Concert Madness

A few weeks ago, Ticketmaster and Live Nation agreed to merge in principle. I say in principle because such a deal must pass anti-trust scrutiny before being consummated. And therein lies the rub and focus of this post. If you are a concert goer of any frequency, you will recognize the Ticketmaster name immediately. Live Nation is a more recent name with a storied history. A quick 'how we got here' is in order.

LiveNation was once gobbled up by Clear Channel Communications and spun back out of that troubled business a few years ago. It's business model is relatively simple: Live Nation owns venues across the country and thus books acts, promotes shows and keeps a cut of the ticket price as revenue and ultimately profit after costs. Ticketmaster on the other hand, does not own venues, but instead has exclusive rights to sell and distribute all the shows from contracted venues. For the most part, Ticketmaster has a lock on the giant stadium type venues.

By now you probably know that Ticketmaster can not be mentioned without the obligatory gripe about their steep fees. In fact, their fees can add up to 50% to the price of a ticket. The company can charge so much not because it does something special in the way of adding value. Rather they maintain an effective monopoly over the distribution of any ticket to any show from contracted venues. If you want to see Pear Jam at a stadium, you're just gonna have to pay the fees.

Shortly after Live Nation began trading publicly again (after the spinoff in December, 2005) I bought some stock as it was trading near book value. Book value is the net worth of the company or the value paid for its assets minus the liabilities or debt. I reasoned that most of these venues are on the books at their cost which was a value from years ago. As digital piracy erodes revenues to music companies and thus royalties to the artists, the artists will become ever more dependent on the live performance revenue. You can't digitally pirate the concert experience and so these venues would increase in value and importance.

With me so far? So, a company like Live Nation would find itself with pricing power- it could command a larger share of a tour's revenue. During the first few quarters of 2006, Live Nation showed this progress and the stock nearly doubled. It aquired the House of Blues, expanding its power. Then it began to edge further into the promotion business by taking on the merchandising and promotion of an entire tour. They even began seeking ways to stop doing business with Ticketmaster for the venues that overlapped and decided to launch a Ticketmaster competitor.

While all this should have resulted in growing margins as pricing power improved, it did not. Management was too intent on growing its reach and scale rather than profitability, precisely the wrong strategy in my opinon. I parted with my shares. Last year, Live Nation announced a stupic, high prices deal with Madonna. There was much debate whether the tour could even be profitable for Live Nation. It seemed like another case of a company striving for the scale and growth of an empire rather than smaller,  highly profitable and slower growing (why else would a company expand into low-margin businesses?)

So Live Nation found itself larger, more powerful and more integral to a tour's operations and success, but also less profitable. Put yourself in management's shoes- you can get rid of Tickmaster and try to capture that high margin revenue for yourself or...merge with them. Merging obviously obtains the revenue stream, but it also has the key advantage of solidifying a monopoly status. The merged company can steer tours to their own venues or charge more in fees when they don't. They can cajole artists into a fully vertically integrated deal from promotion to tour management to merchandising to venues and ticket sales. What is a large artist to do when 90% of their income comes from the live tour? Pearl Jam and Elton John aren't going to start playing in small clubs on principle.

If you thought ticket prices were high before and the value-less fees absurd and insulting, then just wait until this deal is completed (if allowed). Now I am all for letting companies merge to improve their competitive advantage. Of course, the key phrase there is "competitive advantage". When the companies in question hardly had competition before, sanctioning entrenchment and further empowering of the monopoly seems troubling. Especially when the only stakeholder to benefit is the company while all its customers lose.