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.