InTheSpotlight: Clear Channel Exploits the SynergiesBetween Radio and Live Events

Consolidation in radio broadcasting reached a new dimension with Clear Channel Communications Inc.’s $4.1 acquisition of SFX Entertainment Inc. By purchasing the country’s largest promoter of live entertainment events, Clear Channel, a broadcasting and outdoor advertising company, gains immediate leadership in the highly attractive live entertainment industry while taking advantage of the natural relationship between radio and live music events. The combined company would be well positioned to expand Clear Channel’s advertising reach to concerts and sporting events, effectively cross-promote radio stations and concerts within the same city, and offer advertisers multiple opportunities for reaching their audiences. The deal also creates an exceptional platform for Clear Channel to pursue Internet and music interests. SFX also runs a sports marketing and management business, representing more than 650 professional athletes, including Michael Jordan and Andre Agassi, and is the largest producer in the country of motor sports shows, such as truck pulls. Including pending deals, Clear Channel will own and operate radio stations and/or outdoor advertising sites in just about every U.S. market in which SFX owns and/or operates live entertainment venues. Together, Clear Channel and SFX have the ability to reach a staggering percentage of the U.S. population through Clear Channel’s 867 radio stations and 19 TV stations, which reach more than 120 million people weekly; its 7,800 U.S. radio affiliates and interests in 240 radio stations worldwide; and its 550,000 outdoor advertising displays, and through SFX’s 120 live entertainment venues. Last year, reportedly, more than 60 million people attended approximately 26,000 events promoted and/or produced by SFX, including more than 7,000 concerts, 13,300 theatrical productions, 1,400 family entertainment shows, and 520 motor sports shows. Interestingly, SFX began its days in the broadcasting business. The company was a spin-off of SFX Broadcasting Inc., a consolidator in the radio industry founded in 1992. In 1997 SFX Broadcasting branched out into the live entertainment segment with its acquisition of Delsener-Slater, the largest concert promoter in the New York metropolitan area. Tom Benson, SVP and CFO at SFX, said that the company had owned several radio stations on Long Island at the time and saw good opportunities to expand by combining the two businesses. “The live entertainment industry was dominated by local companies in each major region of the country. There were companies with 20-year track records and strong market shares. We saw an opportunity to roll up that industry,” he says. His company then evaluated its radio assets and decided that even though it was one of the 10 largest radio operators, it was at a capital disadvantage to the largest radio operators, which at that time were Infinity and Clear Channel. SFX chose to exit the radio business and focus its energy on roll-ups in live entertainment. In 1997, it sold its radio operations to Capstar Broadcasting Partners, which was controlled by Hicks, Muse, Tate & Furst Inc., and started consolidating the live entertainment segment as SFX Entertainment. Ironically, he adds, the radio stations that SFX sold to Capstar are now, through the pending Clear Channel/AMFM Inc. deal, “coming back to us at the end of the day.” Since launching its acquisition spree in the live entertainment business, SFX has done more than $2 billion in deals and has absorbed nearly every major regional independent concert-promotion company in the country. Some of the first to join the fold were Black-stone Entertainment in Boston for $80 million and Bill Graham Presents, San Francisco, for $65 million. More recently, it acquired Philadelphia’s Electric Factory Concerts in March for an undisclosed amount. SFX brings an entirely new element to Clear Channel’s asset portfolio, and some industry analysts question whether the deal reels in new growth pillar for Clear Channel or represents a one-time opportunity that the company is looking to capitalize on. Clear Channel thinks that SFX’s assets, such as its sports marketing business, provide possibilities for tie-ins with its existing operations. The clients in the sports representation business could be included in sponsorship deals for advertisers, Clear Channel believes. Others, such as Peter Kreisky, head of the media practice at Mercer Management Consulting, believe that the deal evolved from the brilliant insight that there are synergies between radio and live entertainment, in terms of the local nature of both businesses, and real scale efficiencies from having size and national coverage. “One of the great powers in this deal is the ability to cross-promote on a local level. Many people can get national or international scale, through the use of the Internet, for example, but very few can reach the local level in depth,” says Kreisky. Benson says that radio stations blossom by being able to differentiate themselves in the local marketplace, and that promotions for live entertainment can serve as important differentiation tools for radio stations. Both companies believe that owning the local live entertainment company along with the local radio station will create unique opportunities for branding the radio properties and provide additional promotional vehicles for the sale of tickets to live entertainment events. SFX had just started to implement the strategy of cross-promotion in New York, notes Benson, when the company acquired Delsener-Slater. The Clear Channel/SFX combination allows the new company to apply that strategy on a national basis. Phillip Olesen, an analyst at Warburg Dillon Read, sees tremendous cross-promotion possibilities in the deal. “SFX needs to spend money, no matter what, in order to promote upcoming events. It may as well spend that money with Clear Channel’s radio stations, and keep a share of the pie, rather than dilute that spending by going to other radio operators,” he says. The companies are betting that the cross-promotion options created by the deal will be irresistible to advertisers. Clear Channel currently is selling radio/billboard advertising combinations, but the acquisition opens the possibility for also selling advertising that is also tied to a live entertainment event. “For some advertisers, we believe that would be much more appealing than buying just radio or just live entertainment on a stand-alone basis,” comments Benson. Also, he thinks that Clear Channel’s understanding of listener demographics and tastes in music could provide valuable information for SFX in planning events in individual markets. Opportunities for tie-ins between radio stations and live events also are plentiful, Olesen adds. “If the Rolling Stones, for example, were coming to town for a concert, you could have The Rolling Stones, brought to you by’ whatever the classic rock station in the market is; the radio station could play a Rolling Stones album on the day of the concert; a station announcer be the emcee at the show; the station could interview the band before the show. The possibilities are numerous.” “Cross-promotion, absolutely, is