In this episode of Industry Focus: Wildcard, Nick Sciple and Motley Fool contributor Luis Sanchez do a deep dive into the live events industry. As many events get cancelled or postponed, how the industry is dealing with the fallout, and what does it mean for the industry and all its players. They discuss changing consumer behavior and the future of live events and much more.

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This video was recorded on April 15, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. It's Wednesday, April 15th, what ordinarily would have been Tax Day before the coronavirus pandemic swept across the country. And I think all tax deadlines have been delayed. Today our topic is going to be the live events industry. Obviously, this industry has been decimated by the ongoing pandemic. My guest today, to help me break it all down, is Luis Sanchez. Luis, how's it going?

Luis Sanchez: I'm good. How are you, Nick?

Sciple: I'm doing fantastic. You're in New York City, which is one of the epicenters of this thing. How has your life changed in the past month-and-a-half, two months?

Sanchez: Well, I could lie to you and tell you that the mood's been great, but it hasn't. I kid you not, in the past six weeks, I've probably cumulatively spent about four, five hours outside of my apartment. So, yeah, that's how New York City is right now.

Sciple: Yeah, it's not quite that bad up here in DC. I get out maybe a couple of times a day to walk the dog. I'm typically being known as an inside person and I don't think I would be an inside person anymore coming out of this thing, but we shall see, we'll get through this.

Sanchez: Yeah. Are you guys under quarantine as well or ... ?

Sciple: So, yes, shelter-in-place in Virginia through June 10th. So, the Governor announced that a week or two ago. And so that's what we're doing. My fiancé is a school teacher, so they're on remote schooling. You know spring break was last week, just this week they started actually teaching remotely. So, getting used to that. And we'll see how it goes. I think everybody is having to learn how to do things differently these days.

The industry we're going to talk about today, as I said off the top of the show is live events. We're talking about sports, concerts, that sort of thing. And this is an industry that really, kind of suddenly shifted. I remember March 11th, when the Thunder and the Jazz game tipoff was about to take place, right before the game got started, the game got shut down. And after that it seemed like across the entire industry there was this massive shift, where March Madness got canceled. The Masters, the Olympics got delayed.

What was it like, Luis, just seeing this cascade of events take place, as you just see all these things become canceled all at once?

Sanchez: Yeah, I remember, at first people were talking about how we could watch March Madness without audiences. And then pretty quickly it went from, "You know, maybe we could still watch it," to "No, it's canceled." And ever since then, I mean, there's just been a whole list of other events, sports events, concerts that have been canceled. The Masters golf tournament has been canceled. The Olympics has been moved, delayed a year. We're still waiting to hear on whether or not we're going to have a conclusion to the NBA season. So, I would say it happened slowly, then suddenly.

Sciple: That tends to be how these things happen. Is there any analog for this type of shutdown? There's probably nothing where everything has been shut down across the board, but is there anything where there's something we can even compare to this, looking historically?

Sanchez: I mean, other than, like, a World War, the only other modern comparison I could think of is what happened after September 11th and the terrorist attacks. So, we're going to be talking about the live concert companies and I was looking back to see what happened to Live Nation (LYV -0.42%) after September 11th. And they had a lot of issues where not only were a lot of audiences afraid to go to crowded events, but a lot of the artists were also afraid to tour and to, like, visit New York. And you could see that after 9/11, a lot of people and a lot of different parts of the economy were afraid. I mean, afraid to fly, afraid to go to theme parks, you name it.

I think there are some similarities to what is playing out right now, where I saw a survey that indicated that about 70% of sports fans were nervous or afraid to go to sporting events until there's more clarity around treatments or a vaccine. But obviously, this is very different because, as the President likes to say, we're fighting an invisible enemy. So, it's similar but different.

Sciple: Absolutely. And I think, when you laid out that September 11th thing about people being afraid to travel and go to these things even after the immediate risk is removed, I think that's a big question around this industry. It is not only how long until we can reopen but, when things do reopen, how quickly -- or if at all -- do we return to the previous levels the industry was in. We can't really answer those questions right now, but what we can do is put some context around really how big this industry is and how much is being impacted.

