Full Disclosure: I own shares of Live Nation Entertainment (LYV)
In early 1982, a comedian turned lawyer turned CEO named Fred Rosen was looking for a strategy for taking on a powerful company called Ticketron. Rosen’s young company, Ticketmaster, was finding the barriers to entry in the ticket distribution business to be formidable. Then, Rosen hit upon an interesting idea. The prevailing practice in the industry was to charge the venue for the service of distributing their tickets. Rosen’s idea was to flip this around. Instead of charging the venue for this service, he would actually pay the venue for the exclusive right to distribute their tickets. He would then charge the ticket buyer a small fee on each ticket sold. Thus, somewhat counter-intuitively, Rosen charged the ticket buyers for this service rather than the ticket suppliers.
The result? Ticketron was quickly decimated and declared bankruptcy in 1991. “When Ticketron came to an end, I felt more like we had stumbled upon a beached whale that had already died than defeated a fierce enemy in battle,” said one of Ticketmaster’s founders.
Rosen probably didn’t realize it, but the implicit question he raised (which side of the market do I charge?) frequently confronts platform companies with two-sided markets. We have previously discussed and lauded platform companies like Amex and CH Robinson. Ticketmaster brings together venues and fans just as Amex brings together merchants and consumers and CH Robinson brings together truckers and shippers. As Rosen discovered, the right platform company can cause a market to tip to a winner take all scenario as we have seen with Google (searchers and advertisers), Ebay (buyers and sellers) and Ticketmaster itself.
Ticketmaster merged with Live Nation Entertainment (LYV) in 2010. Live Nation now controls an even more complex platform bringing together fans, venues, advertisers, ticketing and artists in a multi-sided market. It is a fascinating company. While still in its relative infancy, I believe it has the makings of a powerful moat.
Live Nation was spun off from Clear Channel in 2005. Live Nation operates the first fully integrated live music platform company. It is helpful to think of it as a media business like movies, television, radio or newspapers. The content it provides is live concerts.
The live music industry is comprised of five key parties: Artists, Promoters, Venues, Ticketing Services and Advertisers/Sponsors.
Artists are the content providers in this business. At the top levels (U2, the Rolling Stones, Jay-Z), they can demand the lion’s share of the profit from the live music industry value chain. However, this elite minority is a fraction of the entire artist universe.
Promoters select and book concerts at venues and provide marketing and advertising for the concert. Promoters fall into two broad categories: local and national. Local promoters book at specific venues. When planning a national tour, artists may contract with several or more local promoters in different parts of the country. By contrast, national promoters have the reach to book an entire national tour. The key difference: national promoters provide a guaranteed payment often in advance of the tour. Local promoters provide a percentage of the gross ticket sales. National promoters can afford to offer a guarantee because they are sufficient diversified to minimize the risk of loss. Losses from concerts that under-perform are offset by concerts that meet or exceed expectations. While there are still a few local promoters, most have been acquired or driven out of business.
Venues are the physical locations where concerts occur. Promoters book artists at venues. Venues range in size from small clubs to sports stadiums. Venues earn money through ticket sales (less the amount paid to the artist) as well as ancillary revenue streams such as sales of food and beverages and parking. Metropolitan areas can support a finite number of venues. Beyond this limit, it does not make economic sense to construct additional venues.
Primary ticketing companies provide services – such as websites, call centers, and retail networks from which tickets may be purchased – that facilitate the initial sale of tickets to concertgoers. Contracts between venues and primary ticketing companies are individually negotiated. In a typical contract, a venue agrees to use one primary ticketing company as its exclusive provider for several years. In exchange, the primary ticketing company often agrees to pay to the venue a portion of the fees that the primary ticketing company charges to concertgoers who purchase tickets to events at the venue.
After their initial sale, concert tickets may be resold on the secondary ticketing market. Secondary ticketing companies provide a platform wherein ticketholders can sell to ticket-seekers.
Advertisers and Sponsors
Advertisers and sponsors pay to reach concertgoers through concert, venue and ticketing assets, including websites. The advertising campaigns typically include venue naming rights, on-site venue signage, online banner advertisements and exclusive partner rights in various categories such as beverage, hotel and telecommunications.
