Asm midterm livenation ticketmaster merger ross simons
Ross SimonsASM Midterm--Oct 18, 2011Ticketmaster/Live Nation MergerExecutive SummaryI recommend that Ticketmaster and Live Nation partake in a merger of equals to become Live Nation,Inc. with a 50.1% stake for Ticketmaster and a 49.9% stake for Live Nation in the new company. This isrecommended to you for a number of reasons. 1. Risk Mitigation a. Ticketmaster does not own venues, and thus must contract with venues or promoters to sell tickets. If they contract with a promoter, if the promoter has a performance in a venue with a contract with another ticketing company, Ticketmaster is not allowed to provide ticketing services for that particular venue. Due to Live Nation’s departure, Ticketmaster is no longer able to ticket for performances in Live Nation’s many venues. In addition, if Live Nation acquires other venues or aggressively expands into the ticketing segment through contracts with other venues, it will strongly limit Ticketmaster’s revenue potential. b. Live Nation chose not to renew their contract which erased 17% of Ticketmaster’s business. They also received a contract with SMG, a customer accounting for 6% of Ticketmaster’s business. This is a combined 23% drop in business in an extremely short period of time. c. Live Nation’s operations tend to be unprofitable. The ticketing segment of the industry however is very profitable by comparison. One can assume that Live Nation will continue to take market share from Ticketmaster as they more aggressively expand into the ticketing segment. 2. Benefits a. Ticketmaster and Live Nation are very strong in their segments of the value chain; both are industry-leaders by a large margin. A merger of the two would create a company able to effectively compete and succeed in all steps of the value chain. b. Typically Ticketmaster receives 40% of the service fees it charges with the remaining 60% going to the venue. By owning the venues through a merger with Live Nation, that 60% of the fees charged would stay with the new company. c. A merger would provide less competition in the marketplace. This is particularly good because the combined company could more effectively receive event sponsorships as well as receiving better deals from artists through more robust “360-degree” deals. d. A merger between the two would raise barriers to entry and increase supplier power, making the industry more attractive. 3. Implementation a. The new company should be able to combat opposition to the merger with minimum concessions. The potential concessions are easily overcome with a well-managed merger and creation of a better ticketing system. b. Integration of employees should go smoothly (though I have no data about specific corporate culture differences).
Risk MitigationThe Live Performance industry value chain consists of five steps: 1. Artists make music and prepare for live performances. 2. Artists contract with booking agents that are responsible for getting them concert contracts and receive a fixed of percentage from performers. 3. They then contract with promoters who are responsible for marketing, ticket sales, obtaining venues, production, working with performers to set ticket prices, etc. They receive money through ticket sales. They pay performers using a variety of ways including fixed or percentage fees. 4. The promoters then rent venues. The venues are responsible for providing parking, concessions, security, etc. The venues would receive some/all of the money gained from these activities and they also receive a fixed or percentage fee from the promoters. 5. Ticketing companies contract with venues or promoters to sell tickets exclusively for a period of 3-5 years. Ticketing companies do not determine the base ticket price and they receive a fixed or percentage fee. The balance of power in the industry is precarious, but shifting. You have a lot of powerfulplayers in the industry. The artists are often represented by labels which can exercise control. This wastrue up until the rise of Live Nation and its ability to offer “360-degree deals” which were used assubstitutes for working with a label (Madonna is but one example). As Ticketmaster owns a controllingstake in Front Line Management, the world’s leading artist management firm, a trend towards 360-degreedeals with Live Nation is concerning. Live Nation primarily worked in the promoting and venue operatingsteps of the value chain, though through 360-degree deals they are able to supplant booking agents aswell. Live Nation has a very strong presence as a venue operator with a segment-leading share of 46.1%of tickets sold by venue operators and ownership of over 140 venues—also a segment-leading figure.Live Nation has recently entered the ticketing segment of the industry which has caused a waning marketshare of Ticketmaster, the industry leader. The ticketing segment of the industry was primarily controlledby Ticketmaster with an 83% market share. However when Live Nation, the largest customer ofTicketmaster, did not renew their contract they took 17% of Ticketmaster’s business. In addition, theywere able to net a contract with Ticketmaster’s second-largest customer, SMG, that accounted for 6% ofTicketmaster’s business. Case data shows that this supplied an almost immediate loss of 16% marketshare for Ticketmaster in the ticketing segment. This shows the shifting power structure of the industry. With Live Nation’s so-far-successful forayinto the ticketing industry, it now has an industry-leading presence in the promoter and venue operator 2|Page
