As reported earlier this week, eBay announced it is buying StubHub for $310m. As a (small) individual investor in StubHub, I’m delighted by this outcome. StubHub is a great success story: the company was started by Stanford MBA students Eric Baker and Jeff Fluhr in the dark days of the tech downturn and was able (or forced by necessity) to raise money primarily from angel investors (with the exception of the Series D round they raised from Pequot last year) when most VCs had pulled up their tents to ride out the storm. At the time, conventional wisdom was that eBay would own the auction market for every conceivable type of good, and, furthermore, it wasn’t worth the risk to invest in what was regarded as “online scalping”.
StubHub’s insight was that while eBay is a fantastic generic-auction marketplace, the secondary event tickets marketplace had several unique characteristics for which eBay’s one-size-fits-all approach would fall short. First, event tickets spoil. After the days of the game or show, the ticket becomes worthless. eBay probably doesn’t sell much milk on its site, and you wouldn’t want to buy a glass of milk that had been on auction for a week’s time. Nor would you want a ticket for an event that had already occurred.
StubHub’s buying experience is totally specialized for buying and selling tickets. It is very easy to find tickets for the specific date, artist, team, venue, etc, that you are looking for. StubHub provides seat maps for most of the venues they carry tickets for. StubHub handles the fulfillment for both the buyer and the seller via FedEx (making sure those tickets get there before the event to prevent spoilage), preserves the anonymity of the buyer and seller, guarantees the tickets and takes a healthy fee from both parties, for a total of 25% commission per ticket.
StubHub also had an insightful approach to build critical mass in their marketplace quickly. Early on, they partnered with several teams in each of the major sports leagues so the teams could offer their season ticket (or single event) holders a better way to sell off tickets they were not going to use. StubHub (and the teams they partnered with) recognized this as a win for everyone involved: fans who could not attend a game gained a safe and convenient way to sell their seats and recoup some of the cost of their season tickets, the team in some cases got a cut of the secondary sale, StubHub made money on the transaction, and, importantly, the venue would gain valuable revenues from concessions and memorabilia sales that would have otherwise been lost. And there were the less quantifiable benefits associated with a more crowded venue: more fans meant more noise and cheering to build home field advantage, and the team certainly looked better on TV when there were fewer empty seats in the stands. The fact that the average transaction is worth hundreds of dollars also makes the secondary tickets marketplace very attractive when the revenue model is based on a percentage of the sale price.
StubHub’s strategy of partnering with teams coupled with heavy advertising on sports radio (which can be a very cost-efficient media buy) enabled StubHub to build inventory, traffic and transaction volume quickly. Eventually the site grew large enough that it no longer needed to partner with the sports teams to build inventory and transaction volume, and it started growing quite well organically as buyers and sellers of tickets recognized the superior experience that StubHub provided. The company grew quickly and is said to have sold over $400m worth of tickets in 2006, netting the company about $100m in revenue last year.
StubHub’s success can be attributed to the power of vertical specialization. While eBay may have a lock on generic merchandise auctions and Google may own generic web search, these markets are so vast that there are often extremely rich verticals that can be better served by specialization, be it shopping search, travel search, ticket auctions, or other as-yet-unidentified verticals. When vertical specialization offers a sufficiently more compelling experience than the generic approach, real value can be built. The trick is figuring out which verticals are ripe for this type of mining. Clearly StubHub found a rich vein to mine.
While eBay also does a decent volume of ticket sales on their own site, in spite of the inferior experience their generic auctions provide, eBay smartly recognized that StubHub was the market leader with a congruous business model and a better user experience, and it was a natural (and smart) decision to buy StubHub.
Congrats to Jeff, Eric and the entire team at StubHub. Your success is richly deserved.