A few weeks ago, we covered the soon-to-be-public Eventbrite -- an event-planning and ticketing platform that targets all but the very largest and smallest gatherings. Who targets the very largest gatherings, then? That would be Live Nation (NYSE:LYV), which has the vast majority of market share in the mega event space.
In this week's episode of Industry Focus: Consumer Goods, host Vincent Shen and consumer goods analyst Nick Sciple dive into the world of big-league concerts and explain how Live Nation established such a dominant position in it. Find out how Live Nation's business model works, what risks investors should be aware of, how this company and Eventbrite compare, where Live Nation has left to grow, and more.
A full transcript follows the video.
This video was recorded on Sept. 7, 2018.
Vincent Shen: Welcome the Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen. Joining me in the studio is fellow Motley Fool analyst, Nick Sciple. We're pre-recording today's show to air on Tuesday, September 11th. Hey, Nick! Great to have you back, man!
Nick Sciple: It's great to be here! Happy to be on, talking to you!
Shen: You have how many podcasts under your belt? Is this your second one? Or have you done a few others?
Sciple: This will be No. 2. By the end of the week, we'll have three down.
Shen: Do you feel like it's getting easier?
Sciple: I'll let you know after the end of this one. How about that?
Shen: OK, fair enough. Really glad that you could hop on, so we can return to our discussion of the live events industry. Two weeks ago, we previewed the initial public offering of Eventbrite. Check out that episode if you haven't heard it yet. The short elevator pitch for the company basically goes like this: you have this fast-growing event planning and ticketing platform that targets what they call the middle market. It's a pretty big bucket. As the CEO describes it, not birthday parties and not Taylor Swift in Madison Square Garden, but everything in between. Through its platform, Eventbrite generates revenue by charging a fixed invariable fee per ticket for paid events, not to mention the additional fee they generate for creators who use the company's payment processing. New creator signups and the subsequent loyalty to the platform are encouraging. But we did have some concerns with, essentially, the ramp up and out of the Eventbrite ecosystem that the most successful creators will naturally experience if they reach a level of success that brings them to the biggest event venues. Just the Eventbrite story there.
Sciple: You're exactly right, Vince. They have the middle of that market. Today, we're talking about Live Nation, which is the top end of that market, which is going to be an interesting comparison between the two companies.
Shen: Exactly. The question ultimately lies in whether or not investors need to be worried that Eventbrite's most valuable or profitable creators inevitably move on to the competition. That competition is who we're going to talk about today. It's dominated by Live Nation, ticker LYV.
In the Eventbrite prospectus, they highlight the fact that they had 700,000 creators use their platform to organize three million events and issue over 200 million tickets last year. I'll just present you the flip side -- for Live Nation, we scale everything up significantly. For that same period, 2017, the company served 580 million event goers, sold over 500 million tickets. That's with a ticketing client base of about 12,000. Those clients being these massive stadiums, pro sports leagues, theaters, more.
What is their secret sauce? You've alluded before to how Live Nation has its fingers in all aspects of the industry, when we were chatting about the company for the show. What does that look like, exactly?
Sciple: Sure. Well, whereas Eventbrite was a company that's mainly focusing on the ticketing aspect of a live event, Live Nation really touches every part of putting on a live event. That comes from operating the venue, the ticketing services, of course, they sponsor artists, and they do advertising for those artists' tours. They really touch everything that you need to put on a live event. Live Nation serves that market.
They're fully vertically integrated, which is a huge part of their model. They use those other areas of their business, the artist management areas of their business, to really funnel where the real profit driver is, which is Ticketmaster. Everybody who's ever been to a live event, I'm sure, of any size, has used Ticketmaster.
Shen: And complained about it. [laughs]
Sciple: Exactly, exactly. We'll talk about that a little bit later. Those Ticketmaster fees are a big part of Live Nation's business model and where they drive their profits from.
Shen: They have become this dominant player in live entertainment. I don't think you can really overstate this. Its strength comes from the very deep roots that it's established up and down the value chain. To further illustrate what that looks like, think about the artists. The company handled shows for 4,000 musicians last year. It has a management arm with clients that, I think the count is around 500 artists. These are pretty much some of the biggest names in music, from more modern stars to classic stars like Paul McCartney.
Then, you have the venues. Live Nation has exclusive booking rights or interests in over 200 of them, some of the most famous and biggest venues in the world. Any the company operates also generate revenue from concessions, parking, rentals. One number I saw cited, just an example here, they generated $24 in additional revenue per fan at some of its venues from things like the concessions, VIP seating, things along those lines.
