Live Nation's stock rose 28% a few weeks ago after the company reported razor-thin profits that actually beat market expectations. That jump increased the company's market cap by $262.5 million. In the days after, the stock rose as much as 8.2% (it has since dropped a bit). Why? Where will the company generate the sort of growth that merits a that kind of increase in market cap?

The market has rewarded Live Nation for eking out a slight profit during a very trying summer. Ticket prices have increased and attendee spending increased 6%. The assumption, which I think is fair, is the company will be able to do the same in similarly difficult years and especially in economic booms.

Analysts also like Live Nation right now because recorded music is doing so poorly. That doesn't say anything about the future of Live Nation's business. All that says is that live music is doing relatively better than recorded music.

I see a couple problems in the focus put on Live Nation: The wrong business segments are getting the attention. Live events have too small a profit margin to merit much excitement. Live Nation is acquiring venues and smaller promoters. This allows for revenue growth but means the company will book more shows in smaller venues and work harder to barely break even. The company understands the future of live music will follow the current trend in recorded music: Stars will sell fewer tickets. Venues are being rightsized accordingly, and some larger venues have been sold. Live Nation can continue on this course and increase revenues and market share, but little is going to end up on its bottom line.

The important growth segments are those with better margins: Ticketing, merchandise and e-commerce. Those areas, if done correctly, will offer more reward than does promoting concerts. (As a point of comparison, Ticketmaster, as a division of IAC, had a 13.65% profit margin in 2007. Its pro-forma margin was 8.77%. Live Nation had a profit margin of -0.3% in 2007.)

But those growth segments that will add most to Live Nation's profit are too clouded in uncertainly right now. The company is going to have to get a few wins under its belt before people pay attention. Live Nation said it plans to debut its own ticketing operation on January 1st, 2009. Expect the learning curve and up-front expenses to hamper results in the first year or two. Beyond that period, ticketing has strong potential.

Right now investors seem to be more impressed by breaking even last quarter than they are by the company's growth strategy. That's a mistake. Multi-rights deals (recordings, fan clubs, merchandise) and big tours make for good headlines, but it's often the least sexy side of the business that generates the most positive cash flow (think American Airlines and its SABRE reservation system). For Live Nation, ticketing won't be glamorous but it could be the main driver of growth.

Multi-rights deals with superstars don't have as much downside as critics think, but any one successful deal won't move the needle much. Live Nation's estimates put Nickelback's contribution to operating income at $60 million over ten years. The estimate for Shakira is $110 million in operating income over ten years. How likely are those scenarios? Time will tell, but there are risks involved.

These multi-rights deals are based on historical numbers for revenue streams such as ticket sales, album sales and fan club memberships. If an artist peaks commercially before or even during its Live Nation contract, those deals will not pay off as expected. Another unique risk is the degree to which the deals' successes depend on album sales and radio play. That's usually the domain of the record label, but Live Nation has said it will not built a traditional label infrastructure. That means those functions will be outsourced or handed off to retailers (think Wal-Mart exclusives). The company is probably safe with U2 (recorded music is not part of that deal) but less so with a band like Nickelback. Take Nickelback off the radio and ticket sales could drop sharply. In addition, radio-friendly arena rock, a la Nickelback, is prone to cycles and it's not clear if the band has reached the sort of "heritage" status by which arenas can be without a hit album. Any deviation from historical averages will lead to less successful multi-rights deals and lower operating incomes.

The Jay-Z deal is another one with uncertainty. Ticket sales are safe, but Live Nation is effectively providing the capital for the M&A activity of Jay-Z's business ventures. Whatever profits these new ventures muster will be split between Jay-Z and Live Nation. Compared to ticketing, the arrangement looks like a crap shoot.

Since Michael Cohl left the company, I like Live Nation's outlook more. The company needed to slow the number of large deals it is signing with artists, be more selective and focus on ticketing. The post-Cohl company will be a more deliberate company that will choose more carefully the artists it signs. It is a company that stands to significantly improve its profit margin as it grows non-concert revenues and works through the inevitable growing pains.