<i>Commentary:</i> Favored-Nation Clauses: Live Nation's Expansion Into 360-Degree Deals with Artists

Quicker Return

Artist development, always a major component of a label's value (and eventually, a valuable catalogue), became almost non-existent. The major labels are no longer run by true music men and women, the kind of visionaries, mavericks and dreamers ' like Sam Phillips, Jerry Wexler, Berry Gordy, Chris Blackwell, the Ertegun brothers and Clive Davis, among others ' who built an industry from scratch into an innovative and creative cultural force.

The majors' current deals reflect their need to find new and much quicker sources of revenue, by taking portions of artists' touring and merchandising monies as a condition of signing them, and consolidating or merging with other record companies to achieve 'economies of scale' in their back-office activities. The labels' financial reports and share prices show a lack of success so far.

On the other hand, I think the 10-year deal that concert-industry giant Live Nation just closed with Jay-Z is brilliant. It builds on Live Nation's groundbreaking deal with Madonna and reinforces its unique position to make these deals profitable. Madonna's reported $120 million deal with Live Nation caught my attention when announced ' not because of the huge number, not because it was yet another try to create a viable '360-degree' deal model, and not because I thought CEO Michael Rapino was trying to put his stamp on Live Nation with a big, splashy deal and quickly justify the huge employment deal he received. What got my attention was that Live Nation had something no record company or any other entertainment company doing 360-type deals had: ownership and control over most of the revenue-generating elements in this deal, and the consequent ability to package, cross-promote, cross-collateralize and otherwise leverage them off one another in an unprecedented fashion to maximum effect. Live Nation's whole was far more valuable then the sum of its parts.

Jay-Z Ideal for 360 Deal

Jay-Z and Live Nation are a perfect match for each other. They have both done well in myriad similar businesses. Live Nation's ownership, expertise and financial clout in the areas of touring, concert promotion, merchandising and ticketing, to name a few, give Jay-Z a larger canvas to paint on where he's already been extremely successful. Jay-Z got more (a reported $30 million more) than Madonna. But it seems justified for many reasons.

Jay-Z's entrepreneurial efforts have been far broader and arguably more successful than Madonna's. It was reported that Madonna's fashion line earned more than $20 million in its first year. Madonna turned Maverick, her Warner Bros.-financed 'vanity' label, into a very successful one for her and Warners. Jay-Z started his Roc-A-Fella empire from scratch and out of his own pocket, initially as a record label to distribute his recordings. He grew it into a hugely successful conglomerate. Roc-A-Fella Records became a viable label. His Rocawear clothing line practically defined hip-hop style; he reportedly sold it for $204 million. He reinvigorated Def Jam Records when he took over as President/CEO. He's discovered new and important talent, such as Kanye West, Young Jeezy and Rihanna. He's expanded into nightclubs ('40/40'), sports (as co-owner of the New Jersey Nets) and spirits distribution.

These achievements surely formed the basis for Live Nation's reported $50 million commitment ($5 million per year for five years and another $25 million for acquisitions) to fund Roc Nation, a new joint venture with Jay-Z for his outside projects ' and from which Live Nation will supposedly split profits. As the saying goes, 'past performance is no guarantee of future success.' However, Jay-Z's track record as an entrepreneur should make this investment as close to a sure thing for Live Nation as there is.

Live Nation is to pay Jay-Z an additional $10-million advance per album, to record three albums during his deal's 10 years. While less than the three-million U.S. units sold of his previous 'Black Album,' 'American Gangster,' released last year, has sold more than one-million U.S. units to date ' a significant accomplishment in these days of plummeting CD sales and rampant piracy.

The structure of the Live Nation/ Jay-Z deal makes it clear Live Nation believes that Jay-Z, like Madonna, will generate far more revenue from touring, merchandising, endorsements, clothing and other activities than from record sales. In fact, Michael Cohl ' Live Nation's chairman and CEO of its Live Nation Artist ' stated that an increase in Jay-Z's record sales is not necessary for this deal to be profitable.

Paying Jay-Z a reported separate $25 million advance for touring may also seem high. After all, Jay-Z, like most hip-hop artists, has a reputation for not being a very frequent or successful touring artist. However, he's indicated an intention to tour more. Reports from his current tour with Mary J. Blige put revenues as of May at $9.1 million, with projected revenue of $33 million. The tour's reviews have been as sterling as its income. Of course, this won't recoup Live Nation's $25 million advance, but it doesn't have to. Just on the touring side, Live Nation is the tour's promoter and owns many of the venues (giving them additional revenue ranging from parking to concessions), a lot of the ticketing and Jay-Z's merchandising. Moreover, Live Nation is also acquiring a portion of Jay-Z's publishing, licensing and other so-far unnamed rights as part of this deal, to further hedge its calculated bet on him.

