P&Ls: What Would Milton Friedman Think About Live Nation’s 2018 Earnings?

– Live Nation – Friedman

What would the late economist Milton Friedman say about the concert promotion business? Friedman insisted a corporation’s sole responsibility was to increase profits for itself and its shareholders. Just profits. He didn’t bend. In fact, Friedman believed a corporation has no social responsibility beyond shareholders – e.g. no giving to charities, no doing good in its community. To Friedman, the shareholder could be socially responsible and the business should focus on being a business. 

But you can’t always follow Friedman to the letter. In the case of Live Nation, cash, not profit, is the better measure of the company. You wouldn’t know from the way journalists tend to cover financial results, however. Revenue and net profit get the attention, not cash, or the amounts of cash generated or used by operations, investing and financing activities. 
Live Nation’s 2018 earnings, released Feb. 28, received widespread yet predictable media coverage. Revenue was up 11 percent to $10.8 billion. Profit – here called net income – was $60 million, a tidy improvement from a $6 million net loss in 2017. Other metrics can be found below the headlines. Concert attendance was up 8 percent to 92.8 million. Ticket sales were up 14 percent to 483 million. Sponsorship and advertising revenue rose 14 percent to $504 million – and added $283 million of operating profit. Operating income was up 13 percent – leaving out a $110 million lawsuit settlement with Songkick.
A similar mantra comes from John Malone, chairman of Liberty Media, a holding company that owns 34.9 percent of Live Nation’s common stock. Malone doesn’t measure a company by the profit it generates. “Forget about earnings,” he’s quoted as saying in a 2002 biography, “Cable Cowboy: John Malone and the Rise of the Modern Cable Business.” 
“That’s a priesthood of the accounting profession. What you’re really after is appreciating assets. You want to own as much of that asset as you can; then you want to finance it as efficiently as possible.” Malone has a history of investing in undervalued assets, often financially strained companies, and selling them at a hefty profit. Rather than post a profit and pay dividends to shareholders, Malone puts money back into the company to fuel growth. In doing so, his companies forego profits in the short term to realize larger profits when the investment is sold years later. In this case, Liberty Media started with shares of IAC/InterActiveCorp., received Ticketmaster shares when IAC spun off the ticketing giant as a standalone, and turned that stake into almost 15 percent of Live Nation after its merger with Ticketmaster in 2010. Over time Liberty Media increased its stake to 34.9 percent of Live Nation’s common stock.
Malone would urge you not to overlook that Live Nation’s operations generated $941.6 million of cash in 2018. That’s nearly $1 billion in cash for a company that typically breaks even in accounting terms. Cash came from reissuing new debt, goes from extinguishing old debt, comes from concerts and tickets, goes to various investments. Cash drives Live Nation’s business forward. Servicing its $2.7 billion of long-term debt cost Live Nation $400 million. After interest there was cash left over to fund more growth; cash paid to acquire controlling and non-controlling interests in companies totaled $120 million. 
To understand why Live Nation continues, year after year, to grow and separate itself from its peers, consider its competitive advantages. A competitive advantage is a characteristic that allows a company to outperform its peers. It’s an edge that competitors don’t possess. Some standard examples of a competitive advantage are access to natural resources (uranium isn’t found everywhere, but Niger has plenty), geographic location (FedEx launched in Memphis for its proximity to most of the country), highly skilled employees (there’s a good reason Google and Facebook overpay some workers), and high barriers to entry (airlines aren’t being created, old ones are merging). 
Another economist, Michael Porter, wrote the definitive book on competitive advantages, “Competitive Strategy: Techniques for Analyzing Industries and Competitors.” Live Nation touches on all three generic strategies Porter outlines: differentiation, focus, and cost leadership. Live Nation touches on all three. Cost leadership involves spreading fixed costs across an organization with economies of scale and large market share. Differentiating products is important in a saturated market: Live Nation has intellectual property, talented people with expertise, and innovative processes. The company also focuses on smaller markets. TicketWeb is an alternative ticketing service used by smaller venues, for example, while TicketsNow is focused on the secondary ticket market. Porter helps explain how Live Nation dominates its market – two actually, promotion and ticketing – year after year even though, technically, it doesn’t generate a profit. But profit isn’t everything. 
Size can be a competitive advantage. Live Nation has a large, diversified, unified business model. The various business segments fit together and feed off one another. Cash is generated by ticketing, sponsorships, advertising, and concessions and other ancillary revenue streams. Sponsorships and advertisements depend on the number of people that attend events. At its owned venues, revenue can come from both the concert ticket and concession sales – the bar is open! Live Nation operates at such a scale it can make acquisitions and outbid competitors for artists’ tours. Indeed, it promoted 19 of Pollstar’s  Top 25 Worldwide tours of 2018. 
Competencies can be inferred by continued success in particular areas of a business. Live Nation clearly excels in absorbing acquisitions into its business operations. An unorganized company with inadequate management would bend under the weight of constant growth, additional promoters and more venues to book and operate. Live Nation’s annual report outlines prime risk of acquisitions: integrating financial reporting, operations, technology and staff; and managing companies spread globally; diverting managers’ mental bandwidth to new acquisitions. In other words, a company has handfuls of ways to fail with an acquisition. SFX – renamed LiveStyle after its bankruptcy – showed that throwing money at festival owners is far easier than folding these unique events into the larger company. 
So there’s risk, but smart acquisitions are a calculated risk. A company could purchase another for people and expertise it lacks in a specific area. But often a company will buy another company to increase its market share and expand into new territories. In these deals, the goal is effectively to buy revenue (with the intention of helping expand the company and cut expenses by consolidating some duties like accounting). Live Nation went on a typical buying spree in 2018, acquiring seven festivals – including the legendary Rock in Rio – numerous ticketing companies, and regional promoters ranging from Red Mountain Entertainment and Frank Productions in the U.S. to DF Entertainment in Argentina. Recently purchased promoters and festivals accounted for $291 million of the concert division’s $852 million revenue growth. The year before, such acquisitions accounted for $210 million out of $1.6 billion revenue growth. Live Nation has a penchant for purchasing companies that add value and generate cash to help make future purchases. Friedman would approve.