Very excited to have Michael Rapino, CEO of Live Nation, here. Obviously, having you here ties into our note this morning. Our summer project, our deep dive on live entertainment, was like an ode to Live Nation in a way.
It was.
In any event, you guys just touch every bucket. Let's go through the business. Starting with, you know, live entertainment industry has experienced tremendous growth over the last several decades and obviously the last several years as well. Can you, you know, tell us some of the key supply and demand tailwinds that you think will drive the next leg of growth for live music over the next, I don't know, whatever period of time, five years, 10 years?
First of all, I thought your report was great. We can just cut and paste that first paragraph on supply, demand. I think you hit—y ou know, forget Live Nation agenda. The industry is having its moment right now. Well, maybe other medias are going through their own disruptions. You know, first and foremost, this is a category where on a kind of product basis, it's not that disruptable. You can't duplicate the live show. So for all the other industries who have some of those challenges, there's nothing like being at that Taylor Swift show. You may then eventually go watch it on a movie theater, or you might have some other things, but it's a really a product that is non-duplicatable. Consumers love it.
A recent report, 67% of customers said it was the most important, memorable moment in their life. So that concert has always been, and now more than ever with social media— 70% of our fans said they go to a show to make sure they have a social post. So, it's that important of a badge in their life to make sure that they can tell people they were at the Beyoncé show. So it's, you know, that artist and what they're able to drive with that relationship with that fan and coming out live is just a bond that we've never seen before, now that, especially with social media. So the artist, the supply side, more than ever, there's more artists on the road.
We talked earlier, there's more artists saying: "You know what? I got 100 million followers, and 30 million are from Brazil. I want to go play Brazil now." That didn't happen before. That artist didn't have that data. They played America, they played Western Europe. So they want to play more markets. They want to get to more markets. And then you see more of these international artists. If anyone watched the VMAs last night, it's just a demonstration of it, man. Latin, Colombia, K-pop.
The world is globalized from the outside in now, meaning these artists are popping up anywhere. And because of social media, my 13-year-old knows that K-pop artist dropped a single last night. It didn't happen for 50 years. It was an old system built by gatekeepers. So social media, globalization of the artist, more artists than ever, the pie is growing. We don't see that stopping in any way.
They're still making 90% of the revenue on the road, so it's financially important to them. They make fans for life on the road. So we see the supply side stronger than ever and continuing. On the demand, again, the consumer, you know, as of this weekend, so the data we're still seeing on sales for next year bigger than ever. I mean, Zach Bryan went on sale last week. Luke Combs went on sale last week. I mean, these sold out in stadiums and pre-sales. You know, that's middle of America everywhere, not just New York. So we're seeing 2024 on sales stronger than ever. Last weekend at our on-site, we're still seeing double-digit growth happening, so there's no pullback from the consumer when they show up.
Secondary is on fire, good or bad, but it certainly shows that no matter what we're pricing it at, there's still a big market above that, on demand. So the supply-demand side of our business seems stronger than ever. It's not a pent-up demand. It's not a one-time because I had some stimulus money from COVID. This is a structural global change around experiences, magic moments that make a difference. And I'll end on this one, you know, the concert continually ranks in the top three of kind of where I want to spend my money to have a memorable moment. And even though you read press every now and then about the ticket price at $400 and it seems expensive, it's nothing compared to their other magic moments, right?
So it's still a very affordable magic moment compared to going on Vegas or Disneyland or on a trip. So we, we think this is a business that's gonna continue to grow on a global basis as an industry, and consumers are gonna do continue to want to say, "That's different in my life. I'm a digital consumer, but going live, bonding with my fans and friends, is how I have those magic moments as a consumer." So we think there's a great, a great run ahead of us.
Right. What, what do you think is driving the growth in the artist pipeline?
Well, you know, the artist still continually—w e've said this many years ago, the artist is a media company on their own now, as you know. They went direct. So that artist now has 20 to—w hat does Taylor have, 300 million followers? They're media companies. But they figured out the number one way to make sure that media company has a really strong heartbeat is to go play live. So you can feed up content, you can sell them some T-shirts, you can stream new music, and that's all very important. But when you show up live, you make lifetime fans. Don't do that on Spotify. So that artist, as a business person, is very astute. They're all very astute around their global audience and how to make sure that global audience maintains for a long time.
So they want to get on the road. They know that's the way they're going to grow their global audience. That's the way they're going to ultimately figure out what their SKIMS is or their product line, their product expansion. So as many corporations and brand architects, they know that live is the heartbeat to all of their ancillary revenues and their fortune long term.
So we see them wanting to go on the road more and more. And we now see this, as I said, just this, the TikTok moment for live music is just the gift from life, right? This, it unlocked every 13-year-old, 17, every kid in the world that wakes up and says, "Drake dropped a song this morning." Not, "I'm in Milan, and I didn't know because the record company didn't buy a spot on the radio." I mean, that was the 50-year model, right? That you would've been force-fed a single eventually in your market, and by the way, only in Western Europe and America. So now whether it's Cape Town, or Milan or Colombia, the social media has unlocked that fan direct to their customer, and that's made new global fans. And then the opposites happen. That artist in that market drops a single, and my kid now, at 13, knows this super big artist from India overnight.
Again, never would've happened historically. This back and forth of a consumer-artist relationship on a global basis in real time is making real fans instantly, much bigger discovery, as you alluded to in your note. So for us, it's just the gift of life. I mean, you know, not to mention, 70% of those fans are posting from that show that night, telling people it's their magic moment, and I got 70 more shows to sell. That's the best marketing one could do, right? So it's this great kind of complement to our core experience that doesn't actually duplicate it or take anything away from being two hours live.
Does it— I mean, one of the things that's been happening more and more in the last year are these artist collaborations, where you have the very established artists, like Elton John, you know, collaborating with some, a newer artist. And it's not just him, it's a million people. How is that affecting—i s that affecting your business?
No, it's, you know, I think the artist is going through their own transition on what is their so-called record, what's their art. And, you know, the full record is becoming maybe less important to some artists, dropping singles, ongoing. Drake taught everyone that. Have lots of content. So Shakira's a master at it. So drop a collaboration, and it doesn't have to be a big fanfare record release event. It's drop new content on a Thursday. By the way, I got 100 million followers. They're gonna listen to it. I don't have to go chase media and have an event. So I think they have all figured out more content, ongoing relationship with their fans is a good idea. Cross-collaborate with whoever is good for both of those artists. So you'll see more and more of that happen.
Right. I just feel like more up-and-coming artists getting exposure. But—
Yeah.
One other thing of, touching on, like, some of the stuff that you wanted—y ou talked about the younger generation. Is, has there been a change in the demographics, like your—
You know, we haven't seen it yet net overall. We, we track average age of the buyer. Our fear has never really been that the average age goes up or down. It just was ultimately over time, were there enough youngs coming in the pipe to make sure the business continued, right? Everyone's had a theory over time on, "Oh, the, there's gonna be no more Rolling Stones, just old people go to shows. Young kids are gonna play video games or whatever." None of that has transpired. We're seeing that 12-year-old, I mean, Taylor Swift, God bless her, what a machine that she's able to bring in, you know, having six-year-olds crying in the stands, singing songs, right?
So proves it over and over, that these artists—a nd I got a 12, 10, and 8-year-old, three boys. They live on music. They know, I mean, and when I drive them to school in the morning, I'm amazed every morning when they play DJ on whether it's the Eagles that they found on a video game or the latest artist I've never heard of. So music is just as important to the young generation as it was to everyone in this room. They have their Beatles. Maybe it's Taylor right now. So that's the most important thing to us.
All of us, everyone in this audience still wants to go, wants to bring their wife, maybe their high school buddy, to the AC/DC show for a reunion. But the 12-year-old is saying, "It's just as important to me as the Beatles days, and I wanna go see live." And that's, I think that's a pretty important fact, given my 12-year-old probably doesn't have any other media habits that I had, right? 'Cause at 12, he's got social, he's got video games, he's got so many other digital experiences, and he ain't dying to go to Disneyland, but he wanted to meet up. You know, I had to take him to Lollapalooza in Chicago, and I had to go take him to, you know, a Latin show at the, at The Greek.
We're very thrilled that our data will say young consumers are just as thirsty as every other generation has for live.
Right. So break it down a little bit, and let's talk about the fan growth. You've, your attendance growth is, I think, it's 8% compounded over the last decade. I think you guys have mentioned, Joe, like, you know, I know Joe said it recently, and you may have said on one of the calls that you sold 128 million tickets, but you'll likely end the year somewhere in the high 130s, maybe 140 million range for fans, which is kind of approaching, not quite, but approaching your target of 175 million. You know, how should we think about your fan growth over the next, you know, couple of years?
Yeah, going to my earlier point, I think, you know, this is an industry that's gonna grow. As, you know, for 30 years, this has been about a, almost a 10% compounded business. It was one year in I think, 2009 recession, that we had a decline in the industry. It's been fairly recession-proof, and I don't think you could find another industry, that's had 30 years of this kind of compounded growth, continually. And I would say, let's just in simple terms, that's a US-driven business for the last 30 years. That's before international really started. So, we're very confident for the next 30 years, this industry is gonna grow, maybe not from America, but from the rest of the world, who is just starting to build infrastructure, become professionalized, and wants to see Beyoncé.
So we think this is an industry you should invest in overall. It's gonna have great, great tailwind for a long time to come. Our business, we've always been somewhere 8% to 10% annual growth. We've had a couple rocket years, the last couple. We think that, you know, 2024 looks like another rocket year. That isn't pent-up demand, that's just new secular growth. So we think we're gonna. We think our 175 million is a great target.
I'd say every year over the last couple of years, we've realized the pie is growing faster than we even thought as an industry. So I think that the 175 million will grow because the industry's gonna grow, and we'll continue to capture our piece of that pie.
So, let's touch on. You just mentioned international. On your last earnings call, you mentioned there's 2x more international artists or acts in the top 50 just over the last five years or so. What is driving the international artist growth?
Yeah, you know, it's similar. Just the, you know, we use an example, you know, for 50 years as an artist, you probably toured 90, 90 dates. That was kind of the, "I'm gonna go on tour next year." Tell a promoter, your agent, "I got 90 dates, that's a year." Probably put 60 in America, 30 in Western Europe. It's really the only place you could go, play Wembleys, play arenas in those markets or in America to get the proper price, the gross to pay for the show. You know, when these artists go on tour, they've got a big startup machine, they got big weekly costs, 32 transport trucks, crew.
So they've got to go play those three shows a week that have a certain gross that can cover the cost of their startup, that they're moving, their moving city of 300 people. So you really couldn't go anywhere else. You couldn't go play Latin America, you couldn't play Eastern Europe, you couldn't play Asia. Take you two weeks to boat there, you gross $200,000. You said, "You know what? Give me another night in Los Angeles," and, and that's where you toured. And, and you didn't have the demand, and going back to it, now when TikTok and social media and YouTube unlocked that consumer and that artist said, "You know what? I can, I can go to Argentina, and, and I can still charge the same ticket prices because the demand's there."
