On Jan. 9, 2012, the veteran dance-festival promoter James "Disco Donnie" Estopinal Jr. walked into Robert F.X. Sillerman’s midtown Manhattan office to discuss the dance music business and walked out part of a venture that would change it immeasurably. A serial media-industry entrepreneur, Sillerman was best-known at the time for buying up concert promoters under the rubric of SFX Entertainment and, in 2000, selling them to the radio giant Clear Channel -- since rebranded as iHeartMedia -- in a deal worth $4.4 billion. His latest venture wasn’t that much different. Sillerman told Estopinal he planned to round up festivals and businesses focused on EDM (blanket shorthand for "electronic dance music"). Estopinal agreed to sell Disco Donnie Presents and become part of Sillerman’s new company, as well as to help identify and approach other potential acquisitions.
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With musical tastes that run to Bob Dylan and Paul Simon, the bald and gangly Sillerman, then 63, struck Estopinal as an unlikely figure to invest in dance music. But the promoter also quickly grasped that his new collaborator, who made Forbes’ 400 list in 2005 with a net worth of $975 million, wasn’t like most media moguls. Before Estopinal left, Sillerman offered his hand, saying, "You have to shake this hand because I masturbate with that one." Estopinal also was impressed with his new partner’s ambition. "I asked how much we’d have to spend on acquisitions," he remembers. "He said, 'A billion dollars.’ I said, 'When do I start?’ And he said, 'As soon as you walk out the door.’"
Sillerman revived the SFX Entertainment name -- a scramble of three of his initials -- for his new venture, and during the next 18 months acquired or agreed to acquire eight companies at an aggregate cost of approximately $350 million in cash and stock, including the online EDM download store Beatport (for $58.6 million) and Dutch festival promoter ID&T ($130 million), which produces Tomorrowland, one of the foremost EDM festivals in the world. SFX later acquired more promoters, as well as ticketing startups Paylogic and Flavorus and the digital marketing company Fame House, creating a vertically integrated EDM giant that it began preparing for an initial public offering. According to its 2013 prospectus, SFX’s international portfolio of companies generated $242 million in revenue in 2012, with losses of $49 million. On Oct. 9, 2013, when SFX version 2.0 went public, it had a market value of more than $1 billion.
Then came the sickest drop in the history of dance music: During the past two-and-a-half years, SFX’s stock price fell from $13 to just over 1 cent a share, or an approximate valuation of $1.24 million. In February, the company filed for Chapter 11 bankruptcy and Sillerman, who at various times owned between a third and 40 percent of the business, stepped down as CEO. (He remains chairman of its board.)
All of SFX’s festivals save TomorrowWorld and Stereosonic will take place as scheduled, and a U.S. bankruptcy judge has created a $15 million "artist carve-out" to ensure performers don’t get stiffed. But it remains to be seen what kind of company will emerge from the wreckage -- and who will run it. (Mike Katzenstein of FTI Consulting is serving as SFX’s chief restructuring officer and interim CEO.) SFX laid off 36 employees in April; a month later, Beatport let go of more than 40, about half its staff, and cut all operations except its core digital download store.
Sillerman may no longer be running SFX, but he’s convinced the company will reboot. "There’s no question," he says by phone from the SFX office he will eventually vacate, "that four years later, this is a sustainable genre."
Albeit an unsteady one. After five years of explosive growth and climbing DJ fees, there’s a growing industry debate over whether the EDM bubble has burst. At least seven festivals -- including two produced by SFX -- have been canceled for 2016, and though Ben Turner, a founder of the 8-year-old International Music Summit EDM conference, contends the industry is evolving, not collapsing, he predicts "a big implosion" of mid-tier DJ fees in Las Vegas.
It’s hard to say whether this contraction played a role in SFX’s nosedive, but it’s clear Sillerman helped inflate the EDM economy by growing too fast and paying too much for the companies he acquired and the DJs he employed. "That’s Sillerman’s MO," says a former SFX employee. "Make everyone an offer they can’t refuse."
"It’s easy to say that in hindsight," says Sillerman when asked if he overpaid. "We bought companies based on what we anticipated -- that we could bring in incremental sources of revenue." Without a serious strategy to leverage SFX’s scale in a significant way, however, the company wasn’t worth more than the sum of its parts. "They thought they had a plan to make one plus one equal three," says the former SFX employee. "But there was never a point at which the company was functional."