The traditional live music business model involved the participation of various independent parties. Artists contracted with promoters to arrange live concert performances. Artists often contracted through a manger that handles the artists’ performance and business needs, and many of these managers further contracted with booking agents to arrange an agreement with a promoter for individual performances or a tour. The promoter was then responsible for securing a venue for the performances, and the venue is accompanied by other revenue-producing services such as parking, concessions, sponsorship, and band-related merchandise. The venue, or sometimes the promoter, contracted with ticket distributors that administer ticket sales to performances through Internet, retail, telephone and box office sales.
Figure 1 – Traditional Live Music Model
The industry remained fragmented for many years and pockets of fragmentation exist today.
Business Model & Strategy
Live Nation consolidated the live music industry and brought all of the major actors onto one platform. It is active in all five of the major areas of the industry:
- Concerts – In its Concerts segment, Live Nation acts as a promoter. It is the only promoter that can operate on a global scale. Live Nation often serves as the exclusive promoter for artists on national tours, and uses cross-collateralization and deep pockets to offer artists higher guaranteed compensation. Live Nation has approximately 60% of the US promotion market. Revenue streams including parking fees and concession sales, but margins are very thin and the artist gets the vast majority of the income.
- Ticketing- The Ticketing segment focuses on sale of tickets to the public on behalf of venues and earns service fees on the sale of each ticket. This segment primarily consists of the legacy Ticketmaster business. Ticketmaster is the largest primary ticketing company in the US. In 2014, it generated revenue of approximately $1.5 billion and sold 148 million tickets. Ticketmaster also has a growing secondary ticketing business with $1 billion of gross ticket value changing hands in 2014. Ticketmaster also maintains a database of over 130 million customers.
- Sponsorship & Advertising – The Sponsorship and Advertising segment leverages the 60 million or so fans Live Nation draws to its shows and the 130 million names in its Ticketmaster database to sell targeted advertising to major companies. In 2014, this segment generated adjusted operating profit (defined below) of $212 million on revenue of $300 million – a 70% margin.
- Artist Nation – The Artist Nation segment primarily provides management services to music artists in exchange for a commission on the earnings of these artists. This segment also sells merchandise at live performances, to retailers and directly to consumers via the internet. This is the most fascinating segment for me. First, by having an artist management arm, they obviously have an in when the time comes to plan their next concert tour. But, they are also able to earn a profit on managing their careers. It’s as if the NFL not only had Tom Brady under contract to play football but also earned a piece of the action on his endorsement deals.
In 2014, Ticketing and Sponsorship & Advertising generated just 27% of revenue but 87% of Adjusted Operating Income (as defined below).
Multi-Sided Platform Company
All of these parties benefit from being operating on the Live Nation platform. Together, they create a multi-sided marketplace with strong cross-side network effects. That is, platforms exhibit two types of network effects, which may be either positive or negative: A same-side effect, in which increasing the number of users on one side of the network makes it either more or less valuable to users on the same side; and a cross-side effect, in which increasing the number of users on one side of the network makes it either more or less valuable to the users on the other side. Cross-side network effects are typically positive, but they can be negative (TV viewers preferring fewer ads). Same-side network effects are often negative (trucking companies prefer fewer rivals on the CH Robinson platform), but they may be positive (Google users benefit from better search results as the volume of searches increases).
Here, the Live Nation parties benefit from increasing number of users on multiple sides of the platform. In fact, the interaction of the parties creates a flywheel. It is similar to the flywheel concept from high school physics, typically demonstrated by a heavy disc that is difficult to start up, but that spins easily with limited effort once it reaches full speed. Over time, once critical mass is reached, a simple innovative idea becomes a well-oiled machine, which translates into a predictable and profitable business. A flywheel is also a self-reinforcing loop made up of a few key initiatives. Those initiatives feed and are in turn driven by each other, and build a long-term business.
Venture capitalist Rich Barton describes how the flywheel concept applies to simpler, consumer-oriented websites. “User-generated content models are magic,” said Barton. “And they are magic because the more reviews you have of hotels, for instance, the more it attracts users to the site. And the more users you have, of course, the more reviews you get. This is a very simple, elegant example of a positive feedback system. This flywheel spins faster and faster, and what happens is the competitive moat — the defense, the competitive differentiator or the moat around the castle — gets wider and deeper every day with every review that is done. So, it is really hard for someone to come in and try to compete with TripAdvisor.”
