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MBA 540 Jim Huie

Presentation by
Lee Tillman Tomas Desset
Digital Age
 Computers are everywhere and almost everyone has
access to the internet
 The mp3 is slowly replacing the compact disc much in the
same way that CD’s replaced cassettes and vinyl
 Consumer is able to buy product right away
 By offering a product online you are essentially going into
the consumers home, they have instant access to the product
via a virtual store front such as iTunes or rhapsody
 International and Global sales
 In the past record companies would only focus on one
market in one country and then move onto the next
 By offering digital downloads, your product is now available
to the international market and not just limited to one area
 Creates record sales all over the world
Less cost
 Less cost to create and sell product
 No cost for packaging, shipment, store advertisement,
or store space
 No cost for duplication
 Less cost is more appealing to the customer
 Product is always available to consumer
 More chance for impulse buying with a lower price
 Save the customer money on gas and wear and tear on
their vehicle as they don’t have to drive to a location to
attain your product
 Teenagers
 Vast majority of record buying public are teens
Most teens are computer literate
Teens communicate via the internet
Easy access to new bands and artist via web sites like
iTunes, MySpace, Napster, etc.
Most teens own an iPod to listen to music today
Most teens don’t want to have a physical product to
carry around, they would rather download the mp3 and
have it on their iPod
Adults
 Use a computer at work
 Much business and communication between companies
is done online
 Most home in America have multiple computers
along with internet access
 Many people have recently preferred to shop online or
at home
Don’t have to deal with crowds
Parking
Gas Prices
No actual physical product that you can hold in your
hand
 Some people want to have the CD of a certain artist as a
display or to see album artwork, photographs, and pictures of
the artist
More product offered when you buy an actual physical
Compact
 Some manufacturers in