Scenes From the Strip
A tad belatedly, I’m here to tell you about my whirlwind trip to Las Vegas over the first weekend in December. I’ve been dying to write this all down since the second I got back… but you know how December goes – holiday madness plus everyone trying to fit four weeks of work and meetings into three weeks, as well as clear to do lists that have been gathering dust for months. It’s funny how something as artificial as turning the page on a figurative calendar is enough to create a sense of urgency in so many ways. Anyway, I’m here now… so let’s talk Sin City.
My quick trip was entirely inspired by my mission to see the band U2 play at the Sphere, the latest, greatest landmark to open in Vegas. It’s a giant spherical arena located at the north end of the Strip, closest to the Venetian hotel, to which it is connected by an enclosed pedestrian bridge. The Sphere famously cost $2.3 billion to build and came in way over budget. It has also gone mega viral on TikTok, because of the amazing visuals that it offers on the 160,000 square feet of LED panels lining its interior walls, creating a truly immersive experience.
There are also a gazillion LED panels on the outside (technically 580,000 square feet worth), that make this one of largest – if not the largest - billboard in the world. Lots of potential to sell ads, plus do cool stuff like this…
Or this…
So, we’ve established the Sphere is really cool.
But the Sphere isn’t just a landmark and place to go visit. It’s also a public company, spun out earlier this year from MSG Entertainment (MSGE). When MSG Entertainment split into two companies, the iconic Madison Square Garden arena in New York, along with three smaller venues including Radio City Music Hall went one way, along with the Rockettes franchise that performs about 30 shows per week this time of year over at Radio City.
Into a different company, Sphere (SPHR), went the performance venue of the same name as well as, inexplicably, the MSG Network, a regional sports cable network that broadcasts matches featuring the NBA’s Knicks, the NHL’s Rangers, and the WNBA’s Liberty, all of which compete at the Madison Square Garden arena. The MSG Network is an asset in secular decline – like most linear cable networks – but it produces good cash flow, for now at least, which I presume may be useful to fund the Sphere, which is currently unprofitable as it ramps up operations, having just opened on September 29. But strategically, it’s weird that the MSG Network didn’t go with MSG the arena, and no one can tell me the rational for that.
Anyway, TikTok showed me that the Sphere is in fact cool, which made me wonder if the Sphere will, in fact, be a money maker. That sparked my curiosity to go check it out, plus, I love U2 and was psyched to see them in this totally new format. I’ve seen the band a bunch of times over the last 30+ years and it never gets old for me, so this little research mission came with benefits!
First Impressions
Before I dive into my Sphere review and what it may mean for the stock, I must mention my overall take on Vegas 2023. I had a feeling it was going to be busy, because my hotel room cost a fortune… especially for Vegas, where usually the entry level, non-suite rooms are a very good value for the quality, because they want to entice you to come so they can take your money other ways (aka the casino floor). Always the value investor, I roomed with my two friends, so the expense wasn’t so egregious per person… but our room at the Venetian was about $750 per night. Other than over New Year’s Eve and possibly during the CES tech trade show in January, I have never heard of a basic room rate that high in Las Vegas. So that was my first clue that things were going to be a little nutty in Vegas that weekend.
When I arrived, I realized that it was a BUSY weekend in Vegas. In addition to U2, there were concerts being performed by Garth Brooks, Usher, Adam Sandler, and Depeche Mode (went to that too – they were awesome!), plus Diplo and the Chainsmokers were doing club appearances, and the Pac-12 championship game was happening over at Allegiant Stadium. With all that happening, it makes sense hotels were expensive, but I was totally unprepared for the madness checking into the Venetian. Around 1 pm in the afternoon, there were literally a couple of hundred people in reception waiting to check in. When I finally got to the front, the woman checking me in told me that the majority of the guests were there to see U2.
The Sphere seats about 18,000 people, and there were two shows over the weekend. That will create some hotel demand apparently. Due to that enclosed connecting foot bridge, the Venetian is the most convenient place to stay when going to the Sphere, especially in the winter months, when Vegas gets quite chilly, and in the summer months, when you could boil alive walking just 15 minutes outside. The Sphere is a very, very good thing for the Venetian and Palazzo, which are now owned by VICI Properties (VICI) and operated by Apollo Global Management (APO).