Live Nation has a similar flywheel. The key to the whole thing is content. This is what attracts the fans and gets the flywheel moving. More fans at concerts increases the volume of ticket sales, ancillary sales at venues and attracted more advertisers and sponsors. That allows Live Nation to get more out of fixed costs like the venues and the servers needed to run the Ticketmaster website. This free cash flow allows it to sign more artists, promote more tours and acquire more venues. Feed any part of this flywheel, and it should accelerate the loop and widen the moat. Once the platform company reaches critical mass of participants on each side, the flywheel begins to spin faster and faster. There is ample reason to believe the Live Nation has reached or is on the verge of reaching critical mass.
Increasing Returns to Scale
Because of the huge benefits of scale, multi-sided markets demonstrate a particular propensity for tipping to winner-take-all situations. Platform leaders can leverage their higher margins to invest more in R&D or lower their prices, driving out weaker rivals. As a result, mature two-sided network industries are usually dominated by a handful of large platforms, as is the case in the credit card industry. In extreme situations, such as PC operating systems, a single company emerges as the winner, taking almost all of the market.
Big city newspapers in the pre-Internet era are a classic example of this dynamic. On one side readers are attracted to the newspaper with the most advertising, not because they love ads but because the ad revenue gives the company more money to spend on content. Similarly, advertisers are attracted to the newspaper with the most readers. This dynamic is why in the pre-Internet world, cities were dominated by a single, highly profitable newspaper.
CEO Michael Rapino noted the increasing returns to scale on the Q3 2014 earnings call: “At Live Nation, we see great continued runway ahead, given the fragmented global landscape in concerts, management and ticketing. As our scale grows, we continue to drive increased economics in our business model, with higher profits per show, more advertising, and improved ticket conversions.”
Owners’ Earnings Increasing With Scale
Specifically, how does Live Nation benefit from its scale advantages?
- First and foremost, the key scale advantage is the 60 million fans it attracts to its shows each year. This gives them a lot of eyeballs to monetize. As a result, high margin advertising and sponsorship revenue has increased 15% per year since 2010.
- Live Nation’s dominant market position in ticketing, being magnitudes larger than its competitors, produces a powerful cost advantage that’s difficult for competitors to match. Imagine trying to compete against a competitor that can invest a multiple of your annual revenue on efforts to improve quality and efficiency. They have built a bulletproof ticketing platform that can withstand a huge rush of ticket buyers at key times.
- The 130 million customers Live Nation has in its database provide an interesting source of Big Data for marketers. The database includes name, address, location, tastes, and credit card number. This data is being harvested both by Live Nation and its customers. The information garnered about ticket purchasers from Internet sales can facilitate the development of targeted and thus less costly marketing strategies. Data is used to help a variety of parties — artists, venues, sports teams and brand sponsors — to be as knowledgeable as possible about the live event fan base. That enables them to be as relevant and targeted as possible with their communications, offers campaigns and programs, mobile and social strategies, and ideally across all of their marketing and fan interaction.
- Scale also benefits Live Nation in talent acquisition. Deep pockets allow Live Nation to book artists that other promoters simply can’t afford. Many smaller venues have complained that they cannot offer marquee bands the revenue and venues that would enable them to compete with Live Nation.
- Deep pockets allow Live Nation to mount huge global tours that are beyond the reach of competitors. To acquire the tour, Live Nation can afford to give some performers 100% or more of the gross.
- Deep pockets fund Live Nation’s moat-widening acquisition strategy. They can gobble up new entrants before they become a threat.
- Ticketmaster has the scale to entice venues into exclusive relationships. These contracts usually run 3 to 5 year. Due to economies of scale, Ticketmaster can make a profit at a much lower price than competitors, as a result, it can afford to give venues more of the service fees
- Live Nation has compiled a huge archive of recorded concerts that it has just begun to exploit. It has begun offering ad supported videos of concerts for playback on the Web in conjunction with Yahoo. While revenue numbers have not been disclosed, Rapino did state that the proof of concept was successful.
- Live Nation’s scale in venue ownership effectively forecloses entry by competitors because most markets cannot support more than one such venue.
Advantages Over Other Media Companies
Live Nation has significant advantages over other media companies.
