MEDIA & ENTERTAINMENT

Transcription

1 1/81 MEDIA & ENTERTAINMENT A Research Publication by DZ BANK AG Live Entertainment Industry is gaining importance EQUITIES Sector Study 3 Mar 2015 TABLE OF CONTENTS INVESTMENT CASE 2 THE VALUE DRIVERS IN THE LIVE ENTERTAINMENT SECTOR 4 CTS EVENTIM 3)4)5)6) 26 DEAG ENTERTAINMENT 6) 51 IMPRINT 77 Author: Harald Heider, ANALYST

2 DZ BANK RESEARCH 2/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 INVESTMENT CASE The two companies CTS Eventim and DEAG Deutsche Entertainment focus their business activities on the development, arrangement and operation as well as marketing of live entertainment music events with the regional focus on Germany and Europe outside Germany. They are among the market-leading companies in the live entertainment sector in their respective regional markets. CTS Eventim is also the European market leader in ticket sales for music, cultural and sporting events. DEAG covers this complementary business area within the scope of a cooperation agreement with Ticketmaster and recently began to establish its own ticketing platform. CTS and DEAG are leading in the live entertainment sector Consumer demand is determined very strongly by the attractiveness of the live events offered artistically and in terms of popularity. The more attractive an event is, the more willing consumers are to allocate part of their financial consumption budget to buying entrance tickets. From the macro-economic point of view, total consumer spending on leisure, entertainment and culture grew only slightly by 1.31% in the period from 2008 to Furthermore, the product and service offers of both companies basically compete with a number of leisure and entertainment offers over consumers' time and financial budgets, for example from the sporting events and cinema segments. Against this backdrop, the market for live entertainment events basically shows all the signs of advanced market maturity. The live entertainment market shows all the signs of advanced market maturity The revenues of both companies are based for the most part on the sale of entrance tickets for the live entertainment events. The profitability of an event for the organiser is highly dependent on the capacity utilisation of the event in terms of the number of event-goers in relation to the overall capacity of the venue. The more attractive an event is to the masses, the lower the price elasticity of the consumer demand, which means that strong demand and good capacity utilisation of the venue can be achieved even given high ticket prices. The choice of the event location and the audience capacity available therefore also play a role which is critical for success of course. The main source of revenues is the sale of entrance tickets The organiser's art lies in the ability to put together an interesting portfolio of attractive events and reduce the dependence of overall profitability on the attractiveness risk of the individual events. The live entertainment organisers benefit from the fact that the artists' revenues from the recorded music business have tended to decline in recent years as a result of digitalisation, and revenues from live performances have become significantly more important. Correspondingly, the willingness of many artists to go on tour has increased enormously. The live entertainment business has gained in importance compared to the recorded music business Both groups are in a leading competitive position in an event segment which is otherwise still highly fragmented. This makes it easier to acquire artists who appeal to the masses and are prepared to go on tour, and therefore enables the professional operation of a number of concert events. As a result, an interesting profit margin can be achieved based on the portfolio approach, even taking the high attractiveness risk of individual events into consideration. We believe the market for live entertainment events will consolidate further and enable the leading companies to achieve further market share gains. Furthermore, additional revenue potential will open for the market-leading live entertainment companies within the scope of the

3 DZ BANK RESEARCH 3/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 increasing migration of ticket sales from the traditional sales channels in favour of online distribution. The operators of software-based online ticketing platforms can internalise significant margin components through the disintermediation of the distribution channels. CTS Eventim is in a very stable and market-leading competitive position in the ticketing business which can be secured not least by a leading position in the live entertainment events segment. We believe high-margin online distribution will continue to grow in importance and generate additional earnings contributions. Based on our revenue and earnings forecast, the DCF-based fair value comes to EUR 30.5 per share. Against this backdrop the shares have interesting price potential and we recommend them as a buy. CTS is in a stable competitive position and has regional growth potential DEAG and its subsidiaries want to strengthen the steady revenue growth achieved in the past by exploiting the available potential and synergies in future. The focus on 360 degree artist support and ticket distribution is expected to contribute to making the activities more profitable. DEAG benefits from the fact that as a specialist for the organisation, marketing and staging of live entertainment events, the company is becoming an increasingly more important cooperation partner for large media companies, such as Axel Springer, Sony Music or the Bertelsmann subsidiary BMG Rights Mgt. Based on our revenue and earnings forecast the DCF-based fair value per share comes to EUR We recommend buying the shares. DEAG wants to make its activities more profitable by expanding 360 degree artist support and building up ticket distribution

