Ticketmaster-Live Nation: A sour note

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Shares of Live Nation and Ticketmaster, like most entertainment stocks, have taken a huge tumble as the economy has weakened. But both stocks surged on reports that they may merge.

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NEW YORK (CNNMoney.com) -- There were plenty of stories earlier this week commemorating the 50th anniversary of the plane crash that killed Buddy Holly, Ritchie Valens and the Big Bopper -- a tragedy later dubbed "The Day the Music Died."

But if Ticketmaster and Live Nation wind up merging, that may also become an event music fans will mourn just as much.

According to several published reports, Live Nation (LYV), the country's biggest concert promoter, is in talks to combine with Ticketmaster (TKTM), the largest seller of tickets for concerts, sporting events and other live entertainment.

The two companies are reviled by many music fans because of rising ticket prices and numerous surcharges.

Ticketmaster, in particular, has been a target of both consumers and musicians alike. The rock group Pearl Jam famously canceled a concert tour in the mid-1990s because Ticketmaster would not drop some of its service fees.

But both companies have grown in clout during the past few years.

Ticketmaster, a recent spin-off from the Barry Diller-run Web conglomerate IAC/InterActive (IACI, Fortune 500), last year acquired Front Line, a top artist-management firm.

And Live Nation, which previously was a part of radio company Clear Channel Communications, has gone from just promoting concerts to actually selling music. Both Madonna and Jay-Z have signed comprehensive multimillion dollar deals give Live Nation the rights to their next few albums.

Live Nation has also started its own ticketing operation. So that, combined with the fact that a merger of the two firms would create, by far, the dominant company in the business of both selling tickets and promoting events, could raise some serious antitrust concerns.

David Gurwin, chair of the entertainment and media law group Buchanan Ingersoll & Rooney Based in Pittsburgh, said that one way for the two companies to avoid a long, drawn-out antitrust review would be for Live Nation to sell its competing ticket-selling arm.

If it does not do that, Gurwin said that the companies run the risk of more scrutiny.

But Gurwin added that it will all depend on how regulators define the relevant market that the two companies compete in. The broader the definition, the easier it will be for the merger to be approved.

"If the market is all ticket sales for all events, that may be a much larger market than ticket sales for just A-list concert events," Gurwin said. "The narrower you slice and dice it, the more critical the analysis."

With that in mind, Scott Devitt, an analyst with Stifel, Nicolaus & Co. who covers Ticketmaster, said he expects "significant antitrust scrutiny."

Devitt estimates that the combined market share for Live Nation and Ticketmaster for ticketing to all events is only about 30%. But if the relevant market is just for concert tickets, Devitt said that the combined market share is closer to 80%.

Any concertgoer knows that this is true. If you want to see your favorite band play your local basketball or hockey arena, your choices about where to buy tickets are pretty much limited to Ticketmaster or Live Nation's new service...unless you use a ticket reseller, of course.

Sites like eBay (EBAY, Fortune 500)-owned StubHub, for example, allow consumers to buy up event tickets long after they are sold out. Essentially, it's like a form of legal scalping since the prices are typically much higher than face value.

But guess what? Ticketmaster also owns a major reseller called TicketsNow. And Ticketmaster has recently come under fire from a New Jersey politician due to its ownership of TicketsNow.

On Tuesday, Rep. Bill Pascrell, Jr., D-NJ, wrote a letter to both the Federal Trade Commission and Department of Justice asking for an investigation of how tickets were sold for a Bruce Springsteen show that went on sale on Feb. 2.

According to his letter, Pascrell said that some of his constituents complained to him that they were unable to buy tickets on Ticketmaster due to "technical difficulties." But after the show sold out, consumers were informed that they could buy tickets on TicketsNow...for a huge mark-up.

"I am troubled by how quickly tickets priced exponentially higher became available on the secondary market to thousands of rejected fans, many who also endured unfortunate technical problems on Ticketmaster.com," Pascrell wrote.

Whether or not there is any merit to Pascrell's claims remains to be seen. However, it underscores just how much animosity there is among taxpayers for Ticketmaster.

So if Ticketmaster is already getting politicians to decry its business practices as a standalone company, I find it hard to believe that they'd sit idly by if Ticketmaster and Live Nation plan to merge. That could lead to Congressional hearings, which would inevitably drag out approval of a merger.

What's more, there is recent precedent for long antirust reviews in the entertainment business. It took 17 months before the government finally agreed to green-light the satellite radio merger that created the company now known as Sirius XM (SIRI).

All that means investors, who bid up shares of both companies sharply Wednesday morning, may be getting ahead of themselves.

"This saga has only begun -- we do not think that regulatory approval is going to be a slam-dunk," wrote David Joyce, an analyst with Miller Tabak + Co. who covers Live Nation, in a report Wednesday morning.