INTRODUCTION:

In 1995 Brown put her financial background to work, founding Compass Records with her husband Garry West. Celebrating its 15th anniversary in 2009, the Nashville-based Compass Records Group is an internationally recognized label group with a catalog of over 600 roots music releases across the Compass Records, Green Linnet, Mulligan Records and Xenophile catalogs. Compass Records Group is home to artists such as Colin Hay, Catie Curtis, Lnasa, Solas, Martin Hayes and The Waifs, and has been called one of the greatest independent labels of the last decade by Billboard Magazine. Since its inception Compass Records Group (the subject of both Harvard Business School and Darden Business School case studies) has pursued an ambitious path of growth and met every goal including the most important one: providing a thriving haven of creativity for artists and a reliable beacon of quality for music fans.

Compass records is a small, independent music recording company and co-founded in 1994 by musicians Alison Brown and Garry West. Compass is a new breed of roots-music label: eclectic, sophisticated, and artistfriendly. It is called one of the greatest independent labels of the last decade by Billboard Magazine, Compass Records has provided a thriving haven of creativity for artists and a reliable beacon of quality for music fans. Its 2006 acquisition of the Green Linnet catalog and the 2008 acquisition of the seminal Mulligan Records label has made Compass the place to go for Celtic and roots music. The cofounder of Compass Records, a small, independent musicrecording company, must decide whether to "produce and own" the

next album of an up-and-coming folk musician or simply "license" her finished recording. This case presents information sufficient to build cash-flow forecasts for either investment alternative. Discounted-cash-flow (DCF) analysis reveals that licensing will be the more attractive alternative unless the student assesses the value of the options for follow-on albums included in the "produce-and-own" contract.

CENTRAL PROBLEM:
Between licensing the artist music or to own the artists master recording, which of the two will give the higher benefits to compass records?

MINOR PROBLEM:
1. Would compass record can effectively reduce their mechanical royalty expenses by half? 2. Is purchasing Alice Browns music would mean producing a master recording?

OBEJECTIVES:
1. To use the discounted cash flows analysis to come up with the most reasonable capital investment decision. 2. To interpret the net present value and the internal rate of return result after the quantitative presentation. 3. To exercise a sensitivity analysis to determine the factors that have the most effect on an investments potential outcome.

SWOT ANALYSIS:

STRENGTH

Strong global presence

C O M PA SS R E CO R D h as a w o r l d w i d e m a r ke t i n m a ny c o un t r i e s ; a mo ng i t s ma j o r market are North America, Continental Europe, Latin America, UK & Ireland, Australia, Japan and Asia.

World largest independent music company

COMPASS RECORDS worldwide market share is 12.6%. Its large size gives many benefits s u c h a s c o s t r e d uc t i o n t hr o ug h e c o no mi c o f s c al e . V a st r e so u r c e s a nd st r o ng market share also give the benefit of being able to attract the best staff and artists to the company which have a strong position for the future.

Financial Performance

A l t ho u g h CO MPA SS R E CO R D sa l e s i n fi s c al ye a r d e c l i ne c o mp a r e d t he c o m p a ny operating profit show excellent increased about 33.1% .The improvement in operating profit was due to a comprehensive reorganization of COMPASS RECORDS.

World class artist roster

COMPASS RECORD releases more than 1000 albums e v e r y y e a r a n d h a s a r o s t e r o f o v e r 1 3 0 0 artists.

WEAKNESSES

Difficulties in the US Market

COMPASS RECORD has consistently been towards the bottom of the five majors in the US market share, which is

the world largest recorded music market in the world. In 2003 it only command 9.8 % of US market share

Dont have conglomerate backing

C O M PA SS R E CO R D i s t he o nl y t o p f i v e mu si c c o m p a ny t h at s o l e l y i n d e p e nd e nt w hi c h n o t b e i n g o w n b y l a r g e r c o r p o r at i o n . T hi s me an E MI h as t o g e ne r a t e i t s o w n r e so u r c e s without any help from other larger company.

Decreasing in worldwide market share

C O M PA SS R E CO R D w o r l d w i d e ma r ke t s h a r e d i p p e d . The worldwide decreasing were resulted from the decreasing of COMPASS market share in several major region which included North America (-0.03%), UK & Ireland (-0.01%), Continental Europe(-1.7%), Latin America (-2.6%) and Australia (-0.10%).

OPPORTUNITIES

Joint Venture / collaboration With the recent merger attempts being stopped, COMPASS RECORD consolidation within the industry is becoming more

difficult. EMI has often enjoyed success with joint venture with other large company such as Apple Computer (itunes) and Yahoo! In joint project for mutual gain.