You pulled some numbers on how big the live music industry is, Luis, and some numbers on sports. So, can you share those with us about just how big is this industry or at least was it before all the craziness of the past six weeks or so?

Sanchez: Yeah, so I've spent some time looking at some of the live events companies in the past couple of months because, well, their stocks have been completely hammered. And in doing that research, I learned that the live music market is about a $30 billion annual global industry, and that's actually been growing at a nice clip every year. Partially because artists need to tour to make money and also partially just because there's been a shift in the way people want to spend their money. And people have this desire to spend more money on experiences and going out versus buying widgets and consumer devices.

We also know that, as far as sports is concerned, the broadcasting rights are apparently worth about $22 billion in the U.S. And the U.S. is about 40% of the global market. So, $50 billion around there, give-or-take, is the global sports broadcasting market. And that doesn't even capture all the revenue that's generated from people who actually go to events, buy tickets to see their favorite sports teams, travel to go to those events, pay for hotel rooms, pay for concessions. So, you know, putting it all together this is a massive, massive global industry.

Sciple: Absolutely. To your point, just from live events alone mass amounts of dollars, and that's before you even talk about the TV rights. And when you talk about, you know, all of us are sitting at home, trying to find things to watch, really one of the dominant, at least when it comes to live TV things in the U.S. that we watch, are these sporting events.

So, if you look back to 2019, 8 of the top 10 highest rated broadcasts in 2019 were sporting events. 15 of the top 20 were sporting events. So, you remove this from the landscape, not only is this massive amounts of revenue pulled off but massive amounts of just interest that people lose and that impacts some of these rights deals.

We've heard some speculation about what this could do for ad rights, how it could change the future of sports. Have you done any research there on what we should be thinking about as far as the ad side of this sports shutdown?

Sanchez: Yeah, so, look, this is like a really unfortunate situation, because you'd think that if everyone was stuck at home, what better service to offer them than entertainment over television or over the internet. And I think that sports are going to come back eventually and we could see a resurgence, but right now it's just really unfortunate that sports have been taken off the air. So, as far as the business model, we just referenced the sports rights, and that's part of it, but as you just said, advertising is also a big part of it.

The advertising market is pretty huge. I know that for ESPN, they're taking in about $3 billion just from advertising alone. And that's roughly half of what they take in from their affiliate fees which are what people actually pay to the cable operators to watch ESPN. But as you know, advertising itself is a really cyclical industry. And one of the reasons it's cyclical, is because it's one of the first things that sponsors and advertisers will reduce spending on just because it's just easy to cut that spending.

So, there's all sorts of estimates for what could happen. It's safe to say that we're going to see advertising rates decline, we just don't know how much. And that's going to partially be a reflection of how much of your ship is going to still be there. It's also a reflection of the advertising budgets. And there's also this idea that there's this trend that's been occurring over the last 10, 20 years where more and more advertising spend has shifted over to digital.

And it's actually kind of surprising, TV advertising spend has still been rising, despite flat or slightly down audience. But one of the things that the broadcasters are really worried about is not only is the total pot of advertising probably going to go down, but also where it's spent is probably going to move in the favor of digital channels.

Sciple: Absolutely. We've seen lots of talk around that from folks in the industry. One of the main anchors that is keeping a lot of people in their linear TV contracts is access to live sports, and you remove that from the equation, a lot of those eyeballs that you're traditionally buying with TV advertising, at least in the near-term, aren't going to be there, because the programming that they're watching goes away. So, there's potential to accelerate that trend.

And I think it's important to note, you know, we talked about a lot of this revenue, is just going to be lost for the sports leagues. A lot of these concerts -- we'll talk about Live Nation later -- can be rescheduled to a later date, but there's only so many of these basketball games that you can reschedule, or for March Madness the NCAA loses its main source of revenue for the year.

I pulled some numbers for 2019 NCAA had $1.1 billion in revenue, about a $1 billion of that was March Madness alone. So, some of this revenue just disappears. We've seen some interesting efforts by some companies, WWE is one example, they've really pushed to make sure they can keep holding live events even though they're holding them without audiences in the arena. They actually got declared by the State of Florida an essential industry, there's been some political issues there, but that's all been behind protecting their revenues they have locked in from new rights deals with the USA Network and with Fox.

