Company Loses Big Bet On World Cup Tickets

Buying and selling sports tickets is a risky game.

Yet the manifestations of that risk barely show its face to the general population, save for the case of a man who shot himself in 1998 after he promised Masters ticket packages that he couldn't deliver.

But the economy, combined with a big bet that turned bad, has dug one of the biggest players in the ticket game into a big hole.

World Cup tickets
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World Cup tickets

CNBC has learned that Razorgator, a secondary ticketing site that owns some of the inventory it sells, and has been backed by some of the biggest names in private equity, took a major gamble on the World Cupthat cost the company millions of dollars and led to the laying off of a quarter of the company's employees last week.

According to employees in the room at the time, the company's president and CEO Brendan Ross told them that coming out on the wrong side of a World Cup ticket and hospitality service business glut cost the company $3.5 million.

Razorgator has done especially well with big events that occur annually, like the Super Bowl over the years. For a string of years, the Web site boasted that tickets sold on its site by brokers combined with tickets it sold of its own accounted for the largest percentage of Super Bowl tickets sold by any one company. In 2006, for Super Bowl XL, Razorgator said it sold an amazing 10 percent of the entire audience its tickets.

But less frequent events like the Olympics and the World Cup have always proven to be more of a guessing game. They're often seen as "can't miss markets," but, as Razorgator executives have found out — that's not always the case.

No matter what the event, doing well relies on the standard laws of supply and demand, or more specifically, a sellout. That's where the company's "all in" strategy folded at this year's World Cup.

A CNBC attendance analysis revealed that only seven of the 64 World Cup games sold out, with more than 250,000 tickets going unsold. In games featuring the US team, where Razorgator likely had more tickets than for other matches, more than 27,000 tickets went unsold - for those four matches with the only sellout being its game against England. Not only were low sellouts a problem, but the exit of soccer rabid nations like Italy and France resulted in a glut of tickets flooding the market for future games that fans had planned on attending.

Razorgator had bought inventory and sold it to regular customers or had packaged tickets that it owns for the higher-end customer through its PrimeSport business, which had deals with the Rose Bowl and the NCAA men's basketball tournament. Just like a gambler, if the event was highly coveted, Razorgator could see huge returns. But if it wasn't, it could fall flat on its face.

That's the opposite of what has made secondary ticket company StubHub, which was purchased by eBay for $300 million in 2007, a juggernaut. StubHub doesn't own any of the inventory it sells, it is merely a place for buyers and sellers to meet up, with the company taking a percentage of the transaction. That business has paid big dividends. StubHub executives said last week that they'd hit a 20 percent increase in their mature business for the second straight year.

"The secondary ticket exchange market is evolving, and as we prepare Razorgator for the long term, we believe the future is brightest for the most scalable parts of our enterprise, including and TicketOS"" -Company Statement, Razorgator

Things haven't been smooth for many years at Razorgator, as the company has had three chief executives in as many years. In a move believed to be hastened by the recent losses on the World Cup, Razorgator's president and CEO Brendan Ross announced last week, in a letter written to the company's business partners that the company would no longer sell "proprietary inventory on our exchange" and the company's corporate business PrimeSport would be spun off and owned and operated by one of its employees.

"The secondary ticket exchange market is evolving, and as we prepare Razorgator for the long term, we believe the future is brightest for the most scalable parts of our enterprise, including and TicketOS," the company said in a statement to CNBC. "By narrowing our focus, we'll ensure that our talent and creative energy is focused on the activities where we are best positioned to grow and create value."

But some wonder what Razorgator's future looks like if the company is no longer differentiating itself from the likes of StubHub, and its TicketOS program, which allows corporations to manage its ticket inventory isn't the only program in its space.

Sources inside the company also tell CNBC that it could also come down to a race against the clock: Has its fundraising now dried up and how patient is the bank?

The company announced last April that it had received a $10 million extension in debt financing from Hercules Technology Growth Capital. A representative for Hercules did not return calls seeking comment. The venture capital funds that backed Razorgator — Kleiner Perkins, Steamboat Ventures (which is affiliated with Disney) and Oak Investment Partners — all did not have any comment on the status of its investment.

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