November 30 2007: 12:56 PM EST
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Live Nation rocks the music industry

Michael Rapino, CEO of the Clear Channel spinoff, may just have this whole file-sharing, iTunes-listening, MySpace-Internet-era music thing all figured out.

By Paul Sloan, Fortune senior writer

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Live Nation CEO Michael Rapino, backstage at the House of Blues in Los Angeles
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Arthur Fogel, the Live Nation exec who lured Madonna to the company in a $120 million soup-to-nuts deal.
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Madonna

(Fortune Magazine) -- Jay-Z is about to hit the stage at the House of Blues in Los Angeles. Hundreds of people cram the dance floor, ready to rap along to the hip-hop superstar's every word. Up in the balcony a 42-year-old executive with a close-cropped beard and slicked-back hair of mullet-like dimensions is enjoying a spotlight of a different sort.

Everyone, it seems, wants to schmooze with Michael Rapino. He tosses back a shot of tequila with Jay-Z's attorney. Madonna's manager breaks out of a tête-à-tête with actress Penélope Cruz to seek Rapino out. Diddy, the producer/rapper/entrepreneur once known as Puff Daddy, is introduced and suggests that the two get together. "Absolutely," Rapino tells him.

The music business may be in turmoil, but Rapino couldn't be happier. He is the CEO of Live Nation, a two-year-old spinoff of Clear Channel (Charts, Fortune 500) that generated $4.4 billion in revenue in the past 12 months by running concert tours - more than any other outfit in the world - and owns venues large and small, like the House of Blues chain. The performance business is thriving, in oft-noted contrast to the selling of CDs, which has been buffeted by everything from the advent of file sharing to the disruptive effects of Steve Jobs' iPod (see "Power 25"). For years CDs were the cash cow, and artists toured to promote their albums. Today major artists make 75% of their earnings from touring.

But Rapino isn't satisfied with dominating the concert business. He is mounting an audacious attack on the record labels and seeking to poach their most important assets - their stars - by turning Live Nation (Charts) into a one-stop operation that handles their every musical need. His offer: We already operate your tours. Why not let us make your albums, sell your merchandise, run your website, and produce your videos and a range of other products you haven't yet thought of? This is the age of the empowering Internet, after all. Artists are in charge. Who needs a record label?

Depending on whom you believe, Rapino's strategy will either reinvent the ailing music industry and turn Live Nation into a powerhouse - or cripple his company. Certainly it's brash talk for a concert promoter whose toddler-aged company has never put out a single record. But artists have been listening closely since Rapino landed a giant catch. In October he struck a first-of-its-kind deal with Madonna, who bolted her longtime label Warner Bros. and signed a ten-year contract estimated at $120 million to let Live Nation handle every part of her business except publishing.

"The labels are in a jam," says Guy Oseary, Madonna's manager. "For a company to do well in music now, it's got to be in all aspects of the business. And Live Nation is the risk-taker. It's leading the charge."

At the heart of Rapino's strategy is his company's ability to connect to 35 million people who attend Live Nation shows every year. Already Rapino has a database of more than 25 million concertgoers. Say you're looking for tickets to Coldplay, a group Live Nation promotes. If Rapino has his way, his company will sell you a downloaded song along with the ticket. Or maybe a T-shirt with a download. Or maybe the website will use its trove of consumer information to turn you on to a new band you might like.

"He can touch a lot of different people and flag like-minded fans," says Jim Guerinot, who manages Nine Inch Nails and Gwen Stefani. "And that's a proposition that starts to get really interesting." Sitting in his loft-like Beverly Hills office, Rapino puts it more bluntly: "I am the worst enemy of the labels."

Rapino has spent his career as a promoter, founding a company in his native Canada that he sold in 2000 to Robert F.X. Sillerman, whose SFX Entertainment was gobbling up live-event promoters. Clear Channel acquired SFX for $3 billion in 2000, a disastrous merger that ended in late 2005 with a spinoff of Clear Channel Entertainment. Rapino was tapped to run the new business, and in short order he renamed it, fired the entire 50-person headquarters staff, and unloaded pretty much anything, such as a sports agency, not tied to music.

While the major labels struggled with the post-Napster reality - a generation of fans who expect recorded music to be free - Rapino saw opportunity. Promoters had become increasingly powerful partners with musicians. Even before file sharing accelerated that shift, a mentor of Rapino's - a fellow Canadian named Michael Cohl - had begun working with bands such as the Rolling Stones and U2 to coordinate their various nonlabel revenues, woo big sponsors, and cut the bands in on more and more of the ancillary products.

By the mid-1990s, Cohl and his bands were sharing profits from TV broadcasts, websites, and pay-per-view videos. "Each tour, we brought more and more into the pot," says Cohl, 59. "We were working it together." Rapino admired the approach and bought Cohl's company soon after launching Live Nation.

As CEO, Rapino aggressively revamped Live Nation's Internet strategy. Promoters are often solo operators with sizable egos, and even those who came under the Live Nation umbrella maintained their own websites. Rapino flew the company's 93 promoters to L.A. and took them to a hotel ballroom where the names of their websites were listed on a PowerPoint presentation.

"You think your name is relevant - important to the fan?" Rapino asked. "Our biggest website is ElectricFactory.com." To show how feeble the site's traffic was, Rapino then flashed a slide with the name of a comparably visited site: HipReplacement.com.

In case the point wasn't clear, Rapino fired every promoter's Internet department and told the promoters that their websites would now transfer visitors to LiveNation.com. He created a new-media division and stocked it with top web talent. Now, when Rapino and his crew pitch bands, the company databases spew out useful information about the band's fan base - age, gender, how much they'll pay for tickets.

Says Rapino: "I should be e-mailing you the morning after the Jay-Z concert, saying, 'Want a CD? A download? Want a video of the show? Want a set list? Want a signed shirt with Jay-Z? We printed a limited edition.' The possibilities are endless."

Madonna, a shrewd marketer, bought into that vision after spending months with Arthur Fogel, a top Live Nation executive who handled her Confessions tour last year. Her contract with Warner was coming up for renewal, so Fogel began courting the Material Girl. The pitch: Madonna and Live Nation would share revenue from all products in a bigger way than a label could ever offer.

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