of interpreting laws against scalping is that clubs didn’t mind you selling tickets to your friends, just any old high bidder.

Meanwhile, Fortune recently did a profile piece on Live Nation’s CEO Michael Rapino:

But Rapino isn’t satisfied with dominating the concert business. He is mounting an audacious attack on the record labels and seeking to poach their most important assets – their stars – by turning Live Nation (Charts) into a one-stop operation that handles their every musical need. His offer: We already operate your tours. Why not let us make your albums, sell your merchandise, run your website, and produce your videos and a range of other products you haven’t yet thought of? This is the age of the empowering Internet, after all. Artists are in charge. Who needs a record label?

Depending on whom you believe, Rapino’s strategy will either reinvent the ailing music industry and turn Live Nation into a powerhouse – or cripple his company. Certainly it’s brash talk for a concert promoter whose toddler-aged company has never put out a single record. But artists have been listening closely since Rapino landed a giant catch. In October he struck a first-of-its-kind deal with Madonna, who bolted her longtime label Warner Bros. and signed a ten-year contract estimated at $120 million to let Live Nation handle every part of her business except publishing.

For what it is worth I think they’ll make money on the Madonna deal, even without attributing a value (which is certainly non-zero) to the marketing/business development angle of this innovative and high profile deal.

For more of my thoughts on how I see these markets developing over time, I refer you to a few earlier posts:

• This Just In: Google pre-IPO shareholders owed upwards of $35 billion
• Tickets & Markets, Part 1 (On the shoulders of investment banks)
• Tickets & Markets, Part 2 (Copy, Paste…embrace the inevitability)

Now, I just need to figure out how best to get involved…

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Mountainview, CA – Having sold almost 20 million shares in 2004 at $85, and then another 14 million shares at $295 in 2005 (not too mention various block sales over the years), and with shares now trading at over $700 this represents almost $19 billion of lost value. In addition, since the IPO there have been roughly $3.4 trillion of transactions in Google shares on the secondary markets. Obviously it is unacceptable that not a penny of this is returned to the founders and employees of Google. While acknowledging the benefits that the secondary share market offers to investors and companies alike, and admitting (belatedly) that ‘it does not make sense to criminalize Nasdaq’, to redress this shocking state of affairs, the founders’ agents have suggested that they would be willing to authorize it against agreeing to a levy on all transactions. Set at 1% for example this would amount to returning approximately $35 billion to the Google entrepreneurs and their backers. “And this is just one company! Think of all the other entrepreneurs and venture capitalists that have heretofore been exploited by the maverick and rapacious stock market operators,” said Jim Smith of the recently formed Re-sale Rights Committee of the Santa Clara County Chamber of Commerce.

OK, so I made the preceding article up. But, it makes sense right? After all it’s only fair. At least that’s the view of the (always-ahead-of-the-curve) entertainment industry as reported this week in Variety (thanks to Dom for the pointer):

“The secondary ticketing market offers benefits to music fans and the live music industry alike. It does not make sense to criminalize it,” said Resale Rights Society chairman-elect Marc Marot, manager of Yusuf Islam and Paul Oakenfold, and former chief executive of Island Records. “But there are real issues of consumer protection here, and it is unacceptable that not a penny of the estimated £200 million ($413 million) in transactions generated by the resale of concert tickets in the U.K. is returned to the investors in the live music industry. Where this trade is fair to consumers, we propose to authorize it by agreeing to a levy on all transactions.

“The online ticketing exchanges have consistently claimed that they wish to work with artists and the live music industry. This society presents them with that opportunity.”

I won’t go into it again in detail (see here and here) but it strikes me that instead of vainly trying to preserve an outdated business model by desperately looking to slap taxes and rents on anything that moves, artists and their agents should be looking to embrace the long proven and manifest advantages of robust, liquid and transparent markets to reduce their risks and refine their pricing. Every syndicate manager knows that having good secondary prices makes their job 100 times easier and – while certainly not the only factor – forms the foundation of the primary market pricing algorithm. And as the traditional securities markets become ever more sophisticated in their use of automation for primary distribution, perhaps the resulting marginalized and surplus syndicate managers should consider plying their skills in the market for live event tickets. The right way to help artists garner the true market value of their talents is to well, let the market work!

