Music Industry Titans Punch Their Own Ticket

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Did the weak economy propel Live Nation Inc. and Ticketmaster Entertainment Inc. into each other’s arms?

The two music industry giants the former the world’s largest concert promoter and the latter its largest ticket broker announced last week a merger to form a new entity called Live Nation Entertainment.

Surprisingly, the announcement came just a little over a month after Live Nation formally took the wraps off Live Nation Ticketing the Beverly Hills company’s first foray into ticket sales and a clear sign of its willingness to challenge Ticketmaster on its own turf.

Before this year, Live Nation was Ticketmaster’s biggest customer, and Live Nation opted not to renew that contract as it readied Live Nation Ticketing. However, that was before the economy collapsed.

Analysts who follow both companies said while the union between Live Nation and West Hollywood-based Ticketmaster is far from a shotgun marriage, the economy has put a crimp into consumers’ discretionary spending for such items as concert tickets. Couple that with signs that Live Nation Ticketing may have struggled early and the thinking is the $2.5 billion all-stock deal may not have happened in better times.

Scott Devitt, a Baltimore-based managing director at Stifel Nicolaus & Co. Inc., said he believed the two companies had talked about a merger in the past, but apparently didn’t feel compelled to overcome the obstacles while times were good.

“But they’re in a different situation right now. They feel like they need it,” said Devitt, who follows Ticketmaster.

Devitt also said that a Stifel Nicolaus review of ticketing for an upcoming Jimmy Buffet concert which Live Nation Ticketing was supposed to broker showed Live Nation was still relying on Ticketmaster to sell at least some of the tickets.

And when Live Nation Ticketing opened sales in January for a reunion concert of the band Phish, the online ticketing service crashed, eliciting fan complaints that Live Nation wasn’t prepared for the high volume of traffic.

“It’s possible that even if this deal hadn’t been made, Ticketmaster would still get Live Nation’s business back because Live Nation Ticketing was faltering,” Devitt said.


Two rivals

Ticketmaster and Live Nation have long enjoyed a symbiotic business relationship and, publicly at least, the two chief executives have praised one another Live Nation Chief Executive Michael Rapino, for example, called Ticketmaster Chief Executive Irving Azoff “one of the greatest managers in the business.”

But the two companies have also taken multiple steps beyond Live Nation’s foray into ticket sales to carve into one another’s revenue streams indicating they were becoming more rivals than partners.

Live Nation for instance recently inked multimillion-dollar deals with a handful of high-powered artists such as Madonna and Jay-Z that gave Live Nation far-ranging rights to their music. In response, Ticketmaster announced in October that it had taken a controlling stake in Front Line Management Group Inc., which oversees a slate of around 200 artists and acts including Guns N’ Roses, Miley Cyrus and Christina Aguilera. That merger deal catapulted Azoff, formerly head of Front Line, to the executive suite at Ticketmaster.

But with analysts projecting ticket sales would remain relatively flat in 2009, Ticketmaster has been searching for a way to insulate itself from a range of emerging competitors, including eBay Inc.’s StubHub.com, an online ticket reseller, said Richard Barnet, a recording industry professor at Middle Tennessee State University in Nashville.

Merging with Live Nation could do exactly that.

“Ticketmaster saw a lot of competition coming, and their biggest clients are venues and concert promoters,” said Barnet, who has co-authored a book on concert promotion. “So if they merge with the company that has the largest number of venues and is international in terms of the promotion side, it should work well for them.”

At the same time, Live Nation’s big deals left it with more debt and less cash than Ticketmaster not the most desirable position for a company in this economy. That may have contributed greater momentum for the merger.

“Live Nation has been investing with borrowed money, and you haven’t seen them generate a lot of cash,” said Brett Harriss, a research analyst at Gabelli & Co. Inc. in Rye, NY. “That’s fine if you’re in 2006 or 2007, but as the economy soured and especially as they’re exposed to cutbacks in consumer discretionary spending, they get in a tougher position.”


Antitrust issues

Now Live Nation and Ticketmaster appear willing to set their rivalry aside. But their union has provoked strong outcry from consumers who fear the two companies could leverage their positions to increase ticket prices and drawn antitrust scrutiny. The Justice Department has already announced it has opened an investigation into the merger.

That makes it unlikely consumers will see Live Nation Entertainment any time soon, even though the companies said they expect the deal to close in the second quarter.

“It’s going to be a very bumpy road this year for both these companies, and if the deal gets approved I wouldn’t think it would be before the fourth quarter,” said David Joyce, an analyst with Miller Tabak & Co. LLC in New York City.

Ticketmaster did not return requests for comment. A Live Nation spokeswoman said the company would continue to operate its ticketing arm until the merger is approved by regulators, but offered few other details for this story.

And even if the deal is approved, the companies face the daunting task of seamlessly melding two businesses with thousands of employees, operations worldwide and at least some overlap in their operations.

In announcing the merger, Live Nation and Ticketmaster said they expected to save about $40 million by combining ticketing, marketing and back-office functions which analysts said would inevitably result in layoffs.

Then of course there is the question of whether Rapino, who will become chief executive of the new company, and Azoff, who will oversee Rapino as executive chairman, will set aside their rivalry.

“Can they make it work? I think at the end of the day, there are some big egos here but they’re smart commercial guys,” said Gabelli & Co.’s Harriss of Rapino and Azoff. “They’ll figure it out. It won’t necessarily be a smooth ride, but they’re self-interested enough to make it work.”

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