Deep financial distress at festival promoter SFX – Tomorrowland\’s corporate parent – finally provides EDM\’s parade of haters some evidence for their long screamed belief that EDM is a passing fad. But are we really at the peak of EDM?
The WSJ\’s recent piece on festival economics provides useful context. The WSJ highlighted that the festival scene (EDM included) is in the midst of consolidation. The main USA players are AEG and Live Nation, who the WSJ points out are \”trying to buy every festival out there that can be bought” as part of \”a race to control the content of festivals.” The race makes sense because established festivals are massively profitable. An established festival earns the promoter between $5 million and $10 million whereas a sold-out single-artist show earns the promoter about $40,000. The race continues with Live Nation buying a controlling stake in Bonnaroo in April.
With the consolidation and profitability of festivals in mind, we return to the Forbes report on SFX\’s failure. SFX\’s business model was allegedly simple – Robert F.X. Sillerman would consolidate the regional EDM promotion industry. Sillerman had done similar work before, consolidating the previously regional rock promotion industry into an entity he sold. This entity become Live Nation. Now Sillerman wanted to compete with Live Nation in EDM by founding a new entity.
Issues with Sillerman\’s approach seem obvious in retrospect. First, Sillerman admitted that he knew \”nothing about EDM.” Second, Sillerman ignored business operation concepts like margins, stating that \”[t]he last thing we’ll be thinking about is margins\” because \”[t]hat’s not the way I view the entertainment business–I view it as an art not as a science.”
Sillerman\’s overall business model of consolidating EDM festivals appears sound. SFX revenue is actually increasing, Tomorrowland sells out extremely fast, and Live Nation and AEG appear to be making money with a similar business model. Yet the Forbes report notes that SFX itself is trending downwards – from 2013 earnings of $14.6 million to 2014 loss of $3.4 million to 2015 loss (so far anyway) of $15.3 million.
Sillerman\’s lack of industry knowledge and haphazard approach to business apparently worked well enough during his Live Nation days when he lacked any significant competition. But now facing AEG and Live Nation, Sillerman is unable to compete. At least one financial analyst agrees that Sillerman is the issue rather than EDM festival profitability, writing that \”SFX Entertainment is likely well-managed on the festivals and business unit level\” but the company\’s issues \”appear to be with holding company management and its board of directors.\”
The underlying festival assets remain profitable, and, as shown by expansion even within Chicago by new festivals (e.g. Mamby) and expanded festivals (e.g. Freaky Deaky), other promoters think there\’s still untapped festival demand. So all we have in SFX\’s failure is reaffirmation that poorly managed entities die. SFX\’s fall is simply capitalism without any broader implication for EDM. The EDM bubble may yet pop, but SFX is not the proverbial canary in the coalmine.
What do you think the future of EDM holds? Let us know in the comments below.