Is Ticketmaster Telling the Truth About Its Finances?
In response to recent antitrust charges, Live Nation claims it is barely profitable. But then quietly it also just flagged internal accounting issues on its investor docs. What is going on?
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(I updated this piece with a few tidbits at the end).
In the 1870s, George Francis Train and Thomas C. Durant, two executives at the Union Pacific Railroad, were exposed as having stolen large sums of taxpayer money through a complex financing scheme. The U.S. government subsidized the building of the railroad, and Train and Durant paid that money to a construction company, Crédit Mobilier, that they controlled, at inflated construction rates. In doing so, they siphoned some of it to themselves, used some of it for bribes of top policymakers, and otherwise spent it on inefficient construction techniques, so as to boost the cost of building the Union Pacific and thus the amount they could bill the government.
The Crédit Mobilier scandal rocked American politics, showing corruption of dozens of high level politicians, including the Speaker of the House and Vice President. Yet, the amount Train and Durant stole was far less than the ultimate amount wasted. Indeed, corruption often works this way, someone will take a percentage bribe on a project and steer it in wasteful directions, costing not just the amount of the bribe but far more than that. The template for most such scandals is Crédit Mobilier, whether Michael Milken issuing junk bonds costing tens of billions of dollars while making himself a billion, or an insulin maker getting an extra $10 after raising prices by $100 so it can cut in all the middlemen. The cost to all is far higher than the profit to a few.
And with that, let’s talk Live Nation/Ticketmaster, the conglomerate that seems to have massively driven up ticket prices for concerts, yet argues it makes very little money doing so. I’m not saying this corporation is anything like Crédit Mobilier. But I do have questions about the firms’s financial reporting.
Let’s start with the antitrust case, which is what caused me to look a bit deeper into how Live Nation makes money. Last week, the government filed antitrust charges against the firm, arguing that it has 60% market share in concert promotion at major venues and 80% of the market for primary ticketing services. It uses its control of concerts and artists to secure exclusive ticketing arrangements and charge high fees, what the government called a ‘Ticketmaster tax.' It also captures high-margin ancillary conert revenue in the form of sponsorships. This scheme is illegal monopolization, and the solution, for the DOJ, is to force Live Nation to spin off its Ticketmaster ticketing service from its concert promotion and sponsorship business.
Heat Shields and Low Margins
Live Nation’s antitrust defense is that their business is misunderstood. The fees they charge, they argue, mostly go to artists and concert venues who want to charge higher prices to fans but don’t want to be seen as the bad guy. As CEO Michael Rapino told investors explicitly a few years ago, being hated and taking the blame for higher prices is part of the business model.
“Our Ticketmaster job is to service the venue and our concert job is to service the artist. And we’ve done a fabulous job building those businesses and having very, very happy customers. And part of that proposition historically has been to take a bit of the heat at the front end.”
Consistent with that line is that corporation’s profit margin is actually quite low. Here’s a graphic that the corporation put out showing just how little they make.
Why does the firm have such a small profit margin? According to its antitrust counsel Dave Wall, Ticketmaster’s prices are far lower than almost every other digital platform in the economy. Here’s another graphic the firm included in its rebuttal to the antitrust case.
Wow, look at that low take rate! Less than Twitch, Uber, or StubHub. Ticketmaster is practically a charity! Indeed, Live Nation’s antitrust counsel went out of his way to point out that the head of the Antitrust Division, Jonathan Kanter, sought to “dodge a reporter’s question” on how much Ticketmaster actually makes.
It’s a bold communications strategy. Everyone can see right on their ticket the various fees that Ticketmaster charges, whether it’s a ‘service fee’ without any obvious service or a ‘convenience fee’ that is anything but convenient. Moreover, it’s pretty clear that something in the U.S. is pushing up concert ticket prices. In Europe, big concerts are much cheaper than they are in the U.S. Take the Taylor Swift eras tour, where tickets are $2600 on average in the U.S. and $340 in Europe. As many have noted, an American could fly to Paris, spend a few nights at a nice hotel, see a Taylor Swift concert, and fly back, for less than it costs to see that same show in the U.S.
Still, Live Nation/Ticketmaster is going to stick to this line of attack, discussing margins and prices as a key part of the case. So I’m going to delve into it. And what I hope to show is twofold. First, Live Nation/Ticketmaster’s antitrust defense of slim margins is inconsistent with how it talks to investors about its business. And second, this corporation probably forces the cost of live concerts up far more than the profit they pull out of the scheme. That said, there’s a bit of a writing challenge here, because the financials I’ve looked at make little sense to me, and Live Nation itself just flagged possible accounting problems. I’m not an accountant, and maybe I’m missing something obvious, but I do think there are some interesting and odd elements to the way Live Nation reports its revenue and profit. I’ve asked Live Nation for clarification, but unfortunately, they didn’t respond. So here goes.
