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Live Nation Better Understand the Theory Behind Its Acquisition of the Madonna Brand, and Pronto, ‘Cause If It Doesn’t, It’s Gonna Lead to Big Problems (and There Is No Evidence that It Does)

October 20th, 2007 by David Kronemyer · 3 Comments

A. Live Nation’s Quandary

Simply put, the problem is this – it owns nothing. By and large it leases the venues where it promotes concerts, or has a contractual right to book them. But it doesn’t control the acts, or the musical compositions they perform, or the master sound recordings embodying those performances, even if made at a show it promotes. It doesn’t even own the video images its own camera crews beam to the gigantic projection screens on each side of the stage. Thus, for example, it can’t broadcast them to mobile telephones, even inside the venue itself; nor can it release them, say, on a concert DVD (absent permission from the rights holder, which, typically, is the artist, or the artist’s record company).

At the same time, Live Nation is squeezed from all sides as a fiscal intermediary in the live performance business food chain. Payment terms are dictated to it by powerful agents who represent the artists. It pays huge advances to those artists for the privilege of presenting their shows (and, most often, a guaranteed percentage of the total gate from the tour, if it exceeds the amount of the advance). Its margin on ticket sales is so miniscule that it must rely on ancillary revenue sources, such as parking and concessions, to show a profit. In this way, Live Nation’s primary economic function, at least insofar as the artists with which it contracts are concerned, is to buffer or cushion or insulate them from the risk of marketplace failure. Its ability to do this, and remain in business, only is as durable as its skill in assessing relative demand among fickle consumers for touring shows.

And this demand can be unpredictable. For every Hannah Montana tour, there are dozens that either lose money, or barely break even. Even highly-demanded tours present a problem, again imposed by the market. If Live Nation doesn’t charge enough for tickets, scalpers quickly will drive them to the market-clearing price. Because it already has paid a huge guarantee to the artist, this revenue component is disintermediated directly from Live Nation. Needless to say, this equation doesn’t work in the reverse – that is, scalpers offering refunds on tickets for under-demanded shows.

All the while, Live Nation must carry an incredibly expensive fixed cost apparatus of leases on venues, its well-paid executive staff, their T&E costs, etc. It’s no wonder Clear Channel came to ask why it had bothered to assemble it, painstakingly, to begin with, from a rag-tag confederacy of local and regional concert promoters. Though in fairness to both companies, there is zero costless synergy in the combination of radio and concert promotion, and there were those pesky antitrust issues, both real and pretextual.

B. The Live Nation Equation

Thus constrained, I suspect that Live Nation’s thinking process went something like this:

1. We own nothing.

2. Our margins are under siege.

3. Last time Madonna toured, we guaranteed her {$X million}.

4. She might tour twice in the next decade, in which case we’d pay her f{$X million}.

5. Wouldn’t it be great to own something, like musical compositions, master sound recordings, and merchandising rights?

6. We could get all that for not much more than it would cost us to advance her next couple of tours!

7. It can’t be that hard to sell records, look at how badly the major record companies have screwed it up. Look at how smart we are in the live performance business. Surely we can do better.

C. The Madonna Equation

1. $120 million? Are you kidding? Where do I sign?

D. Two Significant Conceptual Errors Live Nation Has Overlooked

The first part of Live Nation’s Premise #7 undoubtedly is true – the major record companies have done a miserable job of responding to the dynamics and exigencies of the new digital era. What Live Nation is missing, though, is that there is nothing that qualitatively differentiates it from the major record companies which, although they are missing the mark, nonetheless persevere, because this is their core business.

Not only is it unlikely Live Nation will be able to do any better, it is far more likely it will do worse, because managing recorded musical assets is not its core business. Say what you will, the record business is subject to a variety of customs, conventions, templates and protocols. People outside of it frequently believe they can import the skills and techniques from some functional discipline, e.g. “marketing,” and then simply redeploy them. The record business turns out to be so peculiar and idiosyncratic, though, that this approach never has worked.

In a sense, the executives of Live Nation are but sheep ready for shearing. They will be unable to avoid making the same mistakes as their counterparts at the major record companies. In fact, their situation is worse, because they are inexperienced and face a steep learning curve. Consider, for example, the significant barriers to entry confronting every new contestant to any business. In the record industry, these include line items such as “distribution fees” to sell your wares, and issues like manufacturing obsolescence and reserves for returns. Who at Live Nation knows about free goods, and how they get translated into invoice discounts, or the algebraic mechanism of “returns credits, returns charges?” Who will be there to guard against the numerous other instances of the petty thievery that take place at every step of the process? Live Nation getting into the record business is every bit as stupid as Universal Music getting into the concert promotion business, which – as Live Nation will be the first to tell you – has its own set of secret codes and handshakes, impenetrable to all but the most savvy insider.

