StubHub: The biggest fraud in the ticket business?

StubHub was founded in 2000 by Eric Baker and Jeff Fluhr.  Two MBA students who saw an opportunity to build a destination site in the Secondary-Ticketing market.  The original name of their company was Liquid Seats.  The basic premise of the business was to develop a marketplace that would put ticket buyers and ticket sellers together. [Note: Baker is no longer with, although he has still has equity. He is now running Viagogo, which is basically 'Stubhub Europe'.]

Back in 2001 they signed on their first team partner – the Phoenix Coyotes.  Liquid Seats (now: StubHub) and the Coyotes sent a letter to the Coyotes season ticket holders informing them that they could sell their extra tickets through the web site.  From these transactions StubHub makes money by charging a 10% fee to the buyer, and a 15% to the seller.  So their total commission on each order is 25%.  Those early successes drew financial backing some notable Silicon Valley executives, including former San Francisco 49ers quarterback, Steve Young.  So StubHub was able to ramp up their operations and start working on more team deals, and branding the company.

StubHub started spending aggressively to build their name on the internet.  The poured tens of millions of dollars into different advertising mediums over the next few years.  They made huge radio buys across the country.  They paid for online ads with major internet sites.  And they spend lavishly on Pay-Per-Click campaigns with Google and Yahoo (once: Overture).  They also embarked on a huge PR campaign – and Fluhr was quoted in ticket articles around the country.  And they started to sell the message that they were the “fan to fan exchange”.   Saying that “fans supply the ticket and set the price”.  They blanketed everything they did with their message.

They also used their funding to add personnel and improve their web presence.  They hired numerous people to work in their customer service department handling ticket problems their customers were encountering.  And they added loads of PR and Marketing people. And they also stationed sales reps in large cities around the country to try to capture more corporate business.

The other area StubHub started throwing money was at “partnerships” with various sports teams.  These deals, like the one they did with the Coyotes, would give StubHub access to the team’s list of customers.  Thus allowing StubHub to market directly to these season ticket holders.  Today, StubHub boasts “partnerships” with approximately 29 teams in both college and professional sports (15 professional, 14 college).  But does that really give them much marketshare? That is just 15 pro sports teams out of approximately 120 in the four major professional sports.  And just 14 college partnerships, out of the 300+ colleges that compete in basketball and football.  So basically, StubHub has a very small drop in the bucket when it comes to the total “partnerships” that could exist out there with teams/schools.

So StubHub is a slick marketing machine, that has branded themselves as the “fan to fan exchange”.  But if they only have a small number of team partnerships and they don’t own any tickets – then where do all of their tickets come from?

From ticket brokers.

Today, a huge amount of StubHub’s inventory (I’d estimate 80-90%) is directly feed to them by the 1000+ ticket brokers around the USA.  They take data feeds of the tickets owned by ticket brokers, mark the tickets up 15% and then sell those tickets to people who are shopping on Stubhub.com.  And StubHub provides the ticket brokers with branded StubHub envelopes and materials to place in the Fedex envelopes that are shipped to the customer who bought the tickets. So the customer buying the tickets has no idea the tickets came from a ticket broker.  A ticket broker, who that same customer could have bought their tickets from at a lower price (15% less).

So StubHub takes a ticket that is available elsewhere for a lower price, marks it up and sells it to make a profit.  And all the while, they are marketing themselves as the “fan to fan exchange”.  There is no mention on the StubHub web site of this abundance of tickets that they upcharge and sell from the inventory of ticket brokers. And Fluhr has never mentioned this broker revenue stream in any of the newspaper articles he’s been quoted in.  And it is a huge volume of tickets, because some large ticket brokers sell more than a million dollars per year in tickets through StubHub.

Now I’m sure that if he was asked about this business practice, Jeff Fluhr would just say that a ticket broker is a “fan” like anyone else, and has just as much right to use their marketplace.  But the reality is that StubHub went out and sought these business arrangements.  StubHub setup the inventory feeds from ticket brokers because StubHub needs inventory to sell.  If every ticket broker’s inventory was removed from StubHub today, the site would not be able to sustain their breakneck pace of sales.  In-fact, it’s possible that StubHub would fail if they didn’t have this inventory provided to them by ticket brokers.

Within the FAQ section on StubHub’s web site they list the following question “Where do these tickets come from?”. There answer makes no mention of Ticket Brokers providing the majority of their inventory. They say it’s “season ticket holders” and other “ticket holders”, but don’t mention their biggest supplier (by far) the ticket brokers. Clearly, StubHub doesn’t want this fact to be known by the masses. If it was, I think StubHub would lose a lot of their luster.

So then why did Ebay just pay $300 Million dollars to buy StubHub?  And more importantly, how could Ebay view StubHub worthy of that type of investment, if the main thing StubHub is doing is just reselling tickets owned by brokers at a higher price.  Those are questions that would need to be answered by Ebay and StubHub, I could only guess that Ebay might not know the full extent of how much of the StubHub inventory is directly provided by ticket brokers.  If they did, then they are in total denial about that aspect of the business.  Otherwise, why would they pay so much for what is a essential another ticket broker site (no better than RazorGator, Ticketsnow or others).  Sure StubHub has some team relationships, but they paid for those arrangements with their venture money.  So when those deals expire, they’ll have to pay more to keep them going.  The technology at StubHub is nothing sophisticated, in-fact RazorGator and Ticketmaster have nearly identical mechanisms for allowing people to post and sell their inventory.  And Ebay themselves already allows people to post and sell their tickets on their site, so they gained nothing in technology from the deal.

So the deal Ebay made for StubHub seems like nothing more than a desperate attempt by Ebay to jumpstart their slumping ticket sales category. Ebay Tickets is still the largest marketplace for tickets in the world, but in recent years had been losing ground to other competitors, who charged smaller fees to list tickets. Ebay buying StubHub drew a lot of attention in the press, but what does the deal really do for Ebay in the long-term. The one thing StubHub has been most successful at is branding their name. But to do that they’ve had to spend huge amounts of money, and much of that money has been venture capital.  So to keep that up they’ll have to continue to spend those same amounts. Is Ebay going to be willing to pay that price to keep it going? And more importantly, why wouldn’t ebay have spent 1/5th of that $300 Million to just work on their own branding in the ticket space? Lots of questions about this merger, and none seem to have answers that make sense. I think this partnership between Ebay and StubHub is in for some stormy days ahead.

 Don’t believe the tickets on StubHub’s site are mostly ticket broker seats?  Then go look up some tickets on TicketsNow or TicketLiquidator.  Then go to StubHub and look for those exact same seats.  Chances are that you will find those exact same tickets are also listed on StubHub, only at a higher % markup.

So all of this begs the question – what’s special about StubHub? And why would I buy my tickets on StubHub when I can buy them elsewhere cheaper?  Those are very good questions.