I.

INTRODUCTION

This paper is a case study on Music-Making Record Company (MMRC), a recording

company that was founded in 1975 by Jesus V. Soriano. Through studying the company, this
paper will be able to identify the problems of the company and propose various strategies that
could be applied to the company.

The company is struggling hard in its finances due to big percentage of bad debts and
other factors like piracy, high cost of promotion and production, and turnover of talents. What
causes this problem? Do the management need to revise their business policies?

II. BACKGROUND

MMRC was founded by Jesus V. Soriano, the top man of several banana exporting
companies in Davao. This company, in the mind of Mr. Soriano, should be able to take care of
and maximize talents to their fullest potential and to teach them the art of projection so as to
produce good recordings. At the same time, the business should be profitable.

In 1976, because of Soriano’s involvement in day-to-day operations on his banana

exporting business, he asked Manny dela Cruz to join MMRC as president and general manager.
Dela Cruz was formerly the vice-president for domestic artists and repertoire at Victory Music
Corporation, a rival company. Aside from his experience at Victory, he is himself a music
personality.

Manny dela Cruz currently occupies the position of president and as well as head of the
Artist and Repertoire group. The A&R group is responsible for song selection, the matching of
songs with singers, and the collation of research materials for possible songs. The marketing
group is in charge of advertising and promotion with 11 salesmen in the Metro Manila area, 7
people are with the product services section. All in all the company has 20 employees in Manila
and another 10 in Davao and Cebu.

Production

MMRC has its own processing plant located in its office in Cubao, where records and
tapes are recorded from a master tape produced in the recording studios. The company uses
both imported and polyvinyl materials for albums. This results in thicker album and increased
probability of breakage.
Marketing

Product. MMRC predominantly handles local artists. They handled Susan Fuentes and
Nonoy Zuniga. The promotion costs for one record could run up to P50,000 for a three month
period. MMRC prefers to stake its claims on new artists. While MMRC is a small company and
should be doing “safe” ventures like recording only marketable songs, a look at its successful
recordings reveal that 50% of the products were on an experimental basis.

Price

Record industry executives have a gentlemen’s agreement to charge the same prices to
everybody.

Finance

The financial matters of the company are handled by the controller who is concurrently
the controller of the banana export business. The company has acquired a long term debt in
connection with a set-up of a pressing plant. According to dela Cruz, there seems to be no
problem with regard the sources of long-term financing because the banana company can do
the borrowing for MMRC and the accounts or records are just juggled to cover the fact. (See
Exhibit 1 and 2 for the financial statements.)
 EXHIBIT 3.1

Music-Making Record Company

Balance Sheet
December 31, 1976-78

ASSETS

CURRENT ASSETS 1978 1977 1976

Cash P99,933 P108,868 P 22,354

Accounts Receivable
Trade 804,829 507,799 83,203
Others 182,761 135,330 74,160
Allowance for _______
doubtful accounts ( 254,250) ( 192,600)
Inventories- net 549,639 344,326 142,084
Prepaid items and other
current assets 144,103 215,216 1,170

Total Current Assets 1,527,015 1,189,879 322,971

PROPERTY, PALNT AND

EQUIPMENT

Building and _________ ________

improvements 897,593
Machinery and
equipment 924,466 52,195 25,907
Office furniture, fixtures,
and equipment 148,356 75,973 20,630
Delivery equipment 20,187 20,187 20,187
Construction in progress _______ 791,600 _______

Total 1,990,602 939,955 66,724

Less: Accumulated
Depreciation ( 139,114) ( 30,576) ( 6,165)
Property, Plant and
Equipment-net 1,851,488 909/379 60,559
Organization and Pre-
Operating Expense-net 65,517 92,689 116,227
Other Assets ________ 18,450 ________

TOTAL ASSETS P3,448,020 P2,121,047 P499,807

 EXHIBIT 3.1 (Cont’d)

LIABILITIES AND STOCKHOLDERS’ EQUITY

(CAPITAL DEFICIENCY)

1978 1977 1976

CURRENT LIABILITIES
Accounts payable and P1,320,065 845,275 P 83,582
Accrued expenses
Bank loans 3,150,000 1,754,911 ____
Due to affiliated companies 424,660 37,076 60,725

Total Current Liabilities P4,894,725 P2,937,342 P144,307

STOCKHOLDERS’ EQUITY
(CAPITAL DEFICIENCY)

Capital stock- P10 par value

Authorized-72,000 shares
Subscribed-72,000 shares in
1978 45,900 shares in 1977 and
1976
(subscription receivable on
which amount to P108,000 in
1977 and 1976) 720,000 351,000 351,000
Deposit on stock subscription ____ 4,500 4,500
Deficit 2,166,705 1,171,795 ____

