Rob Seib
Peter Paez Compass Records Suzie Wagstaff
Background:

Compass Records is run by Alison Brown and her husband Gary West and is a folk and grass roots label. Both Brown and West were entrenched in this industry and decided to open the label in 1995. Brown who received an MBA from UCLA is very business oriented and realizes that with a small recording company like Compass Records, they cannot afford to make mistakes when signing artists. The company was faced with a dilemma about whether the company should produce Roscommon outright or license the new upcoming artist. Historically, Compass had preferred to license their artists but realize that there is a risk in losing her. It is very expensive to produce an album (even with the advantage of purchasing their own recording studio) and could run the company 80-150 thousand dollars for a new artist. Their business is also 100 percent consignment. They are paid only for the number of records sold not for the number shipped. Assumptions:

* Compass Records’ WACC is 12%. * Projected to sell 10,000 copies of Roscommon’s CD at stated prices. * Total marketing and promotion costs are upfront and at $17,000 of which only half of these costs are recoupable. * Assume that Compass records will only have to pay half of the merchandise royalty if they choose to produce and own as stated. * Assume all figures and projections for the production and selling of Roscommon or otherwise are correctly stated in case.

Solution:
As we can see in appendix 1, by simply licensing rather than producing and owning, Compass Records can achieve a higher NPV on their respective decisions. This is simply due to the fact that there are less upfront costs ($20,000 vs. $3,000). Additionally, all recoupable costs can be recouped under licensing but will not be if they decide to produce and own. The real question, however, is what Allison thinks of Roscommon’s potential on the 3rd and 4th albums to be produced. By simply licensing, Allison is projected to also have rights to the second album, but forfeits her rights on a possibly profitable 3rd and 4th album. The most reliable option, financially, would be to license. However we are in no position to understand the opportunity costs we are giving up in Roscommon’s 3rd and 4th album. This sector of the industry is about identifying opportunities which is heavily reliant on “experience,” something we as analysts do not have. Therefore this decision will come down to Compass Records’ gut feeling on the artist.