Compass Records: A Case Study

Introduction

Recommendation

The management should reconsider their evaluation policy of new artists who join the record label in the dimensions of popularity, how relevant is their music, their previous successes in promoting such type of artists and the amount of investment to be put into the production of that artist’s music.

For the case of Roscommon’s signing, it would be prudent for Compass Records to own the rights of the artist fully since she has an established fun base both locally and abroad. And to predict a success out of Roscommon’s signing would be too far-fetched since this will be dependent on the amount of marketing and distribution costs together with the production costs. In finality, this deal is a worthwhile deal to sign since the historical appraisal of such artists who have a following has been a record hit.  Even if there is a risk of owning an impaired asset in signing the musician, there is the potential of maximizing profits since the musician is a marketed brand in herself.

Analysis of IRR and NPV Values from Licensing and Owning the Full Rights

First, we adjust the different levels of units (forecasted) for the cost of capital to find the present value of units produced at each respective year. This means that we take the number of units multiplied by the annuity factors. The IRR for the company is the same as the cost of capital, which is 12%.

For example, for 2000 units at year 1, the PV in terms of units will be given as;

PV= 2000 x 1/ (1+1.12)

= 1786 units

Total forecasted units sold and their respective NPV and IRR

 
Year 0

(amount sold x annuity factor)

Year 1
Year 2
Year 3

2000 units
2000 units
1786 units
3380 units
4800 units

5000 units
5000 units
4465 units
8450 units
12000 units

8000 units
8000 units
7144
13520 units
19200 units

15000 units
15000 units
13395
25350
36000 units

 

But for the case of Compass record owning the rights of the artist, the present value will be taken by multiplying the cash flows by a perpetuity rate considering the 12% cost of capital.

And this is given by; 8.3 * 14,000 = 116,000 in currency value (this is cost of the overall production for the option of owning the rights of the artist

Compass records under the label management of Brown should be on alert as to how they operate their music-business fundamentals such that they are making the most out of the records they sign. One of the main objectives will be to increase the level of successes in the major record labels to above 15% if their balance sheet is to be healthier than it is.

Music-business essential requirements.

Recording contracts

Recording contracts do bind both parties (the record label and the musician) to payment of royalties and surrender of ones’ license to operate certain music. For Compass records, they will be required to have obligations to the artist depending on the type of recording contract.

Brown should ensure that the contracts signed are entirely exclusive regardless of the type of recording contract. This is the starting point for all contracts in that the artist is wholly owned by Compass records and cannot sign for any other company. This ensure that the company does not share the benefits accrued from the artist with another company and also ensures that the artist does not charge double loyalties for the same product.

Brown should consider in prime those contracts that give the record company rights over other albums of the artist such that within a single CD-ROM, we can find numerous options a part from the single record signing by the artist. Similarly, such endorsements are important when considering new artists whom heavy marketing has to be done on their new products but the returns will be realized fully when artist is fully sold out after some more releases. On these type of records, Compass Records should exercise the act of releasing an artist if they are struggling with sales for their music, if the artists have asked to be released and the most important of them all is that the company should have recouped all of the costs incurred in marketing and signing the contract.

Thirdly, in order to minimize the amount of royalties paid on a single title, Brown has led the management to adopt the combining of the two royalties (the mechanical and recording artist royalties) such they only pay a rate lower than when the two were independent.

On the other hand, the production costs for a certain project should be prudently determined so that Compass Records does not suffer losses in case a non-selling title is produced. The prospects of a certain musician should be clearly determined through such reviews as the social media and to a further extent, the corporate client. If the rating for a popular artist is falling over the past few months, then it means that we are facing a higher financial risk by investing in the production of titles from the artist. Therefore, we should minimize costs for artists whose popularity is falling despite having kept a sound market presence in the near past.

On the issue of marketing and distribution, it is clearly stated that for a record label to enjoy good success in the industry, it has to capture a deal to play regularly on radio and television airwaves and a market presence in retail chains shops and most populated joints in the country. Compass Records had a remarkable way of marketing and this was by having market presence in concerts. It was so prominent that some group of music fans did not purchase CDs even if they were available in stores other than buying at a concert. The biggest advantage with making a presence in concert venues and various retail shops in the country is that the company can use some of its employees to promote the product other than seeking the services of private personnel who would cost more as for the case with radio promoters and doing posters and e-card mailings.

Brown used the technique of incurring all of the company’s manufacturing, preproduction and recording costs in within a period of 6 months before realizing any return. This was the reason why Brown’s management ensured that they did intensive marketing so that the artist’s title would amass a meaningful customer demand.

Conclusion

The management of Compass Records have been considering their case scenario as to whether it can aid them in making a better business of themselves. It is clear that the management has been making some prudent decisions in marketing, distribution, record signing and production enquiries in their works. But the main question has been on how to increase the amount of profits made on the major record labels rather than having huge successes in the small artists only.

 

 

References

Bruner, R. F. (2002). Case Studies in Finance: Managing for Corporate Value Creatio