Clear Channel’s Concert Unit Isn’t Living Up to Its Billing

Hardly more than a week ago, rock icon Don Henley walked Washington’s corridors of power with a dark message about Clear Channel Communications Inc.’s tight grip on the nation’s live concert business.

Performers, Henley told lawmakers at a Senate committee hearing, felt increasing pressure to play Clear Channel-owned concert venues because they feared that the company’s 1,200 radio stations otherwise might not air their latest songs. Clear Channel, which operates Los Angeles’ Wiltern and Orange County’s Verizon Wireless Amphitheater, accounts for well over half of U.S. concert ticket sales.

Henley’s high-profile testimony was the latest allegation to hit Clear Channel, whose rollup of media assets -- from radio stations to airplay research services to live events to television to billboards -- has become a lightening rod for critics who say the conglomerate’s clout is strangling artists and competitors.

But if the San Antonio-based company is flexing its muscle to monopolize the concert business, it isn’t getting much -- other than pain -- for the effort.

Some analysts contend that the performance unit, which runs more than 60 venues in the U.S. and 120 worldwide, is beginning to look less like a bastion of strength than a gaping hole in Clear Channel’s future.

The division “is the company’s Achilles’ heel,” said David Miller, a media analyst with investment firm Sanders Morris Harris. Clear Channel, he added, “radically overestimated” the benefits of linking concert venues to its radio empire, complaints of wary musicians notwithstanding.

Randall Mays, Clear Channel’s chief financial officer, doesn’t dispute that, saying the division has “underperformed our expectations, unquestionably.” But he said, “As we sit here today, you have a division that we think is going to grow very fast relative to the rest of the company.”

Clear Channel’s sagging live-events division, which features everything from motor-bike rallies to Broadway productions to rock shows, might exhibit some improvement when it reports fourth-quarter and annual results Feb. 25, thanks to easy comparisons with weak numbers a year earlier. For the first nine months of 2002, however, the division saw earnings before interest, taxes, depreciation and amortization -- a common measure among media businesses -- drop 14% to $145 million. Revenue fell 8% to about $1.9 billion.

Revenue Contributor

The live-entertainment unit accounted for about 37% of the conglomerate’s nine-month revenue of $5.2 billion but only a slim portion of its earnings. It didn’t help that one of the division’s biggest events last year was a reshuffle of concert management that generated more buzz in the industry than did its disappointing tours by Guns N’ Roses and Peter Gabriel.

In last year’s first quarter, Clear Channel wrote off a breathtaking $4.1 billion to reflect a 75% drop in the value of a business it acquired only three years ago with its purchase of event promotion giant SFX Entertainment. The write-down followed an accounting rule change.

During an interview last week, Mays denied repeated speculation that Clear Channel might try to unload the live-event unit at this point, a prospect that would be difficult given the company’s admission of its drop in value. “Absolutely, it is a business we are committed to,” Mays insisted.

Mays also swept aside allegations that the division strong-arms artists or record companies. Indeed, Mays points to the unit’s dim performance as evidence that the marketplace isn’t short on competition.

This would be “the only monopoly in the world operating with a 7% margin,” Mays said. Other executives say the cultures of the live-event and radio divisions clash so much that the notion of collusion is laughable.

Despite the poor results and steep write-down, Mays said the SFX acquisition was a “good deal” for shareholders. By his math, Clear Channel, which bought the concert firm in 2000 from entrepreneur Robert Sillerman for $3 billion in stock and $1 billion in debt, gave away 6% of its shares for an asset that contributed about 8% of its $1.2-billion operating profit for the nine months ended Sept. 30.

Still, industry observers believe that Clear Channel overreached by paying a 60% premium above the average share price of SFX, which in turn had paid top dollar to smaller concert promoters as it rolled up their regional companies into a national powerhouse.

Outside Problems

To some extent, Clear Channel has suffered from outside problems, particularly after the Sept. 11 terrorist attacks, which wreaked havoc with tour schedules and attendance. According to Mays, the division has been further hurt by escalating pay demands of touring artists.

Yet critics say Clear Channel also has shown itself to be less than adept at managing the business. Although it had a piece of last year’s smash-hit Rolling Stones tour and Broadway’s “The Producers,” the company made some poor choices in booking major acts. Heavily promoted tours by Gabriel and Lenny Kravitz, among others, underperformed.

Marketing Concepts

Worse, the company that promised to revolutionize the music business with slick marketing concepts has seen some of its slickest ideas misfire. For instance, Clear Channel’s much-heralded online subscription ticket club, first tested 18 months ago, is off to a slow start with just 65,000 members. A prospective TV series based on concerts never got off the ground, and a “developmental” basketball league, which was supposed to draw hoops fans in smaller markets, hasn’t paid off.

For Brian Becker, a veteran promoter who has run the live-entertainment unit since the Clear Channel takeover, the answer lies in even brighter ideas to boost ticket sales. “Conventional marketing is probably efficient, but it’s not reaching everybody,” Becker said.

One fancier notion, still in the exploratory stage, Becker said, is to record live concerts as CDs to be sold as fans are leaving the show. Such-instant replay CDs presumably would open a new revenue stream, but the concept could face resistance from artists and their record labels.

Ultimately, Mays believes the solution to his company’s concert woes is clear. “We’re going to have to figure out ways to sell more tickets,” he said.