4 DZ BANK RESEARCH 4/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 THE VALUE DRIVERS IN THE LIVE ENTERTAINMENT SECTOR General setting The live entertainment and event sector deals primarily with the development, operation and marketing of live events as well as the complementary offer of products and services covering all aspects of consumer leisure entertainment. The sector's main revenue sources of income are revenues from ticket sales, but also sponsoring and merchandising revenues. Alongside the complementary recorded music business, which is suffering a decline in revenues worldwide, live entertainment is as a rule the second foothold for an artist to generate revenues from marketing an artistic work. The staging, organisation and marketing of live performances for one artist or a group is carried out by service companies from the live entertainment sector. The development of the live entertainment sector is determined by the consumers' financial and time budgets The live entertainment sector is characterised mainly by small and medium-sized enterprises which are frequently owner run. The Federal Association of Concert Organisers represents around 320 companies from the concert organiser, tour organiser, concert and event agency as well as artist manager segments. The companies in the sector compete with alternative entertainment and leisure offers (e.g.: TV, cinema, sport etc.) over the consumers' limited time and financial budgets. The development of the sector is therefore dependent to a large degree on the trend in and allocation of the consumer spending of private households among other things. The live entertainment sector is still characterised by small and mediumsized enterprises The nominal consumer spending of private households in Germany has grown slightly in recent years. Between 2008 and 2013 consumer spending grew by an annual average of 2.53% at actual prices. The annual average growth between 2003 and 2013 was around 2.20%. Nominal consumer spending has grown slightly in recent years TREND IN NOMINAL CONSUMER SPENDING IN GERMANY IN EUR BN 1,800 1,600 1,400 1,200 1, ,572 1,539 1,507 1,414 1,408 1,446 1,362 1,384 1,327 1,301 1,279 1,248 1,254 1,208 1,174 1,097 1,120 1,140 1,073 1, Source: Federal Statistical Office

5 DZ BANK RESEARCH 5/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 The consumer spending of private households on leisure, entertainment and culture has also grown in recent years, but less than proportionately to overall spending. In the periods from 2008 to 2013 and from 2003 to 2013, the annual average growth came to 1.31% and 1.43%, respectively. Against this backdrop, the share of spending on leisure, entertainment and culture declined between 2000 and 2013 by 1.1 percentage points to 8.9%. Slightly positive trend in spending on leisure, entertainment and culture CONSUMER SPENDING ON LEISURE, ENTERTAINMENT AND CULTURE IN EUR BN % 12.0% % 10.0% 9.0% 10.4% 10.2% 10.1% 9.9% 9.8% 9.9% 10.0% 10.2% 10.3% 10.3% 10.2% 10.0% 9.7% 9.7% 9.6% 9.5% 9.6% 9.4% 9.5% 9.4% 9.3% 9.2% 9.1% % 0.0 leisure, entertainment & culture Share of total consumer spending Source: Federal Statistical Office It becomes slightly clearer if consumer spending is broken down into the average household. The monthly consumer spending of the average household in 2012 was around EUR 2,310, of which 10.6% or EUR 245 a month was spent on leisure, entertainment and culture. TREND IN MONTHLY CONSUMER SPENDING PER FAMILY 2,500 2,000 1,952 1,973 1,972 1,989 1,996 2,089 2,067 2,156 2,168 2,252 2, % 12.5% 12.1% 11.5% 11.5% 11.6% 11.7% 1, % 11.1% 11.2% 11.1% 10.7% 10.9% 10.8% 10.6% 11.3% 10.9% 1, % 10.1% 9.7% Total leisure, entertainment & culture share of total consumer spending 9.3% 8.9% 8.5% Source: Federal Statistical Office

6 DZ BANK RESEARCH 6/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 As can already be seen on macro level, the share of consumer spending accounted for by leisure, entertainment and culture has tended to fall in recent years, but has continue to grow on absolute level. The German live entertainment sector generated revenues of EUR 3.82bn in The revenues are systematically broken down into revenues from the music events segment and revenues from the non-music events segment. The music events segment includes music concerts of all kinds, including festivals and musicals. The non-music event segment includes theatre performances, circuses, shows as well as comedy and discotheque events. The live entertainment sector is dominated by music concert events In 2013 the music events segment accounted for EUR 2.7bn or 70.0% of revenues. Around EUR 1.1bn or 29.3% of revenues was generated in the non-music event segment. TREND IN REVENUES IN THE LIVE ENTERTAINMENT BUSINESS IN EUR BN music non-music Source: GfK study commissioned by BDV and Musikmarkt It can be seen from the graph that both revenues from music events and revenues from non-music events moved sideways with major fluctuations between 2006 and Revenues of EUR 2.82bn were generated in the music events segment in 2007, which could not be exceeded in the following years. Overall around million tickets were sold in the live entertainment events sector in 2013, with an average ticket price of EUR Trend in revenues in the live entertainment segment shows little growth