For one thing, it has stayed clear of anti-trust and regulatory problems. At one time movie studios owned movie theaters – roughly the equivalent of Live Nation owning music venues. But, the movie studios were forced to divest them. Similarly, radio stations and broadcast networks have their own regulator, the FCC. Thus far, Live Nation has not been blocked in its attempt to control the entire ecosystem.
Second, most of these other media companies are either ad-supported or user-supported, but Live Nation is both. Live Nation can both charge concertgoers for tickets and sell ad space at venues. This is the equivalent of HBO collecting subscription fees and running commercials. Interestingly, Sirius, another Liberty Media holding, is able to run ads on certain channels.
Third, unlike record companies and newspapers, a live performance is not subject to technological disruption – at least in no way that I can foresee.
Similarly, most of the other companies are subject to piracy. A live performance can be filmed or recorded but it cannot capture the excitement of actually being there.
Total Addressable Market
Once the flywheel gets spinning, the only limitation on growth is the size of the total addressable market. Revenue from the global concerts industry grew at a +10% CAGR from 1998 to 2012. The industry grossed $14 billion in 2012. Content is increasing as artists are reliant on touring as their main earnings driver and the best means to engage and connect with their fan base. Further, new markets are opening up around the world. As Rapino stated: “The best news for our business is that the industry pie is growing. So, if you look at the global concert business, it’s growing because of the emergence of social media, YouTube, et cetera — have expanded the global audience. So, for 50 years the size of the pie was you toured in North America, you toured in Western Europe, and that was really the only places you actually could make sustainable income. Everything else was an odd vanity play. Thanks to the demand of You Tube and et cetera and the breakdown of the traditional gatekeepers, the artist now like Rihanna has 70 million fans on Facebook and Twitter; 40 million of those are outside the US. So you have consumer demand growing in all of these Latin America, Asia, and Eastern Europe markets that was throttled for many years. So you have mass demand now growing across the globe.”
Understanding Live Nation’s Financials
We believe that GAAP accounting does a poor job tracking the economic performance of a highly acquisitive company like Live Nation. To evaluate Live Nation’s business performance, one first needs to translate GAAP earnings into economic earnings.
Calculation of Live Nation Economic Earnings
These adjustments are required to translate GAAP earnings to economic earnings. The largest adjustments are depreciation and amortization. Live Nation’s GAAP depreciation expense dramatically overstates its capital spending requirements. Per the Cash Flow Statement, Live Nation’s depreciation expense was $122 million in 2013. Per management, the amount of actual capital expenditures necessary to maintain their fixed assets was just $60 million. A similar mismatch occurs in early years. As a result, we add-back GAAP depreciation and deduct maintenance capex per management to get a more realistic amount. Further, goodwill amortization is a non-cash charge as required by GAAP purchase account, but does not reflect a true loss of economic value for Live Nation. As a result, it too is added back to get to economic earnings.
Acquisition expenses are also added-back. These are one-time cash charges that economically should be capitalized as purchase consideration rather than expensed in the income statement.
I decided to keep the valuation process very simple.
I bought shares on 1/30/15 at $23.90 per share. This gave me a pre-tax yield at the outset of 10% (based on 2014 adjusted operating income).
Then we tack on a growth rate. Obviously, this is notoriously difficult. I tried to keep it simple and not make any courageous assumptions.
The global concert industry grew at a 10% CAGR from 1998-2012. While I don’t have data for 2013 and 2014, I believe the historical trend continued. Given its scale advantages and wide moat, there is little reason to believe that Live Nation cannot grow faster than the global growth rate.
Beyond the global trend, in 2012, Management announced their plan to increase AOI by 30-35% by 2015. They are confident this will be achieved and will likely be surpassed. On the Q4 2014 earnings call, management indicated that they expect this growth rate to continue through 2019. There are many drivers available to them that make this growth rate realistic:
- Higher Ticket Volume – Most of the revenue from higher ticket volume drops right to the bottom-line because it is a highly automated, fixed cost business. There are a number of factors that could drive volume growth including: population growth, growing economy, growing interest in live music, etc. Most intriguing are Live Nation’s efforts to increase their conversion rate. 85% of shows do not sellout. Live Nation is trying to reduce this through more targeted advertising.
