Madison Square Garden Entertainment (MSGE) is riding a wave of success, with their Q3 2024 earnings transcript radiating optimism and projections of substantial growth. Record-breaking Christmas Spectacular revenues, a flourishing bookings business, and the potential for deep playoff runs for both the Knicks and Rangers all point to a bright future for the company. However, amidst the jubilant announcements and financial figures, a subtle but significant shift is occurring, one that could reshape MSGE's profitability in the years to come: the end of Billy Joel's residency.

For a decade, the Piano Man's residency at Madison Square Garden has been a unique and undeniably lucrative venture. Unlike typical booking arrangements, the Billy Joel residency was structured as a co-production, allowing MSGE to participate more directly in both concert revenues and costs. Now, as Joel's residency concludes, a gap appears in the Garden's event calendar, one that MSGE is keen to fill with other residencies.

On the surface, this seems like a simple transition. Residencies are attractive to both venues and artists, offering venues guaranteed event days and artists reduced travel demands and a concentrated fan base. However, a closer look at MSGE's financial history suggests a potential hidden advantage of shifting away from the co-production model that defined the Billy Joel residency.

The Financial Shift: Co-Production vs. Wholly Owned Shows

Examining MSGE's income statements from recent years reveals a compelling trend. In fiscal year 2019, during the peak of Billy Joel's residency, MSGE reported a gross profit of $378,268,000. However, their selling, general, and administrative expenses (SG&A) for that year reached a hefty $314,522,000, consuming a significant portion of the gross profit. While various factors could contribute to this, the complex nature of a co-production likely played a role in elevated SG&A expenses.

Fast forward to fiscal year 2023, where the Christmas Spectacular, a wholly owned and operated production, takes center stage. The gross profit for that year was $351,567,000, slightly lower than in 2019. Yet, SG&A expenses were significantly lower at $171,384,000. This disparity suggests that wholly owned productions, despite generating slightly less gross profit, might be more profitable due to streamlined operations and reduced administrative costs.

A New Era of Profitability?

The takeaway for MSGE's future strategy is compelling: while residencies remain valuable, shifting towards wholly owned and operated shows, particularly those with multi-night run potential and lasting appeal, could unlock even greater profitability. The Christmas Spectacular stands as a prime example, with its record-breaking revenues, driven by dynamic pricing strategies and high per capita spending, showcasing the lucrative potential of owning a beloved production. Imagine replicating this success with other shows, capitalizing on the iconic status of Madison Square Garden and the Rockettes brand.

Furthermore, the Christmas Spectacular's dynamic pricing strategy, implemented by MSGE itself, highlights a key opportunity for maximizing revenue. This strategy, currently not applied to concerts, could be a valuable tool for extracting greater value from high-demand events at the Garden and other venues.

Replicating the Christmas Spectacular's triumph is no easy feat. Developing original, high-quality productions demands substantial investment and carries inherent risks. However, the potential rewards, as demonstrated by the Christmas Spectacular's financial success, are substantial.

It's important to emphasize that MSGE isn't abandoning residencies altogether. The company actively seeks new residency deals, recognizing their value for venue utilization and consistent revenue streams. However, the shift toward wholly owned productions, drawing upon the dynamic pricing and operational efficiency exemplified by the Christmas Spectacular, could become a defining feature of MSGE's long-term strategy.

The departure of Billy Joel, while bittersweet, could spark a new era of profitability for MSGE. By leveraging their existing assets, expertise, and the lessons learned from their most successful production, the company could unlock a level of financial success that might even make the Piano Man envious.

Financial Data from Q3 2024 Earnings Transcript (SeekingAlpha)

"Madison Square Garden is not only a legendary entertainment venue but also a National Historic Landmark. Designated in 1989, it has hosted countless historic events, from sporting championships to iconic concerts, leaving an indelible mark on American culture."