The Music Entrepreneur - Assignment Example

ROYALTIES Lecturer 0 work Questions The work questions to be covered here will go a long way in helping us better understand how royalties due to music artists are arrived at. It will also expose the areas recording label should look out for with regards to managing their costs. What more, the report will apply existing law in royalties calculations. 2.0 Introduction Calculation of royalties is one complex issue in the music industry because it is affected by a several other factors, some of which are not straight forward. Normally an artist is to be paid royalties, which is pegged as a percentage of total record sales. These percentages are bound to differ across countries. This percentage is also bound to be affected by other issues including the structure of the deal entered into, the company in question, the clout of the artist and various deductions thereon. The traditional way is for the recording label to peg the royalties on the records market price after deducting packaging cost. Therefore, we look at the marked price and less any discounts on the record. From this, packaging cost is calculated on the net dealer price and the royalty calculated at a percentage of the difference. However, another method is to have a split deal. Here, the revenues are split between the recording company and the artist in a given ration. The amount spilt is normally the net profit made by the recording company. Hence, out of the sales revenue, the company would want to cover its cost such as rent, legal and distribution costs before splitting the resulting profit with the artist. All in all, this is one area where we have a labyrinth of issues and laws and it is important that artists are aware so that they are not exploited. On the other hand, the recording label would be keen to avoid making losses given that they have o be sure that their investments are paying off. Hence it is important that they have an understanding of their cost structures and break even points. This report is going to delve into the issue of music royalties by answering a number of questions such distinction between various costs of a recording label specifically the fixed costs, variable costs and the semi-variable costs. Besides, importance of breakeven point will be analyzed. Ways of calculating royalties due to artist will also be covered. 3.0 TASK 1 A business has many types of costs which go into production of a given output. These costs can be broadly be classified as fixed costs, variable costs or semi-variable costs. Fixed costs are those costs that do not vary with fluctuations in output, activity or sales (Sobel and Weissmann, 2008 pg. 13). Therefore, the costs remain constant but tend to change over time. In essences, whether actual units are produced or not they will still be incurred. A good example for a music distribution company is when there are no performances, yet still costs have to be incurred to run the business. In most instances, these are overhead costs such as rent, payment for equipment and salaries paid to company staff. Poor management of these costs are likely to drive the company out of business as they are to be incurred even when no sales or production are made. Some of the methods used to regulate these costs include hiring machines and production equipment and employing staff on contract basis so the company does not need to pay regular salaries. This way, fixed costs are kept low while at times a variable element is introduced into them thus are only incurred when production or performance takes place (Jermance, 2003 pg. 152). Variable cost on the other hand tends to change with changes in output, activity or sales. According to Jermance (2003 pg. 185), they are incurred when actual units are produced or sold. They are thus never constant and are prone to any fluctuations. For instance, if an artist wins more performances, he is likely to incur even more of these costs. Increased sales of the artists work is also expected to push up these costs. Examples of these costs in the music industry include distribution expenses, travelling costs, postage, sales commissions and royalties. When these costs are not well regulated by the company, it may lead to losses (Maeda, 2011). For instance, buying more items of clothing than is necessary for a particular performance will only lead to losses as the excess clothing which will not be used yet have to be paid for. Therefore, when costing for that particular performance, a loss may be realized. Semi-variable costs have both the characteristics of fixed as well as variable costs. These costs are fixed up to a certain point beyond which they take on the