Live Nation (NYSE: LYV) brought artist representation, concert promotion, ticketing, and advertising together to create a vertically integrated live events business in which each segment complements one another.
In this segment from Industry Focus: Consumer Goods, host Vincent Shen and Motley Fool contributor Nick Sciple compare Live Nation to upcoming IPO Eventbrite before breaking down its business model and profit drivers.
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A full transcript follows the video.
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This video was recorded on Sept. 7, 2018.
Vincent Shen: Return to our discussion of the live events industry. Two weeks ago, we previewed the initial public offering of Eventbrite. Check out that episode if you haven't heard it yet. The short elevator pitch for the company basically goes like this: you have this fast-growing event planning and ticketing platform that targets what they call the middle market. It's a pretty big bucket. As the CEO describes it, not birthday parties and not Taylor Swift in Madison Square Garden, but everything in between. Through its platform, Eventbrite generates revenue by charging a fixed invariable fee per ticket for paid events, not to mention the additional fee they generate for creators who use the company's payment processing. New creator signups and the subsequent loyalty to the platform are encouraging. But we did have some concerns with, essentially, the ramp up and out of the Eventbrite ecosystem that the most successful creators will naturally experience if they reach a level of success that brings them to the biggest event venues. Just the Eventbrite story there.
Nick Sciple: You're exactly right, Vince. They have the middle of that market. Today, we're talking about Live Nation, which is the top end of that market, which is going to be an interesting comparison between the two companies.
Shen: Exactly. The question ultimately lies in whether or not investors need to be worried that Eventbrite's most valuable or profitable creators inevitably move on to the competition. That competition is who we're going to talk about today. It's dominated by Live Nation, ticker LYV.
In the Eventbrite prospectus, they highlight the fact that they had 700,000 creators use their platform to organize three million events and issue over 200 million tickets last year. I'll just present you the flip side -- for Live Nation, we scale everything up significantly. For that same period, 2017, the company served 580 million event goers, sold over 500 million tickets. That's with a ticketing client base of about 12,000. Those clients being these massive stadiums, pro sports leagues, theaters, more.
What is their secret sauce? You've alluded before to how Live Nation has its fingers in all aspects of the industry, when we were chatting about the company for the show. What does that look like, exactly?
Sciple: Sure. Well, whereas Eventbrite was a company that's mainly focusing on the ticketing aspect of a live event, Live Nation really touches every part of putting on a live event. That comes from operating the venue, the ticketing services, of course, they sponsor artists, and they do advertising for those artists' tours. They really touch everything that you need to put on a live event. Live Nation serves that market.
They're fully vertically integrated, which is a huge part of their model. They use those other areas of their business, the artist management areas of their business, to really funnel where the real profit driver is, which is Ticketmaster. Everybody who's ever been to a live event, I'm sure, of any size, has used Ticketmaster.
Shen: And complained about it. [laughs]
Sciple: Exactly, exactly. We'll talk about that a little bit later. Those Ticketmaster fees are a big part of Live Nation's business model and where they drive their profits from.
Shen: They have become this dominant player in live entertainment. I don't think you can really overstate this. Its strength comes from the very deep roots that it's established up and down the value chain. To further illustrate what that looks like, think about the artists. The company handled shows for 4,000 musicians last year. It has a management arm with clients that, I think the count is around 500 artists. These are pretty much some of the biggest names in music, from more modern stars to classic stars like Paul McCartney.
Then, you have the venues. Live Nation has exclusive booking rights or interests in over 200 of them, some of the most famous and biggest venues in the world. Any the company operates also generate revenue from concessions, parking, rentals. One number I saw cited, just an example here, they generated $24 in additional revenue per fan at some of its venues from things like the concessions, VIP seating, things along those lines.
And then, with the events themselves, Live Nation, they promote festivals and these different events that allow them to connect with major sponsors, advertise the fact that they have 90 million attendees, almost, to their concerts for last year. It's a big base of people that companies want to connect with, in terms of their advertising.
And finally, again with the ticketing, and how important Ticketmaster is. 500 million tickets going through that system, about 200 million of which generated fees for the company.
Looking at full year 2017, Live Nation, in their 10-K, they mentioned that they grew their estimated number of events over 12% to almost 30,000. Attendance was up over 21% to almost 86 million people, which I just mentioned. The total number of tickets that Live Nation sold was up just 3% to about 500 million before those 200 million or so tickets that generated fees for the company. That volume was up almost 10%. We're seeing some pretty strong growth in this broad base look at the business.
Breaking things down further, Live Nation reports their revenue and results in three segments. Those are Concerts, Sponsorship and Advertising, and Ticketing. On the top line, the company reported total revenue last year of about $10.3 billion. But the way things shake out on the top line, and the way they shake out to their operating profits, essentially, doesn't quite follow the same mold. Concerts are the biggest part of their revenue. It makes up about $3 out of every $4 that the company generates in sales. That includes promoting and operating these big events, and also the artist management side of the business that you mentioned. Ticketing is good for another 20% of revenue. That Ticketmaster dominance brings in about $2.1 billion. And then, Sponsorship and Advertising rounds out the remaining 4% or so, with just $450 million. For the year, every one of those segments grew double digits.
When it comes to the profitability and contributions to the bottom line, though, again, the businesses break out very differently. Can you talk a little bit about that?
Sciple: You're exactly right, Vince. Whereas a huge portion of their revenue is generated from their Concert segment, it's very relatively small when it comes to the profits of the business. You're looking at ticketing services as only 20% of their overall revenue, accounts for almost half of their earnings. The Advertising segment is only 5% of their overall revenue, and it's 37% of their adjusted operating income.
That really draws through, where you can see how their business model works. They use this Concert segment, their artist management, to really funnel their profits to those other sectors of the business. In their Concert segment, that's going to include the actual cost at the gate for tickets, whereas the ticketing services revenue, the Ticketmaster angle, is going to be those fees that they're charging, those Ticketmaster fees we talked about earlier, that extra $10 servicing fee. Where that comes through into the business model is, that revenue that Ticketmaster or that Live Nation is generating on the Concert segment is really getting funneled into acquiring these artists and bringing them into Live Nation ecosystem. Then, they can use those artists' representation to then push those artists to venues that Live Nation controls, or venues that use Ticketmaster for servicing. And they can really take any revenue through those avenues.
In addition, Live Nation, as the sponsors of these artists, is also working out the advertising side of these tours. For example, recently, Live Nation organized a vodka sponsorship for Lady Gaga's tour that generated some high-margin advertising revenue for the company. That Concert segment is how they acquire those big artists. Then they pull those artists' acquisitions to the Concert segment to really drive profits and Advertising and take any segments of the business.
Shen: Exactly. All these things come together. I've seen people describe it as a flywheel, the strength of this business. Something I want to mention specifically, in terms of some of the numbers if you're looking into the company's financials -- Live Nation reports a non-GAAP metric called adjusted operating income, or AOI. This strips out things like acquisition expenses, depreciation, and amortization, losses and gains from asset sales, and stock-based compensation for essentially what can be considered a cleaner operations-based figure. If you use that AOI number, again, you'll quickly see that the profit margin, though thin for Concerts, it's much stronger for Ticketing, and it's phenomenal for Sponsorship and Advertising. And this all works into the way that those big concerts are needed to draw the business and the volume down to those other more profitable segments.
Nick Sciple has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Live Nation Entertainment. The Motley Fool has a disclosure policy.