Will the Net end ticket scalping?

Summary:New 'direct' auctions could channel money to artists instead.

Got a ticket for a concert in Madison Square Garden? If you stand outside and sell it to the highest bidder you could spend the night in jail. If you sell it on eBay or any other online auction site, however, you can get a pretty penny, hassle free - but are you breaking the law?

The answer is so complex you probably don't even have to worry. But lots of folks, from law enforcement officers to entrepreneurs, are trying to figure out the solution.

The Internet is already changing how people buy and sell tickets to events of all kinds, but many say the biggest innovations are on the horizon, when musicians and promoters skip the middleman and begin auctioning tickets to fans directly.

"The Internet is going to change things considerably," said Stephen Happel, an economist at Arizona State University who studies ticket scalping. "In general it will bring down prices, in all likelihood, for most events." Most people know the problems inherent in the ticket industry.

Your favorite band is playing nearby, so you camp out in line for tickets - and get to the window only to find the show has sold out within an hour. Then the options are either go to a ticket broker or wait until the day of the concert and buy from a scalper - either way paying far more than face value to get in. Meanwhile, the band is upset because the scalpers are making more than they are on the tickets. Some, like Billy Joel, have said they don't want to tour anymore because they feel that the scalpers and brokers are ripping off both themselves and their fans.

And on the flip side, if you have tickets you need to get rid of, you may not even know which of the myriad of state laws and local ordinances apply to you - 14 states have laws against scalping, and many municipalities ban it near the venues. So it hardly seems worth the effort to sell them, even though you see the brokers and scalpers getting hundreds of dollars for similar seats. Enter the Internet.

Just about all of the auction sites have lists of tickets being sold for nearly every event. And more and more ticket brokers - resellers of tickets licensed by the state in which they are based - are putting their wares online. That's making some age-old problems even more prevalent.

Problems state by state
For instance, if the event is in one of the states that ban ticket scalping, the auctioneers may be violating the law. In New York, for example, it's illegal to sell any ticket for more than $5 - or 10 percent - above the face value. And the New York Attorney General's office says its jurisdiction extends to anyone who either buys or sells a ticket in the Empire State.

"I see the online stuff as just a different way of marketing," said Elizabeth Block, assistant attorney general in the Investor Protection and Securities Bureau of the New York State Attorney General's office. "The brokers have always attempted to skirt our jurisdiction by moving outside New York. We take the position that we have jurisdiction."

Block said that recent court decisions support their position that the Internet doesn't shield sellers from local laws. EBay posts a warning in its user agreement that it has "no control over the quality, safety or legality of the items advertised" and states that users "shall comply with all applicable laws, statutes, ordinances and regulations regarding your use of our service and your bidding on, listing, purchase and sale of items."

Rob Chesnut, eBay associate general counsel, said the company has received requests from law enforcement agencies and has given its records to the state officials in each case to aid in the investigations. "Somebody would be poorly advised to unlawfully sell things on eBay because its so public," he added.

On the other hand, Chesnut noted that in the case of selling tickets, "In fairness to a lot of users, the law isn't always that clear... You're often dealing with an Internet company incorporated in one state, operating in a second state, with the server in a third state, the buyer in a fourth state and the event is in a fifth state. Which law applies?"

Block said in that sort of case - where someone in Washington, D.C., sells Knicks tickets to someone in New Jersey who sees the game in New York - "there's a gap there where neither law applies; it just so happens where it falls through the cracks."

But Block said that New York isn't targeting the average eBay user selling their ticket for whatever they can get. "As a matter of how we spend our resources - I don't want to say never - but as a matter of priority we're much more interested in targeting the people in the venues."

'Why can't I get tickets?'
New York Attorney General Eliot Spitzer issued a report in May called "Why Can't I Get Tickets?" that studied the ticket scalper and broker phenomenon. Spitzer found that the reason people can't get seats to concerts and sporting events is largely because brokers pay the ticket issuers bribes - known in the industry as "ice" - to get mass quantities of the best seats before they are available to the average buyer standing in line all night.

"The availability of tickets and the outrageously high - and illegal - prices that brokers charge, to a large extent, can be laid at the door of illicit practices in the ticket industry and other practices that, although possibly not unlawful, are deceptive, unfair to the ticket buying public and supportive of the corrupt ticket distribution system," Spitzer wrote in his report.