We put 10 shows on sale last year in Argentina, in the middle of, you know, hyper deflation, inflation with Coldplay, and sold 10 stadiums out in our sleep at the same gross that you're gonna get in Detroit. Well, that didn't happen 10 years ago. Ten years ago, we would have looked and said: You know, you can't really go to Latin America. Maybe you play a couple vanity shows, but you can't make a business out of it. Now, you can go to Latin America and play 20 dates and get the same amount of money as you could in America. So you can bring the machine, you can bring the proper tour down there.
You can do that now in Pacific Rim. You can go to Japan, Hong Kong, Australia. You can now get the same grosses, same ticket prices. So overnight, the globalization of the fan base and demand says, I can show up, and the consumer pricing now has followed that. They can charge similar prices, so they can pay for the show. So we now look at an artist that says, "Well, I got this global audience. I got 90 dates. Maybe I'll play 50 in America. Tell you what, I don't want to play 90 anymore. I'll play 110 because I see a wider audience. I want to get 10 more dates in Eastern Europe because I've never been to the Middle East or haven't been to Africa and so forth.
" So they're really, every artist is talking to me every day now about, "What about, c an I go play down in blank markets and do 10 dates?" And you can now, we can, we can make the math work, which you couldn't before. So they're curious, their audience expanded, they want to get to these markets and build fans, and now we can mostly get the same gross and the same pricing.
And then the growth of the artists that come from outside the US, you mentioned, like, right off the top, Latin music, Bad Bunny, K-pop, you, I think you mentioned, I don't know if there are, like, Africa. Africa seems like there's a lot of artists coming out of there. What, what is driving them to not just play in their local markets? Is it just social media or is there something-
Just social media. I mean, you just again, if you were that artist in India, breakthrough artist, in a market like that, you just had no apparatus to get to a fan in Toronto. Today, you're on social media, and like you said, maybe you collaborated because artists are smart, and they want to tap into an Afrobeat or they want to try something different. So a Lil Wayne or a Lil Baby says, "Let's do a mix," and all of a sudden, that African artist or that Indian artist or someone from Korea's got 20 million followers because he's been on someone else's social, and the song popped, and boom! He's got an audience, and my 12-year-old in LA says: "Wow, Dad, have you heard of, I wanna go see him. He's playing The Greek."
Right.
So this audience that the artist owns now, and you think about it, it's unheard of, right? The athlete doesn't have the audience, the actor doesn't have the audience, the movie does, or the team does. But in this case, the artist is it, and everyone wants to build that audience, they want to own their audience, and they want to go play for that audience.
Did the growth of the DSPs, like Spotify, going more global, more countries, has that been a factor or?
Just got to give Daniel credit for legitimizing everything he did on that space. But I think the challenge, or the opportunity right now is, if you have young kids, you just got to go see what they do. They're on YouTube and TikTok.
Right.
They might end up at Spotify, but they're discovering in video games, on YouTube, TikTok, Instagram, social media is where they're seeing it, Snap, where their friends and where the community is sharing and seeing that. That's where they're discovering it. Where they listen to ultimately is kind of almost the second step.
Right.
But, you know, YouTube is— I mean, I got three kids, they live on YouTube. I mean, there's a new version of a game watching someone that's got great music in the background. It's so integrated into their world now, that's what's driving it.
What parts of the value chain do you see the most opportunity for Live Nation internationally?
You, you know, Live Nation, you know, we've, we've always had a kind of a small to-do list and a, a big don't-do list. We've stayed very focused on what we think we can do right. We started this, you know, we, we went public 16 years ago, and we were basically a small US amphitheater company. And then we kind of had one revenue stream, and we looked at that and said: "We're actually an advertising company, and we got to legitimize that." Today, we're the largest advertising agency sponsor company in the world in live music and a big part of our business. Along the way, we said, "We've got to be global.
We've got to go faster and be global, while no one's looking," and we have 100 offices in 40 countries, and we can offer that artist that global opportunity. We also looked at and said, "We gotta look at the venues." That's a big part of being vertical. You know, everyone wants to use a Netflix analogy, but we're kind of like Netflix, right? We do a lot of shows, and some of them are Beyoncé in the MetLife Stadium, which we don't own. A lot of them are our own content, where we're putting them in our own festival or our own venue. So we learned a long time ago, we have to have that combination.
We want to be vertical in our own real estate where we can, but also make sure we grow our global market share and venues. And then sponsorship became, you know, kind of the icing on the top of all that, as well as our ticket strategy. So we just look at that model, and we replicate it. There's 100 cities, and when you look at the way we expand, you're probably gonna see a press release on one of those stools kind of getting in place. So maybe we're gonna launch a venue in São Paulo, or maybe we launched a promoter first, and then we're gonna launch a festival we did last week, The Town festival in São Paulo; f irst year we've done it, s old 100,000 tickets and wild success.
Launched it on Ticketmaster in São Paulo, after we bought the festival there. We're looking at cities around the globe, São Paulo, Milan, you name them, you know what they are. Our job is to do what we did well here is, let's make sure we got a great promoter. Then from there, let's make sure we get some real estate, whether it's a festival or a venue. Then launch our ticketing platform there, get a little bit of scale, then we can start getting sponsors, and that wheel starts to happen in that city. You look at Chicago, where we've got Lollapalooza right in the city. We have a good market share as a concert promoter.
We've got a nice venue portfolio, an amp, a theater, a club, great sponsorship, and that could be a $50 to 70 million AOI market. So we kind of look at that model and say, "When we get in a major market, if we can get three legs on the stool and build our model, we can unlock that market and kind of have those returns." So every kind of press release you might see of a festival or a promoter or a venue, it may even look random. It's just a stool on a leg trying to build within that Milan or Cape Town or wherever that market that we think has huge potential.
So 90% of artist income is generated through touring, which is not the traditional way they've made money. You've already said that artists, artists are adding tours, so the touring longer. Can you talk a little bit about how that impacts the economic, you know, just the economics overall and why artists choose Live Nation?
Well, I'll go to the second. I'll say. I think we, when we built Live Nation, we really always said from day one, we work for the artist. That sounds simple, but it's very different than maybe the way they thought about their other relationships. So we work for Beyoncé. We want her to employ us for those 100 dates. We wanna get repeat business from her. So we're a service provider in that sense. We've got to convince Beyoncé that we have a best-in-class operation. A lot of what a model touring and to win an artist is all the pre-planning. So when an artist comes to us and says, "I want to go on tour next year, what do you think?" That's where our data and our depth of expertise comes in place.
Do you play 60 shows or 40 in America? Do you play a Thursday or a Friday? Do you charge $190 or $160? Do you play how much in Europe? Do you go to Australia or not? So mapping out that global plan for them, having real data to talk about pricing, where they can find that fine line on maximizing the gross but not feeling like they're an outlier within others. How do we make sure it's the most efficient use of their time? Can we sell tickets in South America, or, or do we do six more dates in Florida and Texas? So really having that global data-driven expertise, analytics, all of that, that says we professionalize—y ou know, we kind of say, like, we're like UPS Logistics, right? We got to be the best logistics player.
We got to be able to tell that artist, "We can help you make the most money, sell out every ticket, and when you come home, it's not what you grossed, it's what you take home," right? Because you can spend a lot of money on the road. So we want to make sure that that artist has the best return for their capital and their effort. We're the best in the world at that. We've been doing it long. We've got a great database, analytics. And then two is, after all that, the second is, who's gonna sell through? I wanna make sure that every ticket gets sold. I mean, you do not get fired if you sell every ticket. Doesn't matter how much money you pay them, when that artist gets on stage, and it's 40% full, someone's getting fired.
So then you've got to do your job. You gotta make sure you planned accordingly, you priced it accordingly, and on that on sale, you wanna be able to be on that, you know, that text exchange, email exchange with that artist saying, "We sold out today, and we left a few waiting at the door, and we found that right tension," or, "We sold 80%, and we'll sell the rest in the next three weeks." So marketing, having all of our data to reach those customers, deliver that sell-through, make sure that they sell those tickets. And then third is what I talked earlier is, being able to tell that artist, "Listen, when you show up in Milan, Pittsburgh, or Cape Town, we have a local office. We understand the market well. We have all the permits. It's safe, has insurance, and all athe right vendors.
You're gonna get paid. We're gonna pick you up at the airport. We're gonna make sure you leave." So having a global business, global service provider, analytics, and the best marketing sell-through in the world, we focus from day one on building that machine that says, "We know how to build your business model. We're gonna gross the most for you, and we're gonna sell the most tickets in the most safe secure environment, and we work for you." And we're very proud that 16 years later, doing as many global tours, as many dates as we have, you know, we have an incredible high renewal rate, right? Because that's how you kind of judge your business. We've been touring. Most of these artists tour after tour once you deliver for them. So we tend to think that's why we're the best solution.
Regardless of our agenda, right, the biggest challenge you have is make sure that artist feels that—understands that it's his agenda, her agenda. We want them to win, them succeed, and ultimately, our business model provides our return through the platform. But first and foremost, win the artist. They should make all the money. If I could sing and dance like, like Beyoncé, I'd want all that money at my concert. So we kind of thought our position always was different. Other gatekeepers kind of owned IP and lots of fights on who gets paid and don't get paid. We don't get that debate, right? We get to say, "That artist makes all the money," and we're happy. We built a business model that can pay them that money and find ancillary ways to support our business model.
So we've got an authentic business model on the place the artist cares the most about in terms of financially. And our trust and proof is, over the years, have delivered. First one was more —I can't remember.
The touring. The touring for longer.
Yeah.
Yeah.
So that answered the the thrust of it.
Yeah. No, you, you get to most of it, and I've a lot more questions. So you've been successful at monetizing the fan relationship through onsite spending and more recently, with premium experience business. What are some of the ways that you're actually improving the fan experience, and how does that impact the economics of your business?
Well, I think you know, the— we talked about this earlier. I think the sports has done a much better job, one, because they control the environment. So you look at the new arena being built or the new stadium, you know, every owner is building that billion-dollar arena or multibillion-dollar stadium. They're thinking differently. They're not building a round bubble with three layers of suites, right? They're building hospitality, one-off experiences, upgradable experiences, a lot of zones. You look at the Masters, right? $400 per head. They know how to pile them high and watch them buy. They've done a great job. Concert business was always a little way behind. One, we were playing in someone else's venue. We were the secondary player. Or the current music venues you probably go to, they were pretty generic, right?
A lot of GA with a few little V VIPs. You know, kind of we're Southwest Airlines with maybe some peanuts up front. But we weren't taking advantage of truly this new experience the customer wants. I think that's what you're gonna see us kind of be our next phase of real growth. Our biggest opportunity isn't that we need more fans. That's gonna be part of our growth. It's gonna be that we can upgrade and upsell our current base, and we're just in the first inning of that. And you look at that customer. This is not like other consumer segments. This isn't, you know, I buy a Gucci bag, or I shop at Target.
This is about, it doesn't matter what income level I come from, when I wanna go see Bad Bunny or Beyoncé, and I go to two shows a year, I want to spend and have a great experience. I don't want just a $140 ticket in the third level. I wanna, I wanna buy something. I'm bringing my wife, my girlfriend, my buddies. I wanna—i s there an entry? Is there a special access I can get? Is there a, is there a special bundle? I want that magic moment, just like you've all done, God forsake. I, I did it recently when I went to Disneyland and all the crap I bought, blazers and all the stuff you buy on the way out at a crazy price because your kids want that moment. That's what they want, right?
