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Will Ticketmaster Get Scalped?


Legal Affairs: INVESTIGATIONS

WILL TICKETMASTER GET SCALPED?

It is just before 10 on Saturday morning in Los Angeles. At Ticketmaster Corp.'s spartan offices on this early-June day, 90 men and women file in to take their places before rows of telephones and computer screens. Suddenly, a flurry of calls begins. In only 10 minutes, sales total $120,000 for tickets to the upcoming Bon Jovi rock concert and other events.

For Ticketmaster, the nation's largest distributor of live-event tickets, this is just another day. But it wasn't always that way. When President and CEO Fredric D. Rosen took the helm in 1982, Ticketmaster was a 25-person operation on its way to bankruptcy. "We rented office space in Los Angeles for six months because we didn't know how much longer we were going to be around," Rosen recalls.

Today, the privately held Los Angeles-based company is an entertainment-industry powerhouse. In 1994, Ticketmaster sold 55 million tickets--valued at an estimated $1.6 billion--to everything from a Barbra Streisand concert to New York Knickerbockers basketball games. Company revenues have grown 20% annually over the past five years, and last year, ticket sales for shows at 3,000 venues around the country brought in $240 million. Ticketmaster exclusively controls an estimated two-thirds of the major stadiums, arenas, and amphitheaters in urban centers--and provides ticketing for more than 50 major professional sports teams.

Microsoft Corp. co-founder Paul G. Allen deemed the company so attractive that he paid $300 million for 80% of it in 1993. Says Rosen, a blunt-talking ex-New York corporate lawyer who is largely credited with the company's turnaround: "I made a business out of something that wasn't a business."

But it's how Rosen and his allies made that business--and are holding on to it--that now seems to be taking center stage. The federal government, state law enforcers, and private litigants are all questioning the legality of Ticketmaster's dominance in the ticketing industry. Would-be competitors say attempts to break into the business are met with insurmountable obstacles--and nasty intimidation tactics.

SOLO SHOW. Performers such as hot rock groups Stone Temple Pilots and R.E.M. argue that the company's ubiquitous power costs fans the most. Alternative rockers Pearl Jam put Ticketmaster in the headlines when band members appeared before Congress last year complaining that the company's steep fees made tickets too pricey for its mostly teenage fans. On June 16, the group launches its first concert tour without Ticketmaster--albeit mostly in smaller locales. "We wanted to play New York and Los Angeles," says Pearl Jam's manager, Kelly Curtis, "but you just can't do that today without going through Ticketmaster."

Rosen, 51, steadfastly denies that he or his company has done anything improper. The CEO, who seems to revel in his tough-guy image, chalks up much of the grumbling to rivals' jealousy and greed. Ticketmaster's counsel, Frank Barron at Cravath, Swaine & Moore, dismisses charges as fallout from the fame of Ticketmaster's opponents. "One of the things we do in this country is listen to what celebrities have to say, whether or not there is any reason to do that," he says.

BIG FISH. As for Allen, he's taking the criticism in stride. Like Microsoft, which has been accused for years of unfair market domination, big fish are easy targets, he says. "That comes with the territory. A lot of the controversy is started by folks who just don't know how the business operates," says Allen.

And the other big investor, Chicago's Pritzker family, which owns Hyatt Hotels Corp., has few qualms. The Pritzkers still hold 12% of the company after selling the rest to Allen, Rosen, and other Ticketmaster executives. "We're more than happy to have some of our money riding on [Rosen]," says Thomas J. Pritzker.

No wonder. Ticketmaster has locked up the choicest promoters and sites, such as Madison Square Garden and the Great Western Forum in Los Angeles, through lucrative, exclusive contracts. Rosen personally landed many of the early deals by visiting cash-squeezed arena owners and offering them money--in some cases millions--as a guarantee against their share of future service fees. "He told us that he thought arenas and stadiums were valuable and had an inventory of tickets and events worth paying for," recalls Michael R. Rowe, executive vice-president of the Meadowlands Sports Complex in East Rutherford, N.J., a Ticketmaster client since 1985. "That became very interesting to us."

These three-to-five-year deals, which typically divvy up service fees among Ticketmaster, promoters, and venues, ensure that Ticketmaster has ironclad control over ticketing for any rock concert, circus, or sporting event held at that facility. In May, Ticketmaster won the contract for the Alamodome in San Antonio by advancing the city $100,000, installing $150,000 worth of box-office equipment, and promising to spend $300,000 a year promoting events. "Everybody is in everybody else's pocket," says Peter A. Jablow, the ex-head of Ticketron, a rival acquired by Ticketmaster in 1991.

In addition, Ticketmaster has been shrewd in its selection of partners and licensees, cementing its presence throughout the country by teaming up with big players such as Ted Turner, owner of the Atlanta Braves and Omni arena; former Seattle Mariners owner George Argyros, who controls venues in the Northwest; and Abe Pollin, owner of the Washington Bullets, Washington Capitals, and their home arena.

