Show MoreThe case study presented a decision that needs to be made by Compass Records between owning and producing or licensed the recording rights for an up and coming Dublin folk music star, Adair Roscommon. Both scenarios offer different benefits and risks. Within the attached spreadsheet, each option has been analyzed based on their own specific cost structures over a span of year 0 – year 3, with equal sales figures.
To begin, I will speak about the results of the two cash flow analyses, which as stated earlier, are based on similar sales figures and life of investment. The cash flows that resulted from the “producing and owning” scenario were ($41,071) in year 0; $38,562 in year 1; $13,795 in year 2; and $6,388 in year 3. Therefore,…show more content…
Producing and owning may provide a benefit over licensing in the long-term because owning the music would mean that they would be able to “generate revenue indefinitely” from the album and “include a standard option to produce and own three additional albums” (Ross, Westerfield, & Jordan, 2010). Basically stated, this gives them more control over the artist’s future decisions, and an opportunity for greater returns. For example, if Compass owned the rights to the second project and it in turn sold 18,500 copies (10,000 in US; 3,000 in UK; 2,000 in Jap; 1,000 in Can.; and 2,500 from van – change amounts under units sold on top left of sheet on “producing” tab to see the change in cash flows), its NPV would be $38,133.05 and IRR would be 79.66%. This result would mean that owning and producing would be the stronger long-term investment, especially if the first album did not sell the projected 10,000 CDs. For instance, if Roscommon only sold 5000 CDs (2,500 in US; 750in UK; 650 in Jap; 450 in Can.; and 650 from van – change amounts under units sold on top left of sheet on “licensing” tab), its NPV would only be $2,080.86 and IRR would be 20.86%. These results would be terrible under the licensing contract if Roscommon decided to go with a different label for her next album and ended up producing 18,500 in CD sales.
Overall, the two choices represent their own pros and cons. A
Case Compass Records
A compass record is a small Recording label owned and run by Alison Brown and it is located in Nashville Tennessee. Because of its size and resource limitations the company promotes new comer artists with considerable low level of sales if compared with those belonging to major big size labels. The company divides its contract between licensing contracts, the majority, and produce-own contracts. It depends on the financial returns and other benefits involving the artist and her o his potential. Lately, Alison has been analyzing the situation involving Adair Roscommon, an Irish singer with a lot of talent and great potential to generate sales. Alison is trying to decide which of the types of contracts she should arrange with Roscommon. The financial analysis will determine if whether producing or licensing Roscommon's work is the most profitable and financially attractive option.
Licensing may have the same benefit of producing additional albums with the performance-based deal. This way by licensing, the benefits would be greater because no necessity of high up-front investments as well as maintaining the expected returns of following albums under the same negotiation. In addition, the licensing contract would benefit of lower level of recoupable because of the low production in contrast to owning contract. As a result, the recouped costs would be realized in a shorter period of time than it would under the producing contract that was subject of not realization of recoupable cost within the expected cash flow period accumulating eventual losses related to recoupable costs.
As result of my analysis, I have discovered that financially wise both contracts are viable and returns are considerably good. If Alison decided to sign a contract with Roscommon where Compass records would be responsible for producing the album, despite the high initial investment the project would be profitable based on the net present value and internal rate of return. The NPV for this project was around $8, 721, 47 and IRR was around 29% which is higher than de discount rate of 12% this way satisfying its main rule. On the other hand, the licensing project was also interesting based on the same measures. The NPV of this project was about $ 14 155, 99 and the IRR was around 60%. The main difference between both projects was basically the costs involved in the production, the recoupable cost involved in each project, and the future benefits of both contracts. Under the licensing contract, Ms Brown would have little up-front investment of about $ 9 500, 00 divided in; advance of $ 3000, 00; Initial Promotion expenses of $ 6000, 00; and $ 500, 00 related to additional costs of updating the album's packaging. All these costs were recouped and were expected to be recouped right in the first year.