They don't just want to show up at the show. They want that magic moment enhanced. We have not done a good job. We don't. We've-- You know, we've kind of 99% of our business is GA, and 1% is VIP. We use an example in BottleRock. We have an incredible festival in Napa Valley. We love these guys. We bought—w hen they presented to us, Joe and I, they said, "Oh, we're gonna build this great experience. We're only gonna-- We're gonna cap it at 30,000. We don't want any more, and 70% of our festival is gonna be VIP and 30% GA." When you look at Lollapalooza, Coachella, you look at a traditional festival, it's 99% GA and 1% VIP. BottleRock is our, one of our most profitable festivals we have; o ur per heads are incredible.
That's where the business is headed. We're, we're thinking that every day in every new build, building we're designing. I keep saying to the architects the same thing: "Why are we building a GA building with a few VIPs? Let's build a VIP building with a few GAs." Like, we've got a lot of room to move this experience better. So, we're in the first inning, second inning. We're, we're, we're growing it on-site every year. We're launching premium brands, but we're still—e ven look at the, the bar business. They're much, much ahead of us on—y ou know, whoever invented bottle service, God bless them, right? We, we, we don't have bottle service in our building. We should, right? You should walk in, and you should have to buy a bottle service.
We haven't thought of that yet, but so we have a long way to go. We know the fan, and it isn't just the high-end fan. Any fan that's coming twice a year, if we could provide a better experience, they will buy it. And we spend most of our energy looking at our festivals, our venues, and the manifest now and saying: How can we provide a better, upgraded experience from just a face value ticket? But real, not, you know, a fake cocktail in a bad room. How do we really give an ongoing, sustainable value proposition? And every time we do it, we see it win. So we're, we've got lots of case studies, and we think that's the biggest growth opportunity as this industry will look at, is upgrading the experience.
Let's move on to venues. What does the pipeline look like, and how do you identify these opportunities? Can you talk about the typical return profile of the projects that you're involved in? Is it build versus buy, kind of?
Yeah, we're—y ou know, we've always been in the venue business. Amphitheaters in America was the easy entry point for most promoters back in the day. And we have a bunch of theaters and clubs and incredible businesses. They drive huge returns for our sponsorship, our ticketing, and t he vertical machine. So we love, we love the venue business. In COVID, we started to change our strategy slightly and merge all of our businesses under this "Venue Nation," because we started to really see that every developer in town wanted a live venue. They didn't want a movie theater anymore, but they wanted a live venue. Any developer, they wanted to build that L.A. Live, and every rich billionaire that had a sports team wanted to take his arena and build retail and do what Atlanta did, right?
They'd come to us and go. B ut up until then, we were kind of the tail on the dog. We'd be the dumb guy that would like, let the developer come in, maybe SMG built the building, and we'd come to the final pitch and say, "We'll put 100 shows in," and get a rebate. We started to realize is our content was really valuable. We should have stepped that middleman, and we should have built the venue. We should operate the venue and fill the venue. That's the best return on our capital when we do that kind of triple win. So then you just got to look at white space. America was always a bit complicated because there's so many great NBA, NHL, NFL owners that have their own stadiums and arenas. You really couldn't look many opportunities.
Austin was that rare market where there wasn't an arena. We built an arena. It's a home run with OVG. It's a 30%+ IRR. And we look at that model, and to give you kind of capital ideas, you know, you look at a model like that, what the banks love about a model like that is it's really long-term committed capital. So we're gonna launch an Austin arena. It was about $350 million to build, $75 million equity check. Banks love that there's a 10 to 20 year committed revenue around boxes, name and title, premium seats. So you look at a model like Austin, we're pre-selling sponsorship and name and titles three years out. We actually never even wrote our $75 million equity check.
We had more revenue come in, self-finance the building, open up the building, and you get an incredible return. So I say that because I know there's some panic sometimes in building and capital allocation. So we look at models like that, and where we see the white space, obviously, is international. Every market city that we look at probably has a beautiful soccer or football stadium for their local team, but they don't have an arena. There is no NBA, there's no NHL. It's probably been an old arena or a rusty arena. So we have an arena now in Dublin. We bought an arena in Amsterdam. We bought one in Lisbon. We looked at something in Germany.
So we're looking in these markets where there are major cities, probably have either an old arena that we can upgrade, or we could build a new arena and really propel our market share and our return by dropping that in there. So, you know, we've got probably 75 of these on the pipe at any one time. They kind of take a couple of years on permitting. You're bidding against others. You win some, you lose some, you decide it's too expensive. So we kind of really started that "Venue Nation" department in just a year before COVID, where we really developed a development team. And in the last year, we've seen it.
We've been in that pitch, in that foreign market where CTS is pitching, SMG, kind of the traditional OVG, venue developers and us. And we're winning because we get to walk in and say, "No, we know how to build a $300 to 400 million arena. And by the way, more importantly, we're going to fill this thing through content." So kind of being in that front seat of, as the developer and operator owner over time, we think there's great returns here. We typically look on our capital allocation. Now, there's two ways we look at capital allocation. You know, at minimum, we want a 20% return. They, they can be up to 30% on some home runs like Austin and, and even up to 40% on some of our rev gen and capital.
So if you look at our current model, you know, 80% of our rev cap, we're going to spend in CapEx this year. That 450 is going to be rev generating. Joe and I will go through the next month, where we probably have 100 opportunities where our operators will come to us on rev gen. "Hey, I've got the amphitheater in St. Louis, and I got a crappy room like this, but if I get $400,000, I can turn it into the VIP club and sell a new 1,000 members." We did this in Toronto this year, where we had a room like this that was going to be given away to sponsors.
We said, "No, let's make it a membership club." We sold out 100 members at $5,000 overnight, spent $200,000 to renovate. So huge opportunity in all of those. Anything we're doing on-site is probably because we got a room that's selling a face value ticket for low, and we think we can upgrade it or upgrade the concession stands because we can sell more food and beverage. So we're always looking at ways we can make money, where we've already got our investment and get a good return. Those can be as high as 40% return because we already, we really know if we're going to go develop that, we got the market, we got the customers, we just don't have the product. So those, those are kind of proven well. We like those.
And then we balance how many can we afford to do in any one year? And then we're always balancing how many new venues are on the pipe. Do you have two or three a year that you're looking at? All of those are financed by your current cash flow, current balance sheet. No change to our balance sheet to keep adding these one or two big, big venues a year as we start to get rolling out. So that's kind of our focus. We think having a global platform will be a big, big propeller for our international growth. If you look at America, and you really look at Live Nation and say: what was its kind of core strength and what we built this off? It was our 40 amphitheaters.
We were able to have a platform where we could build our ticket and our sponsorship. We didn't have that in international. When we buy a promoter or a festival, it's a slower entry. When you roll into a market and buy and build an arena, you kind of propel all those other pieces really fast. We weren't able to do that in America because, like I said, there's MSG. The main market was already probably covered. Internationally, we think we can actually excel our growth because you can have that one pinnacle venue that really excels your bottom line and your entry.
Okay. We don't have a lot of time, and so I'm gonna skip over other areas-
Okay.
Of opportunity, including—t hese are the questions I can't, I don't have time to ask: ticketing, sponsorship. So, but that's such an maybe a more touchy subject, which is regulation.
We could, we could do sponsorship.
I know they're both sources of upside. We just, like, don't have a lot of time, and I wanna, you know, not touch on the one thing that seems to be maybe a little bit of an overview.
Sure.
I mean, you've been pretty proactive from a regulatory perspective, rolling out all-in pricing. You're working with legislators on this to draft the FAIR Ticketing Act. Can you just talk a little bit, not a lot, about the initiatives that, you know you're addressing speculative ticketing, just how you're positioning with, you know, some of the, some of the regulatory scrutiny that you've been under. If you could also touch on, like, where are we in the DOJ investigation? It's been almost a year.
Yep.
How much longer can it possibly last?
It's okay, so you leave this for the speed round.
I have actually one more question, so if you make it speedy and then the last one.
Okay, so, listen, regulatory, believe it or not, as painful as this year has been through the launch of Taylor Swift, it's actually helped us. You know, there's—i n any time that you're in this kind of transition, this noise ended up being helpful. One is because in the kind of pre-Taylor Swift, we were on our back foot. We didn't spend a lot of time convincing people that venues charge most of the service fee, or that artists take most of the money, right? Those are not popular opinions when you're a B2B business. Thankfully, when this all came out, it—we had to start explaining, and Joe and I spent a ton of time with legislators and regulators.
And once they get past the, "Oh, my god, you must be big," and, "What happened?" And you go, "Well, let us explain it. We, you know, there's a huge challenge in the marketplace right now. It's called secondary. So that on sale that's gonna happen, here's what's gonna happen. There's gonna be a whole bunch of on-sale bots trying to steal those premium tickets, and they're gonna instantly put them on SeatGeek, and that fan that can't get a ticket is gonna jump to Twitter and be mad because they couldn't get a ticket, and they think they're all" So if you want to fix the system tomorrow, we outlaw secondary, you clean up the system overnight. Not gonna happen in a regular marketplace like America. Other countries have it. But it's been valuable that we've been able to have lots of great conversations.
Most of what you end up seeing, once they get their staff working on it, they kind of end up where we are on the FAIR Act on, "Hey, let's, let's have some regulation around secondary." They'll never get as far as we'd like because there's too much good lobbyists and, and other protections around it. But we'd like some regulation around secondary and bots and spec selling and bad websites. We think that's all coming to life. We love all-in pricing. We're leading that. We're seeing that come to life. So I would say most regulators, most legislators, most state laws, there's you know, there's battles all the time. Most of them all end up where we are already and where we think the market should go.
We'd like more, but we're happy where it all ended up because we think we've done a good job, not just us, but the industry in general, educating the marketplace and the legislators around, "Well, let's explain the challenges." Most of them realize it's a really thorny problem with secondary, and they can address it and back away, but at least they leave that room going, "Oh, it's not you. I understand now there's a systemic issue around secondary, and when you have a $10 billion industry fighting to get Beyoncé tickets, that's a problem. That's not a Live Nation or Ticketmaster problem. That's an industry problem. I can't solve it on my own." And that's the big win this year, is we moved to our front foot.
We started being more progressive on what we think is right for the consumer, FAIR Act, all-in pricing. We have more to come, and we think that's been a big win on opening up the dialogue with those that can make decisions. And that's been our best move.
DOJ?
DOJ, you know, I wish I had some new news for you. We're still, you know, in my opinion, we don't believe that this is about the merger. We think this is more about business practices and things they wanna drill down on. We've been doing this for a long time with the consent decree and having them in the last five years with moderators and et cetera. We think we run a very pro-competitive pro-business model for the artist, the fan, ticket, venues. We compete hard. We don't think we've done anything that doesn't make the venue better or the artist better, as we've talked about.