On its way to preeminence, Ticketmaster went on a buying spree. The company acquired at least 12 of its most adroit rivals during the past decade. In 1985, Rosen bought Ticket World USA, whose clients included Radio City Music Hall and the Pontiac Silverdome in Detroit. It also bought TicketPro in New England and Capital Automated Ticketing in Kansas City, Mo. Finally, Ticketmaster acquired its largest competitor, nearly bankrupt Ticketron--complete with regulators' blessings.

CALLING THE SHOTS. Though other, mostly regional ticket distributors exist, Ticketmaster's aggressive climb has enabled it to call most of the shots in its market. Even by Ticketmaster's calculations, increases in ticket surcharges have outpaced ticket prices over the past five years, from $2.55 to $3.15, or 24%, compared with a 19% rise in tickets. For premiere events, the charge can be more than $6 per ticket. "If you've got exclusive access to two-thirds of the available seats in venues nationally, you're able to exert incredible market pressure in the industry," says Richard Schrader, a former New York commissioner of consumer affairs who investigated Ticketmaster and is critical of its practices. "Consumers pay for that."

What's more, Ticketmaster is often the only operation big enough to land plum contracts. For example, it was the sole bidder this year for the contract to handle ticketing at the Meadowlands, a facility that ushered in 5 million patrons last year. Rosen says renewing the deal included a payment to the Meadowlands of nearly $6 million against future sales. "From where I sit, Ticketmaster is a monopoly that will do what it takes to keep me from entering their market," says Tom Kenan, president of Fastixx, a Portland (Ore.) outfit that recently was outbid for contracts in Tacoma and Seattle.

Rosen sees it differently. "There's nothing wrong with being competitive--with fighting for what you believe in," he says. "If I was a football coach, they'd be writing paeans to me."

It will take the government or a jury to determine who is right. Right now, a Justice Dept. task force is in the midst of an antitrust inquiry. Sources, who claim staffers are pushing for action against Ticketmaster, say the government will announce a decision in the case this summer. The Justice Dept. declines comment. But a memo to clients from Ticketmaster General Counsel Ned S. Goldstein obtained by BUSINESS WEEK indicates that the company is bracing for bad news. "We frankly cannot understand what makes the Justice staff believe that it is a good idea to engage in social engineering on the live entertainment business, rather than leaving the participants in that business to sort out their relationships in accordance with their perceptions of what is in their best interest and the forces of the free market," wrote Goldstein.

RUN ON THE COURTS. The feds aren't the only ones giving Ticketmaster the jitters. The New York State Attorney General's office is conducting its own probe, and numerous class actions have been filed against the company by consumers nationwide charging price-gouging and anticompetitive practices. Fourteen of these cases are now being consolidated in federal court in St. Louis.

Rivals, too, are heading to court. In March, MovieFone Inc., the leader in computerized cinema-ticket sales, sued Ticketmaster for antitrust violations. It contends that Ticketmaster illegally erected obstacles to squelch MovieFone's plans to enter the live-event ticketing market and to cripple its existing operations. MovieFone alleges in its complaint that Ticketmaster acquired 50% of box-office-equipment supplier Pacer/CATS Inc. in 1994, which had a contract to provide MovieFone with essential hardware, for the sole purpose of hampering MovieFone's growth.

According to the complaint, MovieFone also alleges that Ticketmaster sought to disrupt MovieFone's initial public offering in 1994 by telling the company's investment bankers at Alex. Brown & Sons Inc. and Salomon Brothers Inc. that they would be removed from a "short list" of bankers considered for a future IPO being considered by Ticketmaster if they continued to work for MovieFone. "This became the story of our IPO," says MovieFone CEO Andrew R. Jarecki, who contends that Ticketmaster's meddling delayed his stock offering and made it more costly. Alex. Brown and Salomon decline comment.

Ticketmaster denies it used strong-arm tactics with the bankers. Moreover, it says MovieFone is using the litigation to prevent Ticketmaster from expanding its movie-ticket business. "Their claim is completely without merit," says Barron. "They're making this stuff up."

Still, Ticketmaster has shown that it isn't afraid to take on its most ardent foes. The company sued for libel San Francisco plaintiff lawyer Joseph M. Alioto, who had filed a class action against Ticketmaster in California in 1992. He was quoted in The Boston Globe charging the company with bribery. The case, filed in Massachusetts, was thrown out twice. In the final review, the appellate court questioned Ticketmaster's motives for filing the suit in a place where neither the plaintiff nor the defendant reside. And it stated that evidence could suggest that Ticketmaster "filed suit primarily to retaliate against Alioto's role in the California litigation rather than to right an independent wrong." Rosen says the company was merely defending itself against a scurrilous accusation.

