Secular tailwinds are finally slowing down for the North American live entertainment industry. While S&P Global Ratings expects demand to persist in the short term, stretched consumers could cause spending to moderate in 2025, especially as macroeconomic risks soften live events demand.

Still, we expect consumers will prioritize experiences, which will maintain overall healthy credit metrics. In particular, ticketing companies continue to benefit from funflation despite competitive pressure.

In this piece, we will explore shifts in consumer demand and funflation's effect on ticketing companies. We'll also look at how financial policy constrains some ratings and strategic growth drives higher leverage for others, and the risk of heightened regulatory scrutiny.

New Rules: Stretched Consumers Choose Experiences

Since 2022, consumer spending on live entertainment has been robust as consumers prioritize experiences over material goods following pandemic-related lockdowns. Consumers have been willing to spend a greater proportion of disposable income on experiences rather than goods or savings, leading to funflation, or the bubble in pricing for live events.

We believe this shift in behavior is secular, especially among younger generations. High demand for tickets across live concerts, sporting, and theater events boosted overall entertainment spending by roughly 25% in 2023 and slightly less than 20% in the first half of 2024, according to Bureau of Labor Statistics (BLS) and company data. In 2024, admission prices for sports and concerts increased about 20% and 10%, respectively, according to BLS and Pollstar data, as demand remains high despite a weak macroeconomic environment.

However, as consumer savings from the pandemic are depleting, we believe consumers will increasingly borrow to fund leisure and entertainment spending. According to data from Experian, the average credit card balance for younger generations, like millennials and Generations X and Z, continues to rise. While we believe the shift in spending to experiences will persist in the near term, higher prices and increasing debt are also stretching consumers. This could moderate spending on live events in 2025.

We also expect entertainment spending growth in 2024 to slow to about 10% due to a lighter stadium concert touring schedule compared to 2023. Although amphitheater attendance and spend is much higher in 2024 compared to 2023, it generates lower spend than stadium activity due to lower capacity levels. Combined with consumer spending pressures, which partially offsets growth in the stadium pipeline, we expect entertainment spending growth to stabilize to 5%-10% in 2025.

Nonetheless, this funflation growth rate--driven by consumers' need for experiences--remains above our Consumer Price Index (CPI) expectations of 2.9% and 2.0% in 2024 and 2025, respectively. As such, growth remains healthy for the industry.

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Under Pressure: Spending Dependency Could Curtail Growth

We believe the live events industry remains heavily dependent on discretionary spending. Although demand for shows and sporting events continues to increase despite economic pressure from high interest rates and prices, additional pressure could limit revenue growth for live entertainment companies, as already-sensitive consumers see their discretionary income continue to shrink. S&P Global economists forecast both U.S. GDP and consumer spending growth to slow in 2025 to 1.8% and 2.2%, respectively, from 2.7% and 2.5% in 2024 (see "Global Economic Outlook Q4 2024: So Far, So Smooth--Can It Last?", published Sept. 26, 2024, on RatingsDirect). In fact, travel companies are reporting a slowdown in U.S. revenue growth as consumers are starting to delay vacations or trade down for lower-priced options.

Furthermore, venue operators like Live Nation Entertainment Inc. (BB-/Negative/--), ASM Global Parent Inc. (not rated), and OVG Business Services LLC (B/Stable/--) remain at risk of sustained supply shocks. These include health and safety issues or other event risks that lead to artist cancellations or hinder the wellbeing of event attendees. Disruptions could cause volatility in cash flow and credit measures across all live event companies, but venue operators are particularly vulnerable due to their high fixed costs.

Our downside scenario contemplates an unexpected decline in live entertainment sales as consumers curtail discretionary spending in the face of rising unemployment. In such a scenario, we expect softer prices and on-site ancillary spending instead of lower attendance, as we believe consumers will prioritize finding discounted deals rather than missing events altogether.

This could hinder companies with more exposure to concert revenue, like Live Nation, as sporting events benefit from a higher amount of institutionalized demand for offerings such as season tickets. The credit metrics of venue operators and organizers would be hit hardest as they bear the burden of fixed expenses and exposure to on-site ancillary spending trends. A decrease in unit ticket sales and prices could also impair ticketing companies, though to a lesser degree due to their more-variable cost structure.

Ticketing On Top: Higher GTV Doubles Revenue

Of all subsectors in live entertainment, ticketing companies have benefitted the most from funflation. Due to their low-cost structure, ticketing companies have been able to scale quickly to accommodate record-high demand for tickets, allowing them to outpace the growth of other live event providers, like venue management operators and theatrical production companies.

We estimate that gross transaction value (GTV) of tickets (inclusive of fees, exclusive of taxes, and net of cancellations) increased 20%-30% in 2023, stemming from higher ticket prices and more concerts. As such, ticketing companies largely doubled their revenue base in 2024, as compared to 2019. For the next 12 months, we forecast revenue will continue growing high-single-digit to low-teens percent for our rated ticketing companies, as consumers remain undeterred by rising prices and economic pressure.

Furthermore, ticket prices have increased the profitability of touring, resulting in North America concert tours by artists like Taylor Swift, Beyonce, and Harry Styles in 2023, as well as Madonna and Bad Bunny this year, grossing hundreds of millions of dollars each. Artists and other entertainment suppliers are also offering longer concert tours and creating more elaborate experiences to engage consumers seeking a spectacle and differentiated products. The pipeline of concerts for 2025 remains healthy, and we expect this trend to continue over the next two years.

