In Defense of Live Nation, High Ticket Prices, and the Department of Justice Investigation

Recently I purchased a ticket to go see Sebastian Maniscalco and was surprised how much I made in "ticket fees" when I ordered the tickets. I was curious to see what caused the high ticket price and decided as a result to write this blog post. 

Recently the U.S. Department of Justice sued Live Nation (Ticketmaster is a subsidiary of Live Nation as a result of a merger back in 2009).  The central claim is that Live Nation has monopoly power over people who would like to see a live event and therefore should be broken and as a result to create more competition to potentially lower ticket prices. 

According to the Justice Department Live Nation controls about 80% of ticketing for major events and 60% of concert promotions 60% of concert promotions at major concert venues. The CEO of Live Nation disputes the percentages given how the Justice Department has a more narrow definition of what a major concert venue is. Live Nation President Joe Burchtold went on CNBC to explain when you look at potential comparable venues their market share is only 50-60%.  

Part of the issue is a lack of understanding how the business works. You have multiple groups in the mix. First you actually have the actual artist, then you have the business team for the artist, then you have the promoter, then you have the actual venue, and then you have the ticketing company. The artist and their business team have to decide what the financials for the tour look like and select a promoter they would like to use. Live Nation and AEG Presents are the two largest promoters in the industry. The promoter can offer cash guarantees for the tour (the guarantee will depend on tour expenses and how popular the artist is the guarantee will depend on tour expenses and how popular the artist is). In addition to the cash guarantees the artist may get a percentage of ticket sales depending on how successful the show is. The promoter has all the financial risk as they have to ensure the tour is financial successful and have to work the logistics of obtaining the venue, transportation, and have to work with the business team of the artist to price the tickets at a reasonable level. Live Nation in 2023 paid artists $13 billion. Live Nation for 2023 had revenue of $22.75 billion. In addition to this Ticketmaster has spent over $1 billion since the merger with Live Nation to improve the technology. During COVID Live Nation had to borrow $1.2 billion to borrow $1.2 billion 

Taylor Swift's Eras Tour grossed $1 billion in revenue, with each show grossing $17 million, the average ticket price was $238, and 4.3 million tickets being sold. The cost of the logistics and transportation was $30 million. In addition to this Taylor paid the crew $55 million in bonuses as the tour had 50 production truck drivers. So just the transportation and logistics was $85 million. Also the tour had 131 different performers . Forbes put some pencil to paper and estimated for the first 22 performances roughly $300 million of revenue for the tour was earned, Taylor and her team earned $110 million from performance (after touring/production costs) and Taylor earning $30 million (after expenses, taxes, agent, and publicist). The Eras Tour ended up having 152 shows so doing some math would say Taylor made $207 million after expenses and fees from the tour. Ticket prices for the same show varied by each city. The highest ticket price in Kansas City was going for $450,000 while in Seattle were going for a little over $4,000 (for essentially the same show). The artist usually makes 90% of the ticket fee. LiveNation keeps around 6% of the ticket price and the profit margin (given LiveNation has their own costs) and has a profit margin of 2% on tickets. So if the average ticket price for Taylor Swift was $238 Live Nation made less than $5 per ticket. AEG was the promoter for the Eras Tour and their profit on promoting is 2% so add another $5 per ticket. So on a $238 ticket Live Nation made $5 per ticket so $21.5 million (on 4.3 million ticket sold) and AEG the promoter made $21.5 million of profit during the Taylor Swift Eras tour compared to $207 million Taylor Swift made after expenses (closest thing to a profit margin for an apples to apples comparison). Part of the reason why ticket prices for Taylor Swift were so expensive is two fold. One is she had not toured in at least 3-4 years and post COVID there was pent up demand to see in person concerts which fueled over 14 million people trying to obtain 2.4 million tickets which caused the Live Nation site to crash. The demand was so high that Taylor in order to meet the demand would have had to play 900 concerts (20 times the concerts she performed or over 3,000 shows which would have added another 2.5 years to her tour-assuming she performed every single night). 

Most people are upset (including myself) about the service fees for the price of one ticket. However, the venue determines what the service fees are and Live Nation or the ticketing company passes these fees along to the consumer. The venue gets about 67% of the service fee and the ticketing company only earns 7% of the service fee. For all the venues that Live Nation owns they have moved to all-in-pricing since Fall 2023 and actually have seen an 8% increase in ticket sales as a result. Also the venue gets to decide if the all in price is displayed or if the service fees are charged. The profit margin on this part is only roughly 2%. Also it is important to remember that Live Nation has 50,000 concerts or events. Ultimately only the top 5-10% of artists are able to command high prices as the demand for their performances exceed the supply of available tickets.

The reason for high ticket prices is multi-faceted. Given consumers during COVID weren't able to see live concerts drove up demand for these services. In addition also the cost to produce the actual show increased since COVID. Additionally artists use to make money from album sales or music sales however the artists now have to give the music away and tour in order to make their money back. If anything some artists are underpricing their ticket prices since secondary markets like StubHub and SeatGeek exist. Given that the secondary market for tickets is roughly over $2 billion says that this is precisely how much artists are undercharging. Artists and their management teams have to walk a fine line between being able to make money, while not enraging the fan base of the artist. 

