Warner Music Group (WMG) dodged a bullet by missing out on the Madonna deal. What did Live Nation get by winning it? A high-stakes shot at diversifying its low-margin business.
Live Nation will eventually have to provide details on the $120 million deal (which may not actually be a $120 million deal, but we’ll get to that shortly). In the meantime, here’s the rough estimate, courtesy of Ethan Smith at the WSJ:
• $17.5 million: A general advance — money Madonna gets just for being Madonna.
• $50 to $60 million: Advances for up to three new albums. This money only gets handed over when Madonna delivers the music, so it’s possible that LYV will won’t have to pay all of this out. Perhaps the Material Girl won’t be moved to record another 36 to 45 more songs.
• $50 million in cash and stock for the right to promote Madonna’s concerts and to licence her name. Note that Live Nation still has to share concert and licensing revenue: It will give her 90% of concert sales and 50% of licensing money it collects.
Live Nation has almost no chance of earning back its money on Madonna’s albums — every one she delivers will be a money-losing proposition for them. So in essence, Live Nation is paying between $67.5 million and $127.5 million for right to promote Madonna’s tour and sell her name on perfume, etc. Can they make their money back?
Concert promotion is a risky and low-margin business. In Q2 07 — traditionally, the spring and summer are the strongest for the concert business — Live Nation squeaked out operating income of $36 million on sales of $1 billion. The licensing business, at least, is relatively risk-free, but it’s not a cash machine, either: Live Nation will probably keep 33 cents of each licensing dollar it generates, but it will have to split that with Madonna as well.
Madonna’s last tour was a record-breaker for female artists, and generated $195 million over 60 shows. She’s nearly 50, but oldsters do well on the concert circuit — their fans have plenty of disposable cash. Lets be optimistic, and assume she mounts a similar tour every three years, generating another $600 million over the course of the 10-year deal. Madonna will get 90% of that, and Live Nation won’t actually keep the remaining 10%, since some of that will have to go to venue owners, etc. But let’s call it $60 million to Live Nation.
By this rough maths, Live Nation still has to come up with another $7.5 million to $67.5 million to break even on the deal. Can it sell enough Madonna perfume, Madonna vitamin water and Madonna girdles to get there? Maybe. But why make this kind of gamble?
Because Live Nation CEO Michael Rapino has been arguing that his company, which dominates the concert business, ought to be much more than that. He has been telling investors that his company should be doing more than concerts: It should sell tickets, records, and much more. We imagine that when the Madonna deal is inked, he’ll argue that this is the first step towards that transformation.
Warner, by the way, had the exact same motivation for trying to keep Madonna — it has been desperately been trying to expand beyond the CD business, and wants to try to cut “360” deals, where it gets to participate in multiple revenue streams. But it has yet to convince a big star to do so. Madonna would have made an excellent trophy — but hearteningly, Warner was apparently willing to close its checkbook when the price got too steep.
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