Competition challenges company margins

However, the competitive landscape limits opportunities for margin expansion for ticketing companies. The ticketing industry is very competitive due to the commodity-like nature of tickets and is highly concentrated, with Live Nation, StubHub Holdings Inc. (B-/Stable/--), and Hoya Midco LLC (Vivid Seats; B+/Positive/--) holding the majority of market share.

StubHub is the leading secondary ticket marketplace operator with Live Nation's Ticketmaster and Vivid Seats closely competing in the secondary market. StubHub lost considerable market share during the beginning of the pandemic due to operating missteps, integration challenges with the viagogo acquisition, and because of increased competition. This prompted the company to aggressively spend on marketing and operate at a loss in 2021 and 2022 as it tried to regain lost market share.

While StubHub's recovery was longer than its peers, marketing spend has moderated and the company benefits from strong brand recognition, which helped the company generate traffic to its website. StubHub's sales and marketing spend as a percentage of revenue declined to roughly 40% over the last 12 months ended June 30, 2024, from about 60% in 2022. By comparison, Vivid Seats' sales and marketing spend as a percentage of revenue decreased to about 20% from 40% over the similar periods.

Overall, we expect StubHub's marketing spend to remain higher than Vivid Seats' as StubHub focuses on converting website traffic to revenue, whereas Vivid Seats' growth strategy lies in driving engagement from its repeat customer base. Although competition remains intense, we expect our rated ticketing operators to achieve strong EBITDA growth in 2024, which could support further deleveraging.

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Financial Haze: Unclear Policies Limit Upside

When consumers began prioritizing live experiences after pandemic-related lockdowns, we upgraded most of our rated live event companies, as EBITDA skyrocketed due to strong demand trends. While we expect resilient consumer preference for experiences to support further EBITDA growth, financial policies limit further ratings upside for many of these companies.

Although we forecast Vivid Seats and Spectacle Bidco Holdings Inc. (Cirque du Soleil; B+/Stable/--) to end 2024 with leverage metrics below their upgrade threshold of 4x, their financial policies allow higher leverage for growth and investment opportunities. This constrains our rating on them both.

Cirque du Soleil is owned by a financial sponsor, which we view as a risk due to the tendency of financial sponsors to use leverage to fund acquisitions, investments, or cash distributions. We expect Cirque's sponsor to remain in control of financial decisions. As a result, we would need to believe the company will adhere to financial policies that support leverage comfortably remaining below 4x before considering an upgrade.

Meanwhile, Vivid Seats' financial sponsor relinquished majority control of the company in December 2023. Now, it is transitioning to a fully independent company, restructuring its board to further reduce the sponsor's ownership stake. While a positive rating action on Vivid Seats could occur shortly, further ratings upside is limited as it lacks a formal leverage target.

In contrast, our current forecast for StubHub does not anticipate lowering leverage below our upgrade threshold for the company due to high debt built up during the pandemic and its strategic growth initiative to expand into primary ticketing. Nevertheless, although StubHub's current financial policy is unclear, we could raise our rating on the company if it prioritized paying down debt such that sustained leverage is below 7.5x and FOCF to debt is above 5%.

Merger On The Dance Floor: Companies Prioritize M&A And Growth Initiatives

The live events industry in international markets is far less consolidated than in the U.S. Live Nation and Vivid Seats have expressed interest in growing their international footprint, particularly through M&A transactions. Both companies pursued international expansion in 2023, such as Live Nation's acquisition of music and arts festival Clockenflap and Vivid Seats' experimental acquisition of Wavedash, both expansions into Asia-Pacific. Live Nation also plans on opening 14 major venues globally in 2024 and 2025.

International markets are likely to experience the same secular tailwinds that the U.S. has benefited from in recent years, although certain international jurisdictions place limits on resale value versus face value, limiting revenue growth by secondary ticketing companies like Ticketmaster (part of Live Nation), StubHub, and Vivid Seats. We expect U.S. live event companies to fund international acquisitions with cash rather than debt due to their high cash balances. We could also view international expansion as a benefit to business risk as it would result in geographic diversification, though the acquisitions carry execution risk.

The primary ticketing space is heavily dominated by Live Nation, which has roughly a 70% market share due to its venue exclusivity agreements and the flywheel effect building on its momentum. However, while StubHub has generally focused on the secondary ticket market, we expect the company to partner with sports leagues and global music festivals to issue primary tickets. We expect StubHub will fund this long-term growth initiative with EBITDA margins of about 30% and substantial cash flow from its secondary ticket sales.

Cruel Summer: Legal Scrutiny Persists

Live Nation has come under intense regulatory scrutiny in recent years. The negative outlook reflects the credit risks and uncertainty of the active U.S. Department of Justice (DOJ) lawsuit against Live Nation. The DOJ is seeking to force Live Nation to divest from Ticketmaster and venues owned and operated by the company due to the company's alleged monopolistic practices.

We believe Live Nation benefits from economies of scale and vertical integration in the live events industry and that Ticketmaster is a core component of its competitive advantage. Therefore, we view the lawsuit as a sizeable threat to the business, though we remain uncertain around the timing, financial impact, and outcome of the lawsuit.

Over the longer term, we anticipate more clarity on legislative bills that could change industry dynamics, including, but not limited to, all-in pricing, speculative ticket selling, and bot enforcement. These bills could lower revenue if ticketing companies are unable to capitalize on price gouging or supply and demand imbalances in the marketplace.

Regulators have also targeted the use of junk fees--which is when online marketplace providers add fees through the purchase process to upcharge customers. California passed legislation that bans this practice starting July 1, 2024, and the Federal Trade Commission (FTC) has proposed a federal ban. Our ratings and outlook on live event and ticketing companies incorporate this heightened regulatory risk, although the timing and outcome of these legislative bills remain uncertain.

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