Digging into the details of a company #1: Viagogo

Question: What happens when a startup receives funding from an executive who is on the payroll of its chief competitor?

Read on to find out.

 

Continuing on my last post, "Digging into the details: understanding companies from the outside", I'd like to explore a bit of a discussion on a startup that seems to be a no-brainer. Not only does it have serious exit options available, but it's being built to capitalize on a large and proven opportunity over the long run.

Interestingly, there's quite a bit of public information about the company and yet it's not getting a large amount of discussion, nor are key details being brought to light. This is why blogs are terrific; I can attempt to address the shortcomings in the marketplace for information. Today, I'll be bringing you Chapter 1 in my occasional "Digging into the details" series:

"The Viagogo story"

Last week, Viagogo got a significant amount of press because it announced a U.S.-based deal with the Cleveland Browns (Techcrunch coverage, Venture Beat coverage and Paid Content coverage) along with a $30mm funding round. Now, I'd been aware of the company for a little while but I found that the coverage smacked of "PR regurgitation" and decided to do some more digging for myself. After having done so, it's become pretty clear to me that those involved in the company right now have a very real chance of making a killing.

Let's start with the basics:

What's the company do?

If you've ever heard of StubHub, you know what Viagogo does. Basically, the markets around tickets for events are pretty inefficient and both Stubhub and Viagogo attempt to make them more liquid, better matching up sellers and buyers of tickets for concerts, sporting events etc. If you recall, Stubhub sold to eBay in January for $310 million. Viagogo's focused on the European market and has secured numerous exclusive relationships there, which is why their entry into the U.S. made some headlines.

How do they make money?  

They match up buyers and sellers of event tickets and charge them both. Their info page appears to be deliberately vague but my understanding is that they charge sellers as much as 15% and buyers as much as 10%. So, that'd add up to 25% on each transaction. Compare that to the typical fees on eBay and I think you'll quickly come to the conclusion that they're either crazy or in an insanely good market.

Is this sustainable?

Given Stubhub's success in the U.S. (conducting hundreds of millions of dollars worth of transactions) , their eventual sale to eBay, and claims that the secondary ticket market might be worth around $10 billion in the US alone, I think it's safe to say that, at the very least, there's clearly some money here.

 

But let's dig a bit deeper, shall we?

While the Browns deal was the company's first in the U.S., they've got substantial traction in Europe. In fact, they have exclusive relationships with the top football clubs in Europe (like Manchester United) and are, I'm sure, working to secure more. This is important because in the U.S., Ticketmaster has typically had exclusive relationships but has been under attack by the event constituents, as they've realized that Ticketmaster is under-monetizing the opportunity.

Let me stop for a second and explain: a core principle of economics is the concept of supply and demand. Basically, the price at which supply meets demand is where the optimal price lies. This is a simplification, but good enough for our purposes. For many years, Ticketmaster and traditional ticket sellers have insisted on selling tickets at tiered rates, without taking into account the ability to upgrade the purchasing dynamics, using the Internet, to determine the accurate prices for tickets. For the most part, this is why scalpers exist. Yes, there are some last minute sales that occur, but really, scalpers are people who have figured out that the ticket price for an event is below the price that rabid, devoted fans will pay. Slowly, sports teams, bands and others have realized this is the case and determined that ideally, they'd prefer to charge the correct prices for their product.

So, back to the narrative. Stubhub and some other competitors have come in and not displaced Ticketmaster, but rather, have layered themselves on top of Ticketmaster, by addressing the secondary market - the reselling of event tickets. In making that marketplace more efficient, they've realized significant economic benefits while pleasing many a happy consumer. Viagogo, however, has managed to successfully replicate that market in Europe and then, taken it one step further by negotiating exclusive relationships with some of these organizations, blocking out competition in a way that hasn't been seen in the U.S.

This is, in a word, genius.

Now, mind you, I suspect that they're being dumb about the long term pricing of the business. I don't think that making 25% on each of these transactions is any more defensible than my $10 service charge with Ticketmaster is (in an efficient market), but then again, business is war and some businesses wage war with consumers...

So, those are the core pieces to understand I think.

But there are a few unique twists here that make this more of a big deal:

1. As is discussed in these articles, Eric Baker, started Viagogo. He co-founded Stubhub and left in 2004, due to some disagreements. So, he already knows how to do this.