segment and a strong position in the ticketing segment. There is even more risk in Live Nation’s verticalintegration into the ticketing segment; Ticketmaster will see decreased contract power as well. Currently,ticketing companies contract with promoters or venues to sell tickets. If they contract with a venue, theysell all tickets for performances in that venue. If they contract with a promoter, they sell all tickets forthat promoter in any venue unless the promoter operates a concert in a venue that has a standingcontract with a different ticketing company. If a venue has a current contract in place, that contractnegates/supersedes any contract that a ticketing company has with a promoter. With Live Nation havinga 46.1% share of tickets sold by venue operators, this proves to be a scary development forTicketmaster. Due to the nature of the industry, concerts that happen in Live Nation venues would resultin negated contracts with promoters. This would ultimately nullify a number of 3-5 year contracts thatTicketmaster has with promoters and limit venue options for future contracts. An expansion into the ticketing segment is undoubtedly attractive for Live Nation. Live Nation’sbusiness model is fairly unattractive resulting in negative to miniscule profits in any given year. Ticketingon the other hand is a more profitable segment with Ticketmaster receiving about a 17.4% operatingmargin. Even more so, the reselling segment of the ticketing industry has proven to be the primary driverin growth for Ticketmaster. This shows that there is significant upside in the ticketing segment with therise of the secondary ticket selling markets (e.g. Stubhub) which has an estimated $25 billion dollarmarket. More investment in the ticketing market, as well as an aggressive movement into the secondaryticket selling market would position Live Nation for further profitability. Thus, Ticketmaster must look topre-emptively merge with Live Nation to avoid this coming to pass.Benefits In addition to merging with Live Nation to limit risk, there are a number of other benefits to amerger-of-equals. The first has to deal with the fee structure. Currently, Ticketmaster gives ~60% of thefees it charges to the venue operators. Through owning a number of venues through Live Nation,revenue and operating margin would immediately increase as 60% of the fees would stay with the newlycombined company. Both companies have large subscriber lists and thus, great user data. A merger of the twocompanies would significantly increase the subscriber list. This would allow them to have much moredata on their target markets’ purchasing habits and would allow them to more effectively price-compete.This data, combined with effective leveraging of the secondary ticketing market, could allow thecombined company to ingeniously price-discriminate. It would do this by lowering overall costs of theinitial ticket price of the original ticket. This would make consumers very happy and would provide peaceof mind for federal regulators. A lower base selling price would ideally result in a higher amount of sold-out shows. Those customers who still want to watch the shows and are less price-sensitive would go intothe secondary markets and buy tickets there at a higher price, netting the company a further percentage- 3|Page
of-selling price fee. Further, these secondary markets would have lower costs per ticket sold due to lowermarketing and administrative costs in this segment as those are primarily incurred in the initial sale. Thiswould increase profitability and hit multiple points on the price elasticity of demand curve for liveperformance tickets. In addition to the ability to price discriminate, the robust user lists could lowermarketing costs as the companies have even more usage data that would allow for more targetedadvertising through specific genres, artists, venues, and price ranges that cater to specific users, etc.Think of this as looking at your customers through a scope as opposed to launching money intomarketing with a shotgun blast of advertisements. These two things (more targeted advertising andlower prices in the primary ticket markets) would also provide a stronger ability to sell tickets duringeconomic downturns. A combined force would result in the strongest competitor in the market by far. With the cloutthe merged company would now have it would be much easier to: 1. Receive corporate sponsorships and the revenue it generates. 