- Higher Prices – Ticket prices have been increasing faster than the rate of inflation for some time. While this trend has to end at some point, I expect it to continue for some time.
- Margin Expansion– Ticketmaster’s sole public comparable, CTS Eventim, has EBITDA margins of 40%. Ticketmaster is down around 20%. There would seem to be quite an opportunity here to cut expense particularly given the business’ high level of automation and the benefits of scale. Management has already announced that they plan to cut expense by $.35 per ticket by 2016 through IT improvements. This will increase AOI per ticket to 26%.
- Secondary Ticket Market – There is some confusion regarding the total size of the secondary ticket market. I have seen estimates as high as $15 billion and as low as $5 billion. Ticketmaster’s gross ticket volume was $900 million in 2014 up from virtually nothing in 2012. Despite this strong growth, only 6% of our Ticketmaster events in 2014 were activated with secondary inventory, so there is substantial runway for growth ahead. Oddly, offering secondary ticket options alongside primary ticket options increases sales of primary tickets. “In general, we have seen that fans are 30% more likely to buy a ticket when they see both primary and secondary tickets together, versus just what’s left of their primary options.”
- International Expansion – Live music revenue is set to rise the fastest in developing markets as tours and festivals extend their global reach. 
- International Expansion for Ticketmaster – Currently, 66% of Ticketmaster’s business is in North America and the platform improvements have been limited to North America. Its seems reasonable to assume that the ticket business will follow the concert business overseas.
- Per Live Nation, Madison Avenue spends $1.5 to 2 billion on music sponsorship and advertising. Live Nation received just 15% of that in 2014. It is reasonable to assume their market share will go up.
- Monetizing the Archive – Streaming Video partnership with Yahoo – another way to monetize the concert platform, proof of concept is successful. We know from our research that the average fan when he is debating going to a concert, the casual fan, he spends a couple of weeks shopping. We know that the number one way that you can get a casual fan to press the buy button is by a live video of that artist, it is a very stimulating conversion tool. We do know that the more we scale and bring a high quality live experience to the fan, and add a buy button, we know it’s also a great conversion mechanism for our core business, so it will be – core benefit is a sponsorship ad unit, and a longer term benefit is conversion around the ticket. Not cannibalizing.
- Return of Consumer Discretionary Spending – As you can see from the chart below, consumer discretionary spending has still not yet returned to its pre-crisis levels. It’s a fool game to try and forecast growth in something like consumer discretionary spending. Nevertheless, it does stand to reason that the growth rate will return to historical levels and Live Nation will benefit.
With 9 drivers to propel them forward and limited headwinds, I believe a growth rate of 10% per year in AOI from 2015 to 2019 is not particularly aggressive and is just slightly higher than historical trends. Thus, at the time of acquisition, the stock had a pre-tax earnings yield of 20%. I think the odds are in our favor that this will be sustainable.
The consensus forecast (per Sentieo.com) is well below this. As he usual does, Mr. Market is simply extrapolating future growth from the recent past. Because he does not understand moats generally or multi-sided platforms specifically, Mr. Market is discounting the opportunity for out-sized growth now that Live Nation effectively controls the North American concert market. I say this with all due modesty in my ability to predict future growth rates. I simply think that given the stock price on the one hand and the evidence indicating strong growth in the future, this is a very good bet. I firmly believe that the best approach to investing is to view the future has a probability distribution. Given the arguments and evidence laid out above, I believe that high growth is of higher probability than the consensus view which projects current growth into the future. Mr. Market’s confusion over the nature of the moat Live Nation has constructed is the kind of opportunity moat hunters like myself look for.
On the other hand, if for some reason my thesis does not play out, Live Nation’s assets provide lots of downside protection. First and foremost, Ticketmaster has a near monopoly on ticket distribution. How much is this worth? Second, Live Nation owns or controls most of the important music venues in the US – venues that it makes no economic sense to duplicate. How much is this worth?
The only challenges I can see to my thesis are (1) another downturn in consumer discretionary spending (2) a renewed regulatory or litigation threat and (3) live music goes out of fashion.
One further risk mitigant: John Malone’s Liberty Media owns 27% of Live Nation and Liberty Media CEO Greg Maffei sits on the board of directors. John Malone, of course, is one of the exceptional CEOs featured in The Outsiders. His stewardship makes it extremely unlikely that Live Nation will make any capital allocation mistakes.