So, you've seen these big efforts, I know you were talking about -- the UFC is trying to do some of these same things as well?

Sanchez: Yeah, it's interesting, because the way the sports broadcasting industry works is, it's all contractual. So, the broadcasters, like, CBS or ESPN, will commit up front to airing a certain number of live sporting events over certain periods. It's usually a long-term contract. So, a lot of people are having issues with their contracts right now, because in a lot of ways, it's unsafe just to even have the events. And there's just not a good way to schedule them.

So, one of the contracts with the UFC is, I think they made a deal with ESPN, where they're supposed to broadcast 42 live events per year and they've already had to postpone all their events from March and April. The head of the UFC, Dana White, has been pretty adamant, somewhat aggressive about wanting to be the first major sports organization to return to a normal schedule. And a lot of that pressure is coming from just the contract they signed with ESPN. There's been some speculation, some rumor that the UFC might host a fighting event on an Indian reservation or even reserve, like, an island, like, a Battle Royale fight island. So, that could be interesting.

I think it's safe to say that when it is safe to have these events and to broadcast these events, we're going to see a lot of events just come out all at once, just because a lot of these sporting organizations are going to be trying to catch up on their contracts. And to their credit, if we're still social distancing and spending a lot of time at home, you know, I think there's going to be a lot of eyeballs on it and I think people are going to be happy to watch these events.

Sciple: Yeah, I can tell you, I'm really missing sports. Being trapped at home all the time with no sports to watch, after a while it's a little bit of return to normalcy. But it's interesting, a lot of the strings being pulled to try to protect those contractually negotiated rights by the WWE and others and some of these trickle down effects for the rights holders, TV broadcasters, that sort of thing.

Now, when we look at public companies, they're probably the most directly affected by this, the shutdown and live events, it's Live Nation. And that's a company, you mentioned, you've done a significant amount of work on. Before we dive into how they're being affected by the shutdown specifically, for folks who aren't familiar with the company, can you kind of give us a high-level look at what they do, how they make money?

Sanchez: Yeah. Live Nation is a really interesting company. They have their hands in a few different areas, all around the concert ecosystem. So, they're probably the largest global promoter and live concert company. They own a little bit less than 300 concert venues all around the world. They also own Ticketmaster, so they're the number one ticketer for events and they also ticket events that they're not the venue manager of.

And in addition to owning the venues and ticketing, they also do a lot with sponsoring events and managing artists. So, for example, they manage Jay-Z and Beyoncé in helping schedule their tours and also some of their things outside of just their concerts. And it's a global business.

So, you got to think, they're hurting pretty badly. I mean, basically in March their business was shut down because a concert is essentially just a large gathering of people. And it couldn't have come at a worse time for a company like Live Nation, because it's actually, it's a very seasonal business. And if you actually look at the company's financials, they actually run a loss in the Winter time and they make that all back and then some in the Spring and Summer time with just huge concert series and live festivals. And just given the timing, the Summer concert series looks like it's off.

Sciple: Yeah, absolutely. This is their most important revenue earning times of the year, this Q2 and Q3. One other interesting aspect of the business, Luis, I want to talk about a little bit is they talk about their flywheel that they have. When you look at the operating concert venues part of the business, not super-profitable, but what really is, is the ticketing side of the business. The advertising side of the business. So, they're able to leverage all these pieces together where each of them by themselves, might not be super-attractive, but as a whole can really drive some value. How does that necessarily work for the company?

Sanchez: Yeah, Nick. I think that's the reason why a lot of really smart investors have been interested in Live Nation. Because in a lot of ways, it's like a vertical monopoly, vertical integration monopoly, where they own the concert venue, they own the ticketing solution. In some ways, they own the artists, because they manage the artists.

And each one of those, each aspect of that business -- you know, owning a venue or doing sponsorships for concerts or even artist management -- each one of those pieces, individually, those are OK businesses, but when you stack them all together, it gives them some really great competitive advantages. For example, if they're managing the artist and they also own the venue. Well, they can just direct their artist toward their own venue for their live event which can give them an edge over other competing venues in the same cities.

