Is Live Nation at deaths door, as some recent media reports may have us believe?
You can put the electrical defibrillator away for now, but dont let the doctor leave the room, yet.
As many of you may know from reading my writings at AllHipHop.com or elsewhere I believe that one of the most important lessons for this generation and culture to learn is that the music industry does not represent the highest level of business activity. And those who think that radio stations, record labels, management companies, and cable channels are the most powerful forces that influence what artists say and do, and who makes money or not, are under an illusion.
Yes, there are power centers and wealthy individuals who are telling the radio stations, record labels, and cable channels what to do, and these dictates and judgments are what often trickle down to Hip-Hop influencing it as a music genre, industry and culture, and even those we call tastemakers and trend-setters..
One of the best places to witness this at work and see how powerful Hip-Hop artists and opinion leaders are (or not) is by studying what happens on Wall Street and financial markets around the world.
I made some waves years ago when I demonstrated this relative to the impact that the uncertain employment status of Star of Star and Buc Wild was having on the parent company of Hot 97 Emmis Communications. The stock price of Emmis was being impacted because influential stock analysts (whom no rap fan will probably ever meet) were downgrading Emmis earnings outlook and no longer recommending that investors buy or hold the stock until it became clear as to whether Star would return. He and his high ratings were that important to Hot 97s advertisers – the source of its revenue. It remains one of the great untold episodes of individual and cultural power in the history of Hip-Hop commerce, in my view, and it opens up a great field of broader research for someone to one day hopefully explore. Only the legendary Hip-Hop historian the legendary Davey D. picked up my brief on it, even though CNBC reported the story.
In that context I look at Live Nation.
Who is Live Nation?
According to their official website:
Live Nation Entertainment (NYSE-LYV) is the largest live entertainment company in the world, consisting of five businesses: concert promotion and venue operations, sponsorship, ticketing solutions, e-commerce and artist management. Live Nation seeks to innovate and enhance the live entertainment experience for artists and fans: before, during and after the show.
In 2009, Live Nation sold 140 million tickets, promoted 21,000 concerts, partnered with 850 sponsors and averaged 25 million unique monthly users of its e-commerce sites.
Live Nation, most Hip-Hop fans will appreciate, is the label that signed Jay-Z to a massive deal that gave it control and rights to revenue produced by his albums, merchandise, and concert tours over a ten year period. According to Billboard at the time of the deal, Live Nation will reportedly contribute $5 million each year in overhead for five years and offer $25 million to finance Jay-Zs external acquisitions and investments, plus $10 million per album for a minimum of three albums within the deals term. Jay-Z will also receive another $20 million for other rights including publishing and licensing.
It was reported roughly as a $150 million deal and generally believed to be not as lucrative as the deals Live Nation signed with Madonna and U2 who gave up less or got more out of their deals than Jay-Z depending upon what analyst you believe.
Most of us were fascinated by the $150 million deal figure and satisfied to view the news as a celebrity story involving Jay-Z, rather than truly study the finer details and merit of it as a business deal. I dont know anyone with love for the culture and a business mind for the industry with the exception of the on-point and excellent Business Unusual Magazine (http://www.bumagexchange.com/) – who really has stayed on top of the matter or looked at the fine print of the deal, from filings regarding it, which are available, because the company is publicly traded and has to make such information available. You can read many of the major filings on Live Nation, analyst reports, earnings estimates and quarterly reports, all conveniently archived at this page on Yahoo Finance: http://finance.yahoo.com/q/sec?s=LYV+SEC+Filings
According to an 8K filing after the deal was done, Jay-Z – through Marcy Media – received 775,434 Live Nation shares, with an option on half a million more with the exercise price of $13.73. As of the close of markets on August 6, 2010 Live Nations stock price was $9.30. You do the math. Anyone who evaluates this deal according to Live Nations funding of albums and financing for Jay-Zs business ventures without considering the stock price, his ownership of stock, and the capital gains (and losses) he potentially experiences is not weighing what could be the most significant aspect of the arrangement between Jay-Z and Live Nation..
Those who have been following the company since 2008 know it has struggled not just financially but maybe more importantly, to find its business strategy. Those paying attention read this in the June 12, 2008 edition of the Wall Street Journal:
A fierce battle has broken out among top executives at Live Nation Inc. over the concert-promotion companys ambitious strategy to reshape the struggling music industry by making wide-ranging but expensive deals with artists such as Madonna and Jay-Z.
The battle is over the limits of that strategy, in which Live Nation has pledged hundreds of millions of dollars to a handful of performers in return for exclusive rights to release their recordings, promote their concert tours and sell T-shirts and other merchandise bearing their images.