7 DZ BANK RESEARCH 7/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 SELECTED FIGURES IN THE LIVE ENTERTAINMENT BUSINESS * Audience in million Yoy -3.8% -6.1% 7.2% -8.5% 9.3% Average attendance Yoy -2.7% -2.8% 5.7% 0.0% 0.0% Tickets sold in million Yoy -6.8% -10.4% 14.8% -9.9% 9.6% Revenues in million 3,872 3,608 3,173 3,943 3,322 3,822 Yoy -6.8% -12.1% 24.3% -15.7% 15.1% Average price per ticket Yoy 3.2% -1.8% 8.3% -6.5% 5.0% Source: GFK study commissioned by bdv and the sector magazine "musikmarkt"; 2010 was not recorded We have compared below the sector data for the cinema market and, by way of example from the sports segment, the Bundesliga attendance figures with the trend in the live entertainment market. TREND IN ALTERNATIVE LEISURE ACTIVITIES Cinema Audience in million Yoy -0.7% -0.2% -0.1% 0.4% -0.2% -1.6% Average attendance Yoy 3.9% 13.3% -13.4% 1.9% 4.4% -2.4% Tickets sold in million Yoy 3.2% 13.1% -13.5% 2.4% 4.2% -4.0% Revenues in million Yoy 4.9% 22.8% -5.7% 4.1% 7.8% -1.0% Average price per ticket Yoy 1.7% 8.6% 9.0% 1.7% 3.5% 3.1% 1st and 2nd football Bundesliga Tickets sold in million Yoy 7.4% 1.1% -1.7% 0.0% 8.7% -4.3% Average price per ticket n.a. n.a. Yoy 2.9% 7.2% 5.5% 2.2% n.a. n.a. Source: DFL, FFA It can be seen that the attendance figures for leisure activities in the alternative segments do not necessarily move in the same direction over time. For example, the number of tickets sold for live entertainment events declined by 9.9% in At the same time, the number of cinema tickets and stadium entrance tickets sold for a 1st or 2nd Bundesliga game in Germany increased by 4.2% and 8.7%, respectively. This trend was then reversed in The live event audience showed an increase of 9.6%, while ticket sales in the cinema sector and for the Bundesliga games The live entertainment segment competes with other leisure options

8 DZ BANK RESEARCH 8/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 declined. This suggests that other cyclical influences also have a considerable impact on the trend in ticket sales. We believe the trend in ticket sales is determined significantly by the attractiveness of the available content as well as by the number of events in a time period. The revenues of the live entertainment organisers are generated by a relatively small number of attendees compared to other leisure activities. According to the Leisure Monitor of the Foundation for Future Issues only 24 of 100 interviewed said that they attended a rock/pop concert at least once a year. With 47 of 100 interviewed, almost twice as many consumers said they attended at least one sporting event each month. In the Leisure Monitor for 2014, the number of those interviewed who attend a rock/pop concert at least once a year rose to 27. The number of tickets sold depends on the attractiveness of the event pipeline FREQUENCY OF VARIOUS LEISURE ACTIVITIES rock/pop concerts opera/ballet/theater cinema visits sport events restaurant visits less often min 1 per year min 1 per month min 1 per week Source: Leisure Monitor of the Foundation for Future Issues; reading example: of 100 interviewed, 24 attend a rock/pop concert at least once a month Against this backdrop, consumers who are otherwise not necessarily to be counted as regular event attendees can also be motivated to attend a concert by tours by very well-known artists and/or bands with mass appeal. On the other hand, widely popular and attention-absorbing events from other leisure entertainment areas, such as football World Cups or the Olympic Games, can considerably reduce consumers' interest in live entertainment events with the result that the attendance of parallel events is only weaker. This effect is well-known in the event industry, so fewer events also tend to offered in these periods. One positive effect for the live entertainment sector is the fact that the organisation of concerts has successively developed into the main source of income for many musicians and bands in recent years owing to declining revenues in the recorded music business. Correspondingly, the offer of widely popular live entertainment events with internationally well-known artists has been steadily expanded. Between 2003 and 2013 revenues generated in the recorded music business in Germany declined by 6.7% to EUR 1.45bn. The recorded music business has been on the decline for years

9 DZ BANK RESEARCH 9/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 TREND IN REVENUES IN GERMANY IN EUR BN music events recorded music Source: bdv, IFPI The value chain The value chain in the music industry is analysed in slightly more detail below. A difference can basically be drawn between the two complementary business areas, the recorded music industry and the live entertainment sector. VALUE CHAIN IN THE MUSIC INDUSTRY Recorded Music Industry Plattenfirma Music (Label) Label Retail Konsument Online-Stores Konsument consumer Künstler Artist Management Live Entertainment Industry Tourneeveranstalter Örtlicher Touroperator Spielstätte Konsument Local Venue Consumer Veranstalter operator Ticketing Booking- Agentur Source: DZ BANK Research As a rule, the starting point of both value chains is an artist, a music band or a show act. There are now two complementary options of presenting the musical work to the consumer. Firstly, soundtrack recording, marketing and sale of a suitable recording medium. Secondly, a personal performance within the scope of a live show in front of a paying audience. While the artists concentrate as a rule on the creative process of composition and artistic performance, the management takes over support of the creative process,