So, we think that it's gonna come down to some business practices that they're gonna wanna probably narrowly look at, and when we're ready, we'll be there to have that discussion. We're very, very confident in our practices, so we'll be there like the other companies are, to talk about how we move on.
Okay. I know we're out of time, but still one last one, if I can just get it in. And you alluded to some of this, but, you know, on a recent podcast, you said there's a next chapter for the company. Can you talk about your—l ike, summarize your top priorities and, and what you think is next?
Well, listen, I think the good news is there's a great consumer experience economy, all that stuff we talk about, so that's a good place to be. I'm glad I'm in an industry where we got some tailwind. We didn't have it 16 years ago when I launched, so it's nice to kind of move into an industry where you got a consumer tailwind pushing the industry. So we're happy about that. We spent a lot of years building the infrastructure. I think what we have a great opportunity to. You can imagine what we do is a lot of brainstorming around: What would you do if you had 175 million live customers in your database going to your store? What could you launch? What could you do? What products?
Could you, could you build off that? I think our first 10 to 12 years was just build the business globally, scale it, run it efficiently. I think the next 10 years are gonna be how we, you know, how this business doubles and triples because of what we did with our scale, and what, what products and innovations came from that. I, I, I won't even bore you on AI and how that's gonna help ticketing and bots and a whole bunch of unlocks we've had in the last while there. But we, we think most of those 900 brands that come to us in our sponsorship division, you know, they look at our distribution and are in awe of our customer base, right?
Oh, my God, you have 130 million customers on a Thursday in a demographic that we wanna talk to." And so we think we have great opportunity to harness and harvest our audience and be more innovative. I'll leave it vague enough there, but you can understand the—
Thank you so much.
Thank you. Appreciate it.
Hi!
Hey, how are you doing?
All right, we'll get started with Rich Gelfond, the CEO of IMAX Corporation, and it's really great to have you back with us. So Rich, you've managed your business extremely well throughout all the turbulence since 2020, and it's been a wild ride. What does the market not understand about IMAX?
A lot, but I'll make it brief. Because we show movies around the world in theaters, the market somehow thinks we're an exhibitor. But we have less in common with exhibition than almost any industry I know. IMAX has a very strong balance sheet, no net debt. IMAX licenses technology to theaters. We also license movies from studios, and our model is based on license revenue almost completely. We're almost like a technology software company because these theaters in the world, we also have a, we maintain every year. So when we turn on the key, we have $65 million in revenue, which is just recurring every year. We're growing at a very rapid rate.
Our box office this year, we've guided to the same level as 2019, which is about $1.1 billion. Q1 was our best Q1 ever. Q3 will be our best Q3 ever. We'll probably be around $900 million of that $1.1 billion by the end of the Q3, and most importantly, we don't sell popcorn.
Okay. So with your Oppenheimer release, your opening weekend delivered 20% of the film's global debut on a relatively small number of screens. It's a really small percentage, right? And-
0.8%.
Right. Like, really small. So, I mean, you way, way, way over-deliver, and you've maintained that share with incredibly strong demand in the 70-mm film locations. What is it about the IMAX experience that allows you to outperform so significantly?
So I think it's a few things. First of all, I think it's the experience itself, and it's—y ou know, I don't want to spend too much time on this, but it's a complicated technology system, and many people join, and I always say to them, "On the first day, you think IMAX is like a gimmick, like you have a well-known brand, and you put it up there, and people come." But we have proprietary technology that captures the image. If it's not an image captured, which Oppenheimer was, if it's not filmed with our cameras, let's say it's Indiana Jones, we have proprietary algorithms that convert it into an IMAX image.
Then when it's shown in theaters, and we're in 90 countries, and we have 1,700 theaters in the world, every one of those is monitored in real time, 24/7. So if the volume is in Singapore off, we call the theater, and we tell them to fix it, or there's a problem with the screen image, so that's why they pay the maintenance recurring fees that we get. And then at the other end of it, the projection systems are also proprietary, patented, and it's so it provides fundamentally the best this reality. And then there's the brand for a company with a $1 billion in market cap, you know, I don't know another company, certainly in the entertainment industry, that has that kind of brand recognition.
I think that partly comes from the talent, whether it's the directors or whether it's the stars, so embracing, and I think they say to consumers that, that's the way I want to see it, and you provide a better experience with a great brand, you have a pretty good business.
Yeah. Obviously, consumers opt for the premium experience. So how should we think about the runway for you to continue to gain share, not only in the US, but, you know, rest of world?
So our market share in the US is up 50% from pre-pandemic. Our market share in the rest of the world, in the whole world, is up about 40% since pre-pandemic. Our network, as I said, is 1,700 theaters. We have 500 theaters in backlog, which means those will be installed over the next several years. This year, we signed so far 87 new theaters, which is about double what we did last year. And, you know, it's somewhat of a complicated model, but when you cut through it all, in addition to the recurring revenues, that we have, we get pretty much 18% of box office on a global basis. So Oppenheimer has done close to $180 million in IMAX so far. So, I'll be lazy, and I'll say 20%.
So you just take $36 million, and that goes into our gross margin. And we didn't make the movie, we didn't market the movie. You know, we invested something in putting the network together, and as I said, we get paid for maintenance. But every theater that we open in the world, so those 500 sitting in backlog today, when they open, you know, again, I'll do made-up math, but if the 500 theaters do $1 million a theater in PSAs, you take that number and you multiply by 18%, and you have incremental revenues that you're adding. And then the second part of the question would be our penetration on a global basis. So, we're about 50% penetrated for our total addressable market.
We've said that we have 3,300 potential zones that we can go into. But we did that study pre-pandemic. And just to give you a context, in China, we originally said that we could go into 90 theaters in China. That was our original TAM. And we have 800 theaters open today and 200 in backlog. We haven't revisited that in a number of years, so we have a very long runway to go.
So how do you think about the positioning of IMAX in the overall landscape in a post-COVID world where demand for premium is so great?
Yeah, I mean, I think that's a really important observation. You know, you look at the Taylor Swift concert, you know, doing $1 billion more. You look at sports going premium. You know, people really want experiences, and it's reflected in our market share, and so that I think is one of the tailwinds we have going for us. I think another major tailwind we have is blockbusterization, and that's we do blockbusters. We don't do small movies, by and large. The small movies have gone to streaming. Theatrical has generally benefited from more and more blockbusters.
We become somewhat of a curator for global blockbusters because the studios really can't coordinate with each other in terms of when the slots are and when the good films are. But people come to IMAX to—t hey'll say, you know, "Does 4 July work?" And we'll say, "We, we can't. We have another film coming out then." So with pretty much every studio we've, you know, people clear with us before they date their movies, and then I have to expand that and say, that's not just in North America. That's very much on a global basis. So this year, we set a record for local language content, so we'll have about 50 local language films. And, we're about to cross $200 million in local language content.
What's been interesting to me about this, and by the way, in the year before the pandemic, we had very little local language content, way less than 1/2 of that. So it's growing very rapidly. But what's really surprised me is the local language content isn't only playing in its local territory. So Japanese anime is a perfect example where, you know, we've done higher box office in China and in Korea, in some cases, than we did in Japan with anime. And there's a Miyazaki film, The Boy and the Heron, that we did 16% of the box office in Japan, and it opens in the US in December.
You know, people look at us, it goes back to the misunderstood first question, Jessica, and they say: "Well, you know, this weekend, Haunting in Venice is opening, and that's not a good movie, so maybe we should sell IMAX stock." But we still did, you know, $5 million in Oppenheimer the last weekend, which is, what, seven weeks after it opened. And Warner Bros is re-releasing Barbie, and Greta Gerwig is doing new footage just for IMAX, and it's coming out the 22nd. And we did a concert film two nights ago with the Talking Heads, which is our biggest kind of alternative content release ever. And last Tuesday or Wednesday, we opened an Indian film called Jawan, which was our second highest weekend ever in India, $2.5 million. So we're just such a different animal.
And, you know, again, I said it's somewhat complicated to follow, though we post these results every week. You just have to get through it, that there's recurring revenue, and then there's 18% of worldwide box office, and then you take out the costs, which are fairly constant, and you get to a gross margin number. And I was saying at an earlier meeting that in 2019, our EBITDA was about $150 million, and we had about 65 million shares outstanding. We've had a lot of cash flow the last number of years. We've shrunk our outstanding share number to about 54 million right now. You know, box office is gonna be in the same range, and you look at the multiple that we're trading at, it's ridiculous.
There's a lot of growth potential.
Right. One of your major initiatives has been to weave IMAX's DNA into films. How do movies filmed with IMAX cameras typically perform in your theaters versus films not captured with your technology? But, like, what's the typical uplift that you would see from IMAX DNA?
It's probably 20% of the gross box office. So using a simple example would be, you know, if we took a film, and we converted it using our algorithms, we do 10% of the US box office on 1% of the screens. But if we use IMAX DNA in the movie, film it with the cameras, you know, it may be a little bit more than 20%. Maybe it'll be, you know, 12% to 15%. You know, as I said before, we've done 30% of Oppenheimer in the US on 1% of the screens. Dune, we did 22% of the movie globally. That was shot for IMAX, and Denis Villeneuve, for that movie, shot 40% of it for IMAX with IMAX cameras. For Dune Two, he shot 100% of it with IMAX cameras. And it has a lot to do, though, with how the filmmaker markets it.
It's not just the technical part of filming it, but obviously, the most recent example is Chris Nolan. 'Cause he goes everywhere, and he says, "You know, you've got to see this in IMAX." I mean, it would be- for you, Jessica, like, you know, someone in finance running all over and saying, "You got to go to Bank of America You can't go anywhere else." So, you know, it's not just the technology, it's the—a nd it's kind of like the filmmakers are like artists, and as I explained earlier in the conversation, it's real. It's not just some brand gimmick. So Nolan wants people to see it in IMAX 'cause it, they like it better.
Right.
We've done a lot of testing, and people watching the same movie in IMAX or not in IMAX say it's a better movie, and in fact, it is because it looks better, and it sounds a lot better.
So who actually makes the decision to use IMAX cameras? Is it the studio, the management? Is it the director? Like, who actually—a nd how much can you influence that choice?
It's either or both. Some studios which we have really good relationships with, like Warner Bros and Disney, they would say, "Hey, this is the kind of movie that we think you should film with IMAX cameras." And, you know, that's a common way it happens. But if you're a well-known creative director or producer, so that happens. So, for Creed, Michael B. Jordan said, "I want to shoot with IMAX cameras," or, for Bond, Cary Fukunaga said, "I want to shoot with IMAX cameras." And of course, you know, Chris Nolan is very kind of addicted to it. By the way, Cary Fukunaga, after he saw the result, he said, "You know, it feels like I've been flying economy my whole life. I could get used to this." So there's a lot of repeat.
Right.
People use it, and, you know, we're hoping, like I said a few minutes ago, Barbie, Greta's gonna—y ou know, is working with us on the new footage. So that's an example of someone new to it, and, you know, since you cover the studios and understand them well, when something works, the studios want more of it.
Yeah.
So one tornado movie, we need three tornado movies. So since Oppenheimer was filmed with IMAX cameras, and it's done so well, you know, recently, a lot of people are calling and saying: How do I get my movie filmed with IMAX cameras? So I think that's a good short-term incentive for that.