Everywhere we went over the weekend was booming, so much so that it gave me 2007 vibes. Vegas was on fire in the late days of the housing boom, as many Californians used their house like an ATM, refinancing off inflated valuations or taking out home equity lines to fund a lavish life style. I’m not predicting a crash of any type – housing, financial, or other – by making the 2007 comparison. I’m just saying it had that same frenetic energy as heading into the last peak.
Around 2007-2011, I used to go to Vegas four times or more per year. Not only was I actively covering the casino companies and gaming equipment suppliers for the hedge funds I worked for, but there were also numerous Vegas-based trade shows for other industries that I covered.
I don’t go as often anymore, but I do end up there at least once a year. This time was especially booming and busy, and it felt like these companies are printing money, which they basically are. After losing money for three years in a row due to the pandemic, MGM Resorts (MGM) will make around $2.31 this year, which is almost double its prior peak earnings per share (“EPS”) from 2016 of $1.22. It’s a similar story for Caesars Entertainment (CZR). The stocks have done OK this year, but nowhere near as well as their operating results would imply. It seems like a lot of investors are betting on the post-pandemic leisure travel boom rolling over, although that shows no signs of happening yet.
Back to the Sphere
My brief review of the U2 show: if you can, go! The visuals and sound are truly amazing. It makes for a truly immersive experience. The structure of having such a highly produced show with so many visuals intertwined with the songs eliminates the ability of the band to be very spontaneous though… the set list is going to be the set list, with the exception of two songs mid-concert that are performed scaled down and without all the pomp and effects. You never know what you are going to get here – kind of like the famous “surprise songs” that were such a highly anticipated moment at every stop on Taylor Swift’s Eras Tour this year. At our show, we got “When Love Comes to Town” and “Love Rescue Me” from 1988’s Rattle and Hum for our songs, leaving me and my buddies with a touch of FOMO, because the night before had gotten the more iconic tunes “Two Hearts Beat as One” and “Sunday Bloody Sunday” from 1983’s War.
At the Sphere, there really isn’t a bad seat in the house. I was lucky enough to get Verified Fan and buy at face value through Ticketmaster, but I couldn’t get great seats, so we were up in the 400s, the highest level. It was a pleasant surprise that the seats were actually great. Sure, we were far away, but I have had other chances to see the band up close… I can’t stop myself from offering this flex from a very fortunate moment on the floor at MSG in 2015…
This wasn’t that kind of concert, where getting closer is materially better. For me at least, this was about taking it all in, and I think you could do that just as well in the cheap seats as the pricey ones, given the Sphere’s design. So bonus points for the Sphere for that.
As for the facility itself, it is brand spanking new, modern, and looks great. The food and beverage offerings were unremarkable, but fine. Overall the experience was good, but there were problems with entering and particularly exiting. It took a LONG time to get out after the show ended. It took close to a half-hour to get back to the Venetian lobby (it only took 10 minutes to walk over, so three times the time to get back). There were times in the extremely congested pedestrian bridge to the Venetian that I thought I was in a fire trap. Didn’t love that part. Not sure if this is something they can work on.
I would most definitely see another show at the Sphere.
But What About the Stock?
One reason investing in consumer stocks looks easy but actually can be quite hard is that a great product or experience doesn’t always make for a good investment. Sometimes that’s because the valuation is insane and is eventually going to fall back to earth. Other times it’s because a product or service meets a niche need that appeals to the person assessing it, but that person makes a bad focus group of one, and the actual total addressable market for this thing they love might in fact be quite small, or at least small relative to the market’s expectations or the company’s valuation. Other times, a product or service may be too good to be true… the value proposition to the consumer is too high, maybe so high that the company will never make money.
This kind of “great product/bad business” situation has been very common in the internet age. Venture capitalists (“VCs”) and public markets investors as well have been trained by Amazon (AMZN) to have a lot of patience with consumer-oriented companies that rack up the losses for years while delighting their customers, with profitability always just a quarter or two away. It worked so well for Amazon, why not have a little patience? Yet the markets are full of companies characterized by profitless prosperity… lots of revenue growth, not a lot of profits. I wonder if Sphere is going to end up in this bucket.
