Krispy Kreme Case

CASE 22: Compass Records

Intro:

Compass Records is an artist-run record company that was founded in 1995. It is jointly owned and managed by Alison Brown and Gerry West. By 2005, the firm was known for its folk and root music production. During June 2005, Brown was faced with a decision of whether or not she would create record contract with Adair Roscommon, a talented upcoming singer. She also has to decide what type of contract she wants to have with Roscommon; either to produce and own the artist's recording or to license the music for a limited period. By producing and owning, Compass can exploit the sales of the album and additional albums that Roscommon records in the long run. If Brown chooses to license, the sales can only exploit the sales in the short run. The probability of success of Roscommon's album determines which option is better for the firm. This financial analysis will determine if Brown should produce or license Roscommon's work.

Issue and Objectives:

The major issue in this case is the profitability of Roscommon. Compass Records must determine which type of contract they should make with Roscommon to the most profitable for the company. In order to determine this, Compass Records needs to determine the NPV and IRR for each type of contracts. Brown should also keep in mind the discount cash flows. Compass Records should answer these three questions: What do the results of the foregoing DCF analysis suggest, uncertainties in the assumptions and lastly, are there any qualitative issues not reflected in the DCF analysis.

What do the results of the foregoing DCF analysis suggest:

Both of the two assumptions, Location based and Percentage of Sales, have the same IRR and NPV. This means that either option is viable to invest in. One of the major differences between the two options is the amount of time for payback. With License having the shorter payback period and thus allowing Compass Records more opportunity for future investments. Making Licensing better short-term plan rather than a long-term plan due to Compass Records not having the additional rights to produce Roscommon's next three records. Another benefit that Licensing has over Owning is that reduction of Compass Records risk, by having a smaller startup cost. Along with the DCF Brown should look at the Incremental NPV and IRR sensitivity to Total Units Sold. This helps Brown at what number of units it is more beneficial to have a Licensing or Owning contract with Roscommon. If Compass Records feels that they will only be able to sell 1-15,000 units they sold go with a Licensing contract. This will again lower risk, increase opportunity for reinvestment, and is a safer investment. If Brown believes that Roscommon can sell more than 15,000 units they should go with the Owning contract.