And it's actually gotten to the point where the government actually views them as a monopoly and there's been a lot of antitrust issues going back to when they acquired Ticketmaster. So, you know, you'll hear a lot of investors talk about how some of the best businesses to own are these monopolies or duopolies.

If you're a monopoly and you have pricing power, you could have really interesting economics, combine that with the fact that the global concert business has been growing over time. It's been a really great stock to own and a lot of people have gotten caught up in it, especially now that the business model has kind of suffered from what's going on with the pandemic.

Sciple: You mentioned the antitrust stuff. This is one of these cases where I went, as I've looked back at this company. The merger between Live Nation and Ticketmaster I think was absolutely a mistake that the government let it happen in the first place. They put this consent decree in place that is supposed to have limited their ability to use some of those synergies, we talked about earlier, it doesn't seem to have worked.

You mentioned monopolies, I think about Live Nation a lot of the ways that I think about Comcast, in that, everybody complains about Comcast and the customer service, and everybody similarly complains about Ticketmaster and how they don't like the fees. But do everything you can, and you can't get away from doing business with these folks, which provides some attractive characteristics for them.

However, we mentioned the flywheel, how all these parts of the business work together to create value. Well, when that flywheel gets shut down, when you throw a wrench in the flywheel, like this global pandemic has caused, that can create some issues for the business.

I know everybody is looking at the balance sheets of these companies right now to see how they can survive what's going on with the pandemic. When you look at Live Nation's balance sheet, what should investors be paying attention to?

Sanchez: Yeah. Taking on debt always sounds like a good idea when times are good, I mean it's a way to get higher levered returns. There's actually, I think, a Warren Buffett quote where he advises people to avoid the three Ls and it's liquor, ladies and leverage, because those always sound good when times are good but if you have a really massive business interruption, you really don't want to have debt to worry about, and unfortunately, Live Nation does.

If you look at its balance sheet, it has about $3.3 billion of gross debt and it also has $2.4 billion of cash but the tricky thing about this company is that its cash balance is a little bit deceptive. So, the way this business works is they promote concerts as far ahead as a year in advance and they sell those tickets and they collect the cash for those concerts that are going to happen in the Summer all the way as early as Fall of the year before.

So, that $2.4 billion of cash that they have, about over $800 million of that is actually prepaid concert tickets. And a lot of those tickets that they sold it's not clear if they're going to happen, they're certainly not all going to happen in 2020. So, there's a lot of questions around how much cash do they really have?

And investors are clearly concerned about it, I mean, as I referenced the stock is down. It was at somewhere near $70 earlier this year and now it's below $40, so it's off about 50%. And you could also look at the bond market. The bond market is a little concerned because the bonds are trading $0.80 on the $1. And the credit rating agencies are also not very impressed, they have Live Nation at junk status. So, clearly the balance sheet is kind of front-and-center.

And recently the CEO jumped on CNBC to talk about the company and how it's dealing with the pandemic. And of course, he was asked about the balance sheet. And the way he described it is that the company has about $4 billion of liquidity. So, a lot of that's coming from its cash balance that it still has, but it does have another $1 billion in borrowing capacity. And the business itself has annual fixed expenses of about $2 billion per year.

So, if the company has $4 billion in liquidity, as the CEO says, it does then -- theoretically the company can make it through 2020 and into 2021. And it really just becomes a question of when can the business turn on again and how worried the creditors are going to be about holding on to the debt?

Sciple: Right. When you talk about access to this liquidity, I think one of the big criticisms Jim Chanos, very well-known short seller has talked about they have access to this liquidity, but this is going to -- assuming they have to tap all those lines and go into that kind of goodie bag of debt to get through this cycle, this company -- it was already quite levered -- is going to be even more leveraged on the backend of that. Would that be a correct characterization?

Sanchez: Yeah, definitely. And I mean that's not an unusual case for even outside of the live events industry. If you look at how most companies are dealing with the interruption in business, they're all basically tapping into their credit lines, calling their banks, trying to just get as much liquidity as they can just so that they can pay all their bills.

