Finance and ‘Funflation’ - PE and the corporatisation of live music.

The corporatisation of the live music industry, as characterised by the aggregation of a previously long-tail of city or regionally-based, independently-owned entrepreneurs, to form a series of vertically-aligned international conglomerates (comprising of talent management; concert and festival promotions; venue ownership, management and/or operations whether arenas, amphitheatres, stadia and greenfield sites; in-house advertising and sponsorship agencies; and the provision of ticketing services) has over the last twenty-years+ increasingly attracted the attentions of a growing number of private equity, and capital investment groups all apparently subscribers to the notion of perpetual sector growth - so long as you ignore the COVID-19 interregnum and focus purely on the ‘record-setting’ rising revenues, and less so on the EBIT of some operators.

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Against a post-pandemic background of challenging global market conditions - high inflation and growing interest rates, slowing economic growth, and violent geopolitical disputes – the sector seemingly operates in contradiction to one of the basic rules of economics i.e., that as the cost of living goes up, discretionary spending goes down.

As 普华永道 asserted (27th June 2023) in their ‘Global Entertainment & Media Outlook 2023–2027 (www.pwc.com/outlook) report, ‘Going out is in again’.

Indeed, their expectation is that global live music and cultural events will surpass 2019 revenues in 2024, and that by 2027 live experience revenues will be growing at 9.6% CAGR (Compound Annual Growth Rate).

The 美国银行 (13th September 2023) in its report ‘Media & Entertainment. Funflation in full force’, concurred that ‘live entertainment is the brightest star’, and also identified several sustainable drivers for sector growth.

These included: a continued trend for consumer expenditure on experiences (recently boosted by pandemic savings and delayed U.S. student loan repayments); the greater utilisation of dynamic pricing by event rights owners; the expansion of international touring circuits with new entertainment and sporting venues e.g. LATAM, Middle East, APAC, coupled with the willingness of artists and attractions to serve those new markets i.e., a pipeline of new tours in new venues attended by the globally emerging middle-classes; and that IRL (In Real Life) events are unlikely to be disrupted by digital technologies in quite the same way that streaming has for example impacted the cinema and television industries.

Rather the report states that the development of new social media platforms, enhanced D2F channels and improved event discovery, alongside the incorporation of AR/VR etc. into the live experience will aid continued growth of the sector.

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Live Entertainment Value Chain

An examination of the BofA entertainment value chain highlights a number of self-evident industry truths.

That talent is the key beneficiary of ticketing revenues (*). That promoting is a risky venture – what BofA describes as ‘Livin’ on a Prayer’. That building venues is expensive and thus requires intensive capital investment, but that they can then extract substantive event-related income via Rental, Hospitality Suites, F&B, Merchandise Commissions, Ticketing Rebates, Car Parking and Facility Fees etc.

(* The report also notes that mid-tier artists are being squeezed in the post-pandemic market due to inflationary event production overheads, and increased energy and touring costs. It is also much more difficult in the post-pandemic period where the congestion of rescheduled and newly released events means all artists face increased FOMO competition for media coverage and/or a share of the consumer wallet.)

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And lastly, the BofA states that vertical consolidation within live entertainment in combination with the pursuit of economies of scale offers a key competitive advantage to corporations, and this process of aggregation and consolidation, drives their profitability.

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The PE perspective

PE is a form of financing in which investments in a business are made in exchange for an equity or ownership stake, and when reviewing market opportunities financiers consider several operational tools it can then apply to organisations to enable improvements in efficiencies and revenues in order to increase enterprise valuation before any eventual exit.

Investments in live music sector targets are made in the belief that it will specifically lead to a profitable return, rather than any abstract concerns such as great art, or a vibrant and diverse live music ecosystem.

Within live music the margins enabling growth and thus higher company valuations are harder to achieve purely via cost management alone – especially when talent is able to extract a premium - although the process of vertical integration permits the retention of margins across the various operational levels of events: production; promotion; staging; retail and marketing.