As a value investor, it is hard not to see Live Nation as fully valued and discount management’s aggressive growth forecasts. However, here we have an example of exceptional management and an exceptional business. I went into my analysis of Live Nation with no preconceptions. I simply looked at it because it turned up in Horizon Kinetics’ portfolio. As I peeled back the onion and discovered the elegance of the multi-sided platform company they had constructed, I was blown away.
Full Disclosure: I own shares of Live Nation Entertainment (LYV)
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 Wired, “Everyone Hates Ticketmaster – But No One Can Take It Down,” 11/1/10
 This dilemma is also known as the “chicken and the egg” problem.
 Rapino: “Then get to our business — we’re the largest promoter in the world, larger than every other promoter in the world combined. So our scale has really come into effect over the last few years, in that we can deliver that global artist a global solution. No one else has a global platform. There are a lot of regional players. But no one else can talk to Lady Gaga and say — yes, let’s play 32 markets and we have an office in all those markets. We’re going to promote you best, we’re going to market you best, we’re going to get local advertising.” Live Nation Entertainment, Inc. at Piper Jaffray Technology, Media and Telecommunications Conference March 12, 2014
 Liberty Media Day 2013.
 Live Nation Entertainment, Inc. at Piper Jaffray Technology, Media and Telecommunications Conference
March 12, 2014
 In LYV’s own calculation of economic earnings (they refer to “free cash flow”) they add back non-cash stock compensation expense. We do not think that is appropriate and have not done that here.
 The exact quote: “On the guidance, a few years ago we had given a three-year plan and a target to get to our $600-million goal, and we’re obviously in the last year of that three-year plan. We believe we’re on track to deliver our goal.
“ Obviously, there is always inquiries about will you give further guidance beyond 2016 — or beyond 2015. It’s not something that we’re going to get in the habit of, but I wanted to give you an overview there that if you look at what we’ve been able to accomplish over the last three years cumulatively, regardless of exactly what year was up slightly versus the other and you were trying to build a model on 2016, 2017, 2018, our message there is to you getting from our $300 million-ish to $600 million. Was because we built a better business, we’re investing in the right levers, and we’re monetizing it. And we do some tuck-in acquisitions and every now and then a C3.
“So you can repeat history going forward, and we would expect to deliver, if we were sitting here somewhere in the year 2019, and looking back over the last three years, our goal would be to continually deliver that kind of ongoing growth.” Q4 2014 Live Nation Entertainment Inc Earnings Call
 Rapino: “But we’ve said it out loud over the last couple of years that we believe the greatest opportunity we have is if 23,000 shows and a Ticketmaster, well over 100,000 events on sale, the greatest opportunity we have to grow this business is to sell 10 more tickets to each event. You sell an extra 10, 20, 30 tickets to our 20,000 shows or Ticketmaster’s 100,000 plus shows, those are millions of dollars to the bottom line, incremental high margin.” Q1 2014 Live Nation Entertainment Inc Earnings Call
 “What we are getting better at is less print ad radio spots and loud untargeted advertising and precision. Because we know who you are, we know where you are on Thursday, we know you like country music, we know your purchase pattern. And the quicker and the simpler way we can talk to you directly and offer you value to come back is how we can continue to convert higher and higher those unsold tickets. “Live Nation Entertainment Inc at Goldman Sachs Communacopia Conference, 9/11/14
 “ More than 50% of our business is outside of the US and has been for a while. We have a really, really huge advantage. Most people can’t think about entering emerging markets like we can. I mean we entered Russia last month. I can move into a market, I don’t have to build a factory. I have no regulations, there’s no media, not like NBC can’t move in Russia because the local — so I have no regulations in those markets. I have no factory to build. And I got a product that I don’t even have to market because Russia knows who Lady Gaga is.
“So we’ve got a product that is truly transportable. All I need to do is get in that market with some credible local executors, promoters. Open up my Live Nation office, start feeding them those 52 tours a year we buy. Build some local scale. Probably then because you’ve got Lady Gaga, U2 and Justin there, you start to hire two sponsorship people and get Coke deals. And then if we can drop in our Ticketmaster ticketing platform I can build my base. “ Live Entertainment at 2/27/13- Morgan Stanley conference.