Right. So just when the box office seemed to, like, really be taking off, really come back post-pandemic, the strike shut down production. So can you talk to us about, like, how deeply will this impact your business? We see movies being pushed back. You know, what, what is the—w hat do you think the impact will be?
So, I mean, nobody's happy about this. Let's just, you know, start there. After the years of pandemic and doing really well and "Barbenheimer" and, you know, the momentum that that's built, you know, it's obviously disappointing in a small way that actors can't promote their movies, and writers, and things like that. For IMAX, we're incredibly nimble. So if you look at our releases over the next, you know, month or two, we're doing Killers of the Flower Moon from Apple, which there was no Apple releases in our budget this year. There's Napoleon from Apple. There's Barbie, which just came in. There's the Taylor Swift concert, which just came in. There's five or six international films that just came in. So, you know, we have—w e're not like, an exhibitor that has to fill 24 screens.
I just need one good property, and it works for us. So my understanding is that everything that's on our slate for the rest of the year that is gonna move has been moved. So I think the slate is kind of locked for the rest of the year, at least for our content. And, you know, there's a little bit of a silver lining to it. So we were scheduled to play Dune, but which meant we couldn't play The Marvels from Disney, and it meant we couldn't play The Hunger Games from Lionsgate, and it meant we had to give some of the Apple movies a shorter run. But with Dune moving, we have a good movie, a very good movie, on the slate for March of next year, and we can play those other movies, so that mitigates it.
Now, for next year, I think most of H1 of next year is kind of locked, and I think some of the movies in H2. So I think if the strike were to be settled, you know, in, in over the next several months, it wouldn't have a big negative impact on-
Right.
We're trying to lock down more live events, more foreign content, but I think if the strike drags on into the new year, you know, we're gonna be impacted by it, just like other people.
Well, obviously, it affects everyone, but you just mentioned a few things. So you mentioned the Taylor Swift, like, that was, came out of nowhere, right? Almost. You said something about Talking Heads earlier, which I saw the reviews. They were—i t was like, it seems like it was insanity in Toronto, of, like, just people trying to get in and the audience reaction. So can you talk about other kinds of content? Like, local language is one thing you said, but what else can you bring in that, like, we're not thinking about?
So we wired 250 of our theaters to be able to do live content, which includes, it could be film. So, Stop Making Sense, was a Jonathan Demme concert film that he did 40 years ago. But we used our technology to make it look great, and then the band got together for the first time in 20 years to do a live Q&A. And it wasn't just Toronto. We streamed it to about 200 theaters globally, and, you know, I was in Toronto. I mean, it was crazy. People were standing up and screaming, and, you know, my wife was dancing in the aisles at it. I mean-
The reviews were insane.
The, well, the experience—
It must have been—
The experience was insane, and I'm, you know, really hoping that—s o I, having just done it two nights ago, I was thinking, you know, not to downplay how good the theatrical experience is gonna be in movie theaters. But, you know, why would you see this on a, you know, on a small screen if you could see it, like, it looks like you're at the concert? And, and by the way, we remastered the sound in it. So in The New York Times article, I don't know if any of you saw it, but they—usually, the New York Times, you can't tell if they hate something or like it, but this article, they called it the best concert film of all time.
But they said the sound was better than the sound was seeing the Talking Heads live because the technology has changed, and you could remaster it. We've done some tests with the NHL. We've done some tests with Major League Soccer. So, you know, I think live content is an interesting possibility.
B ecause we just had Michael Rapino from Live Nation, and the whole experiential economy, you know, it's just seems like such a growth area and an interesting, possibly interesting for you guys. But anyway, you, IMAX typically plans, you know, you plan each year to optimize the slate. How is your planning process changing, given the uncertainty in the industry, given the strikes?
Well, you know, as I said before, there were four or five movies we didn't plan on having in September, October, that we have, so we're kind of agile and informal. But, you know, when you look into next year for the first number of months, what part of it is, we're global. So in February, it's Chinese New Year, and this year we had the best Chinese New Year ever. And by the way, I don't know if you were gonna get into China, but I should mention that the Chinese box office, if I took a poll and I asked you all, "What percentage of China is it at versus 2019?" I'm sure people would guess 50%, 30%. In fact, it's 95% of 2019.
So the Chinese box office isn't doing well with Hollywood films, but it's doing really well with films. And by the way, IMAX in China, we get a much higher take of the box office when it's a Chinese local language film than when it's a Hollywood film. So, you know, there's just so backing up to your question, so we could plan our Chinese slate for next year. We could plan our Indian slate for next year.
We could plan a lot of our global slate, and then the first six months, you know, I think we could lock down pretty tight. I don't think a lot of that's gonna move. You know, in H2 of the year, it's gonna be a little bit challenging, but you know there are Marvel movies in the mix. You know, there are DC movies in the mix for next year. Mission is coming out. Again, we're not sure what the date will be.
Right.
Mission VIII next year. You know, there's a lot of good content out there.
Right. So we'll get to China in a second, but, you know, one of the concerns about these strikes is that everybody will reevaluate how much they're spending. It sort of is, at least from a television side, unsustainable, like, just because of competition. And everybody's, you know, maybe stepping back a little bit. Does this affect film? Do you think, like, when we get out of this strike, will it affect kind of the cadence of films and how much companies are spending?
Again, I don't wanna just talk my book, but I think if there's been one lesson out of the last couple years, it's that you have to spend money on content to achieve results. And, you know, I think the Netflix model, which looks so attractive at some point, quantity, you know, lots of movies, and for Netflix, it was really smart. They didn't have a lot of original IP. But I think the studios learned the hard way that just throwing things up on streaming services didn't work, and the quality of the content mattered a lot. And, you know, Warner Bros Discovery and Zaslav have clearly articulated a focus on content as using that as a driver for the whole business. And, you know, I think Iger's said that since his return.
Well, Bob, Bob Iger actually said, "Less quantity, more quality."
And I think, you know, again, IMAX is the ultimate in quality. That's what we do.
Right.
I think it also enables us. If you look at in 2019, there were nine movies over $1 billion. This year, there are two, and our box office is anticipated to be in the same range. I think that's because of people seeking premium, people seeking blockbusters, and I think, you know, you just have to be flexible. Remember, you know, when I was growing up, Westerns were the big thing, or, you know, I used to watch with my father, you know, World War II movies, but every kind of genre has a cycle, and it cycles away. It, you know, I'm sure The Marvels will still do very well. It might not do the same number it would've done three years ago, but I think the industry always transitions.
I think as long as the studios commit to quality and putting the money in, that's what's gonna drive them. 'Cause, you know, how are they gonna separate us, you know, especially going back to Netflix, which has so many more subscribers and is making so many more movies. I mean, how do you compete with them? From my point of view, I think the way you do it is IP, and blockbusters, and, and high quality and spending money. So I—l ong way of saying I don't think that scenario's gonna play out.
And one other thing, and then we'll get to China. But the, you know, what worked for a few years, several years, with these superhero movies, we just talked about it with Tony Vinciquerra, and it just feels a little like, you know, consumer fatigue, and we saw that with "Barbenheimer." You know, like, it was just, like, really original IP resonated incredibly well. How does it affect you? Like, does that affect you? Like, is it you nervous about that, or is this maybe a different opportunity?
When I think of the IMAX audience, I, I think, some part of it is fanboys, and maybe that'll fade away if some of those things fade away. But I think a lot of it is cinemaphiles, and I think it's people who really wanna see things the best way that they could possibly be displayed. And, you know, the crazy numbers, you know, when we did Oppenheimer, our ultimate for the year was $65 million, and we're about triple that right now. And, you know, some of the movies coming up, like Scorsese and Ridley Scott, I mean, those are really high-quality movies. So I think, you know, we stand a much better chance than anyone of, of filling in with that. And, and again, for, I think the fanboys and fangirls will go through a little of a transition.
So maybe while superhero movies are going down, it hasn't been written about that much, but the anime trend is going very much the other way, and, you know, it's just crazy. I don't know if you've gone in to look at the numbers on those things, but It's a worldwide phenomenon on anime. And even Spider-Verse this year, which Sony did, was a version of anime, which really worked. So I think you'll see the studios pivot in those ways-
Right.
T o different genres. Now, of course, original IP, like, you know, they don't have another Barbie. You know, I don't think Hot Wheels is ready to exactly challenge them in box office in the next week, and I don't think a series of famous physicists is really gonna be, you know, the next box office sensation. So I think you just have to be a little more creative and a little more innovative, but the studios have learned, I would hope, that that's the way to go.
Right. And it just, Tony Vinciquerra definitely said anime. They're doing more in anime, so-
Well, and Sony's the most in on anime.
Yeah.
And they—
Okay.
I think they own Crunchyroll-
Yes.
W hich distributes anime globally. Well, they distribute for us a lot of things, too.
Yeah. Yeah, so you talked about that a bit. So let's turn to China, and there's, like, multiple aspects of this. So first, let's just in general just talk about the box office there. Obviously, as you said, there's, like, real demand for your technology and your offerings in the region, whether it's Hollywood movies or local language movies. But it's a, it's a complex market, and, I think one that we've always found it, you know, a little more difficult with the, the rules and regulations and who gets in, who doesn't. What is your view on, you know, how Hollywood films will do in that country over the next, you know, couple of years?
It's a hard one to answer, but I think, what's happened this year is kind of three things. I think, one, the economy is very challenged. Two, people forget, but China didn't come out of the pandemic really until around January first. I mean, they were still, had drones flying over, and they were, you know, stuck in their homes until January. And if you look at the way the world came out of the pandemic, everywhere in the world, it took time. It wasn't like turning on a light switch. And then I think, years ago, there weren't as high-quality local language films.
So I think, you know, Hollywood, it was a lot easier to just say, "It's either not much or this Hollywood film." But, you know, a lot of local language films in China, like this year, we did $52 million on a film called Wandering Earth 2. And there's a film we just stopped playing called Creation of the Gods, a Chinese film that we did $35 million. Now, Oppenheimer, you know, is probably gonna do $60 million or something like that in the country overall, and, you know, we'll have a nice share of that. But I think it's gonna take a while to transition back to normal. So is normal the old normal, where, you know, Marvel films did $150 to 200 million?
Or is it a new normal, where, because of the pandemic and because of higher- quality films in China, the percentage of the box office is more local language? And if I had to guess, I would say it's gonna be a little more the new normal and not the old normal. And you also have—C hina's very complicated, 'cause as you know, there's tiers of cities. So I think in the top-tier cities 1 and 2, Hollywood content will continue to do really well. And I think in the bottom tier, lower demographic cities, local language content will gain market share.
Right.
But if you ask me, my confidence on anything in China right now—
Understood.
I would say it's in the, it's not the highest in the world.
But you know, you did recently propose to take 100% ownership of IMAX China. So can you kind of give us your view of, like, why you're taking this strategic step? What does it allow you to do? You know, what will it allow you to do that you couldn't do previously, and what is the financial impact?