The concert business is not a great business. You only need to look at mega concert promoter Live Nation’s (LYV) financial statements to see this. The company makes razor thin operating margins, or sometimes even loses money, putting on concerts as a promoter, and instead makes all its money selling tickets through its Ticketmaster division and collecting sponsorship dollars for allowing corporations to stick their names on the venues it owns or onto the tours it puts together.
Sphere is kind of part venue operator and part promoter. On an event like the U2 residency, it’s primarily a venue. Generally, venues do not get any of the face value of the tickets sold to a concert, which goes almost entirely to the artist, with a small cut to the promoter. The venue gets to share in ticketing fees with the ticketing agent, gets paid a rent by the promoter, and can make money on ancillary revenue by selling food, beverages, parking, upgraded experiences, etc. It’s possible that Sphere’s deal with U2 varies from this industry standard, but it’s safe to assume that the lion’s share of the face value of the tickets is going to the talent here.
Running a venue is expensive – you need a lot of people, a lot of insurance, a lot of maintenance staff. Like concert promotion, it’s a thin margin business. The way you make it work is by staying occupied and open. And this is where I have my doubts about the Sphere. When you look at the arenas that a band like U2 typically plays in, they all host sports teams - NBA, NHL, possibly both. An NBA team will keep an arena busy for 41 days a year at minimum – more if the team makes the playoffs. The same with an NHL team. The Sphere is set up like a theater – stage in front, as opposed to in the round like an arena. It will never be able to host a sports team, although one off events like a boxing match or an MMA fight would work in there. The shape of the venue will also preclude a lot of touring acts from making a stop at the Sphere.
The night before the U2 show I saw Depeche Mode at the T-Mobile arena down the road, also on the Strip. T-Mobile seats 20,000, thus is a similar size to the Sphere’s 18,000 capacity. The Depeche Mode stage set up would not have fit in the Sphere space, due to the long runway from the main stage that the band utilized. I just saw Madonna’s Celebration Tour at the Barclays Center in Brooklyn last week, and similarly, I don’t think that stage would have fit into the Sphere.
There’s also a lot of competition in Vegas at this capacity range. In addition to the T-Mobile arena, the Michelob Ultra arena at Mandalay Bay seats 12,000 and the MGM Grand arena seats 15,000, plus there is probably going to be a new arena built to accommodate an NBA expansion team. Sphere will have to compete with all these venues for one-off concerts, and given its shape, it might be a tough sell.
The Sphere is going to need a lot of residencies to fill itself up… but how many bands are there that can fill 10 or 20 dates with 18,000 seats in one city – even if that city is tourist-heavy Vegas. Most Vegas residencies are in venues that seat a few thousand – not close to 20,000. Also, to truly take advantage of the space, an act needs to have visuals created for the show at the Sphere Studios, and those can only be used at the Sphere. That’s a million dollar or more investment that can’t be amortized elsewhere. You need to do a bunch of shows to make that math work.
Where the Sphere does have the potential to make A LOT of money is on its own self-produced content, where it can keep the admissions revenue. Right now, that programming consists of the Postcard from Earth movie, directed by Darren Aronofsky. I went to see it the day after the U2 show for research purposes. It was like an Imax nature movie amped up several notches. It was visually outstanding. But at $169 +$9 fee, it was also outrageously priced for a one-hour movie. I only paid about half that, because I grabbed a discounted resale ticket last minute on Vivid Seats (SEAT) – again, my inner value investor popping up! But even at $80 or $90, I thought it was a rip off. And lots of Ticketmaster reviews seem to agree with me….
In fairness, there are some much better reviews on there too, but overall the Sphere experience gets a 3.7 out of 5 stars, which is OK, but not great. Given how impressive the facility is, it should be capable of scoring higher – but it needs the right content at the right price.
The Sphere tries to earn its steep price for the short movie by including a pre-show featuring AI-enabled talking robots as well as avatar building stations. The robots were kind of cool… for 10 minutes. Not for an hour. And the capacity at the avatar stations was nowhere near enough for the size of the crowd. I was underwhelmed.