variable cost element. For instance, if vehicles are to be used for travel, the company may be billed a flat rate for a given number of hours, beyond which each extra hour is billed at a variable rate. CDs are sometimes produced both for commercial as well as promotional or nonprofit reasons. Therefore, the costs of those CDs produced for promotional basis is fixed while those for commercial basis can be seen as variable. Semi variable costs are an important element of the cost structure. There is a need to balance the two aspects of the costs so as to reach the projected sales or units produced. All these costs are important because they add to the company’s total cost. Marginal cost The marginal cost of a product can be seen as the extra cost to be incurred in producing an extra copy of that product. For instance, it is the cost incurred in producing a copy of the original song. In the digital platform, marginal costs tends to be zero as anyone with access to computers can easily use the various online platform to get a copy of music without incurring any cost (Jermance, 2003 pg. 187). The marginal costing becomes important when determining how much a single unit cost. With this information, we can calculate the contribution of a unit towards covering of cost by deducting the cost from the selling price. The total fixed cost divided by contribution per unit gives us the breakeven point in terms of units; the units that the recording company needs to produce so as to break even (cover their costs.) Breakeven Point Breakeven point can broadly be defined as that point at which the total costs of a business are equal to the revenue generated through sales. Profits at this point are thus neither positive nor negative. This therefore means that the profit earned by the business is zero. The business is able to cover all its costs and therefore does not need any capitulation (Jermance, 2003 pg. 186) from the owners, something that may lead to even more losses. According to Jermance (2003 pg 187) and Sobel and Weissmann (2008 pg. 67) this is an important point because it marks the point at which the business may start to earn profits. This point is very important because prior to this point, all the efforts of a business and sales made are aimed at funding expenses. Worse still, costs of a business will be more than revenue generated meaning that prior to this point, the business will be operating at a loss, and if this period is prolonged, the probability of a business exiting the industry before making a profit becomes even large. The calculation of breakeven point is critical in the sense that it tells us when and if the business will ever make a profit (Davis, 2010 pg. 52). No profit is possible until this point is reached and Calculation of breakeven point is also important because it helps the recording company to make ore important decisions regarding entry into the industry or if it is worthwhile to take on board a given artist (Jermance, 2003 pg. 188). Through this calculation a recording company may quickly determine how much or how many of the proposed label must be sold in order to realize a profit. Jermance (2003 pg. 186) observes that once this information is known, fluctuations in expenses and other issues can be factored in. Breakeven calculation should also help to determine how much of a given product or service should be sold so as to cover a given expenditure given the costs associated with producing and distributing the service or product. Despite the above advantages of breakeven point analysis, it is important to note that this method has glaring weaknesses and it may be misleading. According to Davis (2010 pg. 54), this method assumes that what is produced will be sold. There are instances whereby not everything that is produced is sold and the business may have to find ways of dealing with the situation such as giving discounts. This reality is not covered in this concept. Besides, another key factor is that sales prices are assumed to be constant over the period under review. The truth is that market prices are affected by host of factors and are rarely constant. Hence, the prices of the music output sold, whether CDs, downloads or streaming may vary. Lastly, Davis (2010 pg. 53) notes that this method assumes the company only sells one product or a fixed range of products. However, with new artists coming on board and technology of how the music can be consumed changes, variations in product range or consumption patterns come in. All this have an impact on projected sales figures. However, this impact is not incorporated in the breakeven calculations. 