And then, with the events themselves, Live Nation, they promote festivals and these different events that allow them to connect with major sponsors, advertise the fact that they have 90 million attendees, almost, to their concerts for last year. It's a big base of people that companies want to connect with, in terms of their advertising.
And finally, again with the ticketing, and how important Ticketmaster is. 500 million tickets going through that system, about 200 million of which generated fees for the company.
Looking at full year 2017, Live Nation, in their 10-K, they mentioned that they grew their estimated number of events over 12% to almost 30,000. Attendance was up over 21% to almost 86 million people, which I just mentioned. The total number of tickets that Live Nation sold was up just 3% to about 500 million before those 200 million or so tickets that generated fees for the company. That volume was up almost 10%. We're seeing some pretty strong growth in this broad base look at the business.
Breaking things down further, Live Nation reports their revenue and results in three segments. Those are Concerts, Sponsorship and Advertising, and Ticketing. On the top line, the company reported total revenue last year of about $10.3 billion. But the way things shake out on the top line, and the way they shake out to their operating profits, essentially, doesn't quite follow the same mold. Concerts are the biggest part of their revenue. It makes up about $3 out of every $4 that the company generates in sales. That includes promoting and operating these big events, and also the artist management side of the business that you mentioned. Ticketing is good for another 20% of revenue. That Ticketmaster dominance brings in about $2.1 billion. And then, Sponsorship and Advertising rounds out the remaining 4% or so, with just $450 million. For the year, every one of those segments grew double digits.
When it comes to the profitability and contributions to the bottom line, though, again, the businesses break out very differently. Can you talk a little bit about that?
Sciple: You're exactly right, Vince. Whereas a huge portion of their revenue is generated from their Concert segment, it's very relatively small when it comes to the profits of the business. You're looking at ticketing services as only 20% of their overall revenue, accounts for almost half of their earnings. The Advertising segment is only 5% of their overall revenue, and it's 37% of their adjusted operating income.
That really draws through, where you can see how their business model works. They use this Concert segment, their artist management, to really funnel their profits to those other sectors of the business. In their Concert segment, that's going to include the actual cost at the gate for tickets, whereas the ticketing services revenue, the Ticketmaster angle, is going to be those fees that they're charging, those Ticketmaster fees we talked about earlier, that extra $10 servicing fee. Where that comes through into the business model is, that revenue that Ticketmaster or that Live Nation is generating on the Concert segment is really getting funneled into acquiring these artists and bringing them into Live Nation ecosystem. Then, they can use those artists' representation to then push those artists to venues that Live Nation controls, or venues that use Ticketmaster for servicing. And they can really take any revenue through those avenues.
In addition, Live Nation, as the sponsors of these artists, is also working out the advertising side of these tours. For example, recently, Live Nation organized a vodka sponsorship for Lady Gaga's tour that generated some high-margin advertising revenue for the company. That Concert segment is how they acquire those big artists. Then they pull those artists' acquisitions to the Concert segment to really drive profits and Advertising and take any segments of the business.
Shen: Exactly. All these things come together. I've seen people describe it as a flywheel, the strength of this business. Something I want to mention specifically, in terms of some of the numbers if you're looking into the company's financials -- Live Nation reports a non-GAAP metric called adjusted operating income, or AOI. This strips out things like acquisition expenses, depreciation, and amortization, losses and gains from asset sales, and stock-based compensation for essentially what can be considered a cleaner operations-based figure. If you use that AOI number, again, you'll quickly see that the profit margin, though thin for Concerts, it's much stronger for Ticketing, and it's phenomenal for Sponsorship and Advertising. And this all works into the way that those big concerts are needed to draw the business and the volume down to those other more profitable segments.
Alright, last couple of things for us to discuss from the numbers that I think are worth noting. First, there's some added complexity to the leadership and organizational structure for Live Nation, because Liberty Media, headed by John Malone, has a 34% stake in Live Nation. On the income statement, you'll see a line for net income attributable to non-controlling interests. That's how the Liberty stake manifests itself, not to mention in distributions. About $46 million last year to those non-controlling interests. We're going to probably talk about the Liberty relationship a bit more later on in the show, in terms of some speculation that's come about.
Nick, you also signaled to me a somewhat high debt balance for the company. Is that something that really worries you?
Sciple: At this time, it doesn't really concern me in a major way. If you look at the company's debt to equity, it's about 165%. You look at that number, and it looks scary at first glance. But when you take into account that, in 2017, free cash flow grew about 81%, and we're continuing to see double-digit growth across the business, the company is really in a good place to drive growth. We're also seeing growth in live events, like we talked about last week with Eventbrite. Their business is growing, and they're going to continue to grow free cash flow. I don't think that debt balance is going to be a major long-term concern.