2. If you don't think that he's motivated to beat Stubhub, you're kidding yourself. Surprisingly, none of the articles I saw on this topic touched on a very real point: personal motivation. Baker clearly had strategic disagreements at Stubhub and continues to believe that he could have built a better business. He even cashed out during the eBay transaction (for ~$31 million, if the ownership stakes in this post were right), so he's not doing this just because he made no money. No, he's convinced that the real opportunity has been missed and he's going after it. That is a compelling story and speaks to a fanatical desire, the likes of which often makes for extraordinary success.

3. Techcrunch makes this point: "The company claims to be generating more revenue in June, its tenth month in operation, than StubHub did in its first 15 months combined." Ok, so the data says that they're killing it on the execution and revenue front. I'm willing to bet that not only was Baker right about some of his strategic disagreements but that there's a secret embedded there: the exclusive relationships with the sports teams are paying off.

4. If some of the clubs aren't starting to allocate a certain portion of their tickets to the Viagogo ticket exchange, they're missing out. Here’s why… The football club makes all of the revenue associated with primary ticket sales. Then, there's a secondary market, totally endorsed by the club and powered by Viagogo. Now, typically, when a good is sold the first time, the manufacturer makes money but when it's sold a second time, the manufacturer doesn't see a penny. In this situation, however, the club in question is making money on the first transaction and probably again on the second transaction, via a rev share from Viagogo. If this is what's happening, the revenue from Viagogo is purely incremental, which is music to a CFO's ears. Why wouldn’t a team offer this, both for their fans and for their own bottom line?

5. eBay is an acquisitive company that has bought many similar companies over the years to expand its global footprint. At the very least, if Viagogo successfully rounds up the European market, eBay would want to own it in order to add to its existing capabilities and presence in markets (like the secondary market for events). Additionally, it would appear that eBay sees the opportunity to connect these marketplaces with their Skype acquisition (touched on in the above mashable post) and my guess is that the company thinks that secondary markets can be enhanced using voice/video interactions.

6. Which brings me to my most important point, which I've saved for last...
   Niklas Zennstrom is an investor.
   Now, you might not recognize that name offhand, but he's one of the co-founders of Kazaa and then Skype. In addition to running Skype (according to eBay at least), he also maintains a venture capital fund, Atomico Investments. If you look at their portfolio, you can see rather easily that they've put money into Viagogo. This is important because: a) Niklas continues to run Skype b) eBay owns Skype, after acquiring it a few years ago c) eBay owns Stubhub, a clear competitor of Viagogo.
   
   Let me put this another way: Zennstrom is putting his own money into one of his employer’s competitors. I wonder if eBay knows about this.

So, looking at that overall picture, it looks to me like the WORST case scenario for Viagogo at this point is that it sells to eBay. Not bad for a company that’s only been around since last summer. Seems like a no-brainer to me, how about you?

 

Technorati Tags: Viagogo, Skype, Stubhub, eBay, evaluating companies, research and investing, Niklas Zennstrom, Atomico Investments

Comments

[Mike S.]

Robi, great post! I dig the deep dive concept, its right up my alley too. Right out of B-School case study.

[Ben Hoyt]

I'm not sure that I'm completely sold on your worst-case scenario, being a decision by eBay to buy-out Viagogo in order to get their access to the European market. Isn't there a realistic scenario in which eBay decides that they would rather pay the necessary expense of having Stubhub compete directly with Viagogo in the European market, than spending the money it would take to buy them out?

Also, you and I have discussed this on the phone, but I figured that I'd mention it here. I'm really not convinced that these two companies (Viagogo and Stubhub) are engaged in practices that are really in the best interest of fans in the long run. I realize that, in theory, they are increasing the efficiency of the market for tickets, which probably is a good thing in the long run. However, with the 25% cut that they are taking, they are also screwing with that market in a non-trivial way. Also, I think that by creating this market they are simply encouraging and facilitating scalpers, which i find onerous and inefficient, as well.

Finally, I think that you should be careful with the assumption that simply because someone is willing to pay more for a ticket means that they WANT it more. This would be true in a world of equal disposable incomes, but creating a system in which ticket prices rise (and they will rise, this system isn't designed to help them fall), simply means fewer eager (but poor) young high school and college kids get to buy tickets and more wealthy, affluent older people do. There's something fundamentally sad about that, to me...