a significant part of the deal strategy. You always want to preserve the integrity of the radio station and of the concert promoter, yet the deal increases the strategic benefit of working together and expanding the possibilities for working together on events. At the end of the day, collaboration could be helpful to a radio station, to be known as the place to tune in for event-related specials, for example, and it helps our business because it creates excitement leading up to the events and could help boost ticket sales,” says Benson While it’s important to maintain the unique identities of radio stations and concert promoters on a local basis, the economies of scale from operating on a national basis are very attractive, Benson remarks. Increasingly, SFX has been able to secure performers for countrywide tours on a national basis. Historically, if performers wanted to go on a tour, they would have to negotiate with a local promoter in each individual city, he says. Now, in most cases, SFX negotiates on a national level. But performers still are negotiating their marketing and promotion deals city by city, radio station by radio station, remarks Benson. The Clear Channel/SFX combination would enable performers to negotiate national promotion programs through a one-stop shopping concept. “Now, that we are presenting events on a national basis, we are increasingly tapping into national dollars and, obviously, national dollars are the mother load in terms of the potential size of the marketplace. In the last two years we’ve brought in sponsors, on a national basis, like Levi Strauss, RJR, American Express, and Coca-Cola. This deal would allow us to take this to the next level,” states Benson. In the live entertainment business, he explains, the bulk of a concert promoter’s revenue comes not from ticket sales, in which case most of the proceeds go to the performer, but from ancillary revenue streams, such as parking fees and concession and merchandise sales. “In many cases, our events take place at venues that we either own or operate under long-term leases. Those types of ancillary revenues are enhanced for us by having more fannies in the seats. Fundamentally, through more promotion, we can accomplish that. It’s also positive for the talent, since they want to perform in front of larger audiences,” he notes. Capitalizing on branding opportunities is crucial to SFX’s strategy. The company implemented a multi-year marketing partnership with Levi Strauss which features the “Levi’s First Stage.” Before the main concert at certain SFX venues, a newly signed “baby band” plays at the Levi’s stage, which is erected in the arena’s concession area. “All that is branded around Levi’s. They pays us for the right to do that, plus it’s beneficial to us, because it gets people out to the show early and may encourage them to have dinner,” Benson remarks. One of the benefits of the deal for Clear Channel is that it gives the company a good platform for pursuing its Internet interests. Through its radio stations, Clear Channel has the ability to drive its listeners to local web sites, and SFX has valuable entertainment content. The combined company has the ability to operate leading sites for information on live entertainment on the Web. “The addition of information on live entertainment would make Clear Channel’s existing web sites more valuable. For us, linking with Clear Channel’s 120 million radio station listeners every week would increase our opportunities for bringing more people into our web site, which is designed to lead people to ticket purchases and other ancillary purchases,” states Benson. In a move that kick-started its own Internet strategy, last December SFX acquired a minority interest in UltraStar Internet Services LLC, the Internet company co-founded by rock star David Bowie. UltraStar has revolutionized the Internet by creating a subscription-based service that targets entertainment, sports, and other affinity groups. The investment will allow both companies to broaden their reach by building niche-specific affinity groups. UltraStar will be able to tap into SFX’s events and its relationships with performers and celebrities and. The company will also have access to SFX’s customer base. In turn, the investment will enable SFX to promote its events through UltraStar’s Internet sites. While Benson certainly believes that there is an additional audience for viewing live events on the Internet, the airing of those events may be a couple of years done the road, due to quality issues. He thinks that as streaming continues to improve with the introduction of improved broadband Internet access, it will be more feasible to air events on the Internet. “In the short term, we continue to believe that people still value being at an event and experiencing it live. Although we believe that there is an additional audience for seeing some of these events on the Web, we don’t think it would supplant the live audience,” he remarks. Benson says that his company is beginning to wire some of its concert venues so that the recording for Internet events can be done. “The infrastructure will be in place to do this in a big way, and we will be able to distribute events on a broad basis. But, I think it’s safe to say that the substantial financial impact from this is a couple years away.” With all the promise that the Clear Channel/SFX deal holds, the combined company certainly becomes a very attractive property. Yet, says Olesen, the Mays family, which runs Clear Channel, has shown no signs that it is ready to “pass the torch” in managing the company. Importantly, he says, given the size of the combined company, a “natural acquirer” for such a company does not currently exist. Any firm that would want to acquire it would have to be a major player. And, at that point, he adds, the deal would face significant regulatory problems due to market-concentration problems. “A company like CBS would probably be the only existing radio player who could do it, but it would be so difficult to get the deal done, in terms of regulatory clearances, that it would eat away at any of the benefits of the deal. I think it’s more likely that Clear Channel will remain a buyer rather than a seller,” he says. On a much smaller scale, several well-branded entertainment companies are carving out niches of their own. HOB Entertainment Inc., a live music entertainment firm that filed to go public in mid-March, owns or operates seven House of Blues clubs and 20 amphitheater, theater, and arena concert venues and digitally distributes live music content through its web site. Hard Rock Cafe International, a global restaurant company that offers diners a high-energy, music memorabilia-packed setting, is starting to open live entertainment venues as well. “Although it represents a slightly different business model than SFX’s, and is considerably smaller, there’s no question that House of Blues represents a new competitor with good brand recognition. People may or may not know which venues are SFX’s, because the company hasn’t necessarily gone across all of them to brand them, but with the House of Blues venues, you walk in the door and you know that you’re in a House of Blues,” says Olesen.