Live Nation actually did, like, they went back to their banks and they announced that they made some agreements with their banks that actually gave them a little bit more liquidity. It gave them a couple of hundred million dollars in more liquidity.

And if you want to get really technical, there's these things in bond agreements called "covenants", where banks will tell the company -- well, basically, as a condition for giving access to funds -- they'll say, well you can't get to levered, here are the limits on your leverage. And that's definitely been an area of concern. But in the case of Live Nation, its banks have actually given it a little bit more leeway just in reaction to what's going on.

And you know, that kind of makes sense because Live Nation is a business that has a lot of valuable assets. They own 273 or at least have an equity interest in 273 venues. So, there is value to that real estate. And the debt holders in the banks, they're not motivated to see the company go out of business, so they're going to work with their borrowers selfishly because that's actually better for the lenders as well.

Sciple: Right. These folks don't want to be running a concert business, these are bankers and they're in the business of running banks. And to the extent that they do not have to go through all the procedures, they would need to take control of those assets, it's in their interest to keep the business operating. That said --

Sanchez: You know, in normal times, if we were in boom times and Live Nation had issues with its credit rating and its leverage, the banks would treat it very differently. But it's just a realization that these aren't normal times, so the lending agreements aren't going to proceed as they would in normal times.

Sciple: So, when you look at this company today and where it's trading, the state of the balance sheet, how do you weigh those interests around whether you would make an investment or not?

Sanchez: Yeah, it's tricky, and that's obviously reflected into where the stock is. But obviously, the company isn't going to stand still, to their credit, they did increase liquidity with that recent announcement with their banks. But they've also committed to cutting $500 million of cost per year. And that's a pretty big commitment.

What they're essentially doing is their executive teams have agreed to salary reductions, they're trying to get concessions in terms of deferring the rents or negotiating lower rents. They're reducing costs in every way they can. So, maybe their fixed costs aren't going to be $2 billion per year, maybe they can get them down to, like, $1.5 billion per year.

But essentially the company is taking out its playbook from 2008-2009, and they're hunkering down, increasing liquidity, cutting costs. And as an investor, that's definitely what you want to see them do. It's one of these situations where, you got to think, is that enough, is the liquidity going to sustain, what's their balance sheet going to look like in a year, in two years? And that kind of depends on -- are concerts coming back at the end of 2020, are they coming back in 2021? When they do come back, how many people are actually going to go to the concert? So, it's not just about having the concerts, it's about selling out the concerts, right? because there are a lot of fixed costs to putting on a concert.

So, if you're putting Beyoncé at Madison Square Garden and she only sold 30% of the tickets, because everyone's too afraid to go, that's not very helpful. [laughs] So, there's a lot of things to weigh. And you could even, as equity investors say -- well, you know, I think that at the end of 2021, there's a good chance that the business is going to be back and it's going to be booming.

However, just because it's back and it's booming doesn't mean that this is a company with a balance sheet that you're going to want to invest in. Because if we have to wait 18 months and the company had to add another $3 billion to its debt load, now you're talking about a company that, if it was at 3X or 4X debt-to-EBITDA, so 3X or 4X leverage ratio, now you're talking about, like, 6X to 8X. And that's actually going to definitely way on the kind of valuation multiple that you give to this kind of business.

Sciple: Yeah, I couldn't agree more. I think that's exactly the position I'm in. I own a little bit, a tiny position in Live Nation that I got at the beginning of the sell-off. I was fortunate enough to get it toward its low. So, I'm still green here after it sold-off some. But definitely a lot of concerns to me around the balance sheet and what this business looks like a year from now, even if it's able to get through, it doesn't have issues with its creditors, it's going to take some period of time to deleverage itself. And that is assuming that we return to conditions as they existed before any of this happened, and we can't really count on that.

So, this is just one of those companies that I am definitely not going to be adding to. I'm still trying to decide whether it's a company I'm super-confident in for the next three to five years. So, that's kind of the balance sheet is going to weigh.