Shen: Yeah, and this is a case where the cash flows really do end up shedding more light on the health of the Live Nation business than their straight earnings, which, over the past several years, they've been in the red for quite a few of those years. Free cash flow, like you said, has been growing. I think it was $500 million in the trailing 12-month period, even though net income, again, shows that negative value. I think I saw $90 million of annual interest payments, but that $500 million of net debt, again, given that strong cash flow, it's not too big of a concern to me in that context.
We've covered the fundamental strength of the Live Nation business model, and looked at how the things break down, in terms of their income statement, in terms of their balance sheet. They have this industry-leading scale and reach, which means a lot of synergy between the various segments. If you control enough major venues, and have the reach that Live Nation does, including in regions outside the United States, you attract the biggest artists. That sells more tickets to event goers, which makes sponsorships and ads to your events that much more attractive. Everything comes together really nicely.
Let's look at the flip side now, in terms of the bear case. What do you think is the No. 1 risk that investors need to consider here?
Sciple: I think the biggest risk for Live Nation is really regulatory. That's been going back all the way to 2010, when Live Nation merged with Ticketmaster. They've been under a consent decree from the Department of Justice about how they should operate the business. They had to divest some assets and license some of their IP as part of that consent decree.
But the real sticky point of that consent decree, which is still relevant today, is that the way Live Nation bundles its services together can raise some regulatory red flags. Live Nation, under the consent decree, is allowed to bundle its services together in any combination; but, it's not allowed to punish any potential ticket services customer who may not choose Ticketmaster as their ticketing services company, which is, again, a huge part of Live Nation's profit driver. If an arena or a venue doesn't choose Live Nation for their ticketing services, they can't punish them by not driving artists to those venues and those sorts of things. There have been some accusations earlier this year, I believe it was March, The New York Times had a report out saying that some of live nation's biggest competitors had alleged that Live Nation was, in fact, doing that. If a venue did not choose to use Ticketmaster for their ticketing services, then Live Nation would divert artists away from those venues, and deprive them of the big events that Live Nation drives.
If Live Nation were to be investigated and found guilty of doing these sorts of practices, it would, obviously, significantly impact the business. There'd be some regulatory fees, and perhaps they could be broken up. I think if we're actually looking at the likelihood of that sort of thing being proven, it's a very difficult case to prove. Live Nation can divert artists away using their management arm, if they can just come up with any kind of reasonable business purpose why they would do those sorts of things.
Shen: It's a very tough hurdle for the regulators to overcome, essentially.
Sciple: Correct. It's a very difficult legal standard. So, it's a risk that's there, but I think realistically, seeing what would have to be proved in court, I don't think it's a risk that is going to materialize. I think they're in a very good position.
The one way this risk could come in -- we may talk about this later. We were talking to the Liberty Media rumors. If there were some kind of merger sort of situation, where there's going to be that FTC, DOJ review from an antitrust perspective, that could bring a risk into the company, of that added scrutiny of their business practices.
Shen: Let's just jump right into that, now that you mention it. We know about this Liberty Media stake that they have, 34% in Live Nation. There's been talks for some time now about the big empire that John Malone controls, also includes parts of Sirius XM, for example, how things might get rolled together there. Again, this is more in the rumor mill than anything. But, what would that look like?
Sciple: Liberty CEO Greg Maffei has stated explicitly on a number of occasions that he would like to bring that media empire together and streamline it. What it would look like, it would be a merger or some kind of combination between Sirius XM and Live Nation. What would be attractive about that, from a business perspective, is you have Sirius XM, which, as a business, is generating free cash flow, but there's really not anywhere else to deploy it within their core business. And you've got Live Nation, which, as we discussed, is relatively highly levered, and is in the same industry. It would make sense, if they were combined, that you could use Sirius' free cash flow to help drive that continued growth from Live Nation and help that debt perspective. And as well, there are the synergies there that are obvious, in that they're both in the music business and they can do some cross-promotion there.
But, again, as I mentioned earlier, I think while there is some merit to that from a business perspective, the regulatory risk would probably be higher under those circumstances. If I were a Live Nation shareholder, I'd be perfectly fine with the business operating as it currently does. I think it's in a great position to continue driving growth, just through the synergies and the vertical integration of the business.
