Live Nation (LYV) – Part 2 – Concerts overview

Brief history of Live Nation

Robert Sillerman created the predecessor to Live Nation, which was called SFX Entertainment at the time.  Back then, the thinking was:

  1. Scale would provide negotiating leverage over artists.
  2. Owning a large number of venues would provide additional leverage over artists.
  3. Scale could create a valuable sponsorship platform with greater reach.  Greater reach could potentially allow sponsorships to be sold at higher rates (per impression).

The predecessor to Live Nation did not seem to be very profitable.  GAAP earnings turned negative before Clear Channel bought the company.  My impression is that the predecessor generated a single digit return on equity (the 10-Ks are available on EDGAR).

Later, Clear Channel decided to purchase Live Nation in 2000.  The thinking was that there would be synergies as Clear Channel radio stations would promote concerts and the artists playing at them (by giving more airtime to those artists’ songs).  These synergies did not materialize; Clear Channel would later spin off Live Nation in 2005.

Currently, Live Nation has been selling off some of its venues so it seems to be abandoning the venue strategy.

Historically, the concerts business has been mediocre for shareholders

In 2000, Clear Channel purchased what is now Live Nation for an enterprise value of around $4.4B.  Over 15 years later, Live Nation has an enterprise value of $6.3B after merging with Ticketmaster ($1.3B EV during the crash of 2009).

One of the issues is that the artists are able to negotiate for most of the profits generated by events.

  1. They can always choose not to perform and allow demand for future tours to build up.
  2. Being saddled with debt means that venues must put on shows to service the debt.
  3. There is no substitute for a superstar artist.  In some ways, the stars are a monopoly on their own brand/music/fans.

For promoters to get ahead, they generally have to find revenue streams that the artist’s manager and other promoters are unaware of.  For example, Bill Graham would oversell tickets for cash at the door and allow the event to exceed the fire code capacity of the building.  The quest for new revenue streams has led to:

  • Convenience fees with very high markups
  • Advertising on tickets
  • Higher prices for concessions, parking, merchandise, etc.
  • Sponsorships
  • Schemes such as having 10 people rent out lawn chairs (with a deposit) and only 2 people to handle returns of lawn chairs.  People who didn’t want to wait in a long line would forfeit their deposit.
  • Ticketmaster exposing consumers to the dubious “Great Fun” program.

Some skilled promoters have been able to become independently wealthy.  The original SFX Entertainment’s 10-K lists the purchase prices for their promotions businesses on page 28.

                                            CASH
                                       CONSIDERATION   VALUE OF     NUMBER
                              DATE      AND ASSUMED      STOCK    OF SHARES              BUSINESS
COMPANY                     ACQUIRED      DEBT (1)      ISSUED      ISSUED               SEGMENT
- -------------------------- ---------- --------------- ---------- ----------- -------------------------------
<S>                        <C>        <C>             <C>        <C>         <C>
Bill Graham Presents .....  2/24/98       $ 72,827     $  7,500       845    Music and Family Entertainment
                                                                             & Other
PACE and Pavilion ........  2/25/98        220,683       20,000     2,250    Music, Theatrical and Sports
Contemporary .............  2/27/98         82,702       16,200     1,894    Music and Family Entertainment
                                                                             & Other
Network ..................  2/27/98         59,145       16,239     1,284    Other
FAME .....................  6/4/98          85,491       35,960     1,500    Sports
Don Law ..................  7/2/98          92,195           --        --    Music
Magicworks ...............  9/11/98        115,740           --        --    Music, Theatrical and Family
                                                                             Entertainment & Other
Other acquisitions .......  Various        194,822       11,000       563    Music, Theatrical, Sports,
                                          --------     --------     -----
                                                                             Family Entertainment and Other
Total ....................                $923,605     $106,899     8,336
                                          ========     ========     =====

However, one problem with skilled promoters is that shareholders can’t really own them.  Live Nation can split equity in a promoter’s business and make them sign non-compete agreements.  However, people are ultimately free to leave and to start a rival promotions business.

That other publicly-traded concerts business

Robert Sillerman, the founder of Live Nation’s predecessor, has founded a second concerts company called SFX Entertainment (NASDAQ:SFXE) aimed at rolling up EDM (electronic dance music) festivals.  It IPOed in 2013 at $13.00/share.  These shares currently trade at $0.506/share.  Here is a picture of Mr. Sillerman:

robert-sillerman

It is unclear as to how much of the share price drop should be attributed to the inherent economics of the live music business.  It could be argued that management is another reason why SFXE performed so poorly.  Nonetheless, my opinion is that much of SFXE’s poor share price performance should be attributed to the difficult economics of the concerts business.

Vertical integration- will this time be different?

I don’t work in the concerts business but it seems to me that vertical integration doesn’t bring that many benefits.

The original SFX Entertainment tried the idea of rolling up concerts promotion businesses and trying to use that scale to sell sponsorships.  That strategy did not seem compellingly profitable.  Currently, Live Nation and SFXE are trying the same strategy from over a decade ago.

What about technology?

Technology is clearly changing the live events business.  Piracy has disrupted the old business model of selling recorded music.  Nowadays, artists generate somewhere around 85% of their revenue from touring.  Recorded music has become a way to promote their live performances.  Social media is helping fans discover events near them.  All these factors contribute to the secular growth of the live music industry.  However, secular growth does not necessarily ensure profitability.  Competition may continue to limit returns on capital just like it has in the past.

An opportunity lies in creating scalable technology (e.g. software, websites) to create value in the events industry.  On the ticketing side, it is obvious that there are new opportunities to create value: the integration of primary+secondary ticketing, fighting scalping, website and email marketing, etc.

On the concerts promotion side, video recordings of live events can become a new income stream.  Currently, Live Nation is working with Yahoo to stream live events.  To me, I think that AEG Live is doing a better job at concert videos.  Their videos have more money behind them (e.g. higher production values) and seem to have higher viewership numbers.  AEG Live and Global Radio co-produce the festival Summertime Ball which has Youtube videos with millions of views.  Having widely-viewed videos with sponsorships from Global Radio, Vodafone, etc. seems like a better business model than what Live Nation is doing with less popular artists on Yahoo.  I would point out that video technology has been around for a very long time.  The only difference today is that anybody can distribute video over the Internet without having to go through a retail store selling DVDs, movie theatres, broadcasters, cable channels, etc.

Overall, I don’t see a lot of opportunity for technology on the concerts promotion side.

*Disclosure:  I covered my SFXE short and currently have no position in it.  Long LMCA.

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