Live Nation’s Creative Accounting
Let’s start with Live Nation’s financials. In 2022, its operating income was $732 million off of $16.7 billion of revenue. Today the whole enterprise is valued at $20 billion. Live Nation is a big successful company, in the top 400 corporations in America. But it’s not Google or Amazon or Nvidia, which are valued in the trillions. And yet, Live Nation’s CEO Michael Rapino in 2022 made $139 million, which was the fifth highest amount in the country that year for a chief executive, and eight times as much as the average Fortune 500 leader. To put it a different way, 19% of the firm’s operating income went to the CEO, which is an unusually large number. That’s not all. Its President and chief financial officer, former McKinsey partner Joe Berchtold, was the highest paid CFO in America in 2022, at $54 million. Added together, that’s 26% of the stated operating income in 2022 going just to the CEO and CFO. That’s… an unusually large amount of a corporation’s profit going to just two guys.
That high pay looks bad when compared against its operating profit and margins, but operating profit and margins aren’t the right way to think about Live Nation’s success. Or at least, that’s not what Live Nation's executives care about. Take “net profit margins.” While its antitrust counsel wants to emphasize slim margins, its chief financial officer Berchtold told investors earlier this month that margins are irrelevant. (I bolded the relevant portion):
And as you guys all know, the reason I don't love going too deep in the margins is because if we do a lot of arenas in Q4, that could bring down our margin while bringing up our AOI and we'll do that all day long.
Berchtold is saying that he prefers something called AOI to net profit margins, because margins are manipulable based on the firm’s capital investments. And a focus on AOI, not margins, is corporate policy. In the firm’s 2023 Annual Report, Live Nation writes that “we use AOI to evaluate the performance of our operating segments.” What is AOI? It stands for Adjusted Operating Income, which in Live Nation’s case, is how much cash you generate when you include various kickbacks that aren’t otherwise accounted for. AOI, not net profit margins, are what matters. And the AOI may tell us something useful, assuming the numbers are real.
Live Nation says it has three official business lines: ticketing, sponsorships, and concert promotion. Ticketing means Ticketmaster, which makes money by selling tickets for venues and getting fees for doing so. Sponsorship means selling ads for shows. And concert promotion, which is by far the largest line of business by revenue, includes organizing shows, artist management, and owning and running lots of venues. Both ticketing and sponsorship don’t require much maintenance or cost to service, but generate a lot of cash. They are ‘capital light.’ Concert promotion is different. To put on a show or tour, you have to invest a lot of money upfront into marketing and paying the artist, and then recoup it later via ticket sales. This segment also includes owning and running venues, and artist management. Basically, all of the costly parts of Live Nation go in here, and the firm is absolutely pouring capital into this segment, perhaps $15 billion a year (or even more).
For the ticketing service itself, the AOI margin in 2023 was 37%, or about $1.1 billion off of $3 billion in revenue. For Live Nation’s sponsorship business, which means selling concert and festival advertisements, it was 61%, or about $600 million off of $1 billion of revenue. Margins at these levels are high, reflective of market power. For concert promotion and venue operations, however, which is where most of the cost of the business is, the AOI margin was 1.7%, or $325 million off of $18.7 billion of revenue. In other words, Live Nation seems to have a high rate of return in two segments, and a low rate of return in its third.
For years, Rapino would talk about how the concert segment was part of the firm’s ‘flywheel,’ meaning it was critical to forcing its ticketing and sponsorship businesses across the industry. And yet, the CEO has recently started obfuscating that reality. He was asked recently about the antitrust suit and what would happen if they had to spin off Ticketmaster. Here’s what he told investors (I bolded the relevant parts):
“At Live Nation, we run a very decentralized organization, and I'm very proud that we've built three incredible businesses - sponsorship, concerts and ticketing - and we're about to embark on our fourth venture around Venue Nation.”
That comment doesn’t seem to make sense. One business is capital intense and generates little profit, and two businesses require little capital and generate a lot of profit. If the operation is decentralized, as Rapino says, why not just say that their concert promotion and venue business is struggling, but their other businesses are going gangbusters? Why not invest more in the businesses doing well, instead of the ones that aren’t?
The answer is that these aren’t actually separate businesses. A few years ago, Berchtold flatly contradicting his boss Rapino about these being separate businesses. An analyst asked him how much the firm makes per fan in its concerts segment, and here’s what he said.
I don't think Concerts AOI per fan is a logical way to look at it. I think if you look at how we've talked about our business, we've talked about our business across the multiple pieces. So you have to look at it, what's the concerts plus sponsorship plus ticketing AOI per fan.