Total Stockholders’ Equity

(Capital Deficiency) (1,466,705) (816,295) 355,500

TOTAL LIABILITIES AND

STOCKHOLDERS’ EQUITY(
CAPITAL DEFICIENCY) P3,448,020 P2,121,047 P499,807
 EXHIBIT 3.2

Music-Making Record Company

Statement of Income and Deficit
For the year ended December 31, 1978 and 1977

1978 1977
NET SALES
P 2,209,000 P1,544,937
COST OF GOOD SOLD
1,459,489 1,079,292
GROSS PROFIT ON SALES
750,312 465,645
ENTERTAINMENT AND COMMISSION
375,189 72,213
INCOME FROM OPERATIONS 1,125,491 537,858

OPERATIG EXPENSES
Salaries, wages, and allowances 614,662 534,856
Royalties 204,587 121,684
Provision for contingencies 197,406 69,724
Advertising and promotions 189,894 176,363
Travel and transportation 139,270 95,325
Provision for doubtful accounts 61,650 192,600
Rent, light, and water 53,058 32,353
Talent fees 50,342 39,521
Freight and handling 46,986 38,966
Professional fees 46,300 24,807
Representation and entertainment 43,853 46,762
Office supplies 33,011 21,731
Depreciation 29,336 26,074
Employees’ welfare 23,997 29,218
Communications 23,549 22,667
Amortization of ore-operating expenses 23,172 23,172
Commissions 18,148 20,283
Repairs and Maintenance 15,818 9,709
Taxes and licenses 12,169 4,246
Subscriptions and membership fees 6,841 6,800
Provision for inventory losses ____ 90,000
Miscellaneous 37,081 27,587
Total operating expenses 1,871,130 1,635,448

LOSS FROM OPERATIONS 745,639 1,097,590

OTHER CHARGES (INCOME)
Interest and other financing charges 308,823 55,204
Miscellaneous (59,553) ____
Other charges-net 249,270 55,204

NET LOSS 994,909 1,152,794

DEFICIT AT BEGINNING OF YEAR 1,171,795 ___

DEFICIT AT END OF YEAR P2,166,704 P1,152,794

EXHIBIT 3.3

Price list of MMRC Records and Tapes

45s LPs Cassettes

Retail Price P5.00 P26.00 P23.00

Dealer margin 1.30 4.00 5.00
Price to dealers 3.70 22.00 18.00
MMRC’s direct variable costs 1.70 8.00 7.00
Contribution margin 2.00 14.00 11.00
III. ALTERNATIVES

To solve the problems at hand, MMRC…

ALTERNATIVES WHY REJECTED

Can apply for a loan to use for additional MMRC is already struggling to pay for its long
capital term loan
Lessen the amount spent on promotions to We think the company’s promotion is just
save up because they are spending a lot on itright considering the competition in the music
industry. And since they are experimenting in
producing new albums, they needed just right
amount of fund to be able to sell their albums.
Close the provincial branches since they are Nationwide branches is a must in the music
not getting any profit from it industry if they wanted a bigger market. They
just have to limit their product distribution in
there.

IV. PROPOSED SOLUTION

Upon studying the company’s problem, we found out that the company is struggling in
its finances because of large percentage of bad debts (50%), piracy, promotions and turnover of
talents. And upon inspecting the given facts above, we thought that the source of these
problems is the management itself. We don’t think that they are managing the business well.
We don’t think that it is because of bigger competitions why they are financially stable. They
produced talents like Hajji Alejandro and Susan Fuentes which are one of the biggest musical
figures in the industry. With right management, we think that the business will do just fine.

V. RECOMMENDATIONS

MMRC’s management structure is weak. Dela Cruz is fine, but the controller who
handles its finances is what we thought one of the problems. Being the controller of the MMRC
and the banana company at the same time is taking its toll on his efficiency as a controller. He
should just focus on one of the two companies. Besides, the day-to-day financial activities in
the music industry is far from the food industry. Maybe he lacks the knowledge in the music
industry for him to be able to manage its finances.
 MMRC should also revise its business policies regarding producing, selling and
promotions of the albums. They’re product costs is too big considering they are using cheaper
materials unlike others. They should also reconsider their vinyl’s quality, the consumers also
look at the quality of the product before buying, why should they buy the original product if it is
as easy to break as the pirated copy? Producing quality albums will help a lot in promoting the
albums, and a successful promotion will help fighting against piracy.

In terms of selling and album distribution, they should set a limit on distributing items to
provinces depending on its purchasing power. If they think the reseller won’t be able to pay a
certain amount of albums, why give them the albums? They should be the one to set the limit
because big percentage of bad debts will do great harm in their business.