More typically, the PE strategy has been to grow overall event volumes via expanding the national, then international touring network, improving the architectural and infrastructural capacities and facilities of the venue spaces (**), and then to maximise per event spend via upgrades to F&B, including Hospitality and VIP offerings, and the utilisation of yield management strategies such as dynamic pricing to ticketing.

(** Corporate rock n’roll is increasingly underpinned by real estate strategies, as arguably first successfully developed at ‘L.A. Live’ by Phil Anschutz with Ed Roski Jr. and executed by Tim Leiweke, then AEG, now Oak View Group. See @BobLefstez Podcast: https://podcasts.apple.com/ms/podcast/tim-leiweke/id1316200737?i=1000622504656)

In short, to increase the volume of events by extending the territorial reach, improving the physical environment where events occur, and by then extracting more from audiences via value-add bundles, packages, and surge-pricing.

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Cause and Effect

The consolidation of the live entertainment sector with a diminishing number of ever larger congloms has therefore been both a cause and effect of the influx of new capital.

In particular within live music where there are a relatively small number of organisations including 安舒茨娱乐集团 - AXS , All Things Live, BookMyShow , CTS EVENTIM AG & Co. KGaA , DEAG Deutsche Entertainment AG , Legends - ASM Global , Live Nation Entertainment - Ticketmaster , Superstruct Entertainment , TEG Pty Ltd - Ticketek Australia , and others, who collectively increasingly dominate the sector.

A strategic growth focus of these investment and/or debt-fuelled groups has been to deepen vertical ownership structures whilst broadening international networks.

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The resultant opaque aggregation of majority-owned, supply-side orientated subsidiaries (whether artist management, event promoters, festivals, venues, ticketing etc.) serves to ringfence these congloms against disruptive entrants with their new business models and inducements, emerging technologies or those seeking the ‘democratisation‘ of the sector by placing the consumer first, or at least central to their thinking.

The live entertainment sector has long professed their ‘love’ for the consumer (whether fan, patron, or supporter), just so long as they continue to purchase ever-more expensive tickets for concerts, games, matches, tours and franchised festivals, with onsales weeks, months, or years in advance of the event, and with little or no right to refund or exchange.?

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As a result, of the PE-funded corporatisation of the live music sector it increasingly resembles a ‘monopsony’, a form of capitalism where there is a limited number of buyers for talent, venue diaries, event production, retail and marketing services, and that concentrated power is then able to set prices to maximize profits and is less subject to competitive constraints.

Whilst there are calls from populist politicians, competing self-interest lobbyists, and some consumer groups for regulatory authorities to review the live music sector, and examine the levels and type of competition, market share and ownership structures, without any robust market definitions, data transparency, or any clear understanding of the economic flows within the sector, those calls are unlikely to have any major impact in the near future.

Governments have historically been sniffy about commercial music formats – typically not funded or supported in the same way that the fine arts are - and have been slow to appreciate the level of economic activity of the sector or accurately define overall employment, earnings or taxation levels within live entertainment, and the self-interested corporate silos especially those within the live music sector have been reticent to collaborate over any meaningful multi-year market studies.

Crisis, what crisis?

But some observers now believe that the PE playbook for wealth generation has become less effective, where average buyout performance (the return a buyout firm generates from buying, improving, and then selling a company) has been on a downward trend.

Further, because of the increased sector concentration, PE-enabled firms are paying more for bolt-on acquisitions than ever before (on average, relative to the businesses’ underlying earnings), and so the return potential is reduced.

And after the economic impact of layers of (vertical) consolidation and (horizontal) aggregation, the squeezing of costs, and the surge-pricing of audiences, to whom do PE-owned live music congloms sell too?

With a number of market-consolidating opportunities reportedly available – for example, See Tickets , Superstruct Entertainment or TEG Pty Ltd - Ticketek Australia – who are the possible buyers? (Please note, other non-public domain opportunities are available.)

Arguably only other PE-backed entities have the means to undertake such large-scale ($Billion+) acquisitions, and so the concentration of ownership within the sector will inevitably continue.

But hey, it’s only rock’n’roll.

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