We took an investor in our Chinese subsidiary, I don't know, like, 10 years ago. I don't remember exactly when. And that investor needed to get out. So we went public in China with IMAX China, and there were a couple reasons. One was to get that investor out, another one was to become more a part of the fabric of China at that time, and another reason was to raise capital. And at the time, I think we had less than 100 theaters, and now with backlog, we have 1,000 theaters.
Right.
So a lot of those objectives were accomplished, of raising the capital, getting rid of the investor. And the company in China still does quite well. Even last year, during the pandemic, when the whole country was basically in quarantine, we had positive EBITDA and positive cash flow coming out. But as good as the company's done there, the stock just hasn't worked there. So it had been as high as, you know, I think HKD 60, and then it just traded in a rut for the last couple years around HKD 5, some, most recently, something like that. So it, you know, it just didn't seem to make sense for investors over there.
It didn't seem to make sense to invest a lot of resources in it, and we thought it was a good idea to offer, you know, the investors there a chance at some liquidity and getting out, and we offered them about a 50% premium. At the same time, for the parent company, it gives us a lot more flexibility. So if we wanna introduce a new product in China, because of the Hong Kong Stock Exchange rules, it's cumbersome, it's bureaucratic, it's very difficult to do. Also, there are strategies we might wanna pursue in terms of global tax strategies. You know, it's much more efficient doing it if we're all in one organization.
Then, also, it's accretive for the parent company, because the multiple is so low in China, so we thought it was good for shareholders in both places.
When you say product, do you mean other kinds of programming or something like actually different business?
Different related, different kinds of businesses.
Okay.
So we have something called IMAX Enhanced, which is on Disney+. If anyone goes on the Marvel tile, all the content is shown in a format called IMAX Enhanced, and we wanted to introduce that to streaming services in China, and we couldn't do that unless they had to buy it from us, and we needed the approval of the independent directors, and it took a long time. It was—it was cumbersome. We just acquired a company called SSIMWAVE. It's really not catchy, so we're calling it IMAX Technology and Streaming. And what that company does is streaming optimization. So if you're a streaming company, it figures out a way, using algorithms, to save you a lot of money streaming. And we have a lot of clients in North America.
We don't have very many clients internationally, but if we wanna introduce that product in China, they have to pay us for it. We need approval. So it's just a cumbersome way of doing business.
Right. Okay. And then you mentioned local language is doing much better in China and, probably other area, many other areas. Can you just talk about what you're seeing in terms of local language production versus— I mean, here we know there's a shutdown, but what's going on in the rest of the world?
It's pretty much unaffected. You know, the strike hasn't affected it at all. And in fact, you know, as, as you know better than I do, it, it's also become a big thing in television and streaming and, you know, you-- we used to think of the world, right, as a Hollywood world, and that was a big place for the content. And Netflix has been very successful in foreign language production, and the amount of it has really ramped up enormously. So I'm trying to remember, but I think in 1979, 3% of our box office in India was local language content. And I think this year, I don't remember, but it'll be more like 30% or 40% of it.
Wow.
So we've also given tools globally as well. So we filmed in China, in films in China using IMAX cameras. We're about to do that in India with IMAX cameras. In Korea, we made a number of films. In France, we've made a number of films, and as I said earlier, the thing that surprises me is how well they play outside of their indigenous market.
Wow. So it sounds like there's a long run, runway for growth just from local language. But then going back to something we talked about earlier, which was the, your backlog and the number of, you know, just your backlog. Where are you? Like, where do you think you are in terms of total TAM? Where do you—what, what markets do you think you have the most upside over the next, let's say, three to five years?
So, where the model works best are where there are the highest per-screen averages. So Japan is about double the per-screen average of North America. It's about $1 million here and $2 million there. So, you know, we only have, like, 50 theaters in Japan, and I think we could do multiples of it there. The Middle East, even though it recently opened, we've gotten a lot of traction there, and the per-screen averages are very good there. So that's a promising territory. I've said for years that India is promising, and again, the per-screen averages there are similar to North America. But the, the difficulties in doing construction there and the complexity of that particular market have always made it go slower than I hope. And then Western Europe is a tremendous market for us. So in England, we have, like, 60 theaters.
In Germany, we have 10, which is the same as we have in Ecuador. And in France, we only have 20 theaters, and it's one of the highest PSA markets for us in the world. So, you know, I think there's a lot of opportunities. Latin America, we're incredibly under-penetrated, but, you know, there are tariff issues and other issues there. But I think there's an awful lot of TAM left, and I think especially 'cause of the local language strategy, you know, when people model it out, they think differently about it. They used to say, "Well, IMAX is this company that shows Hollywood blockbusters," but now it's a whole different mindset that we show local blockbusters and Hollywood blockbusters. And we also use local filmmakers to help promote it in that way, which I think works.
A big plus. We've only have, like, two minutes left, so just gonna skip to the, you know, technology. You, you've really been at the forefront of a lot of, like, technological innovation. There's a lot going on. I mean, it's so overused at this point, AI, but, you know, streaming, et cetera. You've got your own streaming technology, StreamSmart. Given the strength of your brand, your reputation, the, you know, the most premium content offering that there is really with leading technology, you know, just give us your views of some of these newer technologies and how you plan to integrate them into your business.
Yeah, so, you know, I think AI. I don't think that where it writes stories and, you know, replaces actors and puts new faces on bodies, you know, I don't think that's where there's gonna be, you know, a lot of development. I think it's gonna be, you know, much more on post-production and much more on image enhancement. So we've actually dabbled with AI for a number of years, and, as I said earlier, we blow up images. So, you know, we make them look better, we sharpen the edges, we take the grain out, and we've been using AI as a supplement for a while, and I think advances in that area are gonna be really good. I think AI is also gonna help a lot in marketing and analyzing data.
You know, I think at least IMAX, you know, we're really could use a lot of improvement in that area. We have a lot of data, but I don't think we're as adept as we need to be in how to analyze that data and how to target audiences, and I think AI is gonna be extremely helpful there. And then, you know, in terms of SSIMWAVE, which I mentioned, you know, there's a lot of AI technology locked there, and the former CEO of that company has now become our chief product officer. So we're actually aggressively trying to figure out how we could use AI in other areas of our business.
Great. With that, we're, like, out of time, but thank you so much for joining us.
Thank you, Jessica.
Thank you.
Welcome everyone to Bank of America's Media, Communications, and Entertainment Conference 2023. Our pleasure to have with us on stage. Well, first of all, I'm Brian Fenske, the TMT sector specialist here. It's my pleasure to introduce to you for the second year in a row here, Nexstar Media Group. Today we have with us Tom Carter, a 14-year veteran of Nexstar, former President and COO of the company, who recently announced his planned retirement and transition to Senior Advisor to the CEO and Board of Directors, and also company CFO, Lee Ann Gliha. So welcome, and thank you for joining us.
Yeah, thanks for having us.
Thanks for having us. Yeah.
Of course. Of course. So, you know, as we started developing these questions in advance of this, the narrative changed on us. So it felt like we were gonna be sitting here, and Disney and ESPN was still off the air, and they've obviously reached a settlement or a negotiation. So I'd love to just kick off with what that could have meant and maybe what is some of the interpretation of this agreement and the fact that it was settled so quickly, if you will?
Yeah, I think, you know, we, we saw our stock take a hit, as a result of the Charter-Disney dispute, and it's now on its way to recovery. But we, you know, we definitely think that the outcome was good for us from a broadcasting perspective. I mean, at the end of the day, what, what ended up happening? The premier programming stayed, got paid. The DTC services are now actually being looped back into the bundle, and the lower-rated networks got rationalized. And, you know, I think all of this supports our business model. You know, I think there were some questions about, you know, how does this impact broadcast and ABC? You know, the conversation about the broadcast model and ABC was actually very, very limited.
You know, I don't know if everyone's familiar, but with respect to the broadcast networks, they enter into affiliation agreements with station groups and air their content, like us, and then we have the right to negotiate with the MVPDs. So with respect to this Disney-Charter conflict, they really have the smallest O&O station footprint of any network out there. They only have eight stations. So the discussion about ABC was actually limited to that, and obviously that got renewed. You know, we also feel like—y ou know, the other thing that's interesting is that the broadcast networks, you know, we actually over-deliver for the MVPDs. You know, we're the most watched stations and networks, and we're proportionally paid less relative to our ratings.
Like, so for example, you know, when this all happened, I said to our ratings guys, "Can you actually go back and pull for me for all of 2022, 24-hour ratings on average, seven days a week, for the, for the national content?" And what came back was the top four broadcast networks generate the most viewership. We actually generate four times more viewership than ESPN, which is the seventh-rated network. So if you think about the importance of that programming, it's very important, and we get paid less for it. You know, broadcast networks, in general, get paid about 26% of the total pie of retrans and cable affiliate fees, but we generate 40% of the viewership. You know, we're actually the cable company's best investment. We return very well for them.
You know, and on top of that, the other piece I point out, I just want to make, is that our local broadcast affiliates really provide valuable local news and other content. You know, so at the same time, I asked the ratings guys to go back and give me that broadcast, those network ratings. I said: "Can you go back and look at just over our overall station group over the last 12 months? How much of our viewership is from network content versus Nexstar content, so our local news, our syndicated content?" And the answer was: for the last 12 months, our non-network content was 45% of our viewership. So go take those broadcast numbers and then double them because that's what we're providing to our customers.
So, you know, we think, you know, because we're the most popular networks offering the majority of the NFL content and our local news anad other programming, that, you know, we are gonna be successful, continue to be successful with our MVPD relationships. And our content has continued to be offered on the most basic tier because of that. And on top of that, we're not competing like Disney was with the MVPDs. We don't have our own DTC platforms, or we're not making our content less exclusive by putting it on other platforms more cheaply. You know, we're invested in the health of the ecosystem. You know, and then to make it really clear, you know, we did about 50% of our subscriber renewals towards the end of 2022. We did our ABC deal at the end of 2022.
And all of that has been business as usual. You know, we feel like, you know, we've got, you know, good visibility and good reason for our business to continue in the way that it has been, and we don't really see this conflict being anything but, you know, somewhat positive because now guess what? DTC is back in the bundle where probably it should have been.
Excellent. Now, you know, as while we're on the topic of DTC, that obviously became a focus of the major media companies over the last few years. We've seen it be quite destructive to the free cash flow of those companies. You guys have always been somewhat of a, a free cash flow machine. So, one, how do you think DTC plays out, and how do you guys participate, not participate, compete in that DTC ecosystem? And do you suspect that these larger media companies are going to back away from DTC, lean into the linear business where, you know, they historically generate lots of free cash flow as well?
Yeah, I mean, look, I think our point there is, if you look at the major media companies, Fox, Comcast, Paramount, Warner, Disney, almost 80% of the revenue comes from linear, and all of the profit comes from linear. You know, there isn't any DTC product out there that actually makes money. And so, you know, we think that this will incentivize those media companies to lean back into linear. And you're already kind of seeing that. You're seeing price increases that are happening on the basket on DTC services. Now, a basket of DTC services is actually more expensive than the average cable bundle. And, you know, I think the other piece of it is, you know, 1/2 of the video revenue that t hese companies generate is from distribution, which is supported by the MVPD companies that generate almost 1/2 of their residential revenue from video services.