10 DZ BANK RESEARCH 10/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 organisation and time planning as well as the marketing of the artist and the handling of the business opportunity with a view to the two complementary value chains. The management advises the artist in the search for a suitable music recording company (record company), carries out the negotiations for them, for example regarding fees, royalties, marketing budgets and the marketing strategy for new albums as well as the media positioning of the artist in the market. The music recording company essentially carries out the development, production and marketing of music and its interpreters on recording mediums (record, music cassette, CD, DVD) or, also strongly on the increase, as a digital download file. The global market is dominated largely by the three major studios Universal, Sony and Warner and their music labels with an estimated market share of between 75% and 80%. The large studios concentrate almost fully on the recording medium and publishing business. These companies astonishingly have only rudimentary activities in the complementary live entertainment business. This also applies vice versa for the companies operating in the live entertainment business. As a rule the Artist & Repertoire Manager (A&R) is responsible for discovering and promoting new performers. They decide whether an artist or band will be taken under contract by the music recording company. The recorded music business is dominated by a few major studios The recording of a master tape in the recording studio is pre-financed either by the record label or by an independent producer and sold on via a publishing agreement with the music recording company. This then sees to the production, marketing and distribution of the musical work as a physical product or a digital download file. The IFPI estimates that given the corresponding talent of the artist and widely popular quality of the repertoire, a budget of around EUR 0.7m to 1.2m is needed to make an artist known internationally. In return, the artist receives a share of the dealer selling price (DSP) of between 7% and 12% as a rule. GLOBAL TREND IN REVENUES IN THE RECORDED MUSIC SECTOR IN US$ BN Source: IFPI Recording Industry in Numbers 2014, Bundesverband Musikindustrie e.v.

11 DZ BANK RESEARCH 11/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 As global revenues in the recorded music business have declined successively in recent years and are expected to further decrease, the live entertainment business has become the main source of income for most music artists in the meantime and therefore also significantly increased their willingness to go on live tour. Concerts are extremely important in the artists' income budgets The management also maintains the contacts to the agents and promoters who organise and operate the tours and concerts. In this context it conducts the negotiations as a rule over the possible fee for concert performances as well as the schedule and the choice of the event locations. An artist's management first gets in contact with an agent once an artist has decided to perform in public within the scope of one or several live appearances. A booking agent takes on an agency function and is primarily responsible for placing an artist's live performances with corresponding promoters. If an artist wants to go on a concert tour beyond the borders of their home country, as a rule an international agent is appointed to find a national tour promoter in the different countries the artist will perform who knows the national general setting in each case and takes on the organisation of the concerts. Together with the management, the agent negotiates the artist's fee to be paid by the tour promoter. With internationally known artists and bands this typically consists of a minimum guarantee and payment depending on the revenues. The agent's commission amounts to an estimated 10% to 20% of the concert fee depending on the artist's market value. The artist's agents are responsible for choosing the tour promoter as a rule Tour promoters and local organisers Once the management and agent reach an agreement with the tour promoter over the artist's fee, they are responsible for the overall concept of the tour. This includes the financial concept of the tour, the production of the live performance, hiring the suitable venue, the national marketing concept (radio, newspaper, TV, Internet), the staging of the individual concerts, the travel management and the appointment of a company to take on the sale of the entrance tickets. In return the promoter receives the revenues from the ticket sales from which it covers all costs incurred alongside the artist's fee, a fixed part of which (minimum guarantee) is already paid to the artist before the concert is held. Alongside production costs, costs for hiring the venue, advertising, personnel, GEMA and security are the largest operational cost items. The tour promoter organises the concerts and chooses the event locations With international stars the concert revenues are frequently divided into split deals in which 85-95% of the promoter's gross profit goes to the artist. This profit is made up of the revenues from ticket sales minus the promoter's production and operational costs. Should the promoter generate a profit with the event which is below a certain threshold (minimum guarantee) or even make a loss, the artist does not receive a share of the gross profit and then has to make do with the minimum guarantee which is paid in advance. Against this backdrop, high capacity utilisation of the venue is an important prerequisite for the financial success of a tour. The tour promoter frequently arranges to share the work within the scope of a cooperation agreement with a local organiser who is then responsible for operating a concert in a specific location. The local organisers often have exclusive access to certain venues, which are often owned by cities and communities and take over the hiring of the venues accordingly. The local organiser then bears the operational costs for catering, hall equipment and security as a rule. In return, the local organiser The local organiser is responsible for operating a concert