In other words, Berchtold is saying that Live Nation is running a break-even concert promotion, artist management and venue operation, and then making money on the high margin sponsorship and ticketing it tacks on.
That’s the DOJ case, the argument that a giant concert promotion business serves as a moat for its monopoly. That is, if you are a rival and want to get into ticketing or sponsorship, you’d need to also build a huge, low profit margin concert promotion, artist management and venue business. There’s a bunch of evidence on how Live Nation thwarts anyone who attempts to build an integrated rival, which I wrote about last week. So Live Nation can just run its concerts, artist management and venues, and then skim the cream from its ticketing and sponsorships. And no one can undercut them to put on shows more cheaply.
Both the monopolization scheme and the cream skimming were documented by the Antitrust Division, which pointed out the firm’s high margins in ticketing and sponsorships. But problems with this firm goes beyond what enforcers publicly observed. Indeed, back in March, I noted a secret expert report showing that Live Nation looks like a money laundering operation that moves cash around its various segments to suit its aims. The firm overpays venues, so that it can get a rebate on the backend and escape from profit sharing with partners.
The Nerds Are Getting Nervous
How extensive is this behavior? Well that’s not clear, but there are indications the corporation may not be totally forthcoming about its numbers. In fact, the corporation just started warning investors it may have to redo its accounting. Here’s what it said in its last quarterly investor report.
I noticed this segment of its investor report because Berchtold was asked earlier this month on its latest investor call by Wall Street analyst Jason Bazinet why Live Nation put this notice in its investor docs. What this notice says is interesting. Live Nation is citing a ruling by the Financial Accounting Standards Board (FASB), which regulates accounting standards for corporate America. In this order, FASB called on corporations to be more honest about expenses and profits, saying they are not allowed to give investors one set of numbers on profits and losses, and internal decision-makers an entirely different one.
What including this notice in its investor docs could mean is that some securities lawyer working at Live Nation said ‘yup we better warn investors about this ruling since we don’t want to be sued later if we have to change our numbers.’ When asked, the firm’s CFO responded to the query by saying that Live Nation is simply ‘studying’ the provisions. Maybe that’s true. Still, it’s a bit of a red flag when a firm publicly says it may have accounting issues after an expert report in litigation was unveiled showing the firm plays accounting games.
Global Profits
And that brings me to the other problem with these numbers. How do European tours affect Live Nation’s profit versus American tours? Does it matter to Live Nation if Europe is so cheap and America is so expensive? The answer is I don’t really know. I read a bunch of their annual reports, but while Live Nation notes that its international segment was 37% of their total revenue in 2023, it doesn’t seem to break out its domestic U.S. business from its international lines of business. Maybe I missed it. (I asked Live Nation whether they break that out, but they didn’t respond.)
There is some information about their international vs North America businesses. They put out charts that show where they sell tickets.
They also discuss differences in their business models. Live Nation does say in their investor docs that for most jurisdictions, unlike the U.S., they aren’t an exclusive ticket vendor. And they just don’t seem to control many non-American venues.
Live Nation owns 10 venues abroad, vs 22 in North America, but in terms of exclusive booking rights, it controls 65 of them in the U.S. versus a single one in its entire international division. Interesting numbers that show much less control abroad, but nothing useful for accounting purposes.
That said, the place you can find some income data is in the section involving income taxes. And here’s where I saw a red flag.
Live Nation claims that for tax purposes it made $237.5 million in the U.S. and $657.0 million abroad in 2023, with a roughly similar ratio for earlier years. That’s… weird. Just 37% of its revenue is international, yet most of its profit comes from abroad, even though prices are much lower there and it has less control of ticketing and venues. Further, earlier in the document, Live Nation tells investors that “significant additional investments that are not profitable over the short term could be required over a prolonged period” to make some of its international operations profitable. How does that square with these numbers?
Maybe Live Nation is booking its profit in Ireland for tax purposes, big companies do that. But I don’t think that’s what’s going on. The real reason these numbers make no sense is they disprove the argument Live Nation has made about its ‘flywheel’ and business model. If its vertically integrated model is not profitable in its core market where that model is most developed, why doesn’t the corporation just break itself up? Further, if America itself is such a bad business, then why didn’t Live Nation say that in its defense against the antitrust charges? The DOJ only has jurisdiction over the American market. Why did Live Nation contort themselves into arguments like low take rates and slim overall margins?
Live Nation Or Crédit Mobilier?
The excessively high executive pay, the use of AOI instead of more standard measures of profit, the suppressed expert report on shady bookkeeping, the FASB accounting disclosure, and the opaque and weird numbers between domestic and international operations lead me to believe something is off with these numbers. In addition, Live Nation’s profit, such as it’s reported, doesn’t reflect the cost they may be imposing on the whole industry. And that becomes clear when you compare European costs and American costs for concerts.