And lest anyone in the securities industry feel too smug about how much more enlightened they have always been, remember how Stanley Ross was enemy number one for many in the square mile when he pioneered gray markets 30 odd years ago, and as little as 5 years ago (still today in the US & in Equity markets) electronic bookbuilding platforms were not exactly met with a warm embrace…to use one of Pip Coburn’s favorite quotes on change (Machiavelli):

“… nothing is more difficult than to introduce a new order. Because the innovator has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new…”

…efficient organized markets in tickets for events have not been allowed to develop despite the fact that: (a) the existing market structure is horribly inefficient to the detriment of both buyers and sellers and (b) a vastly more efficient, tried and tested, robust market structure which could very easily be applied to ticket markets already exists and furthermore, especially given modern web technology would be easily adaptable to ticket markets.

As I also noted, I’ve been thinking about this for some time, but was catalyzed to comment by reading two articles. The first (behind the FT’s ridiculous paywall, yet another industry to be deconstructed and rebuilt!) was an editorial by Joe Cohen on secondary ticket markets sparked by the massively over-subscribed Led Zepplin reunion concert. The second was a post by John Wilson also on the subject of secondary ticket markets.

Basically they both point to the fact that secondary markets for tickets exist (despite laws and restrictions against them; these only serve to make them work badly…) and that this is a contributing factor to unnecessarily disfunctional primary markets:

(Joe Cohen on the sale of Led Zepplin tickets, FT Sep 21, 2007)
The circus that has ensued would dent anyone’s confidence in promoters. A crashed website, a ballot with a window of less than a week to enter and no guarantee of a ticket at the end of it. Add to this, of course, the blood-spitting opposition of such promoters to reselling your ticket if you turn out to be unable to attend. “Be patient,” was the concert spokesperson’s answer to the debacle. Be realistic, is my response, and look to the US for a healthier way of ticket allocation.

(John Wilson on getting tickets to the Police concert)
Where to get tickets at this late stage? Well, at this point I did some digging around and was astonished by the results.

- Ticketmaster still had tickets at £90 face value plus booking fee of over £10.
- Seatwave and Viagago, as well as similar ticket trading exchanges had an abundance of tickets. These were trading at an average price of £112 on top of which had to be added Seatwave charge on the buyer of £15 or so. This was for tickets and not hospitality packages
- ebay also had lots of ticket on buy it now and auction. All were evidently looking for a premium.
- Gumtree also had an abundance of tickets, but these were mostly at a discount to face value eg £90 tickets for £45

Why such a wide variety of prices for a relatively homogeneous item? Moreover, if there were still tickets in the primary market (Ticketmaster), why would anyone pay a premium in the secondary market?

Well, there are several factors to consider
- I bothered to search; some people don’t bother to scan the many “trading venues”
- trust; I trust that Ticketmaster has the genuine article. Seatwave & Co have refund policies (assuming you believe that they can honour them) and assurance re delivery. ebay has a ratings system. Gumtree is dealing in the wild west with persons unknown as is the case with other websites advertising tickets.
- time to “expiry”. As the event approach, people become more desperate to sell which can quickly drive down prices if there is an abundance of tickets evident. But even if scarce, you still want rid of them in time. Some people “blink” sooner than others.
- booking fees can add a considerable premium onto the price, so some tickets advertised above “face value” simply reflect attempts to recoup booking fees.

Much to the ticket industry’s annoyance, there is clearly an active secondary market, but despite their lobbying efforts, the UK Govt is loathe to outlaw such markets, questioning why live entertainment should receive special concessions and how is the consumer harmed by the current situation.

