By: Eric Fuller
StubHub is for sale. Interested? Cramer says it could sell for $10 billion. Quite possibly it’s worth zero. Here’s what you ought to know:
StubHub is a resale ticket marketplace owned by eBay. It’s where consumers from around the world buy tickets to events. Before StubHub, the only alternatives when tickets were sold out were the local broker or the guy on the street outside the venue. Now, StubHub sells tickets which consumers bought but no longer want. But, their bigger business is selling tickets bought by investors. These tickets are sometimes sold for more than face value, sometimes for less. StubHub also is making direct deals to purchase tickets which they sell exclusively on their platform. Good people work at StubHub. Today we only discuss the potential risks StubHub faces as the ticket industry continues to change, and whether it is worth buying as an investment.
StubHub presents itself as a tech company. It maintains a database of tickets for sale, lists of potential buyers, APIs, and a large body of consumer data history. However, this alone does not make a tech company. StubHub is a marketing company. Its business model is to spend more than $100 million annually on Google keywords, Facebook ads, and other social media presence to drive ticket sales. This gives them the scale to block out other potential competition.
StubHub charges a fee to both the buyer and the seller of a ticket, totaling about 25% on average. It uses that revenue to pay for operations and advertising, all in hopes of ending the year with a net profit. In preparation of being offered for sale, StubHub raised the sell fees it charges smaller ticket brokers by 50%. They used to charge 10% to the seller, now it’s 15%. However, they left the discounts they offer to large sellers alone. So, in preparation for being a standalone company, the first step StubHub took was to alienate a large portion of the suppliers providing them inventory.
Although StubHub is making some smaller direct purchase deals and has licensed vendor relationships with certain sports teams, it has almost no control over either the supply or distribution of the tickets it sells. Control of supply is in the hands of the professional ticket speculators and promoters who use StubHub’s marketing power to arbitrage supply and demand. Control of distribution is held by the primary ticket issuers, teams, leagues and producers. They have the discretion to allow or restrict resale of tickets and the ability to require tickets be sold only on specific markets or within particular price floors and ceilings.
Because of the intrinsic risks of losing supply, distribution or both, a buyer of StubHub has to look at its future revenue stream as having a high risk of coming to an abrupt end. Therefore the present value of the future cash flow from StubHub has to be analyzed accordingly.
Any potential buyer also has to consider the political implications of acquiring StubHub. StubHub has operations across the globe. StubHub works within the regulatory framework of the countries where it operates. Although it’s biggest market by far is the United States, StubHub operates throughout the world. Curiously though, Kijiji — eBay’s Craigslist like venture in Canada just suspended sales of tickets through its platform because of concerns over their ability to safely transfer digital tickets. Perhaps this is because Kijiji’s trust and safety infrastructure was immature relative to that of StubHub.
Anyone considering a purchase of StubHub also has to figure out whether its infrastructure is mature once it loses the umbrella of services provided by its corporate parent eBay. Here’s a small insight into what sorts of issues may lay beneath the surface: Recently I personally made two purchases on StubHub totaling just over $3,000. StubHub canceled both deals within two hours of my purchase because the seller complained the price posted was an error. Before any transaction is complete on StubHub, they authorize the buyer’s credit card. My card was charged immediately. Since StubHub canceled the transactions, I figured that I would see my funds returned within a week which is basically the standard time frame to receive a refund posted to a credit card from an online purchase. StubHub did issue a full refund of both purchases. It took them nearly two months. That’s not only unacceptable, it’s indicative of a breakdown in their internal processes which may signal to an attentive buyer that their other internal policies and procedures are equally immature.
Regulators worldwide are beginning to believe resale ticket markets manipulate consumers through deceptive marketing practices. New laws are under consideration in the U.K, the E.U., Canada, and even here in the United States. The Federal Trade Commission just this year finished an extensive investigation, which included reviewing more than 6,400 public comments. I attended that FTC workshop and wrote the following articles about it:
Three days after the FTC’s workshop in ticketing concluded, the BOSS ACT 2019 was introduced in Congress. New Jersey Congressmen Bill Pascrell and Frank Pallone and Connecticut Senator Richard Blumenthal want to impose regulations on how ticket prices display to consumers. The bill also proposes a host of other restrictions. Below is the press release issued by Rep. Pascrell:
The market for event tickets is vast, complicated, and always changing. Very few people truly understand its dynamics. It’s so difficult to understand that both MIT economists and University of Chicago Booth school professors get it wrong. First, you have to follow the basics of supply and demand.
