April 10, 2008 - Live Nation (NYSE:LYV) knows the game of promotion inside and out. Whether its promoting concert tours for the likes of Jay-Z, U2, and Madonna or creating buzz for itself within the music business, there's no denying the explosive report of cannon balls shot across the bow of old-guard record labels by Live Nation.

Each of these artists may be past their prime, but they are iconic figures of the music industry. By signing them to massive, all-encompassing deals, Live Nation is establishing the new generation music deal and telling up-and-coming artists you know you've made it when you sign with Live Nation.

There was a time when the record labels owned the distribution and that meant everything, but that once-steady profit machine is a horse and cart in the age of the automobile. There's a revolution occuring in the music industry, and the record companies appear to be fighting a losing battle while Live Nation is one of the key agitators forcing change.

The stakes are high so the old guard isn't going away without a fight, and there are times when supporters of the cause wonder if the cost is worth it. Live Nation's stock price lost half its value in the months following the Madonna deal, though it keeps bouncing back from the $10 area and currently trades at $13.

Live Nation is symbolic of a new era for the entertainment business. The company grabbed headlines last year as the concert promoter that stole Madonna from Time Warner. While much has been made of $100 million+ cost, the company is striving to make the point that they are not just making record deals but rather comprehensive revenue shares on everything from concert tickets and merchandise to clothing and streaming videos.

This company is also behind the hugely successful Police reunion tour, Avril Lavigne's tour, the Van Halen reunion, and the first Stevie Wonder tour in over a decade. Live Nation is best known as a concert promoter, but the company actually has three lines of business: events, venues and sponsorship, and digital distribution.

Let's just say these are three very lucrative aspects of the business, while record labels and the rest of the entrenched music industry are drowning in their own corpulence. The best money has always been in the touring and merchandising--record sales were more of a means to an end, or icing on the cake, at best. The digital age means the old distribution infrastructure is more of a costly legacy than an asset.

Live Nation has revenue of more than $4 billion in the past year, and analysts expect the company to break into profitability on a sustained basis later this year or early next. The consensus for 2008 is a net loss of 13 cents per share compared to a loss of $0.17 cents in 2007. The first full year of profits is expected in 2009, with analysts expecting EPS of $0.34. It's worth noting that four of the five analysts covering the stock have a Buy rating on LYV, with the expectation that earnings will soar in the coming years. Live Nation has a business model that they think is a winner.

This is a high-risk, high-reward type of situation--clearly the music business is in the midst of major transformation but it's not yet clear who the big winners will be. Satellite radio, iTunes, and Live Nation are all evidence of the new era for entertainment. With the recent sell-off in LYV, Live Nation's stock is trading just above its book value ($11.58) and a price/sales ratio of just 0.22. If the revolution plays out as Live Nation envisions, this may be a chance to own a piece of the future at a bargain price.

- James Hale