Why Ticket Scalping at the World Cup Could Mean Trouble for FIFA

Given the magnitude of the event and the desire of millions to witness it firsthand, it's hardly surprising that ticket scalping was an issue at the World Cup.

On July 7, Brazilian authorities arrested Ray Whelan, CEO of Match Hospitality, a FIFA corporate partner that sells World Cup tickets and hospitality packages. Whelan, according The Globe and Mail, is now a fugitive, fleeing shortly before police came to re-arrest him. The newspaper reports that Whelan is wanted for his role in a FIFA ticket-scalping operation estimated to be worth $96 million. He is alleged to have facilitated the resale of thousands of tickets intended for companies and national soccer organizations.

Yet global ticket marketplace StubHub continues reselling tickets as part of the estimated $8 billion-$12 billion secondary ticket market. Facilitating the resale of thousands of tickets is its business model. How can StubHub, owned by eBay (NASDAQ: EBAY  ) , legally offer the same ticket transactions that got Whelan in such a mess?

How does StubHub makes its money?
Born in a Stanford Business School classroom nearly 15 years ago, StubHub, the largest legal online ticket reseller, is the brainchild of Eric Baker and Jeff Fluhr, who made an opportunistic fortune off the ticket exchange's supply and-demand concept. In this type of transaction, the more politically correct term for "scalper" is now "broker."

People always need to find a way to sell tickets, and companies like StubHub provide a user-friendly avenue that reaches a wider audience than friends of friends. StubHub also offers security that the tickets sold are legitimate, as opposed to those often sold directly outside of the venue, and that they will show up on time for the event.

StubHub generates revenue by taking a cut of the transaction -- 15% of the price from sellers and 10% from buyers -- totaling hundreds of millions of dollars a year. As of October 2013, StubHub cornered 30% of the secondary ticket market.

Why is Match a scandal but StubHub is perfectly acceptable?
StubHub operates in full force because no national laws and few state laws prohibit reselling tickets. The ones that do carry little weight in online transactions, which can involve selling tickets across state lines using a third-party platform and servers that could be located in other states as well. And in several states with prohibitive reselling laws, StubHub has contracts with teams and venues to allow business to continue as usual.

Several court cases against StubHub questioned whether the company retained immunity under Section 230 of the Communications Decency Act. This law determined whether or not StubHub was merely an access provider for ticketholders who themselves were responsible for their reselling actions rather than the site itself.

These cases often ended with the court granting StubHub its motion to dismiss the suits -- though not always, indicating that this law is not ironclad.

Meanwhile, StubHub takes an active role in ensuring its immunity and is actively involved in the influence of legal proceedings, particularly in support of lobbyists. For example, StubHub provided initial funding for the lobbyist group Fan Freedom, which supports legislation and promotes activism to protect the basic rights of ticketholders. 

What does this mean for ticket resellers?
The laws that protect StubHub, however, do not apply to the current FIFA-Match Hospitality debacle, though the basics of the transaction are the same -- reselling tickets at a higher face value than they were originally worth.

People, particularly authorities and legislators, view different facets of the secondary ticket market as separate entities with separate guidelines to follow.

The fairness of the outcomes of these different venues' transactions is up for debate, but one thing is for sure. Regardless of the legal action they might face, scalpers -- or, should we say, brokers -- will always exist, at all levels of ticket reselling, from the stranger on the sidewalk peddling $5 tickets to the corporate bigwig with access to thousands of hospitality packages.

It's the nuances of the law -- not to mention the lobbying efforts of those involved -- that determines if those resellers are providing a service accepted as a respectable business or are on the run from the authorities.

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Carolyn Heneghan

A new addition to the Motley Fool team, Carolyn is an avid writer of all things tech, food, music, media and business. You can follow her on Twitter at @carolynola11.

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