The Music Industry's Next Idol

The next time that Aerosmith jams to "Walk This Way" or Christina Aguilera belts out "What a Girl Wants," don't be surprised to see IAC/InterActiveCorp (Nasdaq: IACI  ) CEO Barry Diller going "ka-ching" backstage. WSJ.com is reporting that IAC is acquiring musical artist management firm Front Line.

The move makes sense, as a way for IAC to grow its Ticketmaster concert-promoting and ticket-selling arm.

Front Line is available, perhaps for the same reason that Front Line has been able to acquire roughly 40 different, smaller artist management companies recently: the music industry is scared. It sees falling CD sales. It sees new artists breaking out on social networking sites and American Idol.

If there is any surprise to IAC coming out the winner here, it's that one of the remaining major record labels didn't get to Front Line first. In fact, Fortune magazine reported last month that Warner Music Group (NYSE: WMG  ) was in talks to acquire Front Line.

Schoolhouse rocked
Despite its name, Front Line is the last line of defense in a struggling music industry. Folks may not be buying CDs the way they used to -- and digital music sales have only partly offset the decline -- but there is still strength in live concert performances and artist merchandise. Artist management firms typically get a piece of that action.

Concert promoter Live Nation (NYSE: LYV  ) posted a 13% spike in quarterly revenues last week. It's not perfect. Live Nation posted a loss for the period, and the top line gain was the result of a massive shopping spree. However, live events should continue to hold up well. Whether music fans are consuming their music through CDs, iTunes, music-subscription services, or pirated downloads, there is still an attraction to catch popular acts on stage.

IAC knows it. Ticketmaster was one of the brightest spots in the company's first-quarter report. Ticketmaster transaction revenue soared 26% to $309.9 million for the period. Operating income at Ticketmaster inched up just 10% higher, but bellyaching labels would love to get in on that kind of growth.

Record labels know that if CD sales continue to slump, meatier stakes need to be found elsewhere.

The record labels need to realize that their future doesn't lie in CD sales. When it signs a new artist, it needs to spend less money on bankrolling the disc's appeal and more in buying a stake in the artist's gigging and merchandising potential.

Who said that? Me. Four years ago! The industry didn't listen, and now it's a new media conglomerate with an active role as a promoter that is beating the labels to the punch.

Now if only Van Halen could get back on the road
Digging deeper into the music isn't a surprise at Ticketmaster. The company recently announced that ticket buyers to any of its summertime concerts will receive a 10-song digital music sampler. Concertgoers will also get a free digital download of their choice through Apple's (Nasdaq: AAPL  ) iTunes store.

Buying Front Line will pose a few problems for Ticketmaster. Artist management companies, by definition, represent musicians. I imagine that many of the top draws on the Front Line roster have fresh recollections of Pearl Jam's battle against Ticketmaster in the mid-1990s.

Things could get even hairier if the labels start buying up artist management companies, especially when it's time to renew record deals and rival labels are offering sweeter terms.

Still, the labels may not have much of a choice. Digital music sales through iTunes or music subscription services like Napster (Nasdaq: NAPS  ) and RealNetworks' (Nasdaq: RNWK  ) Rhapsody are high-margin outlets, but it won't be long before more bands realize that they can cut out the middleman and be their own digital distributors.

Like clipped vinyl in the cutout bin, the musical markdowns will be permanent. The record industry will have little choice but to take a weed whacker to its overhead by trimming artist development, promotion, and distribution costs. The Internet will play a major role in all three solutions. The legions of indie artists with an established online presence, who mope about the state of commercial radio "not getting" their music, probably have no idea they're sitting right on the "X" that marks the majors' ultimate destination.

Who said that? Me. Five years ago.

I guess I happen to be early too often. That's never a good thing for a musician where it's important to be on time, but it will do just fine for investing when timing is everything.

IAC has a winner here, as long as it is able to cash in on the synergies that are available through its growing portfolio of media properties, without alienating the Aguileras and Aerosmiths that it needs to see its dream through. 

To read more about IAC's other puzzle pieces:

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Longtime Fool contributor Rick Munarriz does not own shares in any of the companies mentioned in this story, though he has been a frequent freelance contributor to IAC's CitySearch. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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