Supply of tickets comes from “rights holders” — the bands, teams or theatrical productions whose tickets are for sale.
Control of that supply resides with the promoters, leagues, and producers. They decide how to price the inventory, when to sell it, whether to impose restrictions on the tickets such as delayed delivery, non-transferability and floor or ceiling limits on the price of any ticket resold.
The amount of supply is affected by the size of the venue where the event will occur. It matters whether it’s in a stadium, festival field, arena, theater, or club. It also makes a difference whether the event is held once or on multiple nights in each location.
The price set for tickets varies endlessly. How much demand is there for the event? Are the tickets tiered so better seats cost more or is it all general admission? Are there presales for season ticket holders, subscribers, preferred credit card holders, people with the correct band, venue, promoter, Spotify or Facebook password? Is the ticketing company using Platinum and VIP packages to raise prices of “premium” seats? Are the tickets being dynamically priced so that they change continuously in response to the demand the ticket servers observe as the sales take place?
Understanding the price of any event has become a game of bluff poker. Primary markets move prices with impunity. They determine which specific seats are sold as “Platinum” or “VIP.” Then, they charge up to ten times that of the standard priced seat next to it. Later, prices move back for those seats which didn’t sell. Dynamic pricing changes the prices of tickets from the moment an event opens for sale until once the event begins. The entire concept of “face value” pricing is gone, replaced with real-time price adjustments based upon fluctuations in supply and demand.
There are so many opposing forces acting on prices, supply, and distribution. A shortlist would include regulators, primary and secondary ticket markets, brokers, teams, consolidators, consignors, venue owners, producers, managers and the typically clueless fans who often know little about what a ticket is truly worth.
Fans fall into two distinct camps. There are those for whom tickets are an emotional purchase divorced from the economic reality of cost. Alternately there are those fans who seek the opportunity to obtain tickets at a discount. Discounts typically appear when prices collapse in the last hour or so before curtain time.
So, let’s review how tickets work. Demand for event tickets turns on several factors. First, there is the emotional connection between fans and their bands or teams. Second is the amount of their discretionary spending money, FOMO and Instagram inspired urgency to be where everyone else is going. And, last is the supply of available tickets relative to the demand.
Starting with supply and demand, here’s the trend over the past two years: Prices are moving steadily higher, which traditionally reduces demand. At the same time, events are moving up in the size of their venues. Theater level acts are arriving in arenas, and arena level acts are playing stadiums. You would think that with both supply and prices increasing that demand would fall, and that’s been the case recently, particularly with festivals. Almost every festival this year has sold below face value on the secondary markets. Coachella weekend two did not even sell out last year while their VIP passes for weekend two went below 50% of face value.
StubHub sounds like the perfect acquisition: $5 billion in sales, $1 billion in gross revenue, on-trend with millennials, and in the very sexy space of delivering tickets for live experiences around the globe. Because of StubHub, nothing is ever truly sold out. Tickets are always available for nearly any event, their price fluctuating in real-time based upon supply and demand.
Resale markets like StubHub provide three essential services for consumers. First, they offer a safe transaction where someone can buy a ticket and feel secure they will get into the show or get a refund in the event of an issue. Second, as often as 40% of the time, ticket prices on the secondary market resell below face value, allowing consumers to avoid paying full price. Third, the way resale markets work, tickets are usually available on the day of the event, even though they were initially sold as much a year in advance. Because of StubHub and other resale markets, consumers who didn’t know they would be in New York when Billy Joel was playing the Garden or that their new romantic interest really wanted to see Lady Gaga play in Las Vegas now have a reliable way to get those tickets.
So, why wouldn’t anyone with access to cash, bank loans or private equity salivate over the opportunity to lead the world’s biggest secondary ticket market into the future?
Do you remember MySpace, where everyone’s first friend was Tom? In July 2005 nearly 14 years to the day before eBay put StubHub up for sale, Rupert Murdoch paid $580 million for MySpace. Four years later in June 2009, MySpace was dumped onto a group including Justin Timberlake for $35 million. Timberlake’s shares were then worth $15 million. In 2015 JT reportedly sold all his shares to a fan for one dollar.