Having laid out so much cash an estimated $120 million for Madonna and $150 million for Jay-Z alone Live Nation Chief Executive Michael Rapino has sought to slow the pace of deal making so he can ascertain that deals already struck are working before entering new ones. But the companys chairman, concert promoter Michael Cohl, wants to quickly strike deals with as many as 15 more artists.
Two years later, just last month, in the July 15, 2010 edition of the Wall Street Journal the headline was Concert Sales Slipping, Live Nation Says. You know things are bad for a multi-national corporation when its leadership starts blaming the media for everything. As the article mentions, Live Nation Global Music CEO Jason Garner in the presentation repeatedly blamed ticket-sales problems on The Wall Street Journals coverage of concert-industry troubles, which he said was frightening artists and their managers into staying off the road.
What is Mr. Garner referring to?
The Journal reports, Even as Chief Executive Michael Rapino sought to reassure investors Thursday at a conference in New York, he acknowledged that the weak economy has taken its toll on the concert industry. The company says a further 15% drop for the top 100 tours could occur in the second half. Adjusted operating income for 2010 is projected at $405 million, down from $445 million last year, despite the benefits of its merger this year with Ticketmaster Entertainment. A rash of cancellations from bands has also hurt sales. U2s postponement of its tour until next year will cost the company $6 million this year.
As many of you know, rumors can wreck havoc on a stocks price and everything from the supposedly quirky behavior of Live Nations CEO, to continued music industry sales woes, reports of disgruntled artists, and uncertainty about the Great Recession have been weighing on the companys stock. So, I thought about consulting AllHipHops legendary dean of rumors, IllSeed (https://allhiphop.com/stories/rumors/archive/2010/8.aspx) for some insight, but decided to first reach out to a Wall Street analyst whom I respect. Not wanting to make matters worse for Live Nation or themselves, the individual permitted me to quote their opinion, last Thursday, of the stock, anonymously:
Looking at Live Nation as a stock .Cant say that Id buy it for my own portfolio, or recommend it for my clients. Listening in on their conference call, they had disappointing 2nd Quarter results, losing 20 cents a share (they were expected to lose 2 cents per share).
Theyre currently losing money, so their price to earnings ratio (P/E), is negative. Revenue is down 9.7%, and their concert attendance is down 6%. Revenue per ticket was also down 4%. Live Nation sounds like a fun company, with businesses that span concert promotion, artist management, and e-commerce. The problem is that I just dont see how they increase revenue in the current economic environment. Concerts are by and large a luxury for individuals. And at 9% (and rising) unemployment, concerts are a luxury that many cant afford at this time. They indicated on the conference call that the quality of artists lined up for their upcoming concerts is less than desireable as well. With that being the case, I dont see a whole lot of room to bump up their ticket sales.
Furthermore, Live Nation is in a business that already has pretty slim margins. They may have to go on a cost cutting campaign, in order to keep investors happy.
Now to their credit the stock is up over 50% this year. And they seem to have benefitted from their merger with Ticketmaster. But once again they operate in a thin margin environment with a hurting consumer to boot.
They have a beta of 2.24 (to put in perspective, a beta of 1 means that a stock moves in lockstep with the market a beta of -1 means a stock moves inversely to the market). A beta of 2.24 means that when things are going well in the overall market Live Nation should do well. But if things go bad investors Live Nation could potentially feel a lot of pain.
Its currently trading at about $9.46. Option activity is showing investors willing to pay $0.30 for the option to buy it at $10 and $0.85 for the option to sell it at $10. So Id look at a trading range of about $9.15 to $9.76 or so short term.
At the end of the day I dont see a great deal of movement on the stock and I wouldnt really be interested in picking it up, unless I wanted to make a purely speculative play, timed with a projected upswing in the overall economy.
I received a phenomenal reaction to my two part series, Jay-Z, Rich Righteous Teacher, (https://allhiphop.com/stories/editorial/archive/2010/06/22/22273991.aspx) it was loved by some and hated by others primarily on ideological grounds, not from the lens of economics. Most of us in Hip-Hop, even our most respected intellectuals and conscious artists tend to judge Jay-Z from perspectives that leave out any thorough examination of his business affairs (I dont consider labeling him a greedy capitalist or calling him a corporate pawn an examination of his business affairs). As I wrote in part II, I do not think anyone can offer an authoritative view of his career without including an assessment of his business manager John Meneilly who also was the less visible decision maker at Roc-A-Fella Records. I now, go further, and say, that anyone looking at Jay-Zs career (and I dare say Hip-Hop, period) who does not factor in financial markets and stock market activity simply cannot appreciate Jay-Zs career (and the full influence of the Hip-Hop culture) with a full economic perspective (a point I go deeper on in a recent interview I granted Shotfromguns.com (http://shotfromguns.wordpress.com/). This goes for those who are both enamored and critical of him.
