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Sex, drugs and synergies

7 May 2015 By Rob Cox

Something odd occurred last week on Wall Street: A gaggle of financial analysts gathered around their star phones for a discourse on the profitability of entertaining 80,000 sweaty hippies in the backwoods of Tennessee. The reason was the purchase of a controlling stake by concert conglomerate Live Nation in a happening called the Bonnaroo Music and Arts Festival.

To understand the incongruity of financial practitioners booting up Excel for a four-day assembly of jam-bands, consider the first query on the Live Nation call. “I have a really quick question just on the acquisitions that you’ve been making, and perhaps how we should think about their accretion going forward,” asked Amy Yong from Macquarie Capital. “How should we think about the top- and bottom-line synergies?”

Rock ‘n’ roll gets associated with many things, but more often sex and drugs than synergies and accretion. The jarring juxtaposition underscores the challenge, and perhaps the opportunity, of Live Nation’s recent move to consolidate the festival business in the same way it has done with concerts generally and ticketing through its dominant Ticketmaster service.

Live Nation’s ardor to jump the line in this particular arena of the rock business, whose growth has allowed a thousand musical gatherings to bloom, may suggest that peak festival is nigh. For now, though, investors seem to be enjoying the vibe. After announcing plans to acquire a controlling interest in Bonnaroo from founders Superfly and AC Entertainment, Live Nation shares vaulted 9 percent to hit an all-time high of $27.79, valuing the company at $5.6 billion.

A trip to “the Farm,” or Great Stage Park – the 700-acre venue about 60 miles southeast of Nashville – is instructive. Starting on June 11, the location becomes Tennessee’s seventh-largest city, with a postal code and newspaper of its own. At about $300 a person, ticket sales rake in about $24 million.

That’s only part of the allure for Live Nation, though. As Chief Executive Michael Rapino explains: “Once we plug that into our ticketing platform, plug it into our Yahoo platform … and into our advertising business, we’ve had great success taking those businesses and making them very accretive very fast and increasing adjusted operating income by bringing some scale and professional management and advertising to them and growing them at double-digit rates.”

This highlights the quirky nature of the business model. Live Nation effectively runs its mega-concert operation around the world as a loss leader. In the first quarter, for instance, the concerts business lost $11.6 million on $623 million of revenue. Similarly, its artist management arm lost around $5 million on $78 million of sales.

While the ticketing operation pays most of the bills, Live Nation wants to juice up its bottom line with sponsorship and advertising, where it generates a whopping adjusted operating margin of 55 percent. The problem is that the division, while growing at 22 percent, only accounted for less than 5 percent of Live Nation’s first-quarter revenue.

This is where events like Bonnaroo – along with Lollapalooza and Austin City Limits, whose promoters Live Nation took control of last year for $125 million – enter stage left. By offering a chance to connect with up to nearly 100,000 captive consumers in the highly attractive 18- to 35-year-old range, festivals can rival sporting events as advertising opportunities.

Indeed, the same Macquarie analyst who managed to harmonize her spreadsheet with Slayer and Deadmau5 on last week’s conference call estimates that Live Nation’s haul from sponsorship and ads only amounts to about $4 per attendee, compared to $60 for National Football League fans. Yong reckons there’s another $1 billion in sponsorship to be spent on musical happenings from advertisers like Smirnoff and Hilton.

Even before selling to Live Nation, Bonnaroo’s promoters understood the value of knowing their clientele. Each year they ask “Bonnaroovians” to fill out a census that includes whimsical-yet-valuable questions like how they’ll use their smartphones and whether they stopped at Waffle House on the way. It’s marketer gold.

Of course, the very customers Live Nation hopes to cultivate may not take kindly to the idea. The festival’s roots run deep into the Grateful Dead’s touring counter-culture, which would hardly have welcomed telephone sponsorship.

For now, the founders who hatched Bonnaroo, inspired by the Coachella Valley Music and Arts Festival in southern California, will still run the show. “We entered into the deal for Bonnaroo because it was a great opportunity to preserve the integrity of the festival with the support of Live Nation,” they say. That may just be sufficient to mitigate the risk that a whiff of corporate sellout would cause to Wall Street’s sudden interest in 80,000 hipsters descending on the Tennessee woods.


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