ProPublica The Top 400 Income Earners Americans and Charles and David Koch and Koch Industries Dividend Estimate Update

Within the past year ProPublica released information on the 400 richest Americans. The actual information came from leaked IRS records that came from an IRS contractor. The contractor (Charles Littejohn) is now facing criminal charges for leaking the confidential information to two news organizations (ProPublica was one of the news organizations).

Charles and David Koch showed up on the list of top 400 highest income earners. According to data from ProPublica from 2013 to 2018 Charles Koch earned an average of $213 million per year. His brother David Koch earned on average $234 million per year. It is interesting to point out that Charles was the 153rd highest earning individual in the United States and his brother David was 136th even though they had the same ownership percentage within Koch Industries. There are a couple of reasons why this could be true. The first is David Koch owned many different homes all over the United States and a sale of one of these homes could have increased his adjusted gross income (AGI)-this is the metric that ProPublica used for income. Another potential difference would have been if David Koch's tax and financial advisors sold any other assets (stock/bonds/etc.) during this time period that his brother Charles Koch didn't sell. 

Evaluating these numbers and comparing them to what I previously have estimated is a useful and entertaining exercise (I am curious how close I am). My first dividend estimate back in 2015 suggested that David and Charles Koch were each earned around $200 million per year. My estimates have varied over time given new information that was presented. My last estimate for Koch Industries dividends was that Charles and David Koch each earned around $800 million in dividends however I believe this figure is grossly overstated. The biggest reason for this is the assumed rate of return that Koch Industries earns on their revenues. Steve Feilmeier in this YouTube video stated when Koch Industries evaluated $40 billion of investments over many years the average return was 12-13%. Daniel Fisher for Forbes back in 2012 estimated that Koch Industries earned a 10% pre-tax profit margin. However, this figure seems to be high for a number of reasons. The first is if you look back at publicly available data Koch Industries has historically had a low profit margin. Koch Industries is a large conglomerate of various different companies and no longer just in the oil and gas industry. 

In 1961 Koch Industries generated $3.5 million in profit. Although an exact figure for the revenue of 1961 can't be found the 1960 revenue for Koch Industries was $70 million. This would say the profit margin in the early 1960's for Koch Industries was roughly 5%.  

Back in July 1974 when Forbes did a profile of Charles Koch and Koch Industries the reporter had had Charles Koch if their profits were $100 million and Charles responded to the reporter as a typical engineer would that "You're not off by a whole order of magnitude". According to the Forbes article, in 1974 Koch Industries had revenue of roughly $2 billion which would put their profit margin at 5%.   

In the 1980's Koch Industries continued to have a low profit margin. Beginning in 1980 Koch Industries. In 1982 Koch reported $565 million of pre-tax earnings on roughly $17 billion of sales. The next year the company reported $467 million of pre-tax earnings on $15.6 billion of revenue. In 1988 the company reported a profit of $400 million on $16 billion of revenue. This would say even though the 1980's was a decade of greed Koch Industries on average only had a profit margin of roughly 3%. What is even more interesting is how Koch Industries nearly ended the decade with less profit then at the beginning of the decade. 

In 1994 the Dallas Morning News had estimated that Koch Industries made $308 million in profit on $23.7 billion of revenue. This would say Koch Industries had a profit margin of 1%. In the mid to late 1990's Koch Industries got into trouble investing in projects that ultimately didn't turn out well. Koch in the 1990's was spending plenty of money on Purina Mills and ultimately lost $120 million on it. Charles Koch in this video explains the failures during that time

Using a lower profit margin for Koch Industries of around 5% changes the numbers for how much Koch Industries pays out in dividends. In 2015 (I took the midpoint for the ProPublica estimate) Forbes estimates Koch Industries had $115 billion of revenue. If you take $115 billion revenue x 5% profit margin would say the Koch generates $5.75 billion in profit. Assuming Koch Industries pays 20% for corporate income taxes would say Koch has $4.6 billion of after tax cash available. Koch historically reinvests 90% of their profits back into the company which would say that the company reinvests $4.1 billion back into the company leaving $460 million left over to distribute to shareholders. Since Charles Koch owns 42% of the company it would say that roughly $193 million of Koch Industries dividends would be paid out. David Koch's family would also receive the same amount $193 million) given similar ownership interest. These numbers are also similar to what was reported on the tax return for both Charles and David Koch. Also there may be other income for Charles and David Koch (dividends from stocks/bonds/other investments) that would push up their income. 

The bottom line is Koch Industries is large company with a possibly low profit margin. However, the fact that the company has reinvested 90% of their earnings back into the company has help the company growth dramatically. According to Sons of Wichita the company in 1967 paid out $300,000 in dividends to shareholders. Using the updated figures I would estimate that Koch Industries Inc. paid out $500 million in dividends (based on $125 billion of revenue). This would say over a 56 year period Koch Industries has increased their dividends by 14% per year. Actually this figure seems reasonable given the company has historically grown 12% per year. The story of Koch Industries and it's magnificent growth given their unusual policy of plowing 90% of their earnings back into the company every year.