Why we pluck free tunes but pay up for concerts
The question hit me as I waited in line at the FleetCenter, trying to buy tickets to the upcoming Simon & Garfunkel concert: Why are people willing to pay a small fortune to see live concerts when they aren't willing to pay anything to listen to the same music at home? The answer, I suspect, has relevance to businesses that have nothing to do with music. The concert industry has pricing power most industries would kill for. According to Pollstar, a music trade publication, the average ticket price at a major rock show has climbed from about $25 in 1996 to $50 today, an increase of roughly 10 percent a year. Tickets to the Simon & Garfunkel show ranged from $50 to $125. In the recorded music industry, by contrast, people aren't feeling so groovy. Prices on CDs are falling in response to the challenge from file sharing. Global music sales fell 11 percent in the first half of 2003.
Part of the extra value of a concert is obvious. The experience -- the sound, the mood, the interaction between the artist and the crowd -- can't easily be duplicated. A live show also has a certain scarcity premium. Simon & Garfunkel have not toured in years; it is possible they won't ever perform together again. But there is something else at work here. The live music industry is a great example of what Warren Buffett called a business that is surrounded by a moat, a protective barrier that keeps the competition away. The tour has one promoter who books the act into one arena in each city. You can only buy tickets at the arena or through, say, Ticketmaster, and they work together. You can't sneak in or watch the event on television. There are no low-cost Simon & Garfunkels being imported from China. Buying a concert ticket is like buying a hot dog at Fenway Park: If you want one, you have to pay a steep price.
Whatever moat once surrounded the recorded music industry has been drained by technology. Downloading and file sharing have made music available for free to consumers all around the world. Using the technology may be illegal, but that doesn't seem to deter many people.
The music business has plenty of company. Changing technology and changing mores have made a long list of industries vulnerable to low-cost or no-cost competition. The prescription drug makers used to have a pretty good moat called the patent system. Today the barbarians are at the gate of the castle. Lower-priced drugs are currently available from Canada. Down the road, pirate producers may manufacture cheap drugs in the Third World and ship them back to the United States.
Newspapers, my business, are having trouble getting customers to pay for their product. Free information is available everywhere, including the newspapers' own websites. On the advertising side, Internet competitors like Monster.com offer help wanted ads at significantly lower prices than newspapers historically charged. Siebel Systems, a software company, last week had to introduce a discount version of its software on the Web or risk losing sales to rivals who had been undercutting Siebel's prices.
Where have you gone, pricing power?
I don't mean to suggest that rock promoters are the only ones who can still push through price hikes. Cable television companies, pro football teams, and health maintenance organizations all seem to be able to get their customers to pay more year after year. So do colleges, even though they are in the business of selling information, a tough field. "People will still pay $40,000 for the experience of sitting in a Harvard classroom listening to a faculty member," said Jon Fay of Park Loop, a Concord consulting firm.
How about your business? Is it more like a rock concert or a CD? The answer could matter. A lot.
In the meantime, here's my advice to parents: If your kid has the talent, tell the kid to become a rock star, preferably one who spends more time on tour than in the studio. It's still a heck of a way to make a living.
Charles Stein is a Globe columnist. He can be reached at stein@globe
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