2. Bargain with artists to increase payouts to the new company. Also, be able to further diversify what they can receive from artists (e.g. more from merchandising, cd sales, DVD sales, etc.). This can be achieved through combining and leveraging Live Nation’s presence in the venue operating and promoting segments in addition to the ticketing segment through Ticketmaster and the artist management segment through Front Line Management. 3. To consolidate administrative functions such as technology costs (e.g. website management, data centers, etc.), marketing, ticketing savings (i.e. from avoiding fees normally paid to other players in the value chain) and back-office functions (e.g. call centers, customer relationship management, administrative staff, etc.). 4. To raise the barriers of entry of the industry as new entrants would have less access to venues and little participation in more than one segment of the value chain.Implementation Mergers are typically accompanied with implementation and regulation problems. The first ofwhich is opposition from federal regulators. This potential merger will undoubtedly receive opposition andsome concessions may need to be made. You should be prepared to agree to not partake in anti-competitive activities such as pricing-out competitors or threatening businesses in the supply chain (e.g.other venue operators) with repercussions. You may be required to license your ticketing technology toAEG Live and/or divest in Paciolan. These are manageable concessions. With AEG’s presence in thepromoter, venue operator, and artist management segments, it has the ability to influence primary ticketsales, particularly in its own venues. Though it may satisfy regulators as they would believe AEG wouldbe an effective competitor, AEG coupled with Ticketmaster technology would still have troubles 4|Page
competing with the new Live Nation. A divesture in Paciolan would have its concerns, however thePaciolan ticketing technology is inferior to Ticketmaster’s technology and licensing of Paciolan representsa small portion of Ticketmaster’s business. The new company could invest in R&D and make furthertechnology improvements with their ticketing technology in order to overcome any short-term results ofthe above concessions. In addition, none of these potential concessions address the secondary ticketingmarket which is a strong growth opportunity for Ticketmaster. It would be in your best interest to makethese small concessions in the ticketing segment as they can be overcame by the benefits of the mergerthat have been explained in this report. Also, these concessions would be made in an effort to avoidregulators requiring changes made in the other operations of the business. It makes sense to make easilyovercame concessions in the ticketing segment to protect your other positions in the value chain. The new Live Nation will also provide value for its shareholders and customers. It can betterguide customers down a buying funnel that adds value to the customer at all of the steps of the valuechain. In essence, it can be used to fulfill Live Nation’s mission of connecting the fan to the artist--fromthe artist to targeted notifications about concerts to combo deals to fan clubs to point of sale (at lowerprices) and everything in between. The second issue is integration of the two firms (e.g. regarding production capabilities, corporateculture, job placement, etc.). I do not believe Ticketmaster will have significant issues as it is not aconventional vertical merger. There is a finite supply of tickets in this segment (limited by spaceavailability at venues) and there will not be issues with shortages or excess capacity in production of thegood (i.e. tickets). The two companies operate independent models and the value chain is not traditionalin that resources (e.g. artists, managers, venues, tickets, etc.) are mostly finite and one segment of thevalue chain is not dependent on the other for production. The only similar business is the ticketingportion which will require some management of teams and some loss of redundant employees. However,the other operations of the new business should be able to mostly preserve their sales teams andmanagement. Executive-wise it would be appropriate for Live Nation to have a higher percentage of theirexecutives intact after themerger as that business seems to have a much higher need for activemanagement. With the above analysis, you should be able to more effectively make your decision. To re-iterate, I unequivocally recommend a merger due to the risk of Live Nation’s expansion into the ticketingsegment, the benefits of a merger that creates a company so well-positioned in the value chain, and thesmoother-than-average implementation process. 5|Page