It pays to play second fiddle

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Just who is entitled to profit from the markup on resales, how best to price tickets initially and how to ensure that loyal fans get a genuine first crack at face-value tickets are questions that have been endlessly debated in the music industry and are unlikely ever to be resolved to everyone's satisfaction.

Talent agent Marty Diamond of Little Big Man says it's an exceedingly complex supply-demand conundrum, one he'd like his industry "to put some big thinkers on," perhaps in the form of symposiums at elite business schools.

It was in fact on the campus of one of the nation's most prestigious campuses, Stanford University, that the idea for the peer-to-peer ticket bazaar StubHub was hatched in 2000 by graduate students Jeff Fluhr and Eric Baker. Almost seven years later, the company generates about $400 million a year and was recently named by Inc. magazine as the fastest-growing private retail corporation in the U.S. StubHub has been rumored to be a purchase target of Internet auction giant eBay.

Operating as something of a customer-service enforcer among fans, StubHub derives its profits not from markups but from percentage fees it charges to facilitate transactions between fans. Individual sellers pocket the profit (or sometimes take a loss) as market forces shift supply and demand.

Because online prices typically drop incrementally in the days leading to a show (particularly for high-priced concerts), the new model has come to mirror the travel industry in some ways. Fans can find last-minute bargains, sometimes below face value.

Tours that aren't doing well also can benefit. Fence-sitters who might not have come through the door at say $60 tend to take a chance when they spot a seat online for $30. Such customers then spend money on parking, T-shirts and beer, revenue crucial to promoters.

StubHub executives say they emphasize convenience, transparent pricing and guaranteed delivery, working to relieve fans of much of the anxiety associated with buying concert tickets.

"We recognized that there are hundreds of options and places to buy tickets," says Colin Evans, vp business development at StubHub. "What differentiates companies is service and the user experience. We survey 10% of our users on an ongoing basis and we know that the fastest-growing user categories on our site are word-of-mouth and repeat business."

Industry leaders like Live Nation have acknowledged that the entire concert business must improve its primary service, content and pricing to compete in a packed entertainment marketplace. Failure to meet the needs of customers were missteps that left a hole for nimble outsiders like StubHub to fill with personalized service.

"The buying of a concert ticket has become a much more difficult decision for most people to make," promoter John Scher says. "Three or four hundred dollars for a night out at a concert? Suddenly you have mom and dad also having to make decisions about little Billy's lunch. It's not a decision people make quickly or cavalierly anymore."
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