1. MUSIC PERFORMANCE Where Musicians Make Money

2. Estimated Pre-tax Gross Income, Top 35 Touring Artists, 2002 Rank Artist Concerts Recordings Publishing Income 1 Paul McCartney $64.9 $2.2 $2.2 $72.1 2 The Rolling Stones 39.6 0.9 2.2 44.0 3 Dave Matthews Band 27.9 0.0 2.5 31.3 4 Celine Dion 22.4 3.1 0.9 31.1 5 Eminem 5.5 10.4 3.8 28.9 6 Cher 26.2 0.5 0.0 26.7 7 Bruce Springsteen 17.9 2.2 4.5 24.8 8 Jay-Z 0.7 12.7 0.7 22.7 9 Ozzy Osbourne 3.8 0.2 0.5 22.5 10 Elton John 20.2 0.9 1.3 22.4 11 The Eagles 15.1 0.7 1.4 17.6 12 Jimmy Buffett 13.7 0.2 0.5 14.4 13 Billy Joel 16.0 0.0 1.0 17.0 14 Neil Diamond 16.5 0.0 0.3 16.8 15 Aerosmith 11.6 1.0 0.8 16.5 16 Crosby, Stills, Nash & Young 15.7 0.0 0.3 16.0 17 Creed 10.9 1.1 1.6 13.4 18 Rush 13.4 0.0 0.0 13.4 19 Linkin Park 1.7 4.7 6.3 13.1 20 The Who 12.6 0.0 0.0 12.6 21 Red Hot Chili Peppers 6.1 3.4 2.7 12.1 22 Brian "Baby" Williams 0.2 2.7 0.9 11.8 23 Nsync 7.7 0.5 0.9 9.4 24 Barry Manilow 8.0 1.2 0.0 9.2 25 Britney Spears 5.5 1.8 1.0 9.1 26 Alan Jackson 4.6 3.0 1.4 9.0 27 Rod Stewart 6.6 1.4 0.8 8.8 28 Andrea Bocelli 8.1 0.2 0.4 8.7 29 Brooks and Dunn 6.7 0.4 1.4 8.1 30 Enrique Iglesias 4.4 1.5 1.7 7.6 31 Tom Petty 6.6 0.2 0.7 7.5 32 Tool 7.3 0.0 0.0 7.4 33 Kid Rock 3.4 0.8 1.3 7.0 34 Kenny Chesney 5.8 1.1 0.1 7.0 35 Santana 6.0 0.0 0.7 6.9

3. Publishing, Recordings, and Performance

4. Live Performance Contracts Bands/artists hire manager to represent them in exchange for a share of their earnings Manager contracts with promoter(s) to promote live concerts The promoter Secures a venue Advertises the event Makes other arrangements Record labels may promote concert tours

5. Typical Contract with Promoter Band/artist receives a guaranteed advance Say, the first $100,000 in ticket sales Band pays travel and other expenses Promoter then recovers expenses and guaranteed profit Say, $50,000 expenses and $22,500 profit Expenses include advertising, rent for the venue, costs of unloading equipment, etc. Band and promoter split remaining revenue Typically 85% to band and 15% to promoter Bands with greater bargaining power get higher advances and % revenues after expenses

6. Revenue Sharing Band or manager negotiate ticket price with promoter affecting total revenue Band receives 100% of merchandise sales T-shirts, CDs, etc. Venue keeps concession and parking revenue This division of revenue may be efficient Ticket revenue to band and promoter Merchandise to band Concessions to venue Each party receives revenues from the sources for which it is most responsible.

7. Ticket Sales Promoter contracts with a ticket distributor to sell tickets Ticketmaster is the largest distributor charging fees of about 10% of the ticket price In some cases, this fee may be shared with the venue, promoter, or band/artist, depending on contract Venue’s box office and band’s fan club may also sell tickets Tickets are often sold on a secondary market by unregistered scalpers, sellers on Internet sites like ebay, and ticket brokers.

8. Contract Enforcement Moral hazard problems Artist is relatively uninformed Promoter or ticket distributor keeps the records that determine the artist’s earnings Moral hazard occurs if the promoter cheats the artist by “lying” about the revenues or expenses to the promoter’s benefit Or if artists don’t show up for shows, show up late, abuse drugs during shows or behave in ways that reduce the show’s quality In general, moral hazard occurs when a party to a contract changes its behavior after the contract is entered Contract enforcement depends on repeated transactions among parties who value their reputations.

9. Concert Promotion is Highly Concentrated In the 24 largest cities Market shares of the top four firms total 90% Within city HHI for promoters fell from 4,200 in 1986 to 2,800 in 2001 Artists may be at a disadvantage Less established artists lack bargaining power Artist has less information

10. Annual Gross Revenue of Top 100 Tours in Billions of U.S. Dollars Source: Pollstar, NIPA.

11. Ticket Sales of #1 Tours in $millions 1997The Rolling Stones89.3 1998Elthon John46.2 1999The Rolling Stones64.7 2000Tina Turner80.2 2001U2109.7 2002Paul McCartney103.3 2003Bruce Springsteen115.9 2004Prince87.4 2005The Rolling Stones162.2 2006The Rolling Stones138.5 2007The Police133.2 2008Madonna105.3 2009U2123 2010Bon Jovi108 2011U2156 Source: Pollstar, NIPA.

12. Average Ticket Price, Top 100 Tours

13. Tour Revenue, Price and Quantity Estimates, North America Revenue in $100 million; Price in nominal $; Quantity in millions. Source: Pollstar, NIPA

14. Are Superstars on the Decline in Live Performance? Top 1% of performers account for nearly 60% of ticket revenue in 2003 Top 5% of performers account for over 80% of ticket revenue Leaving about 15% of ticket revenue for the other 95% BUT, the share of North American ticket revenue accounted for by the # 1 tour is declining Source: Pollstar; Rockonomics, fig. 4.4.

15. Pricing Issues Characteristics of live performance High fixed cost and low marginal cost An experience good whose quality is unknown until it is consumed A ticket has zero value after the performance occurs Seats vary in quality Bands/artists sell complementary products Merchandise and recordings

16. Price Discrimination Artists have market power since they sell differentiated products High and low price elasticity demanders can be sorted by seat location Marginal costs are below average costs (P G -MC)/P G = -1/E L Price cost margin for a “good” seat depends on low price elasticity demanders (P B -MC)/P B = -1/E H Price-cost margin for a “bad” seat depends on high price elasticity demanders

17. Price Discrimination with Complementary Products Effect of ticket price on demand for complementary products adds a positive externality (P i -MC)/P i + X j = -1/E i Or (P i -MC)/P i = -1/E i – X j The ticket price is reduced if more ticket sales increase sales of the complementary products There is no incentive to reduce the ticket price for discriminatory purposes below that associated with a sell-out A fall in demand for the complementary good raises the ticket price

18. Some Pricing Puzzles Price discrimination is surprisingly rare 75% charge a uniform price Influenced by fairness concerns? Pricing often leads to excess demand for tickets, leading to scalping Scalping occurs when speculators buy concert tickets in hopes of selling them for a higher price on the secondary markets Secondary markets include scalpers, licensed ticket brokers, and individuals selling tickets on websites like ebay But only about one-third of concerts sell-out and may have excess demand Why don’t artists and promoters charge the market clearing price? A concert is a social event, with consumers’ demands positively related (low price draws bigger crowd, increases value of the experience) Fairness? Is market-clearing price unfair? Influenced by complementary products?