Looking at things like stock market price movements can better inform the praise and hate for Jay-Z.
But in terms of its business model, what is my view of Live Nation?
I share the view expressed in the portion of the assessment the stock analyst sent me regarding the nature of the concert business, Live Nation sounds like a fun company, with businesses that span concert promotion, artist management, and e-commerce. The problem is that I just dont see how they increase revenue in the current economic environment. Concerts are by and large a luxury for individuals. And at 9% (and rising) unemployment, concerts are a luxury that many cant afford at this time.
A bit more narrowly Im not a big fan of what Ive seen of Roc Nation the joint venture between Live Nation and Jay-Z, run by John Meneilly (his role at Roc Nation is more open than it was at Roc-A-Fella).
The companys website (http://rocnation.com/home/) outlines the scope of its business model, which makes it look a little bit like Live Nations mini-me: In April 2008, Live Nation one of the largest producers of live concert tickets in the world, selling over 70 million tickets worldwide and expanding over 33 countries partnered with entrepreneur Shawn Jay Z Carter to create Roc Nation. Roc Nation is a fully functioning entertainment company, including artist, songwriter, producer and engineer management; music publishing; touring & merchandising; film & television; new business ventures; and a music label. Artists signed to Roc Nation partake in full-rights deals, which are all encompassing and include ticket sales, record sales and all forms of endorsements.
FYI: full-rights deals is the more diplomatic phrase for what is more commonly described as a 360 deal, which I have written about previously at AllHipHop.com (https://allhiphop.com/stories/editorial/archive/2009/12/08/22049697.aspx)
In particular, I believe the handling of Wale and his album by Roc Nation (who only manages him but whose influence guided the album release) was a unnatural disaster. A person who views my Facebook Fan Page (http://www.facebook.com/#!/pages/Cedric-Muhammad/57826974560?ref=ts) asked me what I thought of it, over the weekend and I said, I think its sad. Wale had a GREAT album but the label marketed him the wrong way. Hes a Diasporic Personality not a backpacker. Roc Nation also didnt know how to attack the issues with DMV artists (D.C-Maryland-Virginia) who are always big locally but not nationally.
While no one can deny how effective Roc Nation was in positioning Wale before his album in high-profile events, they failed miserably in dimensionalizing his personality and story which has local and international appeal. If you ask anyone how they see Wale – it is usually as an underground artist. That categorization although a credit to his lyrical talent and consciousness does a disservice to the dynamic ways he could have marketed and the powerful sound of his album which is not as much grimy (the traditional underground preference) as it is soulful, with movement potential. To me Wale never became a person that the Hip-Hop universe, Black America, Africa and its Diaspora could embrace and claim.
If I was advising Roc Nation I would have told them to first build a huge cultural and viral marketing campaign around Shades featuring Chrisette Michele (the melodic song is about skin complexion perceptions and politics in relationships between Black men and women; and Africans and Black Americans http://www.youtube.com/watch?v=lhL_aJ3pf8g). They could have done this even while still pushing Chillin featuring Lady Gaga. Shades would have taken him out of the underground position, given him a leadership profile and politically incorrect edge, and broadened his appeal to women. What this campaign would have done – which Roc Nation never achieved despite giving him high visibility was get people talking about Wale. Putting Wale in the shadow of Lady Gaga while he was already under Jay-Zs was a bad move. We never ever felt the authenticity of Wales statement on Mama Told Me, Im rapping for the scholars and the hustlers.
While I like, on a few levels, Jay-Zs recent move to joint venture with British Hip-Hop artist Tinchy Stryder (a wise move to go overseas when international sales of music are increasing), if the issues that hurt Wales branding and positioning are not corrected or learned from, Im skeptical of Roc Nations ability to produce a gang of young stars here or abroad who can sell out concerts and move merchandise especially at a time when profit margins are thin and revenue has a ceiling on it courtesy of the Great Recession.
And thats the bottom line.
Live Nations investors are watching balance sheets and profit and loss statements, not Jay-Z.
Cedric Muhammad is a business consultant, political strategist, and monetary economist. Hes a former GM of Wu-Tang Management and currently a Member of the African Unions First Congress of African Economists. Cedrics the Founder of the economic information service Africa PreBrief (http://africaprebrief.com/) and author of The Entrepreneurial Secret (http://theEsecret.com/). He can be contacted via e-mail at: cedric(at)cmcap.com