Quote:FIN 465
Thoai Nguyen
Sungbin “Vincent” Cho
2/4/2011
Brief: Compass Records
Background and Issues: The cofounders of Compass Records, a small independent music recording company, must analyze different economic benefits of producing and owning the next album of an up-and-coming folk musician, or simply licensing that album. Each scenario requires a different initial outlay of funds. The final decision of whether to license or own the album must keep along with uncertainties of future sales and any other qualitative consideration that may have an influence on the project.
Analysis: With produce and own the next album strategy, Compass Records would be able to gain creative freedom in production, more options for three additional album producing, and possibility to gain more income stream. On the other hand, the company would be beneficial from licensing a recording that provides the less upfront costs, low risk for operating, and no responsibility to produce the next album.
The initial layout funds of produce and licensing are $32,000 and $24,500, respectively. The producing initial layout fund is estimated to be 31% higher than licensing funds (Appendix 1). According to the three-year forecast based upon the assumptions, with the industry’s standard 12% discount rate and expected units sales amount of 10,000, produce and own strategy would yield a net present value(NPV) of $6,741 and internal rate of return(IRR) of 33% (Appendix 2). Under the same circumstance, licensing strategy would have higher NPV and IRR, $14,068 and 71% (Appendix 3). However, produce and own strategy give Compass Records a better option in long-term profit. First, Brown believes she can have Roscommon enter a deal which will give the company the option to own three additional albums. Second, Roscommon also has to share 50% of the mechanical royalties earned on an album with Compass Records as part of the deal.
Quote:The initial outlay under a licensing contract for Compass included an artist advance, which typically runs about $3,000 to $5,000 and additional cost of $500 for touch-ups to the master. Also, royalties must be paid to artist for use and sale of their music for licensed recording this fee was $1.75 per unit sold. On the other hand, producing and owning a master record presented significant up-front costs, which the company might not realize until other...
Basically, this is a case study. The writers appear tasked with deciding whether Compass Records should license the recordings of a particular artist or produce their own.
If they produce their own, the essays indicate, they own the rights to the master recording forever. If they license an already existing master recording, it costs them less up front.
The essays indicate they normally license the recordings. This would make sense if they expect to sell 5K units at most because it would be harder to recover their costs.
All this raises the possibility they could license Haley's existing recordings. If the resulting album sold well, it could indeed be lucrative to her ($1.75 per unit sold) and she would still retain the long-term rights to the recordings.
