The business of ticket brokering – or ticket scalping, as many prefer to call it – is a controversial one. Most people who are against this business are passionate fans who feel that passion, above all other things, should be the prerequisite for buying tickets. And, indeed, performers and promoters appreciate this fact, so they typically set ticket prices at levels that most of their passionate fans can afford. But prices set by performers do not reflect the true market value of tickets.
Economist Paul Krugman argued in a Slate article that performers make ticket prices affordable in order to ensure continuity. They understand that it's their passionate fans they can turn to each time there is an event. Therefore, performers keep ticket prices at low levels to establish a solid emotional connection with their fan base.
I recently read an article on a ticket broker's blog where he was trying to justify the ethics of the business. In short, he writes, "Venues price their tickets at low prices because they find that to be the most profitable business strategy for them [because they need to fill the arena]. I price my tickets at true market value because that’s the business strategy that works for me."
If we drop the emotional sentiments that are associated with the entertainment business, we'd have to agree with this ticket broker. Whichever way you look at the matter, business is business and its primary objective is to be profitable.
Most brokers argue that if the tickets they sell were overly expensive, people won't patronize them. That's a valid argument. But then a question remains unanswered. Why should people who don't intend to go to shows buy tickets? They're taking them out of the hands of real fans.
Scalping as investment
One way to look at this matter is to think about the art of investing. In simple terms, whenever we invest, we do so with the aim of getting the maximum return possible.
Let's consider trading of currency. People who do not intend to live in China – at least not anytime soon – put their money in Chinese banks, for instance, because the national average rate of a one-year certificate of deposit there is higher than in the U.S. As of December 2013, the average one-year rate in the U.S. is 1.05%, while the one-year rate in China is 3.3%. Investors believe that the Chinese currency is undervalued at the moment and, as such, appreciation against the U.S. dollar is imminent. In the end, this venture would turn in gains for people who put their money in Chinese banks. Investment guru Warren Buffett supports this belief when he said:
The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly.
Let's break it down. The first thing here is that investors are able to identify that the Chinese currency is currently undervalued. By comparison, ticket brokers are just like investors who have been able to identify that ticket prices are underpriced, made evident by the fact that people are willing to buy tickets at higher prices.
By no measure is it unethical for people to put their money in banks of countries where they don't live, provided the funds are generated legally. If that's the case, then why should it be unethical for people to purchase tickets for shows they don't intend to attend?
If the Chinese government thinks that it needs to control the inflow for economic reasons, it might need to reduce the rates. But in the end, it could have an adverse effect on economic growth since investors would be discouraged from coming into the system.
In the same vein, if we feel that ticket brokering is hurting the business of entertainment, then performers should reassess the real market value of tickets and consider adjusting accordingly. But then, this would affect the continuity strategy.
However, performers are adjusting to the reality that ticket brokering is beyond their control; some of them even resell their ticket allotment on ticket exchange sites.
Big companies show that scalping isn't illegal
Both eBay's (NASDAQ:EBAY) Stub Hub and Live Nation's (NYSE:LYV) Ticketmaster support ticket reselling. As the image above shows, Ticketmaster offers a ticket exchange service on its site that allows tickets to be sold above face value. Stub Hub is king of ticket resale.
In conclusion, speaking strictly in business sense, ticket brokering is profitable and legitimate. The only thing that you can rightly question is the means through which brokers get their tickets. But until you can prove that a broker is buying tickets illegally, you're wrong to think he is a fraudster.
Fool contributor Ray Adey has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.