But when you look at the assets, there are some attractive things to say about them, it's just there's a lot of uncertainty right now around the balance sheet, it wouldn't be one I'd be rushing in to put a whole big chunk of my portfolio in. There's strong arguments on both sides.

And this is interesting, right? You have two legendary investors on both sides of this, right? Jim Chanos is saying, this is a stock I want to short. Then John Malone, who is another legendary investor, owns a big giant chunk of this company. We shall see. Those are the factors that you should consider, though, as an investor.

Another live event company that I know a lot of folks around here have some interest in is Eventbrite (EB 4.86%). Luis, when you look at what's going on with that company, how similar is it to what's going on with Live Nation, how different? I think they have a net cash position, no?

Sanchez: Yeah, so Eventbrite is a much smaller company. It's a fairly recent IPO; I think IPO'd a couple of years ago and its market cap is just a fraction of Live Nation. It's not exactly in the same business as Live Nation. Eventbrite caters more to independent events, small events, not necessarily concerts but just, kind of, communal gatherings. And they make money in some similar ways by selling services to event providers and also taking some of the ticketing revenue in compensation for that.

But it's a very different business from Live Nation, because Eventbrite is more of a tech platform. So, Eventbrite doesn't own massive amphitheaters and theaters around the world. What it really is, it's a corporate office with staff that manages the tech platform. You know, there's a lot of variable costs in this kind of business, because the variable costs involve running the platform, hosting the servers, paying for marketing, but really where costs lie are in the fixed overhead.

So, what Eventbrite is doing is actually pretty bold. They came out a couple of weeks ago and said they're going to lay off 45% of their staff. And it's going to cost them some money to do that. They're trying to treat their employees right, they're paying them severance fees, they're exiting some leases, which costs a little bit of money. But you know, they essentially believe that they're going to save $100 million by doing that. And that's probably the right move to make.

And yeah, as you mentioned, Eventbrite is sitting on a little bit of cash. They have the same issue as Live Nation with their cash balance where the majority of their cash balance is actually, like, working capital. It's, like, tickets that they presold, so they're probably going to have to refund a lot of that. So, again, you got to be careful, you can't just look at the balance sheet and say, "Oh, this company has $300 million in cash." [laughs]

It's in bear markets and recessions where you've actually got to look at, even, go down into the notes of the annual report and just learn about, well, what is the cash? Is the cash actually cash? Is the cash sitting in foreign bank accounts that need to be taxed? Is it something they could access? Which is, it's kind of unusual from a bull market, where in a bull market a lot of investors, they don't even look at the balance sheet, they just look at how much can the business earn and what kind of multiple can you put on that? But now we've come to this place where it's just as important to kind of think, will this company survive?

And I think Eventbrite is doing the right thing in terms of what they need to do for the business, because it's a young company, it actually just turned cash flow positive last year, but it's obviously not going to be cash flow positive this year or next year. And just given the fact that it's much smaller than Live Nation is going to have a lot. It's going to have a much tougher time getting banks to loan it a bunch of money and tapping the capital markets, which is important to understand when -- you know, there's a big difference when you invest in small companies that have less access to capital versus investing in large companies that can really tap the capital markets much more effectively.

Sciple: Absolutely. Just to call it out, Eventbrite is, like, $700 million market cap. That's about 10X, maybe 12X smaller than Live Nation. So, much smaller. And then, yeah, the other thing you mentioned about access to capital is, Live Nation could probably do some sale leasebacks of real estate. They could do lots of creative financing through their venues, correct?

Sanchez: Yeah, there's probably some things that they could do with their real estate. You have to kind of go through and see what they've already done, because I think a lot of their existing debt is already in the form of, like, mortgages.

I think more importantly for Live Nation, they have a pretty strong group of investors that back them. So, you know, they have John Malone who has deep pockets. Certainly, John Malone wouldn't want to see Live Nation go under.

However, John Malone is an interesting character, so you could also see John Malone, kind of, pulling a Warren Buffett type move and giving himself some really attractive preferred stock or, kind of, benefiting himself in a way where he bails out the company and also puts himself ahead of minority equity investors. So, you have to kind of think through all the different aspects of the direction of what getting more liquidity means.

