Madonna Math, Revisited: Warner Music and Live Nation

I still can't quite believe the supine nature in which a throwaway clause in a rushed WSJ article – "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" – has rapidly become conventional wisdom.

For one thing, the WSJ scooped everybody else on this story, so I can guarantee you that they didn't spend a huge amount of time phoning up "people in the music industry" before they ran with it. Those "people" are in fact almost certainly just one person, who probably came up with the number off the top of his head.

I talked some numbers yesterday with Peter Kafka, who's been running Silicon Alley Insider's coverage of this deal. He's also been hitting the phones, and has come to this conclusion:

After talking to industry sources, we think the breakeven per album is closer to high single digit millions per album -- this assumes that 1) Madonna is getting as much as $45 million in advance for all three albums upon the deal's close and that 2) Live Nation will have to pay onerous distribution fees to get the discs in stores.
There is a debate about how many albums Madonna sells: The only audited numbers available are from SoundScan, which only counts U.S. sales. Some websites provide unsourced numbers that claim her last album sold 11 million copies worldwide; music industry sources say the number is closer to 6 or 7 million.

I'm much more upbeat on the Live Nation deal than Peter is, for many reasons.

For one thing, Madonna is not getting $45 million for all three albums upon the deal's close. More likely only half of the deal is upfront, and a large chunk of that will be in stock, not in cash.

But let's assume, for the sake of argument, that Madonna is getting a $45 million advance against royalties for three albums. And let's say she gets $3 in royalties per album. Then Live Nation basically gets to keep Madonna's royalties for the first 15 million albums sold before paying Madonna any extra. But Live Nation, as the music label, makes its own profit on every album sold as well. Yes, it will have to pay larger-than-usual distribution costs, since it's not a major record label, and it will also have to pay marketing costs and the like. But after all that it's reasonable to assume that Live Nation's profit per album will be at least $2.50.

In order to recoup the up-front $45 million advance, then, Live Nation would have to sell just over 8 million copies of all three albums combined. Which is not far off Kafka's low estimate of the global sales of Madonna's last album alone.

If Madonna sells 7 million copies of each of her next three albums globally, then that's 21 million albums moved in all. Live Nation's profit on those albums would be $52.5 million, while Madonna's royalties would be $63 million. In other words, even if Live Nation pays Madonna a total advance of $60 million – at the top end of estimates – it's quite easy to get to a point where she earns that out over three albums, and makes a lot of money for Live Nation on top.

But that's not all. On top of album sales there are single sales, which are increasingly popular in the age of iTunes. And on top of single sales there are ringtone sales, which are huge in Europe and getting big in the US as well. And then on top of ringtone sales there are all the licensing fees that Madonna will charge people who want to use her latest song in their TV advertising or whatever. And then on top of the licensing fees are the videos sold on iTunes and the expensive remixes and "special edition" CDs and DVDs sold to completists, etc etc... It all adds up.

Live Nation is a concert promoter, so one assumes that they know what they're doing with the $50 million advance for the right to promote her concert tours: certainly concert-ticket price inflation doesn't show any signs of slowing down. And the $17.5 million for everything else – think merchandising, which has insanely enormous profit margins – seems pretty low, especially given that Live Nation is divorcing Ticketmaster and will henceforth pocket for itself all those exorbitant "convenience" and "handling" and "shipping" fees which get tacked onto every ticket sale.

And the bigger picture is even better for Live Nation, which is using this deal to get out of the razor-thin margins of the concert-promotion business and into the world of music-industry home runs. It's conceivable that Live Nation will lose money on this deal, although I doubt it. But it's equally conceivable that they will make a fortune on it, if the stars align. Live Nation has very few opportunities to make that kind of money, and it makes sense to grab this one. Warner, by contrast, has hundreds of artists who might break out into megastardom and make them the same kind of fortune – so they're less concerned about the loss of Madonna, especially given that they retain all the rights to her enormously profitable back catalogue.