As I pointed out in Part 1, and is implicitly underlined by these two gentleman, a healthy – transparent, liquid, well-regulated – secondary market adds enormous value to the price discovery and distribution process of any (transferable) good or service. So why is their so much resistance to free and fair secondary markets in tickets? Well, last year at the futures industry’s annual Burgenstock conference I was speaking on a panel – discussing the future potential of markets in sports risk – and the conversation gravitated towards the question of why so many people seemed to have such a hard time seeing the potential for new types of markets and, worse, why they should not stand actively in the way of these developing. A gentleman in the audience reminded everyone (I for one had not been previously aware of this historical gem) that in the early 20th century – and then especially from the period starting with the “Great Crash” and lasting until the early 1960s, secondary markets in equities were seen by much disdain by many in the establishment and were at best tolerated and at worse actively argued against. In this context, the NYSE was seen as a second-class citizen in the financial firmament and traders and speculators in shares were considered an untouchable caste by the brahmin bankers. The moral of the story: that resistance to change and the dispersal of power engendered by transparency and access to information have been resisted by the “gatekeepers” since the beginning of time. (Just ask Martin Luther!) Equally, this resistance has always proved futile and those that embraced transparency and change, usually not only survived but prospered in the new paradigm. (The mystery is why the strategy of active immobilism continues to find disciples given its horrendous historical track record of inevitable failure…I’ll leave that one to the sociologists amongst you!) Perez would frame this situation as a disconnection of the techno-economic paradigm (what is possible) from the socio-institutional paradigm (what people in power can stomach.)

But I’m an optimist. So whereas I know the road will be bumpy and resistance will not melt away with a whimper, I’m convinced that the market for tickets – both primary and secondary – will undergo a transformation that take months and years, not decades. The foundation of my conviction is that the market model (and many if not all the mechanisms and processes) exists already (in the shape of the capital markets, see Part 1) and needs only minor adaptations to serve the needs of all the participants (’wholesale’ and ‘retail’) in the markets for tickets for entertainment events. And indeed, the entrepreneurs and innovators are moving forward at this very moment: a number of ticket brokers and/or exchanges exist such as StubHub, viagogo, seatwave and of course eBay (amongst many others); major primary resellers like Ticketmaster; and aggregators such as Tickex (who in a highly fragmented market such as tickets have a great business model in my opinion.)

I’m in no way anything close to being an expert on these firms and their business models, however my impression is that in general they have focussed on the fulfillment process (super important of course) rather than the risk management process. Of course you need both, but in my opinion, the potential (financial) opportunity arising from intelligently revolutionizing the risk management (underwriting and distribution) process is even greater than the exciting rewards available for these companies that are optimizing the matching and fulfillment process. This is certainly an opportunity I will have my eye on going forward. (Indeed, I look forward to learning more about John’s portfolio company he alludes to at the end of his post linked to above.) Rather than delve deep into the myriad opportunities that exist to transpose the capital markets paradigm on to ticket markets, let me leave you with a fragment of a possible future:

The year is 2021 and Oasis has announced they will be doing a reunion concert at Wembley Stadium to celebrate the first year-on-year drop in CO2 emissions in the history of the modern world. The $7 billion Live Entertainment Fund – a leading hedge fund focused on underwriting and investing in live sporting and entertainment events – has underwritten the entire ticket offering at a price of £20 million and will work with a number of ticket distributors to syndicate and distribute the tickets over a week, one month prior to the concert, using the online bookbuilding capabilities of Tickex Group. The fund would not comment, but analysts expect the proceeds from the sale to exceed £25mn, which will likely give LEF a return on equity of more than 30% for their 6 month investment (depending on the cost of various insurance and weather hedges: the tickets are expected to include the now standard 50% rebate for rain for outdoor concerts and sporting events.) Since its inception in 2010, the flagship LEF Music Fund has returned an average of 43% annually.

(Oh and by the way I had my pension fund invest £50,000 in LEF in 2011…making it a lot easier for me to afford to bid for a box for my friends and family to go see Oasis at Wembley!)

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