If Sphere can keep packing people in for this movie, then that could go a long way to making this a profitable venture. It’s not disclosed what this movie cost to make, but Sphere gets to keep all the admissions revenue for it, as opposed to handing the cash over to Bono and crew, collecting rent, and trying to get a return on $2.3 billion of investment by selling one $14 beer at a time. The movie could be very profitable at $99, or even $79… it doesn’t need to be $169. I just wonder how sustainable demand is for a one-hour movie at any of these price points. Sure, everyone wants to see the Sphere. But once you have, are you going to pay even $79 to see a one-hour movie to visit again? I’m skeptical.
$2.3 billion is a lot of money, and the concert business is an inherently low margin one, and the Vegas venue market is super competitive. The advertising angle is interesting, but to be honest, it was very hard to see what was on the Sphere in the bright Vegas sunlight… the exterior of the building works much better as an ad canvas during nighttime hours.
Investing alongside the Dolans has never been a slam dunk, kind of like the challenges of being a Knicks fan under their ownership. For this venture to generate a decent return on invested capital, it needs to do $200 million in profits. Given taxes and an estimated run rate of $300 million in operating expenses, the Sphere is going to need to do around $600 million in revenues to have a respectable return on invested capital. That is $1.6 million in revenue per day… I just don’t see how that’s possible. That’s more than 9000 $179 movie tickets every day of the year… they have the capacity for that. I just don’t see the demand materializing at that level. On concert days, it’s easy to see them getting to $1-$2 million in revenue based on rent, ticketing fees, food, and beverage… but how many days out of 365 will there be a concert? Advertising is really going to need to work here, but as I mentioned, there are issues with visibility during the day.
I put the Sphere into the good product, bad stock pile. It’s nice someone spent $2.3 billion on this cool thing we can enjoy, but I am not sure the return will be there for shareholders. It’s in good company with a bunch of other things I love, like Sweetgreen (SG) salads and Peloton (PTON) bikes. Sometimes a good product just doesn’t equal a good business model. Also, the CFO quit right before earnings recently, which on its own wouldn’t be enough to shake me out of stock, but it’s just another piece of anecdotal evidence telling me to stay away from this one.
I’m not as bearish as this… but this post certainly made me laugh!
Some Interesting Things I Read Recently
Tallest hotel in Las Vegas finally welcomes guests after sitting empty for 10 years
The Independent, 12/19/2023
I distinctly remember looking out at this building in 2008 during the depths of the financial crisis, watching some of its windows shatter. I was told some windows were imploding because of some kind of pressure problem from being empty inside despite being mostly completed. 15 years and several different owners later, it’s finally open.
Sphere CFO ‘calmly’ quit after MSG boss James Dolan’s ‘yelling and screaming’
New York Post, 11/7/2023
Working for the Dolans sounds really fun. Kind of like a hedge fund.
More US retailers adopt ‘keep it’ returns policies to shelter profits in holiday surge
Reuters, 11/30/2023
This has happened to me a few times with Amazon. It’s not surprising – processing returns is a huge expense for ecommerce companies, especially in apparel, when people often order multiple sizes and use delivery and return to create an at-home fitting room experience. I remember some retailers telling me they would have net negative ecommerce sales days after the holidays and other big events when the value of returns would exceed the value of new sales.
Variety 100 Greatest Shows of All Time
Variety, 12/20/2023
This list may give you some streaming inspo for during your time off over the holidays. There is also plenty to debate here around the dinner table. My primary beefs are with Six Feet Under being so low and Seinfeld being so much higher than Friends… that seems like a ranking decision based in the world of 1998, but with the hindsight and wisdom of how these two shows have aged over time… I would think a 2023 ranking would done differently.
Wishing everybody a wonderful holiday season! You’ll most likely hear from me next time in 2024.
Prosperous Investing!
Disclaimer: This content is for informational and educational purposes only and does not constitute financial advice or a recommendation for a particular investment.
Disclosure: The author may have a personal financial interest in the securities mentioned. At the time of publication, personal investments included SG (short).
Great post, a very useful rundown!
Could they franchise this across the globe analogous to IMAX? Difficult (real estate &cost) and not a particularly good business model either but this way they can share the production and promotion costs of ads and movies? I could see parties in Singapore, Tokyo, Dubai, and maybe a few other cities having an interest?