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September 30, 2014
By Jon Baker, CFA
We first received shares in Ticketmaster when it was spun off from former portfolio holding IAC/InterActiveCorp. We had come to appreciate aspects of the ticketing business having followed it for several years in our diligence of its then-parent. In mid-2008, already reeling from the announced defection of its largest ticketing client (Live Nation), Ticketmaster was loaded with debt by its parent and kicked out the door on its own.
Expectations for touring activity soon withered as the global economy tipped into recession. In a matter of months, with both of their businesses continuing to track lower, Ticketmaster and Live Nation announced their intention to merge. Following nearly a year of anti-trust review, the companies combined in early 2010, forming Live Nation Entertainment. The pairing boasted two “world’s largest” titleholders - concert promoter and ticketing provider - bumping along the bottom of the worst touring environment in memory.
Live Nation CEO Michael Rapino may well have had conflicting emotions about his new partner. On the one hand, Ticketmaster had been reviled by consumers for decades. The buying public saw fees approaching 15-25% of stated ticket prices (oblivious to the fact that Ticketmaster only netted perhaps $2 of these charges per ticket) and cried foul. And, though technically deemed ‘not a monopoly’ by the Justice Department, Ticketmaster had often acted like one. Years of underinvestment by cash flow hoarding owners had left Ticketmaster in need of a serious facelift. Yet, despite the vitriolic consumer relationship and lack of client facing innovation, Live Nation found itself the proud new owner of a ticketing service that had amassed a U.S. market share in excess of 80%. It had also gained access to Ticketmaster’s massive trove of historical transaction data, and that data was only growing more valuable.
File sharing and digital sales had already combined to reshape the landscape of recorded music by the time of the merger. According to Forbes, in 2006, 75% of the earnings for the music industry’s top acts was earned on the road. With touring revenues of growing importance to artists and the largely fixed costs borne by venues and tour promoters spread over shrunken recessionary crowds, every next concert attendee had become that much more impactful to the bottom line of each.
Against this backdrop, Rapino embarked upon a multi-year overhaul of Ticketmaster’s technology infrastructure. The first order of business was to improve the experience for the company’s 12,000 venue customers. Ticketmaster long ago signed the vast majority of large U.S. venues to multi-year, exclusive deals, becoming the sole ticketing provider to events staged in those facilities. Today, the gross value of tickets sold by Ticketmaster is approaching $10b per year, multiples of the next largest seller. That massive volume attracts and holds the attention of the industry’s largest ticket buying audience. A defecting venue risks less exposure for all its events, fewer ticket sales, a less enticing payday for each artist and lower parking, concession and merchandise revenues for other constituents. Thus, despite tools that fall short of state of the art, customers are still incented to partner with Live Nation.
Of course, being incented to partner is not the same as being happy to do so. Given its existing market power, combined with Rapino’s demonstrated willingness to invest, Live Nation can uniquely craft an offering that both better pleases and better rewards. The day to day, tangible experience for the typical venue is improving and the consumer exposure to each venue’s content is already second to none. However, Rapino can do more to put greater distance between Live Nation and second best. He can improve the consumer experience via investment in mobile tools, social media and an improved web/buying experience, thereby growing the audience on offer to venues and artists. He can diversify and expand revenue sources via secondary ticketing, sponsorship and digital advertising, thereby accessing even greater resources with which to cement exclusive partner relationships. Live Nation is in motion on all of these fronts.
Live Nation’s ability to access larger audiences and greater physical distribution is attractive to artists, and that is increasingly true on a global scale. Since the merger, both Ticketmaster and Live Nation’s volumes have improved, dragging profitability up with them. Earnings will soon take another step forward as the surge in catch-up investment spending subsides and targeted efficiencies bloom. The company’s emerging earning power and repaired balance sheet are about to make a strong argument for playing more offense. Live Nation has already begun to accelerate the pace of acquisitions, especially of international event promoters. We expect this expansion of its global distribution network to continue, to the benefit of artists, Ticketmaster and shareholders alike.
We value Live Nation in the high $20’s per share and, despite the stock’s strong 2013 performance, still consider it a good value at current prices. It would appear some of our favorite capital allocators agree. Longtime portfolio holding Liberty Media owned 27% of Live Nation as of September 2014, whereupon they entered into a forward purchase agreement to buy up to their maximum allowable ownership of 35%.
As of September 30, 2014: Live Nation represented 1.3%, 3.0% and 4.1% of the Partners Value, Partners III Opportunity and Hickory Funds’ net assets, respectively.
Jon Baker, CFA Joined Weitz in 1997. He graduated from the University of Notre Dame and previously spent four years as an accountant at McGladrey & Pullen. Jon has been a CFA charterholder since 2000.
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