I love a story about how a company dominated its industry primarily by changing its business model. (See here and here.) Ticketmaster, which has been in the news lately, has such a story buried in its past.
The Prior Business Model: Ticketron
Ticketmaster overcame a near-monopoly named Ticketron. Ticketron was the sole computerized ticketing provider in the US in 1970. Ticketron’s business model was to install ticket dispensing kiosks at retail locations in cities. Ticketron charged consumers a small service fee for the tickets which was then split with the retail location that hosted the kiosk. According to a recent article in The Hustle, ” the venues that partnered with Ticketron paid ~$0.25 per ticket sold, and they owed rental fees for kiosks on their premises.” The key point to note is that the venues paid a fee to Ticketron to sell their tickets electronically.
The New Business Model: Ticketmaster
Ticketmaster had an entirely different relationship with event venues. The money flowed the opposite direction. As The Hustle article states:
Rosen [Ticketmaster’s CEO] believed venues, not concertgoers, were his company’s real customers, and flipped Ticketron’s model.
- Instead of charging venues to use their ticketing system, Ticketmaster offered to pay them with a cut of the service charges.
- In exchange, Ticketmaster became their exclusive ticketing platform.
Ticketmaster […] even floated advances to venues before the fees came in. Ticketron failed to compete and was bought by Ticketmaster in 1991.
Many concert promoters eventually wanted a piece of the fees, too, and, years later, some top-tier artists started to negotiate for a share, according to Rosen.
“That’s how Ticketmaster got built,” Rosen said. “Where everybody had a piece.”
Ticketmaster made venues a partner and increased charges to concertgoers to share with them (and others). After all, concertgoers are the least price-sensitive member of the ecosystem. And they are certainly the most fragmented, least organized negotiators in the ecosystem.
I love this description of the strategy by a former Ticketmaster employee:
“So Fred [Rosen] came in and said, ‘Right now you have a cost center, it’s called your box office. You pay for the equipment and you have to pay for the labor to sell the tickets. I’m going to give you the equipment for free. I’m going to equip your entire box office with terminals. I’m going to teach your people how to sell tickets over those terminals, and I’m going to support those people. What I’m going to ask you to do is close down the first day of sale on concerts and let me sell those tickets through my outlets. So now you don’t even have to pay the labor on the first day of sale. But if that’s not enough, I’m going to give you a piece of every ticket I sell. So I’ve just turned your cost center into a profit center.’ (…) [T]hat was the difference between Ticketmaster and Ticketron and why Ticketron lost the entire business.” (p. 75).
There’s Probably More to the Story…But
I’m sure there were other reasons Ticketmaster won the battle against Ticketron:
- Ticketmaster was solely focused on this business, while Ticketron was a sidelight for its owner. (Ticketron was owned by Control Data, a computer hardware company, for whom this was a tiny business.)
- Ticketmaster thought like an entertainment company and Ticketron thought it was in the kiosk/distribution business.
- The company would also argue it had better and more reliable technology. (Ironic, huh?)
But the business model change sure seems ingenious. Charging the concertgoers more makes a ton of sense if you think about the industry along the lines of Porter’s Five Forces, for instance.
Ticketmaster’s strategy reminds me of the strategy used by accounts payable and virtual card vendors today. The pitch by these AP vendors to customers has been, in part, “we will reduce the cost of your AP department and turn it from a cost center into a profit center”. (This sounds like the pitch Ticketmaster made to venues about their box offices.) For the AP vendors, the change in business model is accomplished by moving as much of the payment stream as possible from checks to cards, which take a fee from suppliers. The fees suppliers pay to accept card payments are then shared with the tech vendor and buyer. For many years, payment vendors tried to charge buyers to make their checks electronic, but over time, the entire industry’s business model has been flipped on its head.
Pricing is an endlessly fascinating topic and especially so in multi-sided markets It’s not just about how much to charge and how to price, but who to charge in the first place! Getting the pricing model right can tip an entire market.
Turning a cost center into a profit center is a very powerful pitch to the person running the cost center. They go from “zero to hero” internally. Sometimes it’s not a completely rational shift at the enterprise level – but we all know that enterprises are not rational actors – they’re also a bunch of egos fighting for resources and credit.
So true James!