So there's just an entrenched reason why linear needs to continue to exist. But that doesn't mean that DTC is gonna go away. You know, we think it'll coexist. I mean, the interesting thing that we point out, and we see this with our CW app, is that, you know, there is a younger audience that's on these DTC platforms. It's almost, you know, non-exclusive, right? You've got two unduplicated, different audiences, a younger audience here, an older audience here. And so, you know, we do feel like, you know, you probably, you may need both, going forward, and we don't have any problem coexisting. We've coexisted with lots of other video services for many, many, many years.
And at the end of the day, you know, the largest and most distributed audience is the broadcast audience. And here's where I'm gonna just take a minute, sorry, but I wanna give you guys my broadcast virtuous cycle pitch, because this is against the MoffettNathanson article that came out, or the Charter doom loops. I've got our broadcast virtuous cycle, which is, one, our content's already the most watched content. Broadcast has the broadest reach of any medium. We reach 76% of the population on a daily basis. Sports teams and leagues wanna be on broadcast. They want to reach the most people. They don't want to alienate fans. They want to create more health of their franchises and grow that value.
You know, NFL is a perfect example of this. And as a result, you know, pay TV p roviders are gonna continue to carry and pay broadcast networks because it has the key sports and news content that audiences want. And then viewers will continue to subscribe to pay TV services to access the content in an easy-to-use interface, and that virtuous cycle will continue. So, you know, I think that, you know, to answer your question, you know, I think we'll have some rationalization, we'll continue to coexist, but broadcast will continue to thrive as it has, you know, for many, many years.
To just clarify something, 'cause the word linear sometimes has a negative connotation these days, 'cause just some people's mind goes to, that's legacy, sitting back on a couch, watching TV like my parents did, and new media is DTC. But I think what you're saying is linear is kind of the old distribution model.
Yes.
It's intelligent. It's still gonna have apps.
Yes.
Still gonna have websites and streaming. It's just not going to be do it alone. It's gonna be do it with partnerships with MVPDs.
Absolutely. Absolutely.
That's great. That's really helpful. So a number of media companies, including Disney and Paramount, have engaged in processes or talked about potentially selling or reconfiguring their asset portfolios. No major news has hit yet, but it's certainly a topic our Jessica Reif Ehrlich has written extensively about. Since M&A has always been a clear driver of growth for Nexstar, how do you see your company potentially participating?
Well, we think that there could be some opportunities, depending on, as you say, how it really falls out. I think, you know, all of these companies, Disney included, you know, have shareholders to answer to for these massive amount of investments and the massive, you know, free cash flow that they're reinvesting in direct-to-consumer, that may make some of the linear assets, as we just talked about, available. But it's interesting, you know, and I know that, Disney had talked about it this way, you know, let's kind of morph into a growth co and a sustainable co, if you wanna think about it that way. The only issue is the sustain co is funding the growth co, and if you sell one, you've lost access to that cash flow.
Now, granted, you're gonna have proceeds, but, you know, is that really what you wanna do and how you wanna fund that with a one-time sale versus, you know, correcting? So, to your point is right. You know, we spent the better part of the first 10 years I was at Nexstar in an acquisition mode. We made over 40 acquisitions in 10 years. A couple of them were sizable, where we more than doubled the size of the company, and we did it with largely debt, but those were massively accretive. The Media General transaction was 40% free cash flow- accretive, and the Tribune acquisition was 60% free cash flow accretive. That's work worth doing. If those types of opportunities present themselves going forward, whatever it is, I think you'll see us take a look at it.
But more specifically to those assets, a lot of those assets, the linear and the DTC assets, are intertwined from a programming perspective and from a content perspective. You're seeing, you know, ESPN simulcast the majority of their large sporting events on ABC. If you were to buy the ABC complex, how would that work going forward? So there's a lot of questions that need to be answered there, but it's something that we—
Have you hit the regulatory limit yet for station acquisitions or?
We are.
Yeah.
B ut that would not preclude us from buying stations, because as Lee Ann rightly pointed out, ABC's portfolio of stations is modest. It's only eight, largely in the top 10 markets. We're in eight of the top 10 markets already, so we could buy—a nd with a CW station, we could buy a second station in that market and not increase our household footprint.
Got it.
There may be a few stations that would require divestiture, either of a Nexstar station or an ABC station, but we could, we could onboard those with relatively little friction.
Got it. Okay, extremely interesting. Switching gears here—
Now, before we the only thing, I don't know if there's a deal to be done there.
Right.
Because I think they've got to be a little bit clearer in their own thinking with regard to how that goes, because, you know, we can take direction, but we're not necessarily out there leaning into any of this stuff without a clear path.
Understood. So yeah, switching gears a little bit, you have an ongoing dispute with DIRECTV.
So I'm told.
And, where you've taken down your stations from their service since the start of July. Any update you can provide on this, key sticking points, asks, and how are they, w hat are they thinking?
All good questions, not all of which I can or will answer in a public forum. But you're right. I mean, you know, the first month or so, we were, you know, in blackout with them. There wasn't a lot of movement going on. We've been in pretty constant contact over the last several weeks. Progress has been made. We don't have a deal. We're not gonna do a bad deal.
Yep.
But I think, you know, our expectation is that we will reach an agreement at some point, hopefully sooner rather than later, because everybody agrees it's not in anybody's best interest to alienate the consumer.
Right. Okay, thank you. A point I wanted to get to is your view on capital structure and leverage and use of free cash flow. You know, you're as you said, you've intelligently used debt when we were in a very low-rate environment to make these incredibly accretive free cash flow deals. So I'd love to just hear some commentary, 'cause I think you guys have been very thoughtful about use of the balance sheet.
Yeah, I mean, look, from a leverage perspective, for the last quarter, we were at 3x leverage. We don't feel like we're in any situation where we're over-levered. We also don't necessarily feel like we're under-levered. As a result, then, we've had the flexibility to use our free cash flow to fund our dividends, to make some, you know, a few small acquisitions. We did a small station deal earlier this year, and then, you know, to use the balance of our free cash flow for share repurchases, because we feel like our stock, you know, is incredibly undervalued at these levels.
Great. Thank you.
Especially at these levels.
Yeah.
Yeah, absolutely. I noted that earlier in the day, but it has been one of the best performing media stocks on a trailing one-, three-, five-year basis, and—
Yeah.
Yep
It doesn't get highlighted all that often. So switching gears a little bit, there's the traditional companies. We've talked about a few. Charter came up in this discussion, and so did DIRECTV, but obviously Hulu and YouTube TV are two of what we call virtual MVPDs in this world. So can you just, and I guess, educate us a little bit, how negotiations and deals work with those players? How different are they, either from the complexity, or are they easy to work with, and what's it like?
It's more complicated under the virtual world than it is under the traditional MVPD world. The MVPD world is very closely governed by FCC regulations. Because that was part of the ecosystem when the whole concept of must-carry or retransmission consent was really put in at the end of the '90s. At that time, virtual MVPDs didn't exist, so they ended up being classified really as more internet than video providers and distributors. And so the stations are granted under FCC regulations for the each individual station or group of stations with the right to negotiate directly with the MVPDs, and that's what we do. That's what we're doing with DIRECTV, all the cable companies, et cetera.
Because the virtuals are deemed more to be digital, the networks have retained the digital rights that they have, and so they negotiate with the virtual MVPDs, and then they offer us the right to opt in or opt out of that. It's a binary kind of outcome. You either like it, and you opt in, or you don't like it, and you opt out. Obviously, there's always a third alternative, which is everybody band together, and you try and negotiate a better deal with the networks. But there's an intermediary between us and the virtual MVPDs, which is the network, and the network can, you know, negotiate for more than just carriage of the network with those virtual MVPDs. They have other properties that are cable channels, et cetera.
So they have the potential to have conflicts with regard to what's doing best for the network and its affiliates, and that's where we take umbrage with that. And there is a move afoot in Washington through our you know government representatives and the business of the vMVPD and the MVPD are not any different at all. It's just the delivery mechanism, and it's now a delivery mechanism that's excluded from FCC regulation because it didn't exist at the time that that regulation was put in place. So maybe it's either a regulatory solution through the FCC or a legislative solution through Congress to include the vMVPDs in the retrans ecosystem that exists. We think that's a fair outcome.
Is there a momentum? It reminds me a little bit of the music industry—
Yeah.
You know, moving from radio to satellite to streaming. We had to—
Yeah.
A dapt copyright rules-
Right.
And things like that. Is, does this have momentum, this movement?
I would say it does, but is it at the top of any legislator's list? No.
Right.
But, you know, that's incumbent upon us and our peers to go out and make it so. But it's also difficult because we have the networks that are pushing back against it because they see value accruing to them in the existing ecosystem.
Got it. Okay.
There's not unanimity in the sector with regard to how this should work.
Okay. We'll see how that—
Stay tuned.
We'll see—
A s we say in television.
So, Lee Ann, you referenced this, that 50% of the deals were kind of struck last year, which is great, helps de-risk the portfolio for many years. But, can you tell us a little bit about—o bviously, I'm not asking you for the details of these agreements, but what have you seen in these recent resets with Fox and ABC towards the end of last year? How has the balance of power shifted, if at all, over the last few years?
Yeah. Look, I think we've been very clear with our network partners that historically, part of what we have paid a large amount of our—y ou know, our largest expense is the payments to our network affiliate partners in the entire corporation. So part of what we have historically paid for is exclusive programming. With the exception of Fox, the other three networks have started to diminish the exclusivity that we have by putting the same programming, whether it be football on ABC and ESPN or Paramount+ or Peacock, putting some of the programming that historically has been exclusively available to network affiliated on their DTC platforms.
That diminishes the value of that programming to us, and by the way, they're creating a whole new revenue stream or at least part of their revenue stream on the backs of something that used to be exclusively for us. So we've told them historically, if that starts to happen, we'll start to pay less in affiliate fees, and you're starting to see that manifest itself.
Will investors start to see that reflected in the—w hat line item on the income statement would that be, your costs go down?
Station operating expenses.
Station operating expenses start to, you know, moderate.
Right. You know, the growth will tail, and then eventually it will start to decline.
Right.
At least that's our expectation. And this year, we really, in our guidance, we said that we expected, and this was before the DIRECTV blackout, if all went according, went well, we thought our retrans revenue growth would be high-single- to low-double-digit percentage growth, and we said that we believed our total network affiliation payments would increase mid-single-digit percentage. So that's how you can see that retrans revenue continues to grow and the cadence or the trajectory of the growth in the network affiliate fees would start to moderate.
Got it. Now, next question, I wanted to ask you a little bit about concerns that are around traditional media, larger media, and you guys, about just subscriber declines, just classic cancellation, cord-cutting that we see. How are you guys contending with that? How do you plan on growing revenues as a total company in the face of you know, subscriber attrition, and, and, you know, how do you think about it?
Sure. I'll start and let Lee Ann follow in behind. Yes, I mean, we're experiencing that. We're not adverse to that. As the largest television broadcaster, I think it's gonna be hard for us to materially deviate from that. We had some stations that weren't historically carried by the virtuals, and we have worked hard to get those included, so we did have a little bit of an uptick from or a relative decline lessening of decline in our subscribers relative to some others. But, you know, I think one of the benefits of the Charter-Disney deal is basically we're putting the band back together. We're recreating the bundle by bringing Disney+ back into the pay television ecosystem and not strictly as a DTC product.
