Compass Records Case Analysis

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Background Compass Records is owned and operated by Alison Brown and her husband, Garry West. Alison Brown, a former investment banker, is a world-renowned bluegrass artist, and along with her husband, started Compass Records in 1995. Based in Nashville, it has been in business for 10 years. Compass is a small business compared to the rest of the global music business, but has been able to remain competitive by turning a profit on 80% of its titles compared to the industry average of 10%. Compass has a portfolio consisting of nearly 50 artists and averages 20 releases per year. Recently, Brown has shown interest in a new folk musician named Adair Roscommon. Brown needs to decide whether to produce and own the recording or just license it. Each decision will require different monetary investments in the artist and carries different risks. Analysis/Assumption ● Producing cost: $20,000 ● Licensing Advance: $3,000 ● Sale Projections: 10,000 units ● Mechanical Royalty (MR): $0.85 per unit ● Recording Artist Royalty (RAR): $1.45 per unit ● Marketing/promotional costs the same for both licensing and owning/production ● No changes in net working capital (NWC) ● No capital expenditures ● Marginal tax rate: 40% ● Discount rate: 12% Recommendation With Compass projecting sales of 10,000 units, we recommend the company licensing the rights rather that owning and producing. Although owning the recording will result in lower artist royalty fees and higher potential upside, the net present value of owning the rights is -$8759.49, whereas the net present value of licensing Roscommon’s music is $6,111.02 (see appendix). One of the negative aspects of owning and producing the master recording is the upfront costs ($20,000), which are significantly higher than the licensing advance($3,000).Considering Compass Records turns a profit on 80% of its titles, every

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