I understand the thinking behind Live
Nation 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.
Update: I missed that the WSJ chart was only for
US units sold, not global units sold. That makes an enormous difference: her
2005 album "Confessions on a Dance Floor", for instance sold only
1.6 million units domestically, but moved 11 million units globally.
Still, the mathematics remains, and I remain suspicious of the WSJ’s claim that
Live Nation will need to sell 45 million albums before making back its investment.