Venture Capitalists: Buying High, Selling Low

Live Nation's Strategy Looking Even Worse As It Has To Cough Up Extra $$s For U2, Madonna

from the how-not-to-run-a-business dept

Thu, Dec 18th 2008 4:33pm — Mike Masnick

While we definitely think there's a huge opportunity for more comprehensive business models in the music industry, we're still skeptical of Live Nation's model. The company, which is mostly known as a concert promoter, has signed huge deals with some big name musicians to get them to leave their record labels and do everything through Live Nation -- including music sales, concerts and merchandise. Live Nation gets a cut of it all. On the whole, such a model does make a lot of sense, because with one entity managing all of the different revenue streams, the company is much more likely to tweak the knobs. If it realizes that it can make more money in those other products by giving away the music, it (in theory) won't hesitate. That doesn't happen when the record label only gets a cut of music sales.

The problem, though, with Live Nation's model was its decision to focus on just a few huge names, and to pay them tremendous upfront amounts. Now, it turns out, the deals are even worse than what Live Nation expected. Apparently, it paid a portion of what it owed both U2 and Madonna in stock. That, by itself, is fine. It lets the musicians share in the risk a bit. Except, for some bizarre reason, the folks at Live Nation took away all of the downside risk for the musicians by promising how much the stock would be worth. With the stock market in freefall, that's now going to cost Live Nation a ton. For example, it gave a bunch of stock to U2, and guaranteed the stock would be worth at least $25 million. In actuality, it's worth $6 million. That means the company now needs to cough up an additional $19 million in cash and give it to the band. Madonna is apparently in a similar situation, with a similar guarantee about to come due.

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Filed Under: madonna, u2
Companies: live nation

8 Comments

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Bill W, 18 Dec 2008 @ 5:15pm

Stock grants/options
Gee, my company gives me stock in my 401k but, unfortunately, they don't actually provide a guaranteed value for it ... too bad.

Seems like Live Nation overlooked the incentive part of stock grants ... i.e. you make us profitable and you gets lots of money. Seems like they got the "you get lots of money" part right but slipped up on the other part.
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Joel Coehoorn, 18 Dec 2008 @ 7:21pm

loss leader
I don't know- I think even taking the stock loss this is a good idea for Live Nation. Signing those high-profile acts, even if it costs them some money, gives them credit with other not-yet high profile acts. It shows the up and coming bands that they are legitimate: a real option rather than a nobody. This will help them sign other more profitable acts and grow their profile.
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Aaron deOliveira (profile), 18 Dec 2008 @ 8:57pm

flip side
The other side of the story is that the musicians or someone on their side are savvy negotiators to work out a deal like this.

It should also show us that musicians can achieve a position of strength to negotiate from when doing any kind of deal.
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PopeRatzo, 18 Dec 2008 @ 9:26pm

nope
"Signing those high-profile acts, even if it costs them some money, gives them credit with other not-yet high profile acts"

No, it does not. U2 and Madonna are hardly cutting edge. Most of the artists that will be popular next year and the year after consider them dinosaurs, and see LiveNation as nothing but another music conglomerate, only worse. Such pretentious lumbering behemoths are exactly what the up-and-comers don't want to be. After all, when South Park has made entire episodes making fun of you, it's over, no matter how much money you bring in every year. The SP episode which portrayed Bono as a walking, talking pile of feces pretty much was the final word on it.

If there is a company going by the name "LiveNation" in 18 months, it will be the butt of scorn and jokes. My guess, though, is that "LiveNation" will end up as another failed gamble by music executives that couldn't find a clue if there was one stuck in the palm of their collective outstretched hand.
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LBD, 18 Dec 2008 @ 9:41pm

The sad thing
The sad thing is that, while this could prove an end to the company...

It will be held up as (incorrect) proof that concert promoters +50% of other goods 'can't work'
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Joel Coehoorn, 19 Dec 2008 @ 3:48pm

Re: nope
Who said anything about cutting edge? They are "big" names: everyone has heard of U2 and Madonna.
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Terry Wilkinson, 20 Dec 2008 @ 11:06am

Wrong Approach
The money in music is in signing an unknown artist for peanuts, and reaping the profits after making them a star! Case in point, the creators of American Idol or even producers like P.Diddy. The top stars already know the game and how to manipulate the system. Just ask U2 and Madonna.
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armstrong, 1 Jun 2009 @ 3:13am

Morbid
Ive just finnished an album and its good but not good enough for that kind of money but never again.Its just too tiring and sick a buisness. Actually it makes me want to die.So tell Madonna I wont be making it next Burns night.How can a mafia porn star and most important person ever lose.I was proud of music but maybe Im now too old.$1M a show is just sick and its crucifying me, whats going to become of Jesus or Moses or bloody Lourdes.We should all have ignored her and stuck with Nirvana.Pass that lithium number on to the kids.Your too kind See you later in the crater.Dont do another tour skeletor ,please!
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