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This merger could save the music business. But is it good for fans?

May 2009 | Cover Story | Music

By ETHAN SMITH
The Wall Street Journal

The music business is in far worse shape than most people realize, says Irving Azoff. And he thinks he has a way to save it.

Mr. Azoff is the CEO of Ticketmaster Entertainment, the largest ticket vendor in the world, which in turn owns Front Line Management, the world’s biggest talent-management company, representing more than 200 stars including Christina Aguilera and Miley Cyrus. Now he’s planning to merge his company with Live Nation, a concert promoter that also manages the careers of artists like Jay-Z, Nickelback, Shakira and Madonna and operates a network of concert venues.

The proposed merger would concentrate power in the music industry like never before. It would give the combined company unparalleled power to negotiate with competitors and business partners, with potentially wide-ranging implications for how the business of live music works.

But if nothing else, it’s a survival strategy. Both companies have been scraping by in a music industry that is changing fast and delivering less profit to the established players, including music labels, concert promoters, artists and retailers. And the recession has only made their plight worse.

Mr. Azoff says the deal will help the two companies weather the recession and revive the struggling music business by reducing the number of middlemen between artists and fans. The result, he says, will be fairer treatment of artists and lower ticket prices for popular concerts.

But competitors, consumer advocates and some members of Congress think the result could just as easily be the opposite: a company that controls so many parts of the business that it can exert its near-monopoly power to drive up the price of concert tickets and give preferential treatment to its own roster of artists.

“If this merger is allowed to proceed, the combined entity will have the ability to suppress or eliminate competition,” said Jerry Mickelson, the chairman and executive vice president of Jam Productions, a Chicago concert promoter, in testimony before Congress in February. “The whole game here is control.”

CHANGING TUNES

The proposed deal—which is being reviewed by the federal government to see whether it would illegally restrict competition—illustrates how much the music business has changed in recent years, and even recent months. (See related book review on Page 19.)

For decades, a musician’s path to riches was landing a fat recording contract that would pay a big upfront fee, and then a percentage of future CD sales. But the rise of file sharing and online music services like iTunes has crushed CD sales. Record companies have seen their revenues nosedive—album sales are down 45% from their peak in 2000—and so have many older musicians and bands that derived much of their recurring revenues from CD sales.

Today, concert tours remain one of the few ways for musicians to reliably convert music into money. Since 2000, concert ticket sales have more than doubled, totaling $4.2 billion last year, according to the magazine Pollstar; and standard concert-booking deals pay artists 90% or more of the box-office gross. That’s why many older acts are going back out on the road.

Mr. Azoff, who founded Front Line, estimates that his oldest and biggest clients derive just 6% of their revenue from recorded-music sales (including downloads), down from 50% a decade ago.

But the economics of the concert business are changing, too. The rise of online ticketing sites, brokers and resellers means that fans are often paying more to attend concerts, but artists and venues aren’t seeing any additional revenue.

NEAR MONOPOLY

These challenges fueled the intense competition—and now the merger—between Ticketmaster and Live Nation.

Ticketmaster for decades enjoyed a near-monopoly on sales of tickets to major concert and sporting events. That sometimes alienated fans, some of whom have

complained about the fees that Ticketmaster tacks on; those fees can add 15% to 50% to the cost of a ticket.

But Ticketmaster’s control has been challenged in recent years by online ticket services like StubHub. Basically, scalpers and others are finding ways to sell tickets at much higher prices than Ticketmaster, whose prices are set in negotiations with artists and venues.

Ticketmaster’s attempts to fight back—such as the acquisition of a StubHub rival called TicketsNow—only stirred up trouble. Last fall, fans were outraged when their attempts to buy $95 Bruce Springsteen tickets from Ticketmaster led them to a TicketsNow page with resellers offering seats at up to five times face value.

Meanwhile, Live Nation was evolving from its roots as a concert promoter and venue operator to become a more powerful challenger to Ticketmaster.

The company had long operated on thin profit margins, since the vast majority of concert revenues go to the artists. Eager to find a way to benefit more from the artists’ success, Live Nation in 2007 and 2008 invested hundreds of millions of dollars in unprecedented contracts with artists like Jay-Z, Nickelback, Madonna and Shakira. The deals gave the artists massive upfront payments—$120 million to Madonna; $150 million for Jay-Z—in exchange for giving Live Nation a percentage of future revenue from virtually every corner of their business, from concert tours, to endorsement deals, to T-shirt sales.

Since then, the two companies have been on a collision course, headed either for a brutal war or a merger. Last year, to keep more of the revenue from its own concerts, Live Nation stopped doing business with Ticketmaster and instead launched its own ticket-selling service. That hit Ticketmaster on the bottom line: As recently as 2007, Live Nation’s shows had accounted for 17% of Ticketmaster’s overall revenue.

Ticketmaster responded by acquiring Front Line, figuring that close new relationships with more than 100 of the biggest names in live entertainment would persuade concert venues to continue using its ticket service. Front Line’s founder, Mr. Azoff, became CEO of the combined company.

WHERE THE MONEY IS

In a music career that spans four decades, Mr. Azoff has shown a knack for putting himself where the money is. In the early 1970s, he worked for David Geffen, who would later create Geffen Records and the DreamWorks film studios.

Mr. Azoff made his name managing the Eagles, one of the most successful rock bands of the 1970s, and quickly earned a reputation for driving a hard bargain. He negotiated a record-setting royalty, amounting to $1.50 apiece, for the Eagles’ 1976 “Hotel California” album. It went on to sell more than 16 million copies.

In the late 1980s and 1990s, when CD sales were starting to take off, Mr. Azoff ran record labels of his own. Then, in 2001, he sold out of that business, just as digital-music downloads began undermining record companies.

After that, he returned to his business in talent management—starting first with a few clients like the Eagles and then building Front Line into a giant by acquiring dozens of smaller talent firms and their clients. The added mass boosted his negotiating power with concert promoters and record labels.

When the Eagles in 2007 made their first studio album in 28 years, “Long Road Out of Eden,” he cut the traditional record labels out of the picture entirely. Instead, he made a deal directly with Wal-Mart Stores to be the exclusive seller of the album. The mega-retailer bought millions of copies directly from the band.

Mr. Azoff says the Eagles were persuaded to go with Wal-Mart by simple math. “Do you want to make pennies [per CD] from the labels, or do you want to make dollars from Wal-Mart?” he says he asked Eagles singer Don Henley.

People in the industry say the Eagles may have earned as much as $50 million from the Wal-Mart arrangement, which sold 3.2 million copies. A traditional record-label deal might have yielded less than $10 million, they say.

Moves like these turned Mr. Azoff’s Front Line into a hot property. In 2007, both Live Nation and Ticketmaster began trying to buy a controlling stake of Front Line. Ticketmaster finally closed the deal last October.

Now, with the proposed Live Nation merger, Mr. Azoff is again trying to stay a step ahead of the changes in the music industry.

“The economic foundation that supported artists in the past is crumbling,” he said in testimony to Congress earlier this year. “Piracy is threatening their livelihood. Secondary ticketing is driving up prices for the fans, with absolutely no benefit to the artist.”

By integrating the two companies and connecting several links in the chain, Mr. Azoff figures the company can save about $40 million. That money, he says, can be used to “develop new and innovative products and services that enhance the fan experience and make all forms of entertainment more accessible to everyone.”

The merger, he says, “will allow the live music industry to avoid repeating the mistakes of the record business.”