Even eBay makes mistakes when trying to buy into the tech-driven future. In September 2005 they paid $2.6 billion for Skype, thinking perhaps that telephony had something to do with online auctions. Four years later, they sold Skype for $1.9 billion.
Will the buyer of StubHub replicate the history of MySpace or Skype? Perhaps, like all things there is an easy answer and one which is more complicated. The easy answer is there is a lot of frothy money out there searching for return. How can you lose if you leverage low-cost capital into a high margin business? The more nuanced and complicated answer is that the ticket business is easy to get into and hard to make work. It’s sort of like getting married. It all seems perfect until it doesn’t. And, in both cases, it’s the outside forces beyond your control which will determine your destiny.
Here are the major risk factors facing anyone who might consider taking a run at buying StubHub:
1. Will the resale market continue to exist in its present form?
Ultimately, the resale market for tickets depends on Live Nation’s willingness to allow its existence. Live Nation could, if it wanted, end resale in North American secondary markets. How you ask? Simple, they can restrict the transferability of every ticket sold on their platforms, which are dominant in North America.
So, here’s the play. A Cramer believer raises $10 billion and buys StubHub. Live Nation decides that its business strengthens by giving teams and artists positive control of tickets. Effective immediately, all tickets sold through Ticketmaster, Live Nation, or any of their affiliates are only transferable subject to specific terms. Similarly, any tours with Live Nation as the promoter could impose transferability restrictions upon third parties who sell tickets where Live Nation does not control the venue. Transfer restrictions could be this simple: tickets will not be transferable if there is any compensation paid for those tickets to the seller beyond the face value plus fees of the tickets. That’s already happening on platforms in Europe. Ticketmaster UK’s resale site banner says: Resale tickets are sold by fans at the price they paid (face value + fees), or less. Ticketmaster then imposes a service charge when processing the transaction.
What’s the consequence for StubHub if this becomes the global standard? It isn’t rocket surgery. StubHub fails immediately. Ticket brokers vanish, since they can’t earn any money. Volume on StubHub’s platform drops 95% or more. Welcome StubHub to your new headquarters address: Chapter 7 or 11.
Now, there are certainly compelling reasons why Live Nation wouldn’t want to that that step. First, it would undoubtedly trigger litigation to define the “third rail” issue of whether a ticket to an event is the property of the holder or a license issued by the act or team subject to whatever restrictions they may choose to implement. These restrictions could be transferability, floor or ceiling price if resold, restrictive limits on which markets may resell the ticket and so forth. This duality has never truly been tested in court for good reasons. It’s an all or nothing result. If the holder of the ticket owns it, then they can sell it regardless of whether the artist, team or promoter approves. In that case, the resale market is open to all comers and likely prices will edge down over time. Classic economic theory tells us that supply and demand are elegantly intertwined. When prices get too high, supply moves into the market, and prices fall. When prices get too low, inventory sells, thereby clearing the market and causing prices to rise until supply and demand reach equilibrium.
We already see the limited transferability arguments being established by lobbyists and corporate public relations teams. It’s framed this way: we need to know who is in each seat for the safety and security of all. Venues have a right to know who enters. So do the performers or teams. This, they say, is in order to preserve a more secure environment. It is also to be able to interact with specific seat holders and sell them future event tickets or send them coupons for the nearest bar or concession stand. Two quick notes: first, 50 years ago on the day of the Apollo 11 moon landing, fans going to Yankee Stadium received a giveaway which was full-sized wooden baseball bats. Think about that — an entire stadium of people who got in with nothing more than paper tickets and were promptly handed a baseball bat.
Second, I’ve bought tickets for approximately 50 live events annually for the past 40 years. I’ve also purchased another 100,000 tickets or so to resell over the past decade. So far, I have never received a message offering me a discount or upgrade while at an event. Compare that to when I went to Chipotle recently and bought a $7 sofritas salad. They immediately sent me an offer for free guacamole.
Maybe I’m old fashioned in my thinking, but it occurs to me that every PDF ticket I saw had all sorts of ads printed on it. And, many of the old school hard stock tickets had ads printed on the back. Sometimes those ads were coupons, often for drinks or food. My opinion is that a drink or food special texted to a specific fan during a concert or sporting event is not transformative. People leave their seats when the band plays a song they don’t like or there’s a pause in action on the field. It doesn’t really matter what the offer is if the performance is more compelling.
