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

By Paul Sloan, Fortune senior writer

Live Nation execs won't reveal specifics, but people familiar with it say it's valued at around $120 million over a decade. They paid her $90 million upfront in stock and cash, these people say.

Could Live Nation make money on the expensive pact? Well, the contract would pay for itself if Madonna does four tours and three albums in the next decade with revenues comparable to her recent output, the key assumption being that the 49-year-old star suffers no major dropoff. Profits would then come from merchandise, sponsorships, DVDs, and on and on.

Warner fought to keep its star but ultimately conceded defeat. Publicly, it wished her well, noting that it was proud to retain her catalog of past albums and song rights, and that Madonna owes her next album to Warner. Privately, execs say the price just got too high. Says one industry insider: "This is nothing but a loss leader."

To the Rapino gang, such talk shows the labels are stuck in the old model, looking at the deal as if it were built on record sales. "Of course they have to go out and tell the world we overpaid," says Rapino. "And we did overpay, if you're just buying the record. But when you're buying all those rights, it's a beautiful deal."

Beautiful, perhaps - but also necessary. Tour revenues may be rising, but margins have always been anemic. Indeed, Live Nation's cash-flow margins are an uninspiring 4.3%. That's one reason Rapino is marching into other realms, all of which are more profitable than concerts. He wants Live Nation to sell all the tickets for its venues and vows to dump Ticketmaster as the company's main ticket seller after its contract expires at the end of 2008. In November he bought a leading merchandise company, Signatures, which licenses products for such heavyweights as U2 and Justin Timberlake.

Then, of course, there is recorded music. As anyone can tell you, CD sales have been declining for years, with an additional 19% drop just in the first half of 2007 (compared with the same period in 2006). That's a calamity for the labels - but not for Live Nation: Despite the reduced sales, recorded music still offers juicier margins than concerts.

Better yet, Live Nation isn't burdened by the record companies' expensive overhead, such as large teams to market music to radio stations. On average, the labels make about a 16% margin on CDs. Rapino would be happy to take half of that. The balance would go into the pockets of the artists, giving them a powerful incentive to work with Live Nation rather than the record companies. Says Rapino of the labels: "I can only take from them."

Skeptics argue that Rapino needs old-school, major-label infrastructure to get CDs out, and that ultimately he will have to license the job to a label. Moreover, the record companies themselves are trying to do what Rapino is doing - attempting to persuade bands to sign "360 deals," where the record labels share in all aspects of the artists' earnings in exchange for more money upfront.

Rapino dismisses 360 deals, which he argues simply take more from musicians. He brushes off the view that Live Nation needs record labels. He says he knows how to market and can pursue endless distribution options, whether it's cutting an exclusive deal with a retailer, as Paul McCartney did with Starbucks (Charts, Fortune 500), or slicing up albums into digital pieces and selling in a whole new format.

Ultimately, Rapino says, he's not looking to transform Live Nation into a label that bets on scores of artists in the hopes that one or two will score big. He plans to cherry-pick perhaps a dozen superstars over the next few years. That suggests he's less a revolutionary aiming to topple the labels than someone who hopes to use his superior cost structure and promotional acumen to make gobs of money.

Whatever the ultimate goal, investors are dubious. Live Nation's stock has sagged 30% since news of the Madonna deal. Rapino was concerned enough about the reaction that he and his lieutenants spent much of their first-ever presentation to analysts and investors in November defending the plan.

Though the stock hasn't improved, there are a few signs of support on Wall Street. "These guys are really positioning themselves to be a full-service music company," says J.P. Morgan analyst John Blackledge. "Investors are concerned about them dumping more dollars into artists, which is a risk. But Rapino has taken steps to really become a player - if not the player - as the industry evolves over the next few years."

Rapino has no doubt he'll get there - and he uses the enthusiastic crowd at the House of Blues to make his point. The Jay-Z show is winding down, and Diddy takes the stage to join in. The 13-piece band makes the balcony vibrate. Rapino leans over to be heard above the sound. "They say the music business is in trouble. No!" he screams. "The business of selling CDs is in trouble." He gestures across the crowd. "This," he says, "is a religion." To top of page

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