Ticketmaster seems to be doing a lot of defensive work these days--and it's taking its toll. Last year, Ticketmaster lost the coveted contract to sell tickets to the 1996 Olympics in Atlanta--in part, acknowledges Rosen, because Ticketmaster was too preoccupied with Justice Dept. inquiries to respond to those made by the Atlanta Committee for the Olympic Games (ACOG). "It may have been Ticketmaster's contract to lose, but they lost it," says an ACOG source familiar with the ticketing program. "Ticketmaster did not demonstrate to us that they could do what was needed to be done at a price we could afford." Instead, Milwaukee-based Protix, who linked up with an IBM unit, won the estimated $30 million contract.

While the Olympics fumble is a big loss, Ticketmaster is looking ahead to new ventures. The company is talking to QVC, MTV, and the Home Shopping Network about starting a home-shopping channel to sell merchandise tied to rock concerts and theater shows. This summer, Ticketmaster will begin selling airline tickets through a deal with Reno Air Inc. In January, the ticket vendor will launch Live!, a consumer magazine about the live-entertainment industry.

CYBERTIX. And, with Tribune Co., owner of the Chicago Cubs, Ticketmaster is selling 4,400 tickets a month online through a test project with America Online Inc. Allen's online venture, Starwave, helped Ticketmaster launch a web site that offers information about upcoming performances.

Rosen wants to reduce the company's dependence on ticket sales, which make up 95% of revenue. That's particularly true as competitors start to move in on Ticketmaster's turf. Giants Sony Corp. and Blockbuster Entertainment Group have teamed up to enter the ticketing industry. And a smaller rival, ETM Entertainment Network, a startup in Costa Mesa, Calif., is promoting better service, lower prices, and superior technology. For its first and only client, Pearl Jam, ETM charges ticket buyers a $2 service fee. Says ETM co-founder Michael H. Green, uho won't use exclusive contracts: "If you allow exclusives, the quality of your service or system doesn't matter. It only matters how big a check you can write."

Rivals say their only chance to best Ticketmaster will be through technological innovation. ETM boasts a network of 6,000 interactive voice-response lines and a novel system using bar codes to detect counterfeit tickets. Ticketmaster says it can manage only 5,000 calls simultaneously, via live operator. But, it adds, it outperforms rivals with processing technology that can mail out up to 100,000 tickets an hour and maintains an unparalleled distribution network.

Ticketmaster clients certainly aren't complaining. They say the exclusives are the only way to maintain quality control. A consortium of venue owners has hired counsel to argue to the Justice Dept. on Ticketmaster's behalf. Their position: Using different ticketing services "becomes confusing to the consumer and to the advertiser," says Joel Fisher, vice-president for business and consumer sales at Madison Square Garden. Adds Jack Boyle, chairman of Cellar Door Productions, the largest concert promoter: "With Ticketmaster, I know the tickets will be sold legitimately, and I'll get paid."

Still, outside its circle of partners and clients, Ticketmaster and its hard-nosed CEO seem to have few admirers. A growing cadre of plaintiff lawyers, Alioto among them, is out for blood. Groups such as Consumers Against Unfair Ticketing are boycotting the company and pushing regional initiatives to cut service fees. And increasingly, performers demand greater control over ticket prices and a greater share of the proceeds. All this has catapulted the company itself--instead of its shows--into the spotlight. But this is one show Ticketmaster hopes no one will line up to see.

TICKETMASTER DOMINATES TODAY...AND HAS AMBITIOUS PLANS...BUT FACES MOUNTING LEGAL WOES

-- Controls tickets sold at 3,000 venues nationwide, including Madison Square Garden, Pontiac Silverdome, and Hollywood Bowl.

-- Sells tickets to premiere live events, such as The Rolling Stones concerts, via phone orders or sales at 2,800 retail outlets.

-- Has grown 20% annually for the past five years, with $240 million in 1994 revenues.

-- Plans to begin selling airline tickets later this year through a new deal with Reno Air.

-- Is selling tickets online in test trials on America Online. A web site offering tickets and show information is in the works.

-- Currently in talks with MTV, QVC, and other media companies to launch its own home-shopping channel.

-- Justice Dept. is investigating allegations that Ticketmaster engages in monopolistic, anticompetitive practices. A similar inquiry by the New York State Attorney General is under way.

-- Class actions filed on behalf of consumers, including 14 being consolidated in St. Louis, charge the company with price-gouging and antitrust violations.

-- Increasing pressure to lower fees from disgruntled performers such as rock bands Pearl Jam, Stone Temple Pilots, and R.E.M.

DATA: BUSINESS WEEKBy Linda Himelstein in New York and Ronald Grover in Los Angeles, with bureau reports


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