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Equity Perspectives

When it comes to delivering alpha in the entertainment sector, active managers generally try to find companies that have very little competition. Case in point: the live-event industry.

Ask music-loving baby boomers what they remember most about their youth, and chances are live concerts in a big arena will top the list. Ask millennials and the answer might be the same, although the tickets cost hundreds (or thousands) of dollars, not counting the price of commemorating such events with all sorts of merchandise costs. Now, paying top dollar to see the hottest acts of the day is all about the extravagant staging, multimedia, sound systems, and roar of the crowds that heighten the experience. Albums, or for that matter, compact discs, are quaint artifacts. And the once-fragmented business of managing artists, producing concerts, ticketing, and marketing is now dominated by a few integrated giants, with increasingly global reach, seeking to maximize revenue per event—and that is music to the ears of active portfolio managers.

Of course, some investors became spooked about the concert business after terrorists invaded the Bataclan night club in Paris in 2015. But the global live music industry has still grown at a robust clip. (See Chart 1.) The industry’s success encapsulates a number of broader investing themes. Live events continue to take an increasing share of consumer spending, fueled by boomers’ growing disposable income and by the desire of millennials and teens to seek “experiences” over goods. (See Chart 2.) And U.S. consumer spending on concerts continues to break records, even during periods of economic softness, illustrating the potential investment merits of recession-resistant segments such as the entertainment industry. (See Chart 3.)

All of which helps to explain why the shares of one leading live entertainment company have appreciated nearly 48% this year (as of August 23, 2017)—and 345% over the last five years, according to Google Finance.

 

Chart 1. The Global Live Music Industry Is Poised for Continued Steady Growth 
Global live music revenue ($ in millions), 2007–18E



Source: International Federation of the Phonographic Industry and Goldman Sachs Global Investment Research (Goldman Sachs estimates).

 

Chart 2. Live Events Continue to Rock
U.S. concert ticket sales as percentage of U.S. personal consumer expenditure

 
Source: U.S. Bureau of Economic Analysis and Pollstar.

 

Chart 3. Global Live Music Revenue Has Topped Music Retail Revenue Since 2013
Total global revenue from live music versus recorded (physical, streaming, and digital) music, 1998–2015



Source: Goldman Sachs Global Investment Research.

 

The Road More Travelled
The phenomenal growth of live music is a testament to how much the digital revolution, particularly the emergence of streaming services such as iTunes, YouTube, Spotify, and Pandora, has hurt album sales, making artists more dependent on global touring than ever before. The boom also reflects the powerful influence of online ticketing platforms and social media.

According to Goldman Sachs Global Investment Research, for the last several years, global live music revenue has surpassed total recorded (physical and streaming and digital) music retail revenue.1  (See Chart 4.)  And between 1990 and 2016, the industry has enjoyed a compounded annual growth rate of 7.6% (10.2% since 2010), Goldman Sachs analysts added.

Which concert tours made the most money? In the first half of 2017, the top act was the 1980s’ hard rock band Guns N’ Roses. But if you look back farther, the top grossing tours have grown in size, but have declined in the total number of live events, according to Pollstar. (See Table 1.)

For companies with the largest base of music fans, the expanding concert business should help drive their attractive ticketing operations. It also should help drive their high-margin advertising and sponsorship businesses, especially when it comes to teens and millennials, audiences that marketers are hard pressed to reach via traditional media channels.2

 

Chart 4. The North American Concert Industry Is on a Roll
North America concert ticket sales ($ in millions)


 
Source: Pollstar and Goldman Sachs Global Investment Research.

 

Table 1. Top Grossing Tours Have Grown in Size, but Declined in Total Live Events Share
Highest grossing tours and artists in the United States, 1988–2016 

 
Source: Pollstar and Goldman Sachs Global Investment Research.

 

Hot Tickets 
Another reason active portfolio managers have favored the live entertainment sector is the ongoing consolidation of the lucrative ticketing business. Anyone who has seen a concert in a stadium, arena, or festival in recent years can attest to the high cost of tickets, including exorbitant service and handling fees—in both the primary and secondary market (i.e., ticket resellers or “scalpers”).

For the most popular tours, the spread between face-value tickets and secondary-market tickets can be astronomical. As Goldman researchers noted, a $70 general admission ticket for U2’s Joshua Tree Tour at the 92,542-seat Rose Bowl in May 2017 may have sold for $70, but on the secondary market, the price jumped to $365—a 421% increase. Tickets close to the stage (i.e., the “pit” or “red zone”) fetched as much as $4,455—a 6264% increase.

We believe the leading concert promoters have an excellent opportunity to help artists recapture some of the revenue that is flowing to ticket resellers and scalpers by packaging tickets with services such as a VIP reception or VIP parking, and partnering with artist fan groups to facilitate fairer access to performances.  For smaller concerts, the challenge will be to improve ticket sales using additional pricing channels (like Groupon) and data-driven marketing for better targeting of music fans. Then there is the festival industry, which has soared in popularity and generated impressive revenue growth in recent years.

To be sure, the live entertainment business is highly sensitive to public tastes, and depends on its ability to secure popular artists and other live music events; and when it comes to ticketing, the business may not be able to anticipate or respond to changes in consumer preferences, which may result in decreased demand.

The overarching question, though, is whether a tech giant like Amazon will disrupt the market the way it did with book selling, e-commerce, media, and entertainment. According to a recent Reuters report, the Seattle-based company is looking to partner with U.S. venue owners interested in more distributors for their tickets. As much as live entertainment companies have exploited synergies, if Amazon started to sell tickets on a large scale, it could help music acts and sports teams sell their merchandise on that e-commerce platform.3

The beat goes on.

 

1 Drew Borst, Michael Ng, Se Park, Jessica Fan, “Live Music Hitting the Right Notes,” Goldman Sachs Global Investment Research, April 2, 2017.
2 Ibid.
3 Jessica Toonkel and Jeffrey Taskel, “Exclusive: Amazon in Talks to Offer Event Ticketing in U.S.—Sources,” Reuters, August 10, 2017.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education.  None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity.   If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. The information on companies or securities provided in this commentary is not intended to be a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. All investments involve risk, including possible loss of principal. No investing strategy can overcome all market volatility or guarantee future results.

The opinions provided in this posting contains the current opinions of the author are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. This commentary is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general. Nor is it intended to predict or depict performance of any investment. This commentary is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Consult a financial advisor on the strategy best for you.

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