12 DZ BANK RESEARCH 12/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 participates in the concert revenues and therefore also assumes part of the local risk. Several companies from the live entertainment sector act as both tour operator and local organiser. According to the Pollstar promoter ranking for 2013, Live Nation was the largest promoter worldwide with million tickets sold, followed by AEG Live with 13.6 million tickets sold. The largest German promoter according to the Pollstar statistics is the Marek Lieberberg concert agency, in fifth place in the international ranking with around 2.7 million tickets sold. Second place in Germany goes to BB Promotion with around 1.17 million tickets sold and third place to FKP Scorpio with 1.12 million tickets sold. Marek Lieberberg and FKP Scorpio belong to the CTS Eventim group. Part of the ticket sales is accounted for by annual festivals which are organised by tour and concert event companies. The organisation of an established festival at which several artists and/or bands perform after each other or on several stages at the same time is not only a reliable source of income for the promoter. It also has the advantage that a tour promoter not only offers the staging, organisation and marketing of the concert tour in the acquisition negotiations with the artists' agents, but can also give the artist an exclusive commitment of a festival performance. In Germany FKP Scorpio, in which CTS Eventim AG holds a stake of around 45%, is one of the largest festival organisers. Alongside the "Hurricane" and "Southside" festivals, the festival portfolio also includes the "Highfield", "Area 4", "Chiemsee Reggae Summer" festivals or the Swiss "Greenfield" festival. On international level the Sonisphere festivals in Germany, the UK and Switzerland organised by Stuart Galbraith and his company Kilimanjaro Live, which was recently acquired by the DEAG group, are among the largest promoters in the industry. Marek Lieberberg also has prominent events in the pipeline with the "Rock im Park", "Rock n' Heim" and "Rock am Ring" festivals. The latter will be held in Mendig for the first time in 2015 after 29 years at Nürburgring. A week before DEAG will stage a festival at Nürburgring with the support of Wizard Promotion and Kilimanjaro Live in direct competition under the title "Grüne Hölle". The two event locations are less than 35 km apart. Annual festivals can secure a steady flow of income It remains to be seen whether the two rival promoters can succeed in attracting together more than the 80,000 concert-goers who have attended the "Rock am Ring" festival so far and make the two festivals profitable. Assuming both promoters are in the position to bring an attractive artist line-up on stage, it appears to be extremely ambitious in our view to anticipate more than 60,000 concert-goers per festival. At the same time it is to be anticipated that the artists can use the direct competitive situation to enforce higher fee requirements. Venue As is customary in the USA, concert events are also staged in Germany by the venue operators as local organisers. However, the venue is more frequently hired by an independent local organiser. The world's largest venue operator is the American company SMG with over 200 venues. The world's largest tour promoters Live Nation and Anschutz Entertainment Group (AEG) also have numerous own venues in the USA. In 2013 the o2 Arena in London was the best attended arena worldwide with an audience of 2.1 million. In

13 DZ BANK RESEARCH 13/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 Germany the Lanxess Arena with a total of 660,469 entrance tickets sold was number one in the venue ranking. According to information from its 2012 annual financial statements, Lanxess Arena sold around 1.5 million tickets for 141 events in 2012 and generated revenues of EUR 39.8m. o2 World Hamburg and o2 World Berlin were in second and third place in Germany with 469,638 and 462,910 tickets sold, respectively. CTS is responsible exclusively for ticketing for the two o2 arenas in Germany Ticketing The greatest possible capacity utilisation of the event is a critical success factor for a commercial concert event. Correspondingly, the concert organiser's goal is to sell the greatest possible number of tickets for an event. Ticketing is an independent stage in the vale chain Against this backdrop, a local concert organiser appoints as a rule a service company which is specialised on the sale and marketing of the entrance tickets. SYSTEMATISATION OF THE TICKETING BUSINESS Ticket shop Concertgoers Internet Data base Ticketing company Promoter Call center Source: DZ BANK Research The role of a ticketing company is to enable all potential concert-goers to have the simplest possible access to the available ticket volume and buy the tickets as conveniently as possible. In the main, the four distribution channels advance booking office, Internet, box office and call centre are available which as a rule have a parallel connection to a software-based ticketing platform and can be used by the consumers as an alternative for buying an entrance ticket. Depending on the event genre and priority demographic target group, these distribution channels have different weightings in the significance for ticket sales. Ticketing can be critical for success for the capacity utilisation of an event

14 DZ BANK RESEARCH 14/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 SHARES OF THE DIFFERENT DISTRIBUTION CHANNELS IN % 100% 90% 80% % 60% 50% 40% 30% 20% 10% resale call center inhouse internet box office 0% Source: bdv, Musikmarkt In order to guarantee the maximum sale of the event tickets, several general factors which are critical for success have to be considered. For example, ticketing can be geared to whether it is an event with a national, regional or local demand catchment area. First, the ticket price is set depending on the expected demand and the available ticket offer (volume) for an event date or a tour is determined via the choice of the venue(s) and the audience capacity associated with it. Depending on the location alternatives, the promoter can plan for a club with a capacity of 100 guests or a stadium with a capacity of more than 60,000 as a venue. The art of a ticketing company lies in recognising early on whether the demand in advance ticket sales will be strong enough for an event to sell out if possible. In this context, the experience of the ticketing company and of the promoter based on empirical data relating to the demand at earlier concerts of a certain artist or a comparable genre plays an important role for assessing the marketing opportunities. For this purpose, the profile data of the ticket buyers are regularly recorded in a central database of the ticketing company, if permitted by data protection law, and used for market analysis and for marketing the events by sending push-messages to potential concert-goers. Until recently the customer data recorded by the ticketing company were not forwarded to the promoter. The ticketing must cover the catchment area of an event The more widely popular the event is, the weaker the price elasticity of demand and the easier it is for high-priced tickets also to be sold. In the worst case, though, the demand is too low to market the volume of available tickets at a given ticket price. The promoter then has the options of lowering the ticket price via promotion campaigns in order to stimulate demand, moving to a smaller venue or, in the worst case, cancelling the event. However, this would be associated with considerable uncovered costs, which means that selling tickets with a performance is an important prerequisite for a profitable event business. The capacity utilisation of an event is controlled by the ticketing Alongside the option of appealing to potential concert-goers, the discovery of the ticket offer is decisive for the marketing success of an event. If it is a desirable artist