2: Will Federal or State Governments file an Antitrust objection to the buyer?
Let’s analyze who might want to buy StubHub:
Live Nation is the most obvious candidate. They have the most to lose depending on who buys StubHub. A buyer could impact Live Nation’s own resale markets around the world or could use the consumer base that StubHub has to begin competing in the primary ticketing market. But, Live Nation would also probably face the most severe antitrust evaluation of any of the possible buyers. It seems like a longshot for them to be able to convince regulators to go along with them on this one.
Vivid Seats is currently estimated to be the third-largest resale ticket marketplace in North America after StubHub and Live Nation. Vivid just bought the Canadian resale marketplace FanXchange. FanXchange is the market where Groupon distributes the discounted and face value concert and theater tickets they remainder when shows underperform. If Vivid took control of StubHub, this combination would have nearly 2/3rd of the current North American resale market. Allowing a combination with that much market share seems unlikely to survive regulatory scrutiny or at minimum extensive litigation challenging their ability to complete the transaction. Vivid has some of the best technology of all the resale markets. In this case, their efficiency would likely hurt them.
Also, the Federal Trade Commission made clear in their recent Ticket Workshop just how much they disfavor companies advertising misleading web addresses (known as “white label” sites) which appear to be the actual box office when they are in fact controlled by others. Vivid’s new CEO Stanley Chia came from GrubHub, which was just in the news for creating more than 20,000 white label restaurant web addresses. These sites, similar in name to the actual sites for those restaurants, were built to increase GrubHub’s revenue. GrubHub’s commissions increased from 7% to as much as 20% for delivery orders which originated on a GrubHub site rather than that of the restaurant itself. Confusing consumers as to which website is the official site rather than a similarly named site is something the FTC made very clear they will address. Given these issues, I think Vivid may give serious consideration to making an offer, but ultimately they’ll figure out the scrutiny this would bring upon them and the risk of the deal failing outweighs any potential accretive benefit.
Amazon, Alibaba, or Priceline all seem to be natural candidates for an acquisition of this size. They all have reasons to enter the ticketing business. But, the current way resale markets operate doesn’t build a sustainable relationship with consumers. That fact combined with the ongoing risk of owning a company completely dependent upon the continued transferability of tickets suggests that there is too much risk in buying StubHub for any amount in excess of the next year’s net earnings.
The only reason any of these outside companies should consider taking on StubHub is if it provides them a gateway to enter the primary ticket sales market. But, that market is extremely treacherous and fiercely competitive. Just this week we saw former Ticketmaster CEO Nathan Hubbard’s attempt to build Rival, a new primary ticket market, fail. Rival has been backed by great VCs like Andreessen Horowitz. Still, it was unable to complete its platform in time to meet the contracted August 1, 2019 take over date for ticketing on behalf of Kroenke Sports and Entertainment. Live Nation stepped into the breach with people and technology to assist with the transition and to help meet ongoing Kroenke’s ticketing needs. I believe Live Nation will wind up with control of ticketing at the Kroenke venues both in Colorado and at the Los Angeles Ram’s new stadium. Undoubtedly, Hubbard will have to change the name of his company from Rival to Vanquished.
AEG and OVG are both more viable contenders. AEG — Anshutz Entertainment Group owns the AXS primary ticketing platform, along with teams and arenas around the world. OVG — Oak View Group is run by former AEG President and CEO Tim Leiweke and former Ticketmaster CEO Irving Azoff. Between them, they know where all the bodies are buried and may even own some of the shovels used in the process. OVG is super competitive, and is currently building venues around the world. At the same time OVG continues to knit together its Arena Alliance, which presently has 26 venues working together. OVG also owns Pollstar and holds the annual Pollstar Live and Production Live conferences in Beverly Hills. They could mimic the Ticketmaster model and build a ticketing company in part by leveraging their relationships with venues they own or control.
