A Concerted Effort to Do Business Differently

To the delight of Wall Street and the chagrin of many music managers and agents, Robert F.X. Sillerman is fundamentally restructuring the live entertainment business.

After recently agreeing to sell radio group SFX Broadcasting to Dallas-based investment firm Hicks, Muse, Tate & Furst for $2.1 billion, Sillerman has turned his attention to consolidating the fractured live business through his newly spun-off firm, SFX Entertainment.

So far, SFX has spent roughly three-quarters of a billion dollars to acquire such concert promoters as San Francisco-based Bill Graham Presents and Los Angeles-based Avalon Attractions--bringing SFX control of such venues as the Irvine Meadows Amphitheater. Last month, SFX expanded its scope by announcing the purchase of Falk Associates Management Enterprises, the Washington-based sports agency that represents Michael Jordan.

But can Sillerman, as chairman of SFX, profitably operate a group of businesses, many of which have struggled individually?

Sillerman believes he can, and views live entertainment as a potentially advertiser-supported business, as is radio. He also wants to extract better deals with industry powerhouse Ticketmaster--or perhaps by becoming a competitor to Ticketmaster.

Marketing is something Sillerman, 50, understands, having founded and run his own youth marketing consultancy while still attending Brandeis University.

Sillerman discussed his business strategy and vision for SFX during a rare interview in his stark Madison Avenue offices in New York last week.

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Q: Since you're new to live entertainment, how do you convince investors that you know what you're doing?

A: The consolidation opportunity that's available in music and live entertainment is based on marketing skills, judgment, taste and interpersonal skills. Those are the things that made us good in the radio business.

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Q: You're keeping management in place at the companies you buy?

A: There were examples with radio where we bought companies and didn't think management was important. . . . That has not been the case with the entertainment business. The only businesses we've been interested in buying were those where we were highly comfortable that the people associated with them [viewed] the transaction with us as the beginning, [rather than] the end.

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Q: Are there economies of scale in putting these companies together?

A: That's not where the opportunity is. The live entertainment business has existed for a long time, based on positive tension between different people in the industry. An artist attracts a producer, who negotiates with a promoter, who negotiates with a venue for the presentation. If at any point along the way there was somebody's perception that they weren't going to be able to profit significantly, then a performance wasn't presented.

We're no longer going to have to look to one individual, isolated source of revenue. If you roll up the different revenue streams, it becomes less important to make money on each isolated one. We think consolidation will mean more presentations, which means you'll see everybody making more money. Artists, managers, agents, buildings, promoters.

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Q: You've acquired a sports agency. Would you like to acquire an agency that handles entertainment talent?

A: We have announced that we've made an offer for the Marquee Group, which is a company I was involved in prior to SFX Entertainment. They represent, through one of their subsidiaries, some entertainment people. It's unclear to me that it would make any sense for us to expand that. It's also not completely clear to me that it's not something that we shouldn't expand dramatically.

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Q: Some managers and agents have said you're basically trying to cut them out of the action.

A: It would seem to me that if we're able to create more presentations and enlarge the industry that everyone will make more money. A natural reaction from some agents has been that what we're doing is threatening the method that the music business has operated under for a number of years. But what we've said from Day One is that we've never found it productive to try to profit by taking money away from people. The way we have always been successful is by making everybody make more money.

I can't tell you how we're going to operate the business in 1999, because I don't know. But I can tell you that our emphasis is going to be to make it a bigger business, a more professional business, and a more fun and lucrative business for everybody. We have some very specific ideas on how to do that, and if we're right, [everyone] will benefit.

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Q: The majority of your big venues are outdoors. Do you worry about indoor competition?

A: Of course. While we represent a majority position of the outdoor venues, that's a very small segment of the live entertainment business.

The reason that amphitheaters exist is that it's fundamentally easier and cheaper for a music act to perform outdoors rather than indoors. And it's a better experience in almost all cases for consumers as well. But clearly, arenas are competitive.

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Q: What compelling reason will you offer acts to go with your venues?

A: An artist's relationship is with their audience. We're not going to abuse [our control of outdoor arenas]. Right now, Rod Stewart is a tour that we're promoting and producing. There are some places that it makes more sense to play indoors and some places it makes more sense to work outdoors.

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Q: So you're not trying to dictate that artists play only the venues that you control?

A: We now own or have long-term leases on 46 venues. Twenty-eight are outdoors. Do we generally make more money on a venue that we own and operate than on one that we don't? Of course. So is it in our best interest in an isolated example to book into a facility that we own or operate? Yes.