In the U.S., Live Nation has a giant capital intensive unprofitable division of putting on concerts, from which it skims for its real cash flow. But this leverage among different subsidiaries means that it has an incentive to push up the cost of concerts overall, not just for its own profit. This incentive operates in two different ways. One, since ticket fees are based on the price of a ticket, Live Nation seeks higher prices for tickets so it can move more cash to its Ticketmaster subsidiary. And two, since Live Nation itself gets rebates by overpaying for venues, it has the incentive to push up the cost of shows. No one can undercut Live Nation, as it’s a monopoly.
In Europe, however, Live Nation can’t play the same game. Ticketing is competitive, scalping is banned or regulated, and venues don’t have the same kinds of deals with concert promoters. So there’s no ability for the firm to artificially push up costs with high fees or rebates. If it tried, it would quickly be undercut by lower priced rivals. Over time, European costs stay relatively low, while costs in America inflate.
In other words, Live Nation could be imposing a high cost model on the whole domestic industry. That does not mean that Live Nation is taking all the surplus cash its scheme extracts. In some cases, the venues are nicer than they should be, or there are bribes, or other forms of waste and inefficiency. In other cases, Live Nation partners or employees could be pulling out value. The point is, there’s a lot of excess graft in the industry that is being paid for by consumers, or through lower payments to smaller artists or venues.
To make this a bit clearer, let’s do a thought experiment. It could be the case that Live Nation is forcing up the price of a Taylor Swift show in the U.S. by $2000/ticket, and recouping just $100 of that itself. That’s a 5% ‘take rate’, with the rest of the cash going to someone else. Breaking the Live Nation monopoly wouldn’t lower costs by just that 5%, but eventually by the entire 100% of the higher cost. In other words, just because Live Nation is only capturing some of the surplus, it’s still a monopoly driving all of the increased cost.
There’s also a political benefit for Live Nation of having a high cost system. Since the antitrust suit came out, you haven’t seen a lot of calls from popular artists or big venue operators one way or the other. Why not? Fear. Retaliation requires not just the ability to coerce, but to reward. As was said by the Supreme Court in an important antitrust case in 1916 about a can making monopolist named Edwin Norton, “if Norton sometimes showed canmakers that there was steel in his scabbard, his hands always dropped gold.”
Take the Taylor Swift price differential between the U.S. and Europe. Splitting $2600 for each ticket among venues, artists, ticketing services, concert promoters, and so forth is far more lucrative than splitting $340. Live Nation can help direct all this extra cash to those in the industry who play nice. As Rapino said to investors, Live Nation serves as a heat shield for allies in the industry who benefit from a high cost model. When stakeholders don’t have that heat shield, as in Europe, ticket prices are lower.
In other words, Live Nation/Ticketmaster may be exhibiting the Crédit Mobilier dynamic, wasting a lot more money than it is making. It’s very hard to know what the real numbers are, though hopefully the antitrust suit will make that clear. Still, at some level, I don’t really have to convince anyone of this dynamic. People aren’t stupid. Every ticket buyer sees a giant fee slapped onto their ticket, and this money goes to Ticketmaster. Saying “we don’t make much money” or “we don’t set prices” or “we have low profit margins” when your CEO made $139 million in 2022 just doesn’t pass the laugh test.
UPDATE: I got some great feedback on this piece, so I’m going to offer a few additions. First, it turns out the Securities and Exchange Commission is not particularly happy with Live Nation’s accounting - particularly around AOI - and has asked for a bit more detail, including an explanation for why the firm is veering away from general accounting principles in its disclosures. Here’s the back and forth between SEC staffer and Live Nation from this letter on AOI. (I’ll also note that the SEC also asked about accounting liability for the Astroworld tragedy.)
Second, the FASB disclosure is a standard statement across Fortune 500 firms. Citibank’s analyst did have questions about the FASB statement, but I don’t think this is much to be concerned about. That doesn’t mean it doesn’t matter, but it’s not unique to Ticketmaster.
Third, Live Nation has an unexplained difference between the cash they generate and their operating income. Relatedly, accrued expenses are high, with $1.15 billion going to accrued event expenses (see blue arrow) and $929 million going to “Other” (see red arrow). The corporation says accrued expenses for events could be accounting for canceled events, and ‘other’ might be acquisition related. But again, these are high and largely unexplained.
Thanks for reading! Your tips make this newsletter what it is, so please send me tips on weird monopolies, stories I’ve missed, or other thoughts. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation, and democracy. Consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
cheers,
Matt Stoller
So ... when do executives (and perhaps accountants who do double bookeeping) go to prison?
I learned a lot in that essay Matt thanks