Paul Sloan's

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. Originally appeared in Fortune Magazine Nov 2007

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 aclose-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.

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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.”

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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.

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.”

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