Internet sales

I nt e r n e t h as b e c o m e t he f as t e s t g r o w i ng me d i a fo r m u si c d i st r i b ut i o n a nd m an y analyzes expect that the downloading trends will continue to grow in a future. The success of Apple i tunes has show it is possible to sell download music over the internet with many customers willing to pay rather than download the music for free from such sources as KazaA, Morpheus and many more where legality is still a rather grey area. Selling music by internet download may be an area EMI may try to enter directly or through collaborations and increase market share.

More Open M&A regulatory-

Mo r e o p e n o r l i b e r al i z at i o n o f M & A i n m usi c i nd u s t r y m a y i nc r e a se CO M P AS S R E CO R D opportunity to acquire or merge with other music company. This will give COMPASS added market share and resources to compete with other major music companies.

Focus on market where it has a strong market share and growth

A l t ho u g h N o r t h A me r i c a e s p e c i al l y U S i s t he b i g g e s t m a r ke t fo r r e c or d e d mu s i c , however it seem that COMPASS having trouble to keep competing to gain more market share. Maybe COMPASS has to give more focus or gaining more in the market that it has a strong share such as UK & Ireland, Australasia and Continental Europe. COMPASS also has to focus more in growing market region such as Japan and Asia.

THREATS

Limited growth potential for recorded music-

T he w o r l d w i d e r e c o r d e d m usi c i n d u st r y p o s t e d s al e s o f $ 3 2 b i l l i o n . T he figure represent a 7% decline in Dollar sales and an 8% decrease in unit volume room . Compared to , sales of CD albums fell globally by 6% and there more continued declines in the sales of CD singles (down 16%) and cassettes(down 36%). These show that is very difficult to find growth opportunities in the market.

Poor economics condition and exchange rate fluctuation

A s a g l o b a l c o mp an y o p e r at i n g i n m an y c o un t r i e s w o r l d w i d e , CO MP A SS i s e as i l y b e v ul ne r a b l e t o t he d e t e r i o r a t i n g e c o no mi c c o nd i t i o n w o r l d w i d e and

fluctuation in exchange rates and interest rates. These can often adversely affect both revenues and profits for the company.

Impact of piracy (CD burning and mass downloading)

Piracy in the music industry, particularly t h e b u r n i n g o f C D a n d m a s s downloading of free music from the internet has increased recently. The industry analysis estimate that unauthorized file sharing alone has accounted for $700million in lost sales to industry. Predicted the CD album sales globally will drop almost 30% from their peak by i f p r e s e n t p a c e o f unauthorized downloading continued.

ALTERNATIVE COURSES OF ACTION

1.To license the artist music for a limited period of time. 2. To own the artists master recording outright.

RECOMMENDATIONS:
The central question for Brown, when contemplating any new musician, was whether to license that artists music for a limited period of time or to produce and own the artists master recording outright. In the short term, it was cheaper for Compass to license a recording, but it also limited the companys potential profit if Compass Records purchased a musicians master recording and the album failed to take off, however, the company risked owning a significantly impaired asset. This issue and a host of others gathered momentum in Browns mind while the gentle melodies of Roscommons demo filled the thick southern air in her office.

The two most common types of royalties were mechanical royalties, which were paid to songwriters and music publishers for the use of their musical compositions, and recording artist royalties, which were paid to an artist for the recorded performance of those compositions. Each type of royalty worked somewhat differently. In 2005 in the United States, mechanical royalties were fixed at a statutory rate of $0.085 per song. If the song were included on a CD, then the record company would pay the artist and/or the publisher that amount for each CD unit sold. Many record contracts, especially those with artists who were both the songwriter and the recording artist, included a controlled composition clause. The costs for producing an album would typically include fees for producers, arrangers, copyists, engineers, and background musicians,

as well as the charges for studio and equipment rental, mixing, and editing. For relatively new artists signed by a major label, those costs could range between $800,000 and $150,000 for a single album, while established artists were known to run up production costs in excess of $500,000.

IMPLEMENTATIONS:
We have agreed to implement the above mentioned alternative courses of actions in a sequential manner. The first action to be taken by the management was alternative course of action number 1. This is to license the artist music for a limited period of time.

The second alternative course of action that needs to be implemented is alternative number 2. This is to own the artists master recording outright.

CONCLUSION:
After a brief scrutiny of the given case facts and a keen analysis for the alternative courses of actions that come up as a solutions, and recommending which we think are the most effective, we strongly believe that the central problem will be solved.

CEBU ROOSEVELT MEMORIAL COLLEGES

(San Vicente St., Bogo City)

CASE STUDY
In

Accounting 16

Warren A. Buffet
Submitted by:

Ronald Versaga Jasmin Lepiten Ancie Compuesto

Submitted To:
Mr. Gerardo Sayud