By Jim McCarthy Mar 23, 2010 5 comments

Live Nation Layoffs and the Perils of Vertical Integration

Here’s the news: Live Nation is laying off about 20% of its workforce.  According to the article, “The cuts are being made to the accounting, marketing and talent buying departments in the company’s Atlanta and San Francisco offices. Some of the company’s primary and secondary ticketing staff may also face job cuts.”

And here’s my 10-second, instanlysis: if the merger is supposed to get its strength from cost savings, the result won’t be impressive.  It must be about value creation on the upside, and the puzzle in all that is where the two combined companies can create value as a single entity that wasn’t possible as business partners.

I’ve never been a fan of vertical integration as a rule.  It’s like saying you save money by growing your own vegetables.  Sure, you don’t pay for vegetables, but there’s a tremendous amount of time and mental energy that goes into growing them.  It’s better left to specialists, like the people who grow vegetables by the train car load and deliver them to a local store for what is really a very reasonable price, considering all that goes into it.

As I’ve said before, Ford used to mine and smelt its own iron.  The very idea is absurd now but  the ‘vertical integration’ theory is just the same as it was then: if it’s all in house, think of how much cheaper it will be.

But vertical integration of this kind can have some strange warping effects too.  If you always and for sure get your iron in-house, does anyone ever stop to ask if we could get the iron cheaper, or on a better delivery schedule or lighter?  Typically no, because you’re deeply invested in the iron you’ve got.

Over time, vertically integrated organizations often become uncompetitive because they don’t look outside the organization to specialists who can do things better, cheaper, newer, or in a way that’s more in tune with the marketplace.

It will be interesting to see where Live Nation goes from here.  I’m hopeful that the effect of laying off the hundreds of people they’re laying off is that we’ll see those people bring their live entertainment marketing skills into some new settings.  There are tons of opportunities for Live Entertainment entrepreneurs out there and sometimes layoffs like this unleash a lot of pent-up energy.

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