Sciple: Sure. So, we look at Eventbrite, maybe a little bit different cash and debt situation relative to Live Nation. Is it the same kind of balancing act away? I mean, because they do have less leverage concerns but they're a much smaller company with less access to capital? So, kind of that same balancing act between the potential for the business to snap back in a meaningful way on the backend of this, versus the position that they would be in from loss of revenue, balance sheet deterioration, that sort of thing. How would you think about making an investment in Eventbrite today?

Sanchez: Yeah. So, like Live Nation, the stock is also down. I think it was a $20 stock before this and now it's an $8 stock or it's less than $10. So, it's down more than 50%. And Live Nation is down a lot, too. So, clearly the odds, there's a lot of probabilities being factored in here in terms of the survivability and also how quickly earnings return.

I think, again, I want to probably put on my hat as a balance sheet investor before I put on my hat as an earnings investor and just think through like, well, how much cash burn are they going to have relative to their liquidity? And I think it's also important to think through.

If you're the CFO of one of these companies what would you do? So, their stock prices are down a lot, but they're not zero, right? So, debt isn't the only option. And you have to think about, well, should these companies be raising equity? Should they be tapping the equity market? Because if they raise equity, they don't have to pay that back and they don't have to pay interest on that equity. And that kind of helps you understand it better as an investor. To kind of think through, well, what are their options? And I'd say, Live Nation, they might have some real estate value, they might have some more access to the debt markets, but maybe Eventbrite what it could really do is tap the equity market.

So, if I was thinking through an investment, I would also think through, well, how much am I willing to be diluted as a minority equity investor where this investment still makes sense to me?

Sciple: Absolutely. I think it goes back to your point earlier that in the bull market, you're always thinking about your upside, in the bear market, you're really thinking about your downside. So, income statement for when we're in the bull market, balance sheet for when we're in a bear market. And balance sheet is really what everybody should be focusing on right now.

Sanchez: Yeah, absolutely.

Sciple: Okay. So, I just, kind of, wanted to zoom out again. We talk off the top of the show about how we don't really know what things are going to look like going forward, but it's always fun to debate and speculate about how things can change. So, I had a few questions for you about how the world might look at the end of this? So, the first one is, how do you think our consumption of live events changes after this? Does it change, and if it does, how so?

Sanchez: Yeah. That's a really interesting question. And I think there's two things. I think there's one school of thought that says that, there could be more of a permanent shift in behavior where people maybe are more permanently less willing to go to a crowded event space, whether that being a crowded concert or a crowded, even movie theater or a crowded stadium.

And I tend to disagree with that idea. I think that any time you've had one of these big shocks, whether it's 9/11 or something else, people come back. I think people are still going to want to go see their favorite artist perform live, I think they're going to still want to have that in-person experience. It's a question of when they're going to feel safe enough to do that.

And perhaps for the next couple of years, actually going to a live event might involve getting your temperature taken up front or presenting some kind of form of identification which shows that you have been tested for a virus. And that sounds very dystopian, but that could be a reality.

On the other side of things, from the spectator's point-of-view, the spectator at home, the way that sports have been consumed primarily has been through linear TV, through traditional cable TV packages and that actually could change. So, you kind of referenced earlier this idea of people canceling their cable subscriptions. We've talked about cord-cutting a lot in the past. It's certainly a big factor. And it's not the only factor, because you also have to think that people might be more willing to cancel their cable subscriptions in a recession, just because they need to save costs.

So, you kind of have a secular trend and also a cyclical trend there, which leads me to think that cord-cutting could accelerate in the next year. And the fact that there's not live sports on TV, just gives people more of a reason to cut the cord, if that was the reason why they were subscribed.

And just to put numbers on to it, I believe cable subscriptions actually peaked in 2011, and are down 20%, so there's 20% less households in the U.S. that are paying for cable subscriptions now versus in 2011. And you see that reflected actually in the ratings for sports. I mean, sports are still the highest rated thing on TV, but the ratings are flat to down in the last couple of years.

