Friday, October 1, 2010

What’s wrong with Live Nation?

By Emmanuel Legrand

There’s been a boardroom coup at Live Nation Entertainment. Billionaire Barry Diller is out as chairman (but stays on the board). Irving Azoff appears to be winning this round. And it’s business as usual at the world’s biggest live music and talent company. Or is it?

With Diller leaving the ship it seems that Azoff’s has prevailed. But at what cost? The company is in a financial mess. A look at Live Nation’s financial situation for 2009 tells the whole story: revenues: flat at $4.18bn; net income: losses of $60.18m (against losses of $239.41m the year before); return on assets: negative; return on equity: negative; return on investment: negative.

Basically, if you have bought shares of Live Nation, you have not received much in return. The FT pointed out that on September 29, 2010, Live Nation Entertainment’s shares closed at $9.94, “down roughly 40 percent from their postmerger high of $16.90”. In other words, it’s tanking.

How can it be interpreted? If the market leader cannot make a profit during a period of growth for the market, it usually means that either the strategy is wrong, or its analysis of the market is flawed, or the management is faulty and/or incompetent. And quite often it’s all the above!

Live Nation CEO
Michael Rapino
Live Nation was born from the acquisition frenzy started by Clear Channel in the US in the 1990s, buying left right and centre concert venues and local promoters (remember, they did the same with radio stations and outdoors advertising). At some point, Clear Channel let Live Nation go its own way, and since then it has been the philosophy of CEO Michael Rapino to continue the company’s growth through acquisitions of venues, promotion companies and talent, both in the US and in the rest of the world.

This strategy had a cost, a huge cost. And debt burden is now crippling Live Nation’s accounts (although it has to be noted that its Debt to Total Capital ratio is now at 51.94%, against 135.55% a few years ago, according to the FT). Live Nation has often been accused of over-paying for assets. But it is its strategy with artists that is the most questionable. On paper it made sense to couple top acts with concert production, local and international promotion, merchandising and even recording. If major labels could not provide (and deliver) real 360 deals, then Live Nation would!

Except that touring is not an exact science. One hot act today can be cold tomorrow. And acts like Madonna and Jay-Z come at a huge cost. The irony is that in the past these costs would be mostly covered by major labels and record sales would act as collateral for these investments. But with record sales in free fall, live music became the bread and butter of many acts, and with consumers apparently still willing to pay big bucks for the live experience, acts became greedy, and promoters got greedy too, and prices went up and up, until it all crashed – especially in the US market.

What did they think? That live music was going to fly through recession? That milking consumers would last forever without backlash? Add to that a slight dearth of fresh talent to fill stadiums and arenas, and you have a recipe for disaster.

Live Nation ended up with a lot of inventory (i.e. seats in venues around the world) that needed to be filled. And did not get filled, or at bargain prices, pissing off in the process those consumers/fans who had paid premium dollars for tickets.

So what’s the way to the future? Live Nation has good assets with its venues and a great infrastructure. It needs now to be more effective in its cost management. The days of over-spending should be over. 

The amazing thing is that the man in charge of the situation, CEO Rapino, is still in charge. There are very few listed companies who would tolerate that a CEO remained in place after so many negative financial reports. A change at the top would certainly send a clear signal to investors and to the industry.

Considering the share price, it would not be totally unconceivable that Live Nation could become a prey for some deep-pocketed global entertainment company. Vivendi is obviously one name that pops to mind. If Vivendi could combine Universal Music Group with Live Nation/Ticketmaster it would create the biggest music company in the world, with the potential to truly deliver on 360 deals. Such deal would require approval from competition authorities, and that’s not a given. But it would have the great advantage for Live Nation to have its activities and accounts consolidated into a far greater entity, and escape from the quarterly scrutiny of the market. However, so far, the French company has not made any such moves (but now that Universal Music Group CEO Lucian Grainge is based in L.A., anything could happen).

Live Nation, once the pride of the live music industry, now looks like its weakest link. Things have to change or it might end up to be the Enron of the music industry.