Sillerman says "there are no easy answers" to explain SFX’s collapse, but he admits he made mistakes, such as underestimating the importance of individual events and promoters as opposed to performers. He knows some promoters are angry, and "I don’t begrudge them their disappointment and anger because I’m disappointed and angry, too," he says.
He is rarely so serious: Sillerman drops more f-bombs than Entourage’s Ari Gold and revels in a frat-boy sense of humor rare in 68-year-old chief executives. (Asked to confirm the comment he made before shaking Estopinal’s hand, Sillerman replies that, in fact, he masturbates with both hands.) He speaks in a raspy voice, the result of a 2001 struggle with tongue cancer, and he takes nutrition through a feeding tube because he lost the ability to swallow. Now, he says, he feels fine, although given the ill will that SFX’s bankruptcy has generated, he adds, "Maybe it would be easier if I said, 'I feel terrible. Woe is me.'"
Just four years earlier, Sillerman looked unassailable. He grew up in Riverdale, in the Bronx -- his father was in the radio business -- and made his first fortune buying and selling radio stations beginning in the ’80s. He then turned $2.5 billion spent acquiring regional concert promoters and merging them into a national live-events company -- the first SFX -- into $4.4 billion when he sold it to Clear Channel. (In 2005, Clear Channel spun off that division, which has since become concert-biz behemoth Live Nation.) "He gambled big and he won," says Dennis Arfa, Billy Joel’s longtime agent, who worked with Sillerman at the time. "He was a game-changer."
The deal made Sillerman seriously wealthy. He and his wife, Laura, live in a five-story townhouse on New York’s Upper East Side that they bought from HBO CEO Richard Plepler and own property in Southampton with a three-hole golf course. He also found success on Broadway when he invested in and executive-produced his friend Mel Brooks’ smash musical adaptation of his 1968 film comedy, The Producers. Other Sillerman ventures haven’t fared as well, however. His effort to build an upscale golf resort in Anguilla failed, and CKX, a company he founded in 2005 that bought American Idol producer 19 Entertainment and the licensing and merchandising rights to Elvis Presley’s likeness, among other assets, was sold for half its onetime value. Even the first SFX wasn’t nearly as solid as it looked: Two years after Clear Channel bought SFX, it wrote down 75 percent of its value.
"I don’t know what happened after we sold it to them," says Sillerman. "We were on a rocket ride, and they changed a bunch of things."
Or, perhaps, it’s easier to assemble an empire than it is to run one.
How fast did SFX move? Estopinal says that following his meeting with Sillerman in January 2012, he flew home to New Orleans, where that night, he ran into A.J. Niland and Bennett Drago, the co-founders of festival producer Huka Entertainment. Niland remembers Estopinal convinced him to fly to New York that weekend for an important meeting -- he wouldn’t say with whom. "We walk in," recalls Niland, "and Bob is wearing a T-shirt that says 'F-- You, You F--ing F--’ and a hat that you’d get at a souvenir shop that made it look like he had spiky blond hair."
By the end of 2012, says Niland, Sillerman and his new partners had identified more than a dozen companies he wanted to buy and signed contracts with at least some of them.
In January 2013, Sillerman sent an email to the founders of the companies SFX was acquiring, inviting them to New York in March for a party where they would get their checks and, the next day, attend a strategy meeting. In February, the party was postponed for a few weeks -- then delayed again. Around this time, Niland had a disagreement with SFX executives, and he and his partners extricated themselves from their deal to sell Huka. In retrospect, says Niland, it was one of the best decisions he ever made.
Before Sillerman, dance music wasn’t thought of as big business. Promoters had deep roots in local scenes, and large festivals grew organically out of small ones. That changed when SFX started paying top dollar for promoters -- sometimes significantly more than industry-standard valuations -- usually in a combination of cash and equity. When SFX began bidding to buy festivals, so did Live Nation, driving up prices. And as festivals competed for top DJ talent, booking fees rose -- especially when Las Vegas clubs upped the ante. "DJ prices were out of control," says promoter John Dimatteo, who runs the Electric Adventure festival in Atlantic City, N.J.
a. Oct. 9, 2013: SFX Entertainment (SFXE) goes public at $13 a share, giving it a market value of $1.05 billion. The company ends the trading day at $8.58.
b. March 27, 2014: After a photo of Sillerman flipping the bird goes viral, analysts question the SFX CEO, and the stock falls more than 10 percent to $6.81.
c. Aug. 5, 2014: SFX announces a sponsorship deal with MasterCard, which boosts the price of shares from $6.87 to $7.15 during the course of two days.
d. Feb. 25, 2015: With shares trading at a dismal $3.70, Sillerman proposes to take SFX private for $4.75 a share, which bumps the stock price to $4.79.
e. Aug. 10, 2015: The stock hits a new low of $2.36 as second-quarter earnings show growth in revenue and net loss. The latter: $48 million.
f. Oct. 15, 2015: Sillerman submits another proposal to take the company private, this time for $3.25 a share. The stock closes at $1.04, up from 90 cents.
g. Feb. 1, 2016: SFX files for bankruptcy after making a deal with bondholders to cancel $300 million in debt. Its share price falls to 7 cents.
