Music Industry Financials

Is a traditional financial technique which Is used by companies for short term decision making within the music & entertainment industry.

The concept of marginal costing is concerned with the treatment of fixed costs and the relationship that exists between sales, variable costs and contribution. This technique Is often used by record labels to estimate the costs which they will Incur & profits they will earn per unit which is manufactured and sold.Cost behavior – we need to understand how costs behave at different levels of activity so hat we can determine what costs should have been for a trading period and estimate costs for a future period. Cost behavior studies the way that costs fluctuate. Two major influences on costs are volume (activity) and time. There are three types of cost: variable, fixed & semi-variable. Variable costs are those which change with the level of output or activity.

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For instance, if a major record label has manufactured 100,000 Cad’s for a pop artist’s new album which Is going to be released.

The bigger the quantity of CDC sold, the higher the amount of money the artist will receive as royalties. So, if the artist is under a 12% (true artist royalty) therefore receives EH. App per CD sold. If only 50,000 CDC are sold at a Published Dealer Price of EH. 50 they would receive EYE,OHO In royalties. Whereas, If they managed to sell 100,000 C[Yes Instead they would receive 06.

000. As you can see the artist royalty increases as the sales (activity) increases. Fixed costs are those which remain constant despite changes in output or activity, however they can change over a period of time.For instance. If a record label signed an artist and offered an advance of в?40,000 this figure would remain fixed. Despite hangers in sales & expenditure, there is still no change to the advance. Semi-variable costs are those which have both a fixed & variable element.

For instance, if you have manufactured 100,000 CDC for EH. App per unit, brings the cost of production to EYE,OHO. This cost remains fixed. Suddenly there is a lot of demand for the CDC but all of the CDC have been sold, so it Is decided to manufacture 50,000 more CDC therefore the cost raises due to demand to a total of EYE,OHO.Contribution is the difference between sales and variable costs in the marginal cost equation. This is the contribution towards fixed costs and profit. To calculate what the contribution Is you take the selling price per unit and minus the variable costs from It (see example below).

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Selling price per unit Ell Minus Variable costs = E Contribution per unit = EH Breakable analysis uses the same concept as marginal costing to calculate an estimated figure of how many units of a product need to be sold to cover all costs (this is also known as the breakable point).Breakable analysis is used for various ‘OFF changes to a business, to measure profits and losses, to evaluate alternative methods of production. To calculate the breakable point we need to know the: selling price, sots of product/service, variable costs per unit, overhead costs and whether they are fixed or variable. We also need to know if there are any limitations. As a minimum, the sales need to be equal to the fugue of your fixed costs to make sure that you are not losing any money. For instance, if fixed costs are EH per month, you would have to sell at least 357 units to ensure you break-even.Under the 50/50 net receipts deal you are also given a EYE,OHO advance plus 50% royalties, but you do not receive any money from the sales of Cad’s and digital downloads until all costs are recouped then any profits from that point onwards are split 50/50.

All of hose costs are shared by the artist & record label. As stated in the contract extract, costs will include ‘manufacturing, transportation, recording ; any other direct costs incurred by the company relation to exploitation of the recordings’. The recruitment point in this deal is when 39,560 CDC and 255,319 digital downloads are sold.I believe personally an artist would be better off with the 50/50 net receipts deal because although the units of CDC needed to be sold is higher within this deal, once the recruitment point is reached, profits are split in half between the record label and the artist. Whereas with the traditional deal you receive a minority of the profit and the record label receives the majority. Traditional deals are mostly used by major record labels (e. G.

Universal Music Group, Warner Music Group) and are suited to mainstream pop acts because of the big marketing push.This is a big advantage of being signed to a major record label; they have a lot of money available to invest in recording, touring, video shoots & marketing and promotion. Major record labels have been around for quite a while; therefore they have tight connections with media outlets and other companies to give you opportunities which independent record labels would never be able to offer. Therefore helping you achieve your music career goals in no time. The disadvantage is that these deals put the record label very much in the driving seat; therefore the artist will not have much control over their career or creativity of their music.Also, unless you are successful in the long term and become a massive star (e. G.

Madonna) you will only receive a small percentage for your royalties from sales. Bigger advances are normally given by major record labels with traditional deals; however this advance will be re-paid to the cord label somewhere along the line. You are also less likely to receive a lot of attention from the major record label you are signed to because of the many other acts who are also signed to the label. 0/50 net receipts deals are mostly used by independent record labels (e. G. Domino, Mute) and are suited to artists whose music appeals to a niche audience. These deals give the acts creative control because of the close working relationships between the record label and the act due to the smaller size of the company.

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Most independent record labels will only sign an act if they inanely like your music and believe in what you are doing, this means they will also work a lot harder for you.There is no added pressure for you to sacrifice your tastes in favor of seeking out chart success as the label understand you’re not mainstream and will not have a huge fan base. The drawbacks include the obvious lack of funds, most independent record labels do not give advances or if they do they will be very small compared to the advances which the majors offer. Lack of money also means that there will be less marketing ; distribution opportunities available to signed acts. On a positive note the recruitment and breakable point are both exactly the Calculations.