15 DZ BANK RESEARCH 15/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 or top act, the potential concert-goers will actively look for corresponding entrance tickets. In this case, the tickets sell themselves via the artist's brand familiarity on less-known online portals, in particular if the potential demand significantly exceeds the ticket offer. On the other hand, less well-known artists and events are reliant on the marketing of the ticketing offer to potential concert-goers who have not actively looked for the corresponding entrance tickets, but have only become aware of the offer by visiting a well-known distribution platform, for example. The sale of the entrance tickets via a standard Internet platform offers numerous advantages over other distribution channels. The Internet users have the option of selecting from a comprehensive offer of events in corresponding online ticket shops. Comfortable search functions enable a personal choice of artists, genres, even locations and dates. In addition, the currently most desirable events are displayed to the user at a glance, they can see current events in their own area and events which could be of interest for them are automatically generated based on past purchases. The promoters in turn can support the sale of the entrance tickets cheaply with promotional material. Even though the advance booking offices are still responsible for most of the ticket sales with a view to the distribution channels and all event genres, the role of ticket sales via the Internet is growing, in particular for music genres for the slightly younger audience. Despite the advantages of an online ticket platform, the significance for the sale of entrance tickets compared to the distribution channels advance booking office and call centre has not grown further across all event genres in recent years. The Internet is becoming increasingly more important as a ticket distribution channel TREND IN THE SHARES OF THE DISTRIBUTION CHANNELS IN % 100% 90% 80% % 60% % 40% 30% 20% % 0% box office Internet inhouese call-center resale Source: bdv; musikmarkt; GFK Live Entertainment in Deutschland There are currently four ticketing companies of national significance in Germany. The clear market leader in Germany is CTS Eventim AG with the online ticket shops eventim.de, getgo.de and ticketonline.de. The second largest provider is the German subsidiary ticketmaster.de of the global market leader Live Nation Entertainment. CTS Eventim is the European market leader in ticketing

16 DZ BANK RESEARCH 16/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 Reservix.de and Adticket.de are smaller providers. There are also numerous providers of software solutions that can be used to sell tickets. These include white label ecommerce GmbH operated by Arndt Scheffler, a former senior employee at CTS Eventim, or Ticketscript, which claims to be the European market leader in the area of ticketing software for event organisers. DEAG put its own ticketing platform, myticket.de, into operation on 14 November The Myticket.de technology is based on the new platform "white label ecommerce GmbH developed by Arndt Scheffler. The web-based ticketing technology allows tickets and merchandising products to be sold simultaneously. The over-the-counter advance booking office usually receives an advance booking fee of 10% to 15% of the ticket price for the sale of tickets, which represents an independent stage of the value chain as a rule. This is normally due in addition to the face value of the ticket. The average ticket price across all event genres came to around EUR in 2013, which means that the advance booking fee is between EUR 3.10 and The local organiser only participates in this advance booking fee within the scope of a possible reimbursement, for example as a refund paid by the advance booking office to the organiser for advertising measures, the so-called promotion rebate. The advance booking offices (ABO) are connected as a rule to a software-based central ticketing system that is responsible for the management and allocation of the ticketing contingent across all distribution channels. The ABO pays a system fee per ticket of between EUR 0.5 and EUR 1.50 to the respective platform operator for the connection to the system, possibly also a monthly flat rate system fee. If the ticket is purchased by the consumer online via the Internet, the operator of the softwarebased Internet platform can record the advance booking fee as its own income. In this case, online ticket sales are leading to the constructive destruction of the value chain through the disintermediation of the over-the-counter ticket office. With an online or call centre order, a booking fee of up to EUR 2.0 per ticket is also charged in addition as a rule. The ticket buyer then also has to pay for the delivery costs, as a rule EUR 4.90 for standard postage, irrespective of the number of tickets bought. The same applies to buying the tickets on the phone via a call centre. If the customer uses the print@home functionality or mobile ticketing, a commitment fee is charged instead of the delivery costs. With an estimated 1.7 tickets per order, the average revenue per ticket for the market-leading ticketing companies in Germany is likely to be around EUR 6.5. In view of the strong increase in ticket prices in the past and the high cost degression effects in online sales, the ticketing companies have been by far at the most profitable stage of the value chain in the business for music, cultural and sporting events in recent years. The Berlin-based concert event organiser Berthold Seliger is slightly critical of the structures on the German ticketing market. The migration of offline ticketing to online distribution is disintermediation In his book "Das Geschäft mit der Musik", he explains the composition of the ticket price. Based on a sold-out concert with 1500 concert-goers and a ticket face value of EUR 28.0, the end price for the consumer allowing for additional fees comes to around EUR This breaks down into the different stages of the value chain as shown by way of example in the following chart.

