Briefly: Live Nation Meets Extreme Makeover

The world’s largest concert promoter, Live Nation Inc., has come to a sobering conclusion: Staging live music events isn’t enough to drive the growth it needs to thrive in the convulsing music business.So Chief Executive Michael Rapino has mounted what he calls a “transformation” aimed at finding new ways — big and small — to use its platform as a giant in the concert business as a base for expansion.

Part of that transformation means moving into areas traditionally controlled by other players in the music industry, such as record labels. Mr. Rapino has already made waves this year with a $120 million deal with singer Madonna, which, in a first for the company, includes recording as well as touring. He says he is on the hunt for several more such deals. He also made a controversial decision to part ways with Ticketmaster when the company’s contract expires at the end of 2008, and run much of the ticketing operation itself.

Live Nation’s main concert-promotion business involves booking acts into venues, marketing the shows and selling tickets, typically via an intermediary such as Ticketmaster. Live Nation usually gets to keep just 5% to 10% of box-office receipts, after expenses. High-grossing acts it has promoted include several Rolling Stones blockbusters and the Police tour that is going on now.

Live Nation has also been aggressively positioning itself to expand into new business areas that tap into the live-concert experience. It recently announced the $79 million acquisition of Signatures Network, one of the world’s biggest concert-T-shirt companies. That followed other acquisitions, including UltraStar Entertainment LLC and MusicToday LLC, which run fan-club and e-commerce Web sites for musicians.

At the same time, however, Live Nation is tackling the much more mundane task of streamlining the company’s existing business through measures like increasing the profitability of its venues’ snack bars. Mr. Rapino wants to lessen the company’s dependence on its 52 amphitheaters around the country, which are out of vogue with concertgoers and ultimately offer few ways of making money beyond parking and concessions revenue. In a related branding effort, the company is renaming many of its midsize clubs “Fillmore,” after the historic venue it operates in San Francisco.

Earlier this month, Mr. Rapino took the stage at a recent addition to its Fillmore chain, the downtown New York club formerly known as Irving Plaza, to make his case to an investor conference. He has a lot of work ahead with Wall Street. Many have questioned the rich valuation of the Madonna deal, particularly the roughly $55 million in advances tied to three albums. The company’s shares fell after the deal was announced and have also suffered amid broader turbulence in the stock market. Live Nation shares closed Thursday at $13.56, well below the company’s 52-week high of $25.63.

In an interview, Mr. Rapino said Live Nation needs to do more than simply run its concert operations better. “That would not be a strategy for long-term growth,” he said. Meanwhile, he saw other corners of the music business — including his own contractors — and coveted the margins generated by partners like Ticketmaster. “I have to be in that business,” Mr. Rapino said.

Before Live Nation was spun off in 2005 from Clear Channel Communications Inc., executives at the company (then known as Clear Channel Entertainment) thought that they could make more money through amassing sheer scale in the concert industry. The company was constructed by buying up and cobbling together dozens of regional promoters who had been in the business for decades.

Mr. Rapino says Live Nation now realizes that no matter how big the company gets, it will always be in a weak position when negotiating fees with superstar acts. “We do not believe the cost of talent is going down,” Mr. Rapino said. “Just because we’re big, we’re not going to pay Aerosmith less.”

According to a slide displayed during the investor conference, the company typically ekes out just 4% operating profit on revenue that last year totaled almost $3.7 billion. All of that profit comes from parking fees, sponsorships, beer sales and a cut of the service charges imposed by Ticketmaster, a unit of IAC/InterActiveCorp.

Live Nation’s domestic operation is disproportionately dependent on its open-air amphitheater venues — which means, among other things, that one of its main profit drivers lies fallow during the winter months, when outdoor concerts aren’t feasible. In addition to changing its mix of venues to include more small and midsize clubs, Live Nation is also looking to employ its amphitheater workers on a part-time, seasonal status — something Jason Garner, CEO of the company’s North American music division, calls “the Dairy Queen model.”

After Live Nation outlined the changes at the investor conference, Goldman Sachs analyst Mark Wienkes issued a report dubbing the strategy “a river of nickels.” Mr. Wienkes concluded that the incremental strategy “in aggregate, is substantial.” But investors weren’t so sanguine: After the conference, Live Nation’s share price continued the slide that began with the Madonna announcement.

Mr. Rapino calls the drop in share price “frustrating,” but he says none of the company’s biggest shareholders, including Fidelity Management & Research, have sold shares. “Our bigger investors realize it took the promoters 20 years to get here,” Mr. Rapino says. “You’re not going to fix it by Q3.” A Fidelity spokesman said the company doesn’t comment on individual stocks.

Live Nation’s move into ancillary businesses such as concert merchandise were the underpinning of its all-in deal with Madonna, which makes Live Nation the pop star’s exclusive partner for merchandise, recorded music, touring and other music-related businesses for 10 years. The company expects to strike similar deals with about three dozen other artists — though few if any of the deals are likely to be as rich. Live Nation executives say they anticipate entering five or six superstar-type deals in the next couple of years.

Madonna’s manager, Guy Oseary, says he negotiated for months with both Live Nation and Warner Music Group Corp., which had been her record label for 25 years, talking about similarly inclusive deals with both companies.

“In the past, people would tour to promote their albums; today they put out albums to promote their tours,” Mr. Oseary says. “The pendulum has swung, and Live Nation is at the forefront of touring.”

Michael Cohl, the concert-promotion veteran who is heading up the Live Nation division overseeing the Madonna relationship, says the company will balance the album-related expenses against revenue from more profitable businesses like merchandise. As a possible blueprint for its retail strategy, the company points to the Eagles’s relationship with Wal-Mart Stores Inc. Without the involvement of a record label, the band struck a deal directly with the megaretailer to sell its latest album, “Long Road Out of Eden,” exclusively. Launched Oct. 30, the album moved over 700,000 copies its first week out.

When it comes to specifics about its move away from Ticketmaster, Live Nation remains coy. Ticketmaster now handles the vast majority of the tickets Live Nation sells. Though Live Nation has a call center and other infrastructure, the scale is much smaller than that of the ticketing giant. Mr. Rapino says the company does have experience in the field, noting, “It’s not a foreign concept.” The company expects to unveil its in-house ticketing strategy by the end of the year.