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In Bed With Madonna

In the end, the major record labels couldn't keep The Material Girl satisfied.

Madonna apparently will be the next major recording star to bolt from her label. She has one more CD to deliver to Warner Music Group (NYSE: WMG  ) , but The Wall Street Journal reports that a deal is coming together to send her to Live Nation (NYSE: LYV  ) after that.

Wait a minute, what was that? Live Nation isn't chummy with radio station programming directors. It doesn't have layers of retail distribution and seasoned A&R agents on board. What's a concert promoter doing dangling a $120 million, 10-year deal to a pop star whose biggest hits are nestled snugly in I Love the 80s reruns?

I'll tell you what Live Nation is doing: the smart thing.

"A record label isn't getting a cut of the tour receipts and merchandising sales that are often the result of the record company's marketing efforts," someone once wrote. "That has little choice but to change in the music world. The recording industry can't bank on the prerecorded CD as its only source of revenue. It's a loss leader now."

Oh, I was the one that wrote that, and I did so more than four years ago!

"The record labels need to realize that their future doesn't lie in CD sales," I concluded.

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. Will the artists mind? Under the old guard mindset, sure. But how about under the more idealistic scenario in which the labels and artists are working together as shrewd cost-cutters when it comes to fluff, and mutual partners when it comes time to maximize career-enhancing opportunities?

It took awhile, but it's finally coming together. Why can a concert promoter like Live Nation afford to pay so much for what is really a glorified three-CD deal? Following the footsteps of Sean Penn, Warren Beatty, and Guy Ritchie, Live Nation is getting into bed with Madonna. It won't be just a clunky record label deal. Live Nation is taking stakes in concerts, merchandising, and licensing opportunities.

Dinos don't preach
This is just what Madonna needs at this point in her career. Radio play is no longer necessary when your track record is enough to fill up arenas at premium prices. It explains why bands like Radiohead and Nine Inch Nails have given their labels the heave-ho this month.

Despite what the heavies like Warner or Sony (NYSE: SNE  ) want you to believe, the labels are dinosaurs. Bands used to need label support to break into the music scene and keep them there. Now they're doing it on their own by building audiences online through sites like News Corp.'s (NYSE: NWS  ) MySpace or CNET's (Nasdaq: CNET  )

The labels don't get it, but the promoters do. Live Nation isn't the only sharp tool in the shed. Ticketmaster parent IAC/InterActiveCorp (Nasdaq: IACI  ) made a play for leading artist-management firm Front Line back in May. Selling concert tickets and having a financial stake in musical careers is a potent combination. It aligns the mutual interests of both artists and promoters, joined at the hip as they wade through several different revenue streams.

Desperately seeking sustenance
Madonna and Live Nation see the future of music. The $120 million deal will supposedly be in cash and stock, tying Madonna to the success of Live Nation just as Live Nation is hitching itself to The Material Girl.

That's perfect. Live Nation is a pretty creative promoter. It has experimented with revenue-generating concepts like recording performances and then burning them onto CDs for fans to buy on the way out. Expect even more bold ideas to bubble to the surface now that the stakes are higher.

It may have seemed absurd to see Paul McCartney ditch his record company to put out his latest studio CD through Starbucks (Nasdaq: SBUX  ) earlier this year, but it turned out to be one of his best-selling releases in years.    

The music industry is changing. Break out the clean satin sheets, survivors.

More bad news for the majors:

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