17 DZ BANK RESEARCH 17/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 REVENUE SPLIT OF LIVE EVENTS IN % 5% 7% 25% 13% 4% 10% 8% 18% 10% production cost: local operator ad expenses local operator production cost: tour operator KSK und foreigner taxes GEMA and sales taxes actto Ticketing: shipping Ticketing: booking fee Ticketing: box office fee Source: Berthold Seliger "Das Geschäft mit der Musik Trend in the live entertainment market The consumer climate and the trend in the consumer spending of private households represent important prerequisites for the further trend in the live entertainment sector. The GFK consumer confidence index has improved significantly based on the income expectations as well as consumers' propensity to buy and save from its interim low at 1.5 in August 2008 to 8.9 in August After weakening briefly in the following months, the GFK is now forecasting a new high for March 2015 of 9.7. Against this backdrop, consumers are currently anticipating a positive cyclical trend. A favourable consumer climate is an important prerequisite for a successful live entertainment sector TREND IN THE GFK CONSUMER CONFIDENCE INDEX Source: GFK consumer confidence index Based on the economic forecast of the Ifo Institute of 11 December 2014, a positive economic trend can be anticipated for the quarters ahead. An increase in nominal

18 DZ BANK RESEARCH 18/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 consumer spending of 2.6% is expected for 2014 and growth of 2.9% for Nominal annual average growth of 2.5% is anticipated for the period from 2013 to 2019 according to the joint medium-term autumn report by the leading German economic research institutes. Accordingly, a positive general economic setting can basically be derived for the trend in the live entertainment sector with a view to the medium term. TREND IN PRIVATE CONSUMER SPENDING IN GERMANY IN EUR BN 2, , , , ,362 1,384 1,414 1,408 1,446 1,507 1,539 1,572 1,606 1,646 1,687 1,729 1,772 1, % 7.80% 5.80% 1, % 1, % 1.55% 2.19% 2.65% 2.17% 2.08% 2.16% 2.52% 2.50% 2.50% 2.50% 2.50% 3.80% 1.80% % e 2015e 2016e 2017e 2018e 2019e -0.20% -2.20% Consumer spending yoy Source: The Joint Economic Forecast autumn 2014, IFO Institute; DZ BANK estimates However, the number and attractiveness of the live entertainment events offered also plays a role in the trend in revenues in the sector alongside the general economic setting. In addition, it has to be considered whether alternative entertainment offers also absorb part of the time and financial leisure budget in an assessment period, such as football European and World Cups or Olympic Games. As the concert promoters typically try to avoid dates colliding with these competing events, only a smaller number of events are staged in these periods compared to other periods. Overall, we are forecasting a moderate increase in revenues for the live entertainment events segment in the area of music events for the years ahead. Various leisure activities are competing for consumers' favour

19 DZ BANK RESEARCH 19/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 FORECAST OF REVENUES IN THE LIVE ENTERTAINMENT BUSINESS (MUSIC) IN EUR BN % % % % 20.0% % 10.0% % 4.44% 1.80% 2.50% 2.50% 0.0% % % % -10.0% e 2015e 2016e -20.0% revenues yoy Source: GfK sector analysis, DZ BANK estimates However, based on our analysis, no accurate conclusions can be drawn regarding the trend in revenues and earnings of the individual market participants from the overall sector trend. This is because the impact of the general economic setting can be offset by company-specific factors influencing the trend in revenues and earnings of individual sector companies. The organisation of concert tours and concert events in particular is strongly project-based as a rule. This, in conjunction with the fact that most sector companies are small and medium-sized, can lead to the trend in revenues and earnings of the market participants being dependent to a large extent on the successful completion of individual projects. A live entertainment company's business performance is not necessarily linked to the general trend The success of individual tour and concert projects is highly dependent on the public's taste and the resulting capacity utilisation of the events. In view of the competitive situation between the many tour and concert promoters, the popular artists and bands in particular are in a very favourable negotiating position and are able to demand high fees (minimum guarantees and share of revenues). Against this backdrop, the tour and concert promoters can only generate an interesting profit margin as a rule if capacity utilisation of way above 90% is achieved at the tightly calculated concert events. To illustrate this, we give below some examples of the trend in revenues and earnings of individual sector companies. A company's business performance depends on the attractiveness of the events in the portfolio We have chosen Dirk Becker Entertainment GmbH as the first example. The company operates mainly in North Rhine-Westphalia and takes on the organisation and staging of concerts focused in the field of rock/pop as a local concert organiser. The company belongs to the CTS Eventim group.

20 DZ BANK RESEARCH 20/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 TREND IN REVENUES AND EARNINGS AT DIRK BECKER ENTERTAINMENT GMBH IN EUR M sales (left scale) EBT (right scale) Source: Individual financial statements of Dirk Becker Entertainment GmbH The trend in revenues is characterised by major fluctuations. Major increases in revenues were achieved in 2007 and 2011, which were attributable in particular to the staging of Herbert Grönemeyer tours in these years. While the revenue growth in 2007 also had a positive impact on the earnings situation, a loss was reported on EBT level in 2011 despite the major increase in revenues. Revenues were on an unchanged level in 2009, 2010 and In the forecast for the 2012 financial year, a positive trend is expected for 2013 and a moderate decline in revenues and earnings for The second example is Stage Entertainment GmbH, whose core business is presenting musical productions in its own theatres and theatres hired on a long-term basis. The productions are presented en suite as a rule, in other words without interruption in a theatre over a longer period.