"Ticket brokers strive to monopolize the supply of tickets by paying illegal and substantial bribes (premiums over the face price of the ticket) to various persons who have control over tickets at the original point of sale," he continued. "These persons with control over tickets include box office employees or their supervisors, managers of venues, ticketing agents (such as the employees of TicketMaster or Telecharge), concert promoters, security personnel, or a variety of house seat holders."

Block said that nothing about the Internet makes the online ticket brokers any better.

"Whether they're online or advertising in the New York Post, they have to get the supply - and they still have to get their supply the old-fashioned way, and the old-fashioned way is bribes," said Block.

Supply and demand
The reselling of tickets is a huge business, though no one knows just how big, said Arizona State's Happel. One rough estimate based on census data put the combined scalping and brokering industry at between $20 billion and $38 billion a year, he said. Happel said that some 250 individual full-time ticket scalpers travel the country from venue to venue to buy and sell tickets - and make more than $300,000 apiece annually.

Happel said the problem isn't with the scalpers, but with the scalping laws. Happel made that argument in a 1996 paper titled "The Folly of Anti-scalping Laws," published by the Cato Institute, a Washington, D.C.-based conservative think tank that generally opposes government involvement in the free-market economy.

In the paper, Happel and co-author Marianne Jennings argued that scalping and brokering are simply the result of the free market - and promoters' inability to price tickets properly. In other words, it's just the law of supply and demand.

"Scalping is inevitable as long as there are advance ticket sales for big-time events and fan pressure to keep prices affordable to the general public," they wrote.

But the Internet may offer a solution that everyone - the artists, the fans, the attorneys general and the free-marketeers - can agree on.

Some ticketers want to use the concept of the online auction to sell tickets at what economists call the "market price" - that is, the maximum price the market will bear, given the laws of supply and demand.

At least in theory, everyone would be happy. The musicians and promoters would like it because they, rather than the brokers and scalpers, would get the money; the states would like it because it would take the brokers and scalpers out of the equation; the economists would like it because it takes the states out of the equation; and the consumer would like it because at least they'd have a fair chance of getting a seat.

"We feel very strongly that our mission is to change the way that tickets are being sold," said Irwin Kwatek, vice president of business affairs at Tickets.com. "It's going to take some time, but I think we can shift some of how the tickets are sold and who's getting the money."

Tickets.com currently offers a combination of direct sales of tickets, as well as connecting users to ticket brokers and offering an auction site for the resale of tickets. But Kwatek said the site wants to offer direct auctioning of tickets - at least on a limited basis.

Joe Kraus, senior vice president and co-founder of Web portal Excite.com, which recently invested $55 million in Tickets.com, said that the potential for direct auctioning of tickets is "really cool. It is one of the most exciting areas that they have... There's an opportunity to potentially get more of these dollars directly to the artists for the market they're creating."

But there are hurdles. Happel said that every state has laws that make it illegal to print tickets without a price on them - the so-called "face value." But Happel, who compares tickets to stock options since you pay for the right but not the obligation to attend the event, said he envisions tickets of the future having a "par value" like stock certificates.

Assistant attorney general Block said that the concept at least is "very interesting."

"It would eliminate the secondary market," she said, referring to any resale of the tickets.

There go the cheap seats
TicketMaster Online/City Search CEO Charles Conn said that some artists may not embrace the concept. For popular bands and performers, the ticket price in even the nosebleed seats could skyrocket if all tickets were auctioned, leaving fans with no opportunity to buy cheap seats; some artists, such as Bruce Springsteen, deliberately keep their ticket prices lower than they know they could sell them for as a service to their fans, Conn said.

"The acts themselves want to make sure their fans can get to see the events," he said.

But even Conn said that "variable pricing and auction pricing will come, though it will probably come in a limited way."

Conn added that the Internet has been a double-edged sword for ticket brokers.

"It's made their business more efficient," he said. "It's also made it more transparent."

That transparency has helped law enforcement agencies crack down on the illegal activities, he said.

No matter what happens in the ticket industry, some doubt the brokers and scalpers will ever disappear.

"One can view it in a lot of different ways - in the most noble way, there's a secondary market for mortgages," said Jack Staff, chief economist at Zona Research. "It's only natural that there would be a secondary market for tickets as well."

Topics: Legal

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