Critics Missing Point

Critics have had much to say about these Live Nation deals. The deals have been characterized as expensive retirement packages for over-the-hill artists. This obviously ignores the multifaceted successes of artists like Jay-Z and Madonna, and their viability as touring artists and cultural icons, none of which appears to be waning. The critics have highlighted the approximately $12 million loss suffered by Live Nation last year as an indication that these types of deals don't work. However, start-up businesses and established ones using different systems or formulas are expense-heavy at the beginning. Considering the money Live Nation has spent to date, and the progress it continues to make towards profitability, $12 million isn't high, nor does the loss seem to predict the future.

Critics have also said that Live Nation's model can only work, if at all, with superstar-level artists. While this may be correct given the financials of the Jay-Z and Madonna deals and the finite number of current, multi-faceted superstar artists, it completely misses the point of the positive effect these deals can have in attracting younger artists to Live Nation. Younger artists today tend to be far more entrepreneurial and business-savvy than their predecessors, largely because of their ability to manage and further their careers via the Internet and social-networking sites. Live Nation's deals with Jay-Z and Madonna can show younger artists how they should think about plotting their careers going forward. Given a choice between ceding a portion of touring, merchandise and likely other revenue streams to a record company with no experience or direct involvement in these areas (the latter may be a benefit for artists) and to a company like Live Nation that both owns successful companies in these areas and has the expertise and incentive to back it up, a company like Live Nation seems the obvious choice.

Moreover, promoting tours in which a young artist can open for more established acts and owning so many venues of different sizes gives Live Nation a unique ability to break a new artist in the most effective manner: allowing an artist to build an audience by playing live. Deals with young artists would obviously be far less expensive and the new recordings component more valuable. A young artist's potential for selling records should only increase over time, to Live Nation's direct benefit.

And the major record companies? They can't replicate this without many expensive acquisitions or mergers; nor, at least to date, have they come up with another model with the potential financial success of these Live Nation deals. However, the dust seems to be starting to settle and labels appear more willing to try and embrace new ways of doing business. Ironically, Live Nation signing established artists like Jay-Z and Madonna can help the majors ' by making their catalogs more valuable and giving them an opportunity to prove that the 'long tail' works and helps their bottom lines.

Quicker Return

Artist development, always a major component of a label's value (and eventually, a valuable catalogue), became almost non-existent. The major labels are no longer run by true music men and women, the kind of visionaries, mavericks and dreamers ' like Sam Phillips, Jerry Wexler, Berry Gordy, Chris Blackwell, the Ertegun brothers and Clive Davis, among others ' who built an industry from scratch into an innovative and creative cultural force.

The majors' current deals reflect their need to find new and much quicker sources of revenue, by taking portions of artists' touring and merchandising monies as a condition of signing them, and consolidating or merging with other record companies to achieve 'economies of scale' in their back-office activities. The labels' financial reports and share prices show a lack of success so far.

On the other hand, I think the 10-year deal that concert-industry giant Live Nation just closed with Jay-Z is brilliant. It builds on Live Nation's groundbreaking deal with Madonna and reinforces its unique position to make these deals profitable. Madonna's reported $120 million deal with Live Nation caught my attention when announced ' not because of the huge number, not because it was yet another try to create a viable '360-degree' deal model, and not because I thought CEO Michael Rapino was trying to put his stamp on Live Nation with a big, splashy deal and quickly justify the huge employment deal he received. What got my attention was that Live Nation had something no record company or any other entertainment company doing 360-type deals had: ownership and control over most of the revenue-generating elements in this deal, and the consequent ability to package, cross-promote, cross-collateralize and otherwise leverage them off one another in an unprecedented fashion to maximum effect. Live Nation's whole was far more valuable then the sum of its parts.

Jay-Z Ideal for 360 Deal

Jay-Z and Live Nation are a perfect match for each other. They have both done well in myriad similar businesses. Live Nation's ownership, expertise and financial clout in the areas of touring, concert promotion, merchandising and ticketing, to name a few, give Jay-Z a larger canvas to paint on where he's already been extremely successful. Jay-Z got more (a reported $30 million more) than Madonna. But it seems justified for many reasons.