21 DZ BANK RESEARCH 21/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 TREND IN REVENUES AND EARNINGS AT STAGE ENTERTAINMENT GMBH IN EUR M / / / / / / / /13 sales EBT Source: Consolidated financial statements Stage Entertainment GmbH, EBT distorted positively in 2007/08 owing to extraordinary income Between the 2005/06 and 2012/13 financial years, group revenues at Stage Entertainment GmbH, whose business is focused in Germany, fell by 25.5% overall, or by an average of 4.3% per annum. On sector level, revenues declined by only 0.8% between 2008 and 2013 under stronger interim fluctuations. With an estimated market share of way above 50%, Stage remains the clear market leader in the musicals segment in Germany. Despite the significant decline in revenues, the profit margin was increased in 2010/11 and 2011/12 to 6.5% and 6.3%, respectively. A margin of 5.2% was generated in Both examples show clearly that the trend in revenues and earnings of the sector companies is quite clearly dependent on the attractiveness of the events in the portfolio. Correspondingly, the trend in revenues and earnings in the accounting periods can be subject to very significant fluctuations depending on the number of events and the attractiveness of the event line-up. CTS Eventim announced the acquisition of Stage Holding's ticketing companies in Spain, France and Holland on 6 March As part of the agreement, CTS is taking on responsibility for ticket sales for Stage Entertainment in Holland, Spain, France and Russia. The musicals business is an example of a genre which is becoming less attractive To sum up, it can be ascertained that the market for live entertainment events shows all the signs of advanced market maturity and is very closely correlated with the trend in the population's private consumption. Against this backdrop, we are expecting a slightly positive trend in the revenues generated by the sector as a whole in the years ahead. However, this positive trend may be impaired again and again by crowding-out effects from leisure sectors competing for the consumers' attention and financial budgets. Prominent examples of this are the regular major sporting events, such as the football European or World Cup or the Olympic Games. It can also be ascertained that the trend in revenues at the sector companies can differ considerably depending on the attractiveness of the respective event portfolio. Considerable market fragmentation can still be identified. We assume that the The live entertainment business shows all the signs of advanced market maturity

22 DZ BANK RESEARCH 22/81 MEDIA & ENTERTAINMENT LIVE ENTERTAINMENT INDUSTRY IS GAINING IMPORTANCE SECTOR STUDY 3 MAR 2015 market will become more professional and therefore also consolidate significantly. We presume that the market-leading companies, such as DEAG and CTS Eventim, will benefit from this trend in particular This could take place to a smaller extent through organic growth via the direct acquisition of artists who have been supported by smaller promoters to date, or also through external growth within the scope of the acquisition of concert and tour promoters. However, the second option is likely to be rather limited for CTS for antitrust reasons owing to its market-leading position. The trend in the ticketing market The overall marketable ticketing volume correlates very closely with the underlying markets for live entertainment and sporting events. In Germany, the ticketing market was dominated until recently by a small number of nationally operating ticketing companies such as CTS Eventim, Ticketmaster or Adticket. Furthermore, the market is processed by a number of regionally operating ticketing companies such as München Ticket and Köln Ticket. The ability to be able to sell the greatest possible number of tickets for an event on the basis of the software-based ticketing platform is crucial for the competitive position. For this, a parallel connection is required between the different distribution channels - ABO, call centre, inhouse and online - and the ticketing platform, making the fixing of quotas unnecessary. Valuable information about socio-economic features and the consumption preferences of the concert-goers and therefore the potential demand for future live events could be derived from the empirical customer data which the ticketing company collected until recently, but did not pass on to the promoter. Until today ticket sales are still dominated by distribution via the traditional advanced ticket offices, but marketing via the Internet is increasingly gaining in importance. Based on an e-commerce study conducted by Nielsen in August 2014, it was ascertained within the scope of a consumer survey that the number of those interviewed planning to buy an event ticket via the Internet in the next six months increased by 19 percentage points between 2011 and 2014 to 41.0%. The ticketing business in Germany is dominated by a few larger players on national level In view of the growing use of the Internet by the consumer, more rapid migration from the traditional distribution channels in favour of the Internet can be observed in the area of ticket sales. Within the scope of disintermediation, the ticketing platform can also receive the advance booking fee alongside the system fees and increase its margin. Against this backdrop, CTS Eventim as market leader in Europe can generate high double-digit EBITDA margins in particular. We assume that high margins can also be generated in the medium term especially through the sale of tickets via the Internet. However, it can be observed at present that more and more cheap software solutions are penetrating the market, enabling the promoters to operate their own online ticket shops and take on the marketing of the entrance tickets themselves. Alongside the cost advantage that the use of a white label solution brings for the promoter, it can also now generate and analyse its own customer data. This reduces the dependence on the large ticketing distribution platforms, although we still see major advantages for the well-known ticket platforms such as eventim, getgo or ticketmaster under the aspect of discovery of the ticket offers. Cheap software-based self-service ticketing solutions could change the market significantly