The Digital Download Dilema

In a challenge to Euclidean geometry as well as to the US Department of Justice (DOJ), the merger between Ticketmaster, the US’s largest seller of concert and event tickets, and Live Nation, the world’s largest concert promoter, seeks to add degrees to the circular ‘360 deal’ configurations that the surviving major record labels hoped would be their way out of spiralling revenues. The 360 deal refers to record labels taking a piece of all revenue streams generated by their recording artists, including concert ticket receipts and merchandise sales. But Live Nation Entertainment, the name of the merged entity that received tentative US Government approval in January, adds even more degrees to the circle, with Ticketmaster’s reported 89 per cent share of the US large-venue concert market and Live Nation’s stable of 135 venues coast to coast and globally, including London’s Wembley Arena, the House of Blues club chain and the Fillmore theatres in New York City and San Francisco. Then add to that artist management services – Ticketmaster’s CEO is Irving Azoff, manager of the Eagles and other arena-busting acts. Even Alfred Einstein and Max Planck would have trouble contemplating the effect of such a comprehensive entity on the physics of the music business. No wonder Bruce Springsteen has gone on the record as being wary of this deal.

But it wasn’t real estate or even record sales that has piqued the interest of the Justice department. Now that concert revenues are viewed as the primary revenue stream for the faltering music industry – in 2009, North American concert revenue was a record US$4.4bn, according to Pollstar magazine, a 10 per cent increase over the previous year – who controls the box office controls the destiny of the business these days. That was underscored by the fact that a year and half ago, Live Nation launched its own ticketing service for its own venues to compete with Ticketmaster, and quickly racked up a 16.5 per cent market share of those venues. That strategic parry quickly brought Ticketmaster to the table – just two months after Live Nation’s entry into ticket sales, the two companies announced their intention to merge into a new entity with a combined value of about US$2.5bn, much of that coming from the fees generated by the more than 141m tickets, worth more than US$8.9bn, that Pollstar says Ticketmaster sold last year. To give you some sense of scale, Ticketmaster’s next-biggest competitor’s share was just under four per cent.

That’s why the Justice department’s focus was on ticket sales, which have long been a point of contention for concertgoers and local attorneys general, who have on numerous occasions looked into the allegedly monopolistic practices of Ticketmaster, as well as the netherworld of ticket resellers (often known as ‘scalpers’) who are able to buy blocks of tickets from Ticketmaster and its few significant competitors and then resell them at hefty mark-ups via websites and classified advertising. The DOJ rejected Live Nation/Ticketmaster’s initial application for merger, instead stipulating that it take several steps to ensure that some significant competition can exist. The revised settlement filed by the Justice Department, along with 17 state attorneys general, spells out measures to resolve concerns about competition. Under the agreement, Ticketmaster will give Anschutz Entertainment Group (AEG, Live Nations closest competitor) access to its technology so that AEG – which owns and manages nearly 100 venues, including the Staples Center in Los Angeles – can create its own ticketing service. Ticketmaster would also be required to divest itself of a subsidiary, Paciolan, which provides software for venue operators to sell their own tickets. (A division of leading US cable television provider Comcast Corp – which itself is under DOJ scrutiny for its pending move to acquire NBC/Universal and its record labels – has signed a letter of intent to acquire the subsidiary.) Furthermore, in a move suggesting that the Justice Department of the administration of President Barack Obama is a bit savvier than that of George Bush’s when it comes to the entertainment business, Live Nation Entertainment also is prohibited from retaliating against venue owners that defect to competitors. And the terms of the agreement would remain in place for 10 years.

The implications of this merger are far-reaching, and would seem to validate the concerns of the US Justice Department, as well as other concert promoters who have voiced their own concerns, and consumer groups. For starters, combined with Live Nation’s signings of top-selling and top-grossing artists Madonna and Jay-Z to its record label two years ago, the success of Live Nation Entertainment could be what it takes to slide the remaining major record labels into what will likely be their final role – rent collectors for the catalogues they have built up over the past six decades. (If Comcast does acquire Universal, I doubt the record labels would be part of the deal for long – Comcast will likely spin them off quickly, forcing the parent label, with its diminishing revenues, to look for a partner. Like Live Nation, perhaps?) This huge consolidation could also bring about pressure on live sound companies to lower prices for tours, and, in turn, generate even more consolidation within their own ranks, such as the Clair Brothers-ShowCo acquisition in 2001 and Production Resource Group (PRG) consolidating the operations of ProMix, Burns Audio, A-1 Audio and Electrotec that same year. That will have a knock-on effect on manufacturers that cater to the high end of touring sound. We’ve already seen how companies like Harman and Yamaha have vastly increased their downmarket offerings as the top of the market narrows and the bottom – the huge base of independent artists who also have discovered that the devaluation of downloaded music means their best source of revenue is on the road – continues to expand.

It’s also possible that conglomeration on this scale could also turn consumers off, and if they stop buying tickets like they’ve stopped buying CDs, Live Nation Entertainment and AEG are in for a rough ride. Live Nation Entertainment are doing their best to counter the widely held perception they’ll be able to add fees and increase prices at will. Last year, for instance, Live Nation and Ticketmaster instituted ‘no-service-fee Wednesdays’ and reduced prices on open-air seats at Live Nation’s network of amphitheatres around the US to draw more fans.

Some might argue that this is just so much window dressing, especially on the part of Ticketmaster, which has done little over the years to counter the impression that they are not exactly consumer-friendly. And they’d likely be correct; the conglomeration of publicly traded companies – and both Live Nation and Ticketmaster live on the US bourses – is intended ultimately to please shareholders, not customers.

Of course, there is something to be said for the efficiencies of consolidation. Just ask Goldman Sachs, or any other investment banker that’s made huge profits by picking over the pieces of the financial meltdown of the past 18 months. And Mr Azoff makes a reasonably compelling case in that regard. He points out that the deal will help revive the music industry by creating a better-organised process to deliver music to consumers. ‘It will give us greater flexibility in how we promote, market and sell tickets to events,’ Mr Azoff told a US Senate Judiciary Committee hearing looking into the deal last February. ‘It will give us a pathway to alternative pricing and fee structures.’

One thing all of this underscores is that the music business in the West has become an almost completely corporate proposition. The word ‘music’ has been joined at the hip with the term ‘business.’ The depth of Live Nation’s penetration of the live performance business at the club level means only the smallest of neighbourhood caverns remain independent of them – the sort of place the famed CBGB’s was on Manhattan’s Lower East Side, before the club and now the neighbourhood itself became brands themselves. (CBGB’s former location is now an upscale menswear boutique, though the new occupant did leave the graffiti on the exposed brick walls intact.) But back to reality – The newly formed Live Nation Entertainment is going to fundamentally alter the nature of the music industry, and by extension, impact the businesses of live and recorded music. Keep an eye on it.

 Published in PAA May/June 2010