Shen: Again, if we haven't painted this picture clear enough already with ticketing, this Ticketmaster part of the business is really a force to be reckoned with. As a potential shareholder, I think the risk is relatively small, in terms of the regulatory side, given that they are a bit hamstrung by some of the vague guidance in that consent decree that you mentioned. As a consumer, though, I know that I'm not the only person who balks at the high service fees that Ticketmaster often charges. There aren't that many viable alternatives for these large popular events. Kind of a conflicting situation there as a shareholder and as a consumer. Not exactly the competitive environment that we want to see.
But, with competition, too, related to that, there are a few other established players that operate and promote events for these kind of megavenues or major venues. Two that came up in our search were the Madison Square Garden Company, ticker MSG; and then Anschutz Entertainment Group, AEG, which is private. How do they square up here against Live Nation? Just off the bat, we know, market share-wise, not even close. But, in terms of business models and their place in the industry, what do you think?
Sciple: When you're looking at Madison Square Garden as a business, they're primarily a venue operator. I believe they own stakes in the New York Knicks and things like that, but they're primarily a venue operator. They own, of course, obviously, Madison Square Garden, Radio City Music Hall, the Beacon Theater. Some very large, well-known venues across the United States.
When it comes to competition with Live Nation, however, Live Nation provides the ticketing services for all those venues for Madison Square Garden. So, I don't view them as a major competitive obstacle to Live Nation. Live Nation already has their most profitable business --
Shen: They've already established that relationship.
Sciple: Right. And AEG, from a similar perspective, I would say that they're the No. 2 live event promoter in the world behind Live Nation. They're much more of a venue operator, have some presences in Europe. They operate the Coachella Music Festival. They operate some significant aspects. But their ticketing service, AXS, is nowhere near the size of Ticketmaster's network. They're just really not in a position to overtake Live Nation because Ticketmaster is such a large network and so ingrained.
From my perspective, Live Nation seems to be in a league of its own.
Shen: Maybe that speaks to my next question for you. We have a minute or two left. I'm ultimately curious where you stand. You've had a chance to dig into this stock, into this company. Are you sold? Is this something that you would consider adding to your portfolio?
Sciple: Yes, I would. I think just looking at the company, the way all of its segments operate together, it really creates a virtuous cycle. They're the largest player in the industry, so they can pay the largest incentives to the largest artists and bring in most dominant artists in the industry. They can drive those artists, like we discussed earlier, to the other portions of their business to drive more profits, which creates more profits, which allows them to pay even more to acquire the best artists. It just creates a virtuous cycle that I don't see anyone else the industry displacing without some activity from regulatory perspective.
They're in a growing industry, as we spoke about. Millennials, people in our generation, are much more inclined to attend live events than, maybe, previous generations might have been. And they're trading at 20X free cash flow vs. a market average in the 30s. There's a lot to like here, and there's really not a lot of major competitive obstacles. So, from my perspective, I think it's a wonderful business.
Shen: You mentioned this, and we talked about the bigger-picture tailwinds when we talked about Eventbrite. In general, growth of live event attendance. Given that tailwind, whether you're someone looking for the 800-pound gorilla, which is Live Nation here, or you prefer the broad creator base and the diversity of events that Eventbrite serves, I think there is just a lot to like in the long-term prospects for this industry overall, and the different players here.
For the Eventbrite IPO, our recommendation, going back to that, remains, wait and see for a few quarters. But, to the company's credit, now that we've had a chance to dig into both companies I'm actually a little bit more convinced that the middle market lane that Eventbrite occupies can thrive with less risk of intrusion from Live Nation, just based on the scale that Live Nation tends to operate at. It's harder to see the case for them to get into events where -- what was the average attendee count? 70 or something?
Sciple: The mid-60s for Eventbrite.
Shen: We're talking about thousands of people at these venues, usually, where Live Nation has established its foothold. This middle market lane for Eventbrite, I'm seeing as something that's much more sustainable. But, before we sign off, anything else you'd like to add for the industry or anything?
Sciple: I would agree with you, Vince. The area that Eventbrite operates in is a nice middle market away from the dangers of Live Nation and those big players. The analogy that I would give is, college football just started this weekend. We'll have the NFL coming up next week. Eventbrite is college football. That's a big business. There's a lot of opportunities to make money in that space. Live Nation is the NFL. There's a lot of chances to make money there, as well. So, whichever you would like, I think both businesses really have good opportunities to thrive and grow and resonate with customers going forward.
Shen: Awesome! Thank you again for joining us! It's awesome to have you on the team now!
Sciple: Thanks so much! I enjoy being on every time and look forward to joining in the future!
Shen: Sweet! Fools, thank you for tuning in! People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!
Nick Sciple has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Live Nation Entertainment and The New York Times. The Motley Fool has a disclosure policy.