4.0 Task 2 4.1 Question 1 £ 0.86 per CD 4.2 Question 2 £ 0.1 per digital sale 4.3 Question 3 £ 5.6 per 1000 streams 4.4 Question 4 23, 256 physical units 160,000 download sales 714, 286 streams 4.5 Question 5 £ 2.22 per physical sale £ 0.24 per digital download £ 0.008 per stream. 4.6 Question 6 56,306 physical units 416,667 digital downloads 3,125,000 streams 4.7 Question 7 The two contracts offer a mixed bag of opportunities. On one hand, the 50/50 split deal seems to be good because it offers the artist considerably higher returns compared with the traditional model. For instance, while the physical sale of CDs earns the artist roughly £0.86 under the traditional deal, he can earn as high as £2.22 under the 50/50 split deal. On the surface, this might seem to be a better deal. However, it must be noted that the split deal applies to the net income of the recording company (Davis, 2010 pg. 102). Therefore, some company administrative costs which are not included here such as staff salaries, taxes, rent legal costs, packaging and pressing together with advertising may be factored in to get the net income earned by the company in the deal. Therefore, the figures shown by the calculations should not be taken at face value. There is a possibility that the royalties shown in these calculations may be considerably less. Another drawback is that the organizational costs keep changing from time to time and therefore royalties paid out under the 50/50 split deal may also fluctuate over time. The artist therefore not assured of a steady flow of royalties. This uncertainty makes even planning to be difficult as one has to wait till the company has factored in all its cost. Traditional contract gives some certainty in the deal. The revenues from the royalties are considerably less but what is included and what cannot be deducted are known in advance and therefore the artist knows beforehand what is to be paid out to him. It must also be noted that under the traditional contract, there are amounts that are not recoupable against the artist account which may leave him with a bigger share compared to the split deal. Marketing and tour support can only be recouped if it was agreed and included in the contract. As matters stand here, marketing cost might not have been agreed and this should not be charged to the artist under the traditional arrangement, unlike the split deal whereby the recording company is keen to cover their costs and share with the artist whatever remains. 5.0 BIBLIOGRAPHY Davis, M. J. (2010). Legal Issues in the Music Industry. Chicago: BuzsGig LLC. Jermance, F. (2003). Navigating the Music Industry: Current Issues and Business Models. New York: HalLeonard Corporation Maeda, M. (2011). How to Open and Operate a Financially Successful Independent Record Label. New Jersey: Atlantic Publishing Company Sobel, R. and Weissmann. (2008). Music Publishing: The Roadmap to Royalties. London: Routledge . 6.0 APPENDICES 6.1 Question 1 £ PPD (Gross Dealer Price) 7.50 Less discounts of 15% (1.13) Net PPD (Dealer Price) 6.38 Artist Royalty 18% Less packaging deduction (4.5%) Payable artist royalty 13.5% 13.5% of £ 6.38 = payable amount = £ 0.86 per CD. 6.2 Question 2 Net Dealer Price/Retail price £ 0.79 Artist royalty rate 18% Less packaging deduction 30% of 18% (5.4 %) Payable royalty rate 12.6% 12.6% of £ 0.79 = £ 0.1 per digital download. 6.3 Question 3 Revenue per stream £ 0.016 Revenue per 1000 stream 1000* 0.016 = £ 16 50/50 basis= 50* £16 100 £ 8 Less packaging deduction 30% of £8 £2.4 Payable royalty per 1000 downloads £ 5.6 6.4 Question 4 Recoupable cost is £ 40,000 advance. Sales £ 50 % physical product 20,000 40% digital downloads 16,000 10% digital streaming 4,000 Units to be sold: Physical Units = £ 20,000/ 0.86 23, 256 CDs Digital Downloads = £ 16,000 / 0.1 160,000 downloads sales Digital Streaming £ 5.6 = 1000 streams £4,000= £ 4000 * 1000 5.6 = 714, 286 streams. 6.5 Question 5 £ PPD (Gross Dealer Price) 7.50 Less discounts @ 15% (1.13) Net PPD (NPPD) -dealer price 6.38 Less Expense Distribution 40% of NPPD (0.77) MCPS 8.5% of PPD (0.64) Faulties 1% of NPPD (0.06) Manufacturing (0.48) 4.43 50% of £4.43 = 4.43/ 2 = £2.22 per CD Digital Download £ Retail Price (PPD) 0.79 Distribution fee 40% (0.32) 0.47 50% = £ 0.47/ 2 = £ 0.24 per download Revenue per stream= £ 0.016 Per 1000 streams = 1000 * 0.016 = £ 16 50/50 basis £8 per 1000 stream £ 0.008 per stream. 6.6 Question 6 Recoupable costs £ Advance 40,000 Marketing 180,000 Tour Support 30,000 250,000 £ Physical Units 50% of 250,000 125,000 Downloads 40% of 250,000 100,000 Streaming 10% of 250,000 25,000 Physical Units 250,000/ 2,22 56, 306 CDs Digital Downloads 100,000/ 0.24 416,667 digital sales. Digital Streaming 25,000/ 0.008 3, 125, 000 streams. Read More