The second problem is the financial impact of the deal. Live Nation’s 2006 10-K shows that an astonishing 22% of its assets comprise “intangibles” and “goodwill.” Its current assets are significantly less than its current liabilities. Furthermore, its long-term debt and other long-term liabilities far exceed its shareholder’s equity. Booking a $120 million long-term contractual commitment to Madonna – as it will be required to do – will increase Live Nation’s long-term liabilities by 29%. Put differently, if Madonna’s $120 million was shareholder’s equity, she would own 19% of the entire company. Which is ludicrous, and which is the reason why companies that survive from touring season to touring season – Live Nation’s business model – have no business making long-term contractual commitments that far exceed any reasonable revenue horizon, or (for that matter) the ability of its current management team to implement results.

E. Place-Based Media

There is only one way this deal might work, or at least that will improve its chances for working. And that is, the concept of place. If it is about anything, Live Nation is about the venues it controls – all of which are places. Recorded music, on the other hand – especially in its current incarnation – has become completely detached from place. It doesn’t need to be “at” a record store. It doesn’t even need to be embodied in a tangible medium, such as a compact disc. It could be, and often is, “located” anywhere.

Live Nation therefore must amalgamate these different concepts of place and spatiality, by bringing the recorded music it now owns (or will own) to the venue. No, I’m not talking about selling CDs at shows. Live Nation’s efforts to do so have been a failure (albeit constrained by rights issues). Nor am I talking about expensive “premium” packages with parking, preferred seating, a commemorative T-shirt, and maybe, for the extra-high rollers, meet the star. These just are more costly variations of what Live Nation already does, and (at the market-clearing price) appeal only to a small fraction of consumers.

Rather, Live Nation needs to redefine the entire nature of the place-based musical experience – transforming it from something “virtual,” that can be consumed anywhere, to something that is unique, compelling, and can be enjoyed only at a venue it controls. Examples:

1. As a company, IMAX is in trouble, but its presentations of concert films, like the Rolling Stones, were a huge success.

2. Recent music-based movies like Across the Universe have floundered at small-screen multiplex theaters. The forthcoming Tom Petty movie will be a flop (for reasons having nothing to do with what I presume will be the excellence of the film itself). These need to be four-walled at venues with hue screens and sound systems, to be successful.

3. It may sound corny, but companies like Disney typically do a spectacular job of integrating music into place. I’m not saying the world needs more “small world” rides at sports arenas across the country, but I’m sure there’s a form of “attraction” that would make sense. This could be all the way from a “museum”-like installation (the Country Music Hall of Fame, the Rock ‘n’ Roll Hall of Fame, the Vocal Group Hall of Fame, the Hendrix Museum) to an Opryland-Ryman Auditorium type of exhibit (contextually and culturally sensitive, of course). There are Hard Rock Cafes, with a few guitars on the wall, but where’s the Museum of Hard Rock, or Prog Rock, or Madonna, for that matter?

4. One of Live Nation’s main competitors is the Anschutz Entertainment Group, which recently opened L.A. Live, conceived as part of an entire sports and entertainment district in downtown Los Angeles. In addition to a sports arena and an auditorium for concerts, it will have condos, apartments, large public areas, bars, restaurants, hotels, and other urban amenities. Whether this form of “new urbanism” will take hold is an open question, Hawthorne, C., “Mixed Messages,” Los Angeles Times (Oct. 20, 2007). However, among other things, it is a significant (and expensive) effort to “stabilize” or “fix” music at a public location.

By contrast, Live Nation offers primarily cold, sterile, concrete-enclosed sheds and arenas. You come, you park, you listen. And then you leave, probably feeling slightly soiled, if not ripped-off, in the process. That paradigm for experiencing music is every bit as ephemeral and transitory as the one which has wound the major record companies into such astonishingly tight knots. If Live Nation can’t restructure that paradigm so as to take advantage of its unique business skills and abilities, then it might as well forget about it. What I offered above just are illustrations – if they want more, they should pay for it! The key is that Live Nation must aggressively utilize its primary business characteristic, which is, control of places, and embed it with music that either arises from that place, or that can be situated within it (as opposed to “being virtual”).