Jay-Z's entrepreneurial efforts have been far broader and arguably more successful than Madonna's. It was reported that Madonna's fashion line earned more than $20 million in its first year. Madonna turned Maverick, her Warner Bros.-financed 'vanity' label, into a very successful one for her and Warners. Jay-Z started his Roc-A-Fella empire from scratch and out of his own pocket, initially as a record label to distribute his recordings. He grew it into a hugely successful conglomerate. Roc-A-Fella Records became a viable label. His Rocawear clothing line practically defined hip-hop style; he reportedly sold it for $204 million. He reinvigorated Def Jam Records when he took over as President/CEO. He's discovered new and important talent, such as Kanye West, Young Jeezy and Rihanna. He's expanded into nightclubs ('40/40'), sports (as co-owner of the New Jersey Nets) and spirits distribution.

These achievements surely formed the basis for Live Nation's reported $50 million commitment ($5 million per year for five years and another $25 million for acquisitions) to fund Roc Nation, a new joint venture with Jay-Z for his outside projects ' and from which Live Nation will supposedly split profits. As the saying goes, 'past performance is no guarantee of future success.' However, Jay-Z's track record as an entrepreneur should make this investment as close to a sure thing for Live Nation as there is.

Live Nation is to pay Jay-Z an additional $10-million advance per album, to record three albums during his deal's 10 years. While less than the three-million U.S. units sold of his previous 'Black Album,' 'American Gangster,' released last year, has sold more than one-million U.S. units to date ' a significant accomplishment in these days of plummeting CD sales and rampant piracy.

The structure of the Live Nation/ Jay-Z deal makes it clear Live Nation believes that Jay-Z, like Madonna, will generate far more revenue from touring, merchandising, endorsements, clothing and other activities than from record sales. In fact, Michael Cohl ' Live Nation's chairman and CEO of its Live Nation Artist ' stated that an increase in Jay-Z's record sales is not necessary for this deal to be profitable.

Paying Jay-Z a reported separate $25 million advance for touring may also seem high. After all, Jay-Z, like most hip-hop artists, has a reputation for not being a very frequent or successful touring artist. However, he's indicated an intention to tour more. Reports from his current tour with Mary J. Blige put revenues as of May at $9.1 million, with projected revenue of $33 million. The tour's reviews have been as sterling as its income. Of course, this won't recoup Live Nation's $25 million advance, but it doesn't have to. Just on the touring side, Live Nation is the tour's promoter and owns many of the venues (giving them additional revenue ranging from parking to concessions), a lot of the ticketing and Jay-Z's merchandising. Moreover, Live Nation is also acquiring a portion of Jay-Z's publishing, licensing and other so-far unnamed rights as part of this deal, to further hedge its calculated bet on him.

Critics Missing Point

Critics have had much to say about these Live Nation deals. The deals have been characterized as expensive retirement packages for over-the-hill artists. This obviously ignores the multifaceted successes of artists like Jay-Z and Madonna, and their viability as touring artists and cultural icons, none of which appears to be waning. The critics have highlighted the approximately $12 million loss suffered by Live Nation last year as an indication that these types of deals don't work. However, start-up businesses and established ones using different systems or formulas are expense-heavy at the beginning. Considering the money Live Nation has spent to date, and the progress it continues to make towards profitability, $12 million isn't high, nor does the loss seem to predict the future.

Critics have also said that Live Nation's model can only work, if at all, with superstar-level artists. While this may be correct given the financials of the Jay-Z and Madonna deals and the finite number of current, multi-faceted superstar artists, it completely misses the point of the positive effect these deals can have in attracting younger artists to Live Nation. Younger artists today tend to be far more entrepreneurial and business-savvy than their predecessors, largely because of their ability to manage and further their careers via the Internet and social-networking sites. Live Nation's deals with Jay-Z and Madonna can show younger artists how they should think about plotting their careers going forward. Given a choice between ceding a portion of touring, merchandise and likely other revenue streams to a record company with no experience or direct involvement in these areas (the latter may be a benefit for artists) and to a company like Live Nation that both owns successful companies in these areas and has the expertise and incentive to back it up, a company like Live Nation seems the obvious choice.

Moreover, promoting tours in which a young artist can open for more established acts and owning so many venues of different sizes gives Live Nation a unique ability to break a new artist in the most effective manner: allowing an artist to build an audience by playing live. Deals with young artists would obviously be far less expensive and the new recordings component more valuable. A young artist's potential for selling records should only increase over time, to Live Nation's direct benefit.

And the major record companies? They can't replicate this without many expensive acquisitions or mergers; nor, at least to date, have they come up with another model with the potential financial success of these Live Nation deals. However, the dust seems to be starting to settle and labels appear more willing to try and embrace new ways of doing business. Ironically, Live Nation signing established artists like Jay-Z and Madonna can help the majors ' by making their catalogs more valuable and giving them an opportunity to prove that the 'long tail' works and helps their bottom lines.