In 2013, the future looked promising for EDM and SFX. That December, two months after going public, the company announced a sponsorship deal with Anheuser-Busch estimated to be worth $25 million for the coming year. Deals with T-Mobile and MasterCard followed, proving Sillerman right that big brands would pay SFX to help reach young consumers. Eager to generate growth, SFX had its promoters start new festivals, but former staffers say SFX didn’t do enough to coordinate the operations of its promoters -- that it ran less like an EDM empire than a series of festival fiefdoms. "He created this very large organization that was based in New York, but the heads of its businesses were all over the world -- Amsterdam, Belgium, Germany, Australia -- and they never were made to fall into line for any centralization," says the former SFX employee. "He couldn’t convince anyone to do anything."
Wall Street wasn’t exactly enthralled either. A few days before a March 2014 earnings call, images of Sillerman flipping the bird and grabbing his crotch as he deplaned from a private jet to attend Miami’s Ultra Music Festival went viral, and during the teleconference a Deutsche Bank analyst asked Sillerman if he wanted to explain his actions. "We understand that you’re something of a nontraditional CEO," said the analyst. "We’re just trying to make sure you’re still sane." Sillerman said his performance was an inside joke, but after the call, SFX’s share price dropped more than 10 percent.
Culture clashes were the least of SFX’s problems. The growth Sillerman expected never materialized, and by the end of 2014 SFX’s stock had fallen to $3.29 a share. He invested more capital -- initially by purchasing stock. SFX came under pressure to generate revenue and show results to Wall Street, and in March 2015, the EDM download store Beatport launched a free streaming service, even though it didn’t have licensing deals for the dance music that the major labels distributed. Despite sponsorship from T-Mobile, the service never took off and eventually added to SFX’s losses.
A month later, ID&T head Duncan Stutterheim stepped down. "That was a big sign things were going bad," says an employee of an SFX promoter. He wasn’t the only one. As SFX stock declined, the company lost key staffers, including Mike Bindra and Laura De Palma, who founded Made Event, producer of the successful Electric Zoo festival. Since few of those companies owned physical assets like permanent concert venues, those founders and their connections were a large part of what SFX had acquired.
By then, Sillerman was trying to take SFX private. In May 2014, he agreed to pay $5.25 a share for outstanding stock, which put pressure on short sellers -- of which there were many -- and stalled a further slide. "I identified the mistakes we made, and thought I had a fix for them," says Sillerman. When he withdrew the offer in August, investors speculated he couldn’t arrange financing. In fact, "it was because the performance of the company continued to decline," he says. After he unsuccessfully attempted to take the company private for a second time in the fall, SFX filed for bankruptcy on Feb. 1. Sillerman says he is "disappointed" by the outcome. "There were great people we worked with and people who lost money, and I don’t like that," he says.
As the 2016 festival season begins, SFX has shrunk from 650 employees at its peak to approximately 500, while holding the equivalent of an EDM yard sale. In April, it agreed to auction off three companies that it owned. On May 27, Universal Music Group announced that it had acquired Fame House in a deal worth $1.4 million; on June 7, SFX revealed that Vivendi was the high bidder at $4 million for Flavorus.
An auction for Beatport was scheduled, then suspended. Instead, on May 10, the company was stripped to its core. "They had already cut all of the fat, so they went all the way into bone," says a former Beatport employee.
Estopinal is still running his festivals, as are other promoters SFX bought, with considerable independence but also some uncertainty. "Some of them are trying to buy their companies back," says the former SFX employee. "No one wants to be part of anything called 'SFX’ anymore."
Sillerman, whose attitude toward doubters might be best summarized by those 2014 photos of him flipping the bird, is now running DraftDay Fantasy Sports, and says he’s working on a startup (which he won’t discuss) while watching SFX’s progress. "When the company emerges from bankruptcy, it will be a robust and successful enterprise," he says. "But it will be different." The dance music business won’t be the same either.
This article first appeared in the June 18 issue of Billboard.