Saturday, March 24, 2007

Letters to the editor

Part 2 of an occasional series.

I read an article in the Guardian's "Money" section last week that I thought was little more than a hatchet job on concert ticket resellers. So I told them.

My letter (reproduced below) was published today.

Why ticket touts offer a valuable service

Although I can understand the frustration of those who cannot buy concert tickets at "face value" thanks to touts (New move to put the touts out of business, March 17), their anger is misdirected. The touts are performing the valuable service of ensuring tickets are allocated to those who value them most. By underpricing the tickets, the promoters have failed in this duty.

Indeed, the only part I don't understand is, if touts really are profiteering egregiously, why do promoters leave so much money on the table by underpricing their tickets? Any vendor that deliberately underpriced a service and chose, instead, to ration it by demanding displays of devotion from its customers - such as becoming a member of the fan club - is a vendor I would rather not do business with. Therefore, I buy my concert tickets from touts through eBay - at times of my choosing, in comfort and with thanks.

Richard Brown

The article about tickets touts is here

The letters page is here

Part 1 of this series, where I write to the Independent to complain about Johann Hari, ocurred earlier this year.


kyb said...

I don't have a strong opinion about ticket touts, but I do about games consoles.

I cannot understand the idiocy of companies who have to ration the first batch of consoles and sell them for at least half of what people are prepared to pay, when 80% of the people who buy them immediately resell them at a vast profit on ebay.

Any sensible tech company would make sure that the first batch of any item expected to sell out would be auctioned. The items are going to be auctioned anyway, so it's a bit daft that Sony aren't auctioning them themselves on their own website.

They could etch a prominent serial number on every one of the first batch to emphasise the point, and make it easier to auction individual items.

Rather than losing money on a product launch, they would actually make money and cut out shady middlemen (people selling 'pictures' of consoles on ebay). It makes absolutely no sense.

Richard Brown said...

Excellent point... and one that has given me a bit more insight into the world of concerts now I think about it!

My theory for why concert tickets are underpriced is that there are two separate things going on:

1) Promoters realise that their future success depends on creating a steady stream of future concert goers. Pricing students and young people out of the market would maximise their profits in the short run but kill their business in the long run (cash-poor students would substitute concerts for something else). Therefore, by underpricing tickets and giving preference to those who are *time*-rich, they ensure a suitable allocation goes to those on whom their future success depends. They may also be the customers who provide profits in other ways (perhaps they buy more drinks once inside?)

2) By underpricing their tickets, promoters can be sure of selling out very quickly. This means they get all the money quickly, up front. If the tickets were sold at a more realistic price, sales would be slower. Moreover, pricing is an inexact art: promoters may find it hard to discover the correct price in advance and so risk over-pricing their tickets. By selling *well* below the true price, they are guaranteed to sell out - and quickly.

Whenever something is underpriced, there is always an opportunity for someone to make money and so observation 1) above will always lead to touting. The promoters know this but, provided enough of their target market can get tickets at the true price they presumably regard it as a price worth paying.

Situation 2), however, is one where touts positively *help* promoters: they provide the cashflow up front in exchange for discounted tickets, effectively.

Now, I said your comment was relevant: I guess the situation for new consoles is very similar. A console's success depends, to a very large extend, on people believing that it will be (and is) a success. Therefore, creating a buzz about "sold out shops" and "queues going round the block" and "shortages" and all the rest is an absolutely vital component to any marketing campaign. If potential customers think it isn't selling then they won't risk buying into a dead-end technology.

So, I would say that the appearance of consoles on eBay for 80% above retail price is not only encouraged by the manufacturers, it probably makes them very relieved!

kyb said...

If you auctioned off your consoles starting 3 months before launch, you could still sell out very quickly. You would be guaranteed to sell out, because if your console wasn't highly valued, the auction would still find a price at which it would sell.

Personally, I think that "sell out" is overvalued as hype. If any product sells out, that means that a large number of people who wanted to give money to the company didn't and may well have done something else with it instead. It's made even more of a mockery by the fact that in many jurisdictions the console doesn't sell out, while others the shortages are so severe that people are killing each other for the space in a queue.

I walked into a shop on launch day and bought a DS lite in Switzerland, a friend bought his Wii on launch day with no problem. The fact that it didn't sell out made us pleased because we were able to get the product we wanted. The idea that I wouldn't have bought it on the basis that it didn't sell out isn't really accurate.

The xbox360 was priced by microsoft half as much in Japan, but there were still stacks of them on the shelves while many USians couldn't get hold of one for months.

