Madonna Math: Warner Music and Live Nation

I understand the thinking behind Live Nation (LYV) poaching Madonna. Big concert acts like her receive 90% of gross revenues, which means that concert-promotion companies like Live Nation have difficulty making any money:

In 2005 and 2006, Live Nation lost $130 million and $31 million, respectively. In the quarter ended June 2007, it made a $9.9 million profit on $1 billion in revenue.

Clearly Live Nation is hoping that synergies between touring, ticketing, recording, and merchandising will help it boost its razor-thin profit margins – and it's big enough to be able to take a $120 million gamble on Madonna, even if she will be 60 years old by the time the contract ends.

What I don't understand is the economics of the recording business. The WSJ's Ethan Smith reports that the deal includes an advance of between $50 million and $60 million against three studio albums, and continues:

People in the music industry estimate that at current recorded-music prices, the promoter would have to sell about 15 million copies of each of its three albums to make back its investment on that piece of the deal alone. But an artist manager not involved in the deal said that with prices for CDs and downloads alike falling, that number could increase.

Madonna hasn't sold 15 million copies of anything in a very, very long time: the handy chart accompanying the article shows all her albums since 1991 selling somewhere between 700,000 and 3.8 million units (1998's Ray of Light).

But how much money does a record label make on a per-album-sold basis? It's certainly decreasing:

When EMI's subsidiary Virgin put out the Spice Girls debut album in 1996, it sold for around £13 in Britain, from which the company cleared more than £5 in profit. New CDs now seldom cost more than £9, from which the label can expect to make £2, if it is lucky.

Let's say that Madonna's next three albums will sell for an average of $10 apiece, of which the label will receive $2. Then to make back $60 million, Madonna will have to sell 30 million albums overall, which isn't quite 15 million per album, but is certainly much more than she's been selling over the past few years.

But here's the thing: the $60 million is an advance against Madonna's own royalties on the albums. Let's say that Madonna herself gets $3 for each album sold. Live Nation would then keep $5, not $2, from every album sale until 20 million albums had been sold. At that rate, it makes its $60 million back not after 30 million albums but rather after only 12 million albums. And the more generous that Live Nation is being with Madonna's royalties, the lower that number becomes.

In order for the WSJ's number to be true, Madonna and Live Nation between them would have to end up making just $1.33 per album sold. I understand that profits are being squeezed in the music business, but that number does seem ridiculously low: you could follow Radiohead's lead and just give the albums away on the web and make more money than that.

Comments

[User 39798]

Felix,

I don't believe this deal can be viewed by looking at the parts vs. the sum of the parts. I view the $120m as buying franchise. Certian parts don't pencil but each part supports the other. The albums drive the overall marketing of the franchise. Am I missing something.