Economic proof of Elton John's genius!

Economic proof of Elton John's genius!

Economic proof of Elton John's genius!

Moneybox
Commentary about business and finance.
May 13 2005 10:06 AM

Rockonomics and Its Uses

Finally, economic proof of Elton John's genius!

Crocodile rockonomics? Click image to expand.
Crocodile rockonomics?

In recent years, economists have been drawn to the music industry like lawyers to a car wreck. Napster, Grokster, digital sampling, and Chinese piracy have thrown the industry into chaos. Economists have realized it's the best place to study what happens when new technologies disrupt established industries. They have also realized it's really fun.

Among the crowd rushing the stage is Alan Krueger, the Princeton labor economist who is an expert on the minimum wage and many other things. In a paper written with Marie Connolly, which managed to cite both singer Paul Simonand Nobel Prize-winning economist Gary Becker, Krueger set out to answer some fundamental questions of what he and Connolly call "rockonomics." (This is not to be confused with Freakonomics, the book co-written by University of Chicago economist Steven D. Levitt and journalist Stephen J. Dubner. *) Why are Cher concerts so expensive? How have falling record sales and the rise of downloading affected big-name stars? And what's the deal with scalping?

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As a business, rock and pop concerts seem to be more Whitney Houston (fading icon) than Mariah Carey (survivor on the comeback trail). The number of concerts held annually fell 16 percent from 1996 to 2003, and the number of tickets sold fell from about 30 million in 2000 to just 22 million in 2003. Only 31 percent of teenagers attended a rock concert in 2000, compared with 40 percent in 1976.

The reason: higher prices. Between 1981 and 1996, Krueger and Connolly found, ticket prices generally kept pace with inflation. But since 1996, they've risen much faster. From 1996 to 2003—a period in which inflation was a muted 2.3 percent per year—concert prices rose by 8.9 percent annually. Ticket prices for concerts have also risen more rapidly than those for other forms of entertainment.

And what's causing the higher prices? Clear Channel, the giant radio and concert-promotion business run by the right-wing Mays family of Texas, has often been painted as a malign force in the modern music industry—monopolizing venues and driving up ticket prices. But Krueger doesn't buy it. The company's market share of concert revenue has fallen since 2001, even as prices continued to rise. And concert prices have risen sharply in Europe and Canada, where Clear Channel has no presence. Besides, Clear Channel just announced it will spin off its live entertainment unit, which implies the company isn't reaping extraordinary profits from it. "Don't blame Clear Channel," said Krueger in an interview. "Blame the downloaders."

Pop stars are charging higher prices because they're realizing less income from sales of CDs and other forms of recorded music. "Only four of the top 35 income-earners made more money from recordings than from live concerts," Krueger and Connolly note. And for the top 35, "income from touring exceeded income from record sales by a ratio of 7.5 to 1 in 2002."

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In some ways, the rockonomy resembles the increasingly winner-take-all American economy. The rich are getting richer, and it's good to be the king or queen of pop. In 1982, the top 1 percent of artists banked 26 percent of ticket revenues; in 2003, they garnered 56 percent.

Baby-boomers are the primary driving force behind a lot of these trends. Nostalgia-seeking, age-resisting boomers have more disposable income than youngsters, and so have more to spend on expensive tickets at the box office. Paul McCartney and the Rolling Stones topped the income-earning chart in 2002. The top 16 earners in 2002 also included 1970s-vintage draws like Crosby, Stills, Nash & Young, the Eagles, Elton John, and Bruce Springsteen. On tour, Barry Manilow and Neil Diamond easily out-earn Britney Spears and Kid Rock.

Ticket pricing is an area in which market forces don't function very smoothly, the economists concluded. At a surprising number of concerts, all tickets are sold at the same price. If they did what baseball stadiums and even some Broadway producers do—charge more for the best seats and less for the not-so-good seats—rock stars could capture revenues that usually go to scalpers. And in some instances, this could add up to real money.

Krueger and 12 students surveyed 858 people at a Bruce Springsteen concert in Philadelphia in October 2002, where all tickets were priced at $75. But they found that between 20 and 25 percent of the seats were ultimately resold at an average price of $280. Ironically, the better the seat, the less likely it was to be sold. In other words, the fortunates who could have sold their $75 fifth-row seats for $1,000 tended to hold on to them, while the non-hard-core Bruce fan who had paid $75 for a nosebleed seat was all too happy to part with his stub for $280.

Rockonomics has its limits. Numbers can only tell us so much about a singer's appeal. And there are questions about the consumer behavior surrounding popular music that not even all the Beautiful Minds assembled at Princeton could begin to attack. Celine Dion, for example, outearned Rod Stewart in the rockonomics survey. Krueger and Connolly asked, "On what objective, cardinal metric is Celine Dion only slightly more talented than Rod Stewart?" Hey, the economist who can find some "objective, cardinal metric" that proves Celine Dion possesses any talent at all should be nominated for a Nobel Prize.

* Correction, May 13, 2005: This article originally misidentified Freakonomics co-author Stephen J. Dubner as a University of Chicago economist. In fact, Dubner is a journalist. Click here to return to the corrected sentence.