Not to mention the fact that console manufacturers struggle to make money per unit on their goods for years.

It's just stupid. If you know you will sell out, an international auction will ensure you make the most money from it, while also ensuring that the most customers get what they want.

The buzz doesn't help sales, because it's a buzz about how you can't buy the thing. By the time you can buy the thing (3 months after the buzz), I don't think you're selling to people who care about the buzz anymore. Not to mention that with an auction, you'd still sell out, and generate buzz from telling people how much your consoles were selling for.

You also create a lot of ill will for your bad planning. I and friends have preordered consoles and still not managed to get them until many months after the release. It makes you pretty annoyed.

In summary, if it's really that they've thought about it and think that the current way they release consoles is better than an auction, I think they're completely wrong. I tend to believe rather that they've not caught up with the fact that the world has changed, and you don't have to sell through shops anymore unless it makes sense. For exclusive international products with supply problems it doesn't. Shops should only be used once they become commodity.

If they are really undervaluing their tickets because they want to target their market, they could do it much more effectively by assigning a certain number of tickets to students who have to show id to buy or use the tickets. This makes it explicit what the tickets are for, and still allows for market forces within the subcommunity to make the tickets available conveniently. Not to mention channelling the money more effectively to the people who actually provide the value.

Richard Brown said...

Some good points, kyb - thanks.

I'm guessing that there are a few separate strands to the console discussion.

The idea of establishing a level of demand and a price in advance sounds reasonable but I think we will find that the vagaries of local markets (both in terms of regulation and local taste) will mean that regional allocations have to be decided well in advance of launch date (even things as trivial as the packaging, whether to include a UK, US or EU plug, etc, etc, etc).

On the question of hype - I think this might be a question of how sophisticated one thinks one is.

It's well-established that best-seller lists for books (and first weekend's takings figures for movies) are studied (and manipulated) maniacally by publishers because a large proportion of the target market *does* make its decision based on whether *other* people have signalled their approval.

For a console, stories of "sold out on first day" or "queues going round the block" provide very powerful background noise to parents evaluating their kids' requests for birthday presents and feed into playground chatter, etc, etc.

I agree that there may be better ways of organising things but I think headlines screaming "sells out on launch night" is something that vendors would sell their parents to achieve! :-)

kyb said...

Thing is, it's very easy to achieve, anyone can sell out, simply by not making enough of something.

For people buying things for Christmas, Birthdays or Thanksgiving, what is most important is that the item is available when the purchaser goes into the shop to buy one. Parents don't care enough about this stuff to preorder.

And really, the first time you could walk into a shop and buy an xbox 360 after its launch was more than 3 months in some places. I can't believe any parent was still influenced by 'sell out' stories 4 months later. Once you're 3 months in, you're really relying on the early adopters to rant about how great your console is, and cause playground buzz that way. Everyone goes round to Billys house and plays on his XBOX360 because it's got cool games and amazing graphics, not because it sold out.

Parents don't care about sell outs, kids don't care about sell outs (they care about games), only newspapers care about sell outs, and with a little bit of intelligent manipulation, you could probably get them to care more about sales figures.

Best sellers lists for books are a very good reason why books do not sell out (unless it's a surprise success). Nobody wants to be lower down the best sellers list than they should.

If audited sales figures of each console were available every week, - a best sellers list - there would be no more sell outs and customers would be much better off.

While I don't really think sell outs do that much for buzz, 3 day queues and camping to get yours does. I'm not sure how you could encourage camping before launch day if things were organised sensibly, but I'm sure you could come up with a way.

Probably large prizes in decreasing size to the people who queued the longest.

Anyway, although I think sell outs are a sign of inefficiency, (it's been responsible for the failure of some products, particularly in the processor business, where it's called "supply problems" and not hyped at all), my main point is not really that companies should not sell out, or should make more of their first batch of product (that's often not feasible on time), the main thing I'm saying is that those companies should be the ones reaping the crazy rewards, and that 80% of Xboxes shouldn't be tied up in boxes in some ebayers cellar while he sells them on ebay for enormous profit.

The end results are exactly the same, it's just that instead of making a loss on the first batch, the company would make an enormous profit, and more efficiently tap the early adopter market that is prepared to pay over the odds for the product.

If I owned shares in any of these companies, I would be complaining about the millions of dollars of my money that has been dispersed among random ebayers.

kyb said...

Freakonomics blog has a brief mention of this problem with regards to the Wii.

Richard Brown said...

Interesting... Strange how the article makes no mention of Nintendo's apparent choice not to raise the price to reflect the mismatch between current demand and supply