So I think that one of the, one of the potential benefits of the, Charter-Disney deal is, it could potentially, lessen the decline in attrition or lessen attrition going forward because there's less reason for those subscribers now to leave the pay television ecosystem to a all DTC type of bundle. Because one of the biggest DTC players is now inside the bundle, that all of the, all of the, the Charter subscribers will have access at some point to Disney+ or some version of Disney+. So we think that that's a, a positive development overall and could affect attrition. But generally, I would think, you know, attrition is driven somewhat by, the direct consumers, but we participate in that to a degree.
And so from that perspective, I would say, generally speaking, we believe that attrition will continue, but we disagree when people say that the pay television ecosystem, as we know it now in linear, is going to zero.
Yeah, the other point I would just add on to that is just what I said at the beginning, which is we're still undercompensated, right? We're delivering a higher share of the viewership than we are receiving of the fees. So as we, you know, as you saw in our guidance for this year for distribution, we were able to guide towards something that was a higher growth in that revenue line that offset the attrition. So, you know, I think we anticipate we'll be able to continue to do that.
So in a way, some of those lower quality networks that are getting pushed out, that part of that pie could accrue to you.
Would free up.
And that's what's causing the, you know, disparity in our, you know, our contribution to the viewership versus what we get in return is because there are other, you know, content providers where that's upside down, where they're getting paid more than they're contributing. And when you start to get rid of the bottom, you know, quartile of underperforming and marginally viewed cable channels, that's where a lot of the dollars aren't big, but the dollars can be meaningful in terms of redistributing it to others in the ecosystem.
Got it. Now, moving on to a different topic, sports. Obviously, sports played a critical role in accelerating this Charter-Disney deal timing, as everyone was anxious to watch sports during football seasons. But, they're a big driver of viewership. Engagement is unbelievable. It's been—f ans are passionate. Obviously, you know, you're a leading affiliate of all the major broadcast networks, therefore you participate in sports in that way. But, I've seen you've done a number of deals for sports rights at The CW. Your LA station renewed its deal with the Clippers. Can you talk a little bit about your, how your company participates in sports and, and why it's important?
Well, I think let's first back up a second. All of the sports teams, all of the conferences, all of the leagues want to have a presence on broadcasting because the pay television ecosystem is not ubiquitous. It doesn't reach all of their fans, and what they want is engagement with their fans. And the way to do that, the only way, really, to do that, is through the broadcast medium. That works for the teams, and it works for conferences and the leagues. And so you, you're right. We see that with the NFL, and we participate on all four of the big four networks in their NFL offerings and college offerings. As you know, we bought The CW in September of last year. It historically had zero sports programming on it.
We took a little bit of a flyer on LIV Golf early this year and had great success at the station level. I think some of the historical golf advertisers were still very much wed to the PGA Tour, and so on the network level, it didn't work out so well from an advertising perspective, but that's okay because we had a really low-risk contract in terms of the fee payable to LIV. It was basically a rev share deal. So it wasn't really. We weren't exposed to anything there.
But what we found is the affiliates were very excited to have sports, especially because CW had never programmed weekend days before, and that's, you know, that's a fertile field for us because we could now program five to six hours a day on the weekends with sports. We have done that with ACC Sports, Atlantic Coast Conference, and with NASCAR, which we announced we'll start the Xfinity Cup in 2025, and we'll have sports on 48 out of 52 weekends in 2025. But that's all new programming to the local affiliates and to our CW affiliates.
that they haven't had before, and we're able to—we'll be able to increase our affiliate fees that we charge those stations for CW programming, and they're happy to pay it because they see value in that, and it's really, you know, new programming and new time slots that can attract new advertising. So we're seeing that on the network side, and then on the local side, you're right, we have an agreement with the Clippers, and it's the same thing. Historically, they were a sports regional sports network-only customer. But again, the regional sports network or regional sports channels in Southern California are even more fragmented. There are so many of them, and so they weren't reaching nearly all of their or all of their fans.
So we're taking 15% of their regular season games, putting them on KTLA, promoting them, and not only are we broadcasting them in Los Angeles, we're broadcasting them in San Diego and Bakersfield as well, where we have stations to elongate their footprint and reach more of their fans. But they don't give up the entire, direct-to-consumer product because Steve Ballmer obviously is the owner of the Clippers, and they're gonna do their own white label, product that they can, you know, do on their own from a direct-to-consumer perspective, that, you know, will cover the other 85% of their games. So it's a portfolio approach locally and nationally.
It's an approach where a lot of the leagues and the teams, NASCAR in particular, wanted a broadcast network because their historical providers are Fox and NBC, but the Xfinity Cup had been relegated to FS1 and to USA Network, not to broadcast for the most part, and they see broadcast viewership as, you know, a potential 40% increase over the cable channels that they've historically been on.
Now, the financial stress that RSNs have been under for the last few years, it's been a challenged model, to put it kindly.
Yes.
That seems like it's going to create opportunities for you to, to get high-value sports programs from RSNs who are seeking to strike creative partnerships to get eyeballs. Is that fair?
Well, you know, we've used the term we're playing Moneyball with sports programming, and the ACC contract is a great example of that. That was a contract that historically had been purchased by Bally's. During the bankruptcy process, they rejected that contract, and we got word that they were thinking about doing that, and so 10 days after they rejected the contract, we picked it up for a fraction of the cost that Bally's had been paying. Last Saturday night was the first ACC football game on The CW Network, and our game was up against the Big Ten Saturday night game on NBC, and our Pittsburgh-Cincinnati game outdrew the audience on the NBC games, and I'll tell you, they paid hundreds of millions for that contract, and we paid significantly less than that for the ACC.
That's great.
So it's. We think about it just in a cost-per-hour basis.
Got it. I wanted to talk a little bit about demand, advertising, macro trends while we have you up here, but, you know, world seems to be factoring in soft landing to a degree. Any update you guys can provide on the trends you're seeing in local advertising by businesses in the markets in which you serve and just demand out there?
I think no, no, no change in the trend, no change in our commentary. Our local business has significantly outperformed our national business. Local is a lot closer to the consumer. It's more of a demand and a price and an item and a sale type of ad, and the closer to the consumer you are, I think the better off you are right now, because the consumer continues to be healthy. I think what you're seeing in national advertising is an uncertainty in the overall economy, and the closer you get to the cash register, I think the better businesses feel about the health of the economy.
Okay. That's great. Then, look, we're heading into 2024, presidential election year. Can you remind us how big this is for you guys and any expectations, whether yours or experts, we should pay attention to on the topic?
Well, I think, you know, nobody expects this election to be any less contentious than the last several elections, and obviously, we have the added benefit of a presidential contest this time, where we didn't two years ago. Each of the last two cycles, we've been in excess of $500 million of revenue, which is substantial, and also it's interesting because the last presidential election being in excess of $500 million is noteworthy, but the last non-presidential also being, for us, in excess of $500 million is noteworthy because historically, about 25% of advertising in a presidential election is around the presidential election or in the presidential cycle.
So you can, you can see why some of the, the estimates for 2024 can get a little out of hand in terms of what the expectations are, but we, we clearly expect it to grow. I think there are a lot of different ad agencies that give their, their estimates on total political advertising, but all of them have it increasing double digits over 2022, and we think it'll probably do that or potentially more.
Okay, great. Another topic I wanted to end, I want to see if there's any questions in the crowd. We have a few more minutes left. Anyone? Okay, we'll keep trucking. You recently put out an RFP for a measurement company, and and your Chairman, CEO, Perry, made some comments on your last earnings call, talking about being undermeasured. This has been a controversial topic in media and in the transition to digital media for the last several years. So can you talk a little bit about what you're looking for here and how you think you're not getting measured properly in some ways?
Sure. I would say, our problem with the measurement or our, you know, general unhappiness with the measurement comes primarily in out-of-home viewing, and in local viewing, specifically outside the top 50 or 55 metered markets, which is a large portion of our television station portfolio. And so we're looking for either new entrants or the incumbents willing to put more assets and emphasis on those two areas in particular, because we think, you know, whether it's viewership in bars or clubs of sports primarily, or viewership in small markets where people meters aren't used, and essentially what they do is they mathematically try and extrapolate what viewership is. We're looking for more, you know, consensus and also energy to be put behind those two efforts where we think we're underrepresented.
Okay, and I guess getting down to the wire here, but I wanted to ask you, obviously, The CW was an interesting deal that you guys struck and acquired about a year ago, I think. So, we see the new slate is launched. You recently announced some distribution deals with Sinclair, Gray, and it has sports rights as well. Are you more or less optimistic about this business than from when you acquired it? And just any color on The CW, how it's going?
Yeah. I would say we're equally as optimistic about it. The sports, I wish we could say, you know, when we did our strategic plan in the lead up to the purchase of the CW, we knew that the RSNs were gonna implode. We knew that a lot of the teams were gonna come back on the market. We knew that there would be new opportunities like LIV Golf, because all of those opportunities fit well for us when you consider that the incumbent sports providers, the four large broadcast networks and ESPN, basically have overbought, and not only from a price perspective, but from a volume perspective. They have more sports than they can show, and so ESPN has put a lot of that now on ESPN+, but that, that's expensive to a relatively small audience.
We're at the intersection of, you know, the right time to be coming to market, interested in sports, because, again, we had 12 hours a weekend of basically fertile field ready to plow with good sports programming. We always thought we would get into sports programming, but to have ACC football on less than a year in, to have golf, LIV Golf on less than a year in, and to have, you know, a major portion of NASCAR's product on our network two years in, is a win for us.
I have one last question, and it's a little more, I don't know, thematic or topical, which is: as we're sitting here and talking about Disney+ being folded back or made available in a bundle, it's kind of a jarring thing to say, or a change from the last year. Am I reading that right? Is it that big a deal? Did it just—Did we just, like, in the last week, did—w as the bundle just saved?
Well, I think, you know, if you, if you look back on when all this started, which was really, you know, at the tail end of the pandemic, right? It's when everybody was at home, everybody was consuming more television, everybody wanted more choices. You know, the hue and the cry for more entertainment programming was, you know, at its zenith. And back then, in the zero interest rate economy, everybody was paying premiums for growth. Well, we're in a different economy now. And growth is important, but, you know, growth has to come with profit. And as you know, Lee Ann pointed out, all of the major, large media companies that have DTC products are losing money on their DTC product, and there's no clear pathway to profitability.
And so I think investors have had a meaningful effect on companies with regard to, you know, growth at any cost, which was basically what they initiated and how they set out down this path from a DTC perspective. But investors have pivoted away from that, and the companies are having to do that, too. So, yes, I would say relative to two years ago, it's pretty shocking. Relative to last year, I don't think it's shocking at all.
Yeah. Perfect. All right, well, thank you, Tom. Thank you, Lee Ann.
Thank you.
Again, really, really appreciate you guys attending our conference.
Great. Thanks, everybody.
Yeah.
Appreciate your interest.
Thank you.