But we're here for the long term. Our relationship with Rod Stewart and with [Stewart's manager] Arnold Stiefel and with the people who he works with is so much more important to us than how much money we make on a particular day. We want the tour to be good, we want the business to be good, and we want the industry to be good.

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Q: How can you make more money from ticketing?

A: Ticketing is an opportunity for everybody. We have two ticketing companies. Most of our ticketing is now handled by Ticketmaster. If Ticketmaster is able to do that for us in the future, then we would extend and expand our relationship with them. On the other hand, if they're committed to continuing to be an outlet-based system, we would have to examine the alternatives of expanding our existing ticket operation.

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Q: Is it more profitable to do ticketing yourself?

A: Well, listen, Ticketmaster's in business to make money. We produced and promoted events in the last year that sold more tickets than anybody. So do we have the capacity to be our own ticketing company? Absolutely. What we have to evaluate is the investment in doing that, versus working with somebody who's already made that investment. When Ticketmaster made its deals with the companies that now make up SFX, it did so by negotiating a lot of little deals. Now, they can save a lot of money and make a lot more money by expanding their relationship with us.

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Q: You mentioned that only about 50% of your revenue comes from music. What are the other components?

A: About 40% of the events that we produce are touring theatrical events. We present touring Broadway shows in more markets than the next five companies put together in the United States. We are far and away the largest presenter of specialized indoor motor sports in the United States. That's Monster Trucks and SuperCross sanctioned motorcycle events.

We have a very large family entertainment division; we're currently presenting ice skating, the "Rugrats" touring show, "Lord of the Dance." We have a very large comedic division.

We also have a separate division, which we think is going to really grow as a business, an intercept marketing division. That means creating events that attract people in order to get them to sample products and services. For instance, we create events for CBS that tour 40 college campuses to get kids to come to sample the CBS shows.

We're probably the principal conduit from the record companies to the radio industry, for both information and research. You can see how valuable that is to us, because we can see what records are being played, therefore where we might sell tickets, and we can spot upcoming acts and things like that.

Next year we will have showcase or second stages at all of the outdoor amphitheaters. While certainly you need a headliner to sell tickets . . . it's going to be an entirely new opportunity for up-and-coming bands.

I want to mention again that we don't just have amphitheaters. In San Francisco, we have the Fillmore. In New York, we have Irving Plaza. I'd venture to say that within the next 12 months, the major thrust of our expansion and acquisitions will be in smaller clubs and facilities in the music business, and will be in programming and software that is non-music related.

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Q: Analysts expect you to sell SFX Entertainment after a few years, as you did with the radio business.

A: Anyone who tries to build a company simply for the end purpose of selling it, in my opinion, will always fail. You must make the assumption that you're in business forever.

I can tell you unequivocally that our investment in this industry and in these businesses is not for the purpose of creating some sort of crown jewel that somebody will want to buy. But at the same time, I will also tell you with equal dispassion that if we're not able to achieve the kinds of things in this business that we think we can and the kinds of returns for our shareholders, we would not be afraid to sell.

[With radio], I said to people that I would be surprised if in three to five years we were one of the remaining players in it, [and] we weren't. In this case, I'd be surprised if in three to five years, we were not still in [live entertainment].

There are some people who say, 'No matter what, I'm not selling.' Those people should not be running public companies. Those people should be running private companies.

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Q: What's your greatest opportunity in live entertainment?

A: The business has been structurally precluded from the kind of growth that many other businesses have. . . . There was this structural tension that sort of put an artificial lid on how big you could be. When Billy Joel is doing a concert, he can only be in one location at one time. So the structural tension was, where is he going to play, who's going to pay him the most money, and what is in his best long-term career interests to do? That has meant that advertising and marketing dollars have just not been available, because the largest businesses in this country conduct themselves nationally.

What we've been able to achieve, we believe, is to create an SFX live entertainment network. We have access to over 40 million people who've attended events that we created in 1997, and that number will grow. That will be the fundamental driver to the growth of the business. For a marketer who wants to be involved in something national, we can say, OK, you have James Taylor here and Rod Stewart here and Lynyrd Skynyrd here. . . . We finally, for the very first time, have a "footprint" that is available to [marketers]. That will benefit the artist, because there will be more dates, they can make more money, the agents will obviously make more money, the venues, the third-party venues, the ticketers, the concessionaires and, of course, us and our shareholders.

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