Google and Facebook have a different potential reason for looking at StubHub. StubHub spends a lot of money buying online advertising, including paid search and social media posts. If either Google or Facebook bought StubHub, it would disadvantage the other 50% of the ticket market which pays for search on these platforms. It may simply be bad business to try and use StubHub as an entry point to a new business because of the impact that may have on their present advertising revenue in the space. Also, I think the same risk factors related to future transferability of tickets would preclude any publicly-traded company from taking on such a substantial risk. That exposure could trigger litigation against any public acquirer’s board in the event restrictions upon transferability became the new standard, wiping out the value of the acquisition. That said, reportedly Facebook is developing a fan to fan ticket market application.
Private Equity firms looking for yield may also be looking at StubHub as an arbitrage play between the StubHub’s potential revenue and the interest cost of funding the acquisition. Interest rates are currently very low. A great deal of transactional volume and income can be added for a relatively negligible amount of debt service expense. However, there is no upward limit on the exploding costs of paid search required to grow the business, the increasing losses from consumers fraudulently claiming tickets were invalid, and the unpredictable risks globally as regulators evaluate how to restrict resale profit seeking. And, any such purchase bears the same transferability risk already analyzed.
What’s the takeaway?
Live events are indisputably sexy. It’s the collective cathartic experience of a crowd. That pooled energy creates a high, which is what draws people, again and again, to buy tickets, stand in lines and be part of something bigger than themselves and a screen.
Giant companies backed by unlimited cash are looking for ways to enter the market. There’s a false narrative that millennials will pay almost any amount to go to events. While it’s true that major sports championships still draw without any correlation to price — that’s more the corporate entertaining marketplace. Real people understand value. That’s why festivals are losing ground, tours are failing to sell out in otherwise dependable venues and more than 1/3 of all tickets for sale on secondary markets are selling below face value.
For a preview of what lower demand looks like, study Major League Baseball. Baseball decided it didn’t want ticket brokers buying season tickets so they mostly canceled those purchases. Now, the New York Yankees have tickets on Groupon for as little as $3. The Dodgers who bundled all their excess tickets into a consolidation deal with Eventellect wound up unable to sell out their home games for the World Series. As a result, TV viewers around the globe saw blocks of empty seats at Dodger stadium. Declining demand is an ever-tightening spiral. The fewer people who attend a game, the less urgency there is for others to go. As a result, total MLB attendance is declining year over year.
The other way to kill demand is to price every ticket to capture the highest possible price someone may have once paid. This strategy, named “Hopium” by my friend Sam Sherman who founded Broker Genius, the industry leading ticket repricing software, led to Taylor Swift giving away tens of thousands of seats nightly on her Reputation tour to avoid embarrassment. It’s also impacting Chance the Rapper’s current ticket availability, which after two days on sale, was approximately every seat in any venue.
Also, let’s not forget that we are currently in the longest economic expansion on record. All good things come to an end. When the next recession comes, and believe me it will, money for luxury goods like tickets becomes more scarce. Demand drops, and prices soon follow. The Dow dropped 800 points today because the inverted interest yield curve signaled a recession. Finance has certain immutable laws. Here’s a good one: people stop spending money carelessly during a recession. Instead, prudence returns in place of profligacy and once more cash is king.
I believe we are currently at the inflection point in which there is no real ability to continue to push up the prices of tickets. Too many shows are failing to sell through their inventory. Too many people are trying to add just one more fee to the cost of a ticket because of their false impression that no price is too high for a “live experience.” Prices are poised to fall as bands and teams notice the unfilled seats and figure out that a sold out show is better for their brand than bragging rights about how much they collected per ticket. As with all booms, the next trend is reversion to the mean. In this case, it’s probably a return to the wisdom of Bill Graham the legendary San Francisco promoter who, when asked why he didn’t charge the absolutely highest price the market would bear for an artist in high demand replied “because I want the customer to have money left so he can come again tomorrow.”
Buy StubHub at the peak of the market, when shows are under pressure to sell out at the primary market level, when the economy is poised to slow, when ticket buyers are souring on the experience of paying too much or fighting through waiting rooms, presales and code safaris? Buy StubHub when control of the ticket itself lies in the hands of a very tenacious competitor? Buy StubHub when the prevailing consumer trend is to wait until curtain time in hopes of getting a ticket for 50% of face value? I think not.
There’s only one way it makes sense to take on the expense and risk of StubHub — and that’s by using a model which improves the cost and experience for the fans in an industry transformative way. But, that’s a whole other story.
Have questions or want more information? Contact Eric@FullerFacts.com