Live Nation (LYV) just concluded a round of boardroom intrigue by shoving out executive Michael Cohl, who had been spearheading the company’s transition from concert promoter to full-fledged music company. The WSJ, which has been doing an excellent job of covering the story, has details ($), but here’s the short version:
Mr. Cohl had been at odds for weeks with Chief Executive Michael Rapino over how aggressively to pursue the company’s strategy of striking so-called 360 deals with superstar music artists, in which the company offers massive cash advances in exchange for financial participation in a range of revenue streams including concert tickets, recorded-music sales and merchandise-licensing deals. As head of the Live Nation Artists unit, Mr. Cohl oversaw such deals with Madonna and Jay-Z, who were pledged $120 million and $150 million, respectively.
Mr. Cohl wanted to strike many more such deals quickly, while Mr. Rapino favoured a wait-and-see approach. When it announced the strategy last fall, the company said it would strike four to six major deals in the first year. Mr. Cohl wanted to ramp up to as many as 15.
Live Nation’s internal/external debate about 360 deals mirrors the one the rest of the business has been having. The big labels, who have seen music sales drop to a 23-year-low, have been pushing 360 deals as a possible way out: If recorded music is plummeting, the argument goes, the industry is going to have to survive on other revenue streams. And 360 deals do make a sort of sense – but not for Big Music.
The problem is pretty straightforward:
- 360 deals could work for both bands and labels — if the labels are are willing to make long-term bets early in the careers of many small bands, with the knowledge that most will generate little if any payouts.
- Big labels (and LiveNation) aren’t in the position to depend on long-term bets with modest payouts – they need to susbstantial payoffs in the near future, so they can satisfy public investors and/or debt covenants.
- The only way to get collect significant revenue from 360 deals in the near-term is to do deals with superstars who are already generating lots of revenue from tours, merchandise, etc. And they’re not going to give any of that up without huge advances, which means any revenue the labels (or Live Nation) will get will be at low or zero margin.
What does Wall Street think? Here’s LYV since mid-October, when signed its first major pact, with Madonna:
So were does this leave Big Music? Stuck with one primary revenue stream, which is dropping like a stone. In the absence of a digital miracle (the labels are still holding out hope for a mobile music boom) the most practical way for the labels to survive would be to stop releasing new product altogether, and simply harvest their existing catalogues in profitable decline. Ugly? Sure. But we don’t see a better option.