Probably the best example is to look at the Super Bowl. Where I think in 2015, they had a record year, they had something like a 115 million people watch the Super Bowl. And in 2019, they actually had less than a 100 people watch the Super Bowl. Now, maybe the Superbowl is less popular in culture, but I'm sure the fact that less people have cable subscriptions is factoring into that.

So, if we think that there's going to be fewer cable subscriptions, but people are still going to watch sports, maybe there's an alternative that emerges, maybe a streaming company or an online tech company starts exhibiting sports.

And you've actually seen Disney, who owns ESPN, start to dabble in that. They launched this thing in 2018 called ESPN+, which doesn't actually show all of the high-profile stuff that they want people to watch on ESPN channel, but for $5 a month you get access to a lot of other things that just don't make the cut for the cable channel. So, they're showing a lot of UFC matches, they're showing a lot of hockey and Major League Baseball matches on there.

And ESPN+ is actually an interesting test case, in that, when they first launched it, it had 1 million or 2 million people subscribed. But as of February, now there are almost 8 million people subscribed. And I'm sure that when sports come back, maybe later this year, they're probably going to see even more people subscribe, if that's a way to watch sports.

Sciple: Absolutely, yes. So, just this shift of -- as fewer people are subscribing to cable. We've heard some statements from, I believe, the NFL leadership has said that their main focus is on getting as many eyeballs as possible on the product, whether that's on linear TV or elsewhere. And if this accelerates the transition away from cable and moves more eyeballs off that platform then, pushing to these other services, like, ESPN+, etc., starts to make a lot of sense to them. And I can see the argument there.

One other area I wanted to ask you about, because I know you've done some research on the video game companies, and then we'll go away, because I know we've been talking for a good while for the listeners. So, on the e-sports side, is this an accelerator for e-sports to go mainstream, given that they have no competition from traditional sports for, whatever, six months? We don't know how long at this point, but for this period of time?

Sanchez: Yeah, I think the answer is probably yes. It's tough to say, you know, demographically it's a very different market But if you think about it, in a lot of ways, e-sports is all that a lot of people have, because when you start talking about ways to view competitive activities that aren't from the 90s or whatever, ESPN is showing on TV right now.

That being said, there's actually a pretty healthy debate on how big e-sports can be. I think if you look at places in Asia, there's a really large audience in the hundreds of millions of people who actually do want to watch people play their favorite video games.

In the U.S., there's been some interesting developments. I think ABC and some other cable channels have actually aired some of the finals for games like Overwatch. And I think there's actually this NBA game, called NBA 2K, that is actually also broadcasting some of their live e-sports events. But the ratings, they haven't been there yet.

And e-sports is one of those things where there's a lot of speculation, there's a lot of hype and there's a lot of growth. But I'm not as convinced that e-sports is ever going to be as big as, let's say, traditional sports. I think there's a lot less interest there from the broader public, but if you look at the demographics, they skew much younger.

So, as those demographics age, if we're talking 10 or 20 years from now and the people who like e-sports today still like e-sports, and maybe the future younger generations also like e-sports, you know, that could actually be interesting. That could actually start to grow into a sizable market.

I guess the point is, I don't think e-sports in 2020 is going to fill the void of March Madness. [laughs] I think it's safe to say that.

Sciple: I couldn't agree more. I love video games, I've actually picked up a lot more video games in the past few weeks given the options that I have, but it's not going to replace college football for me ever as someone who went to a school in the SEC and all those sorts of things.

I think, when we talk about this industry, it's one that clearly is very incredibly important to how we as people consume entertainment and media, and it's being very directly affected by what's going on right now. We don't have a lot of clear answers about when those issues will be resolved or what things will look like going forward.

But what we can do is, kind of, soberly evaluate the positions these businesses are in and what opportunities they might have going into the future and how the set of opportunities available may have changed as a result of this. And I hope that this conversation gave our listeners a good kind of overview of the things that we're paying attention to as we evaluate this space.

Luis, thanks so much for coming on the show and sharing all your insights.

Sanchez: Yeah, thanks, Nick, I had fun.

Sciple: Absolutely. Let's do it again sometime soon.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for his work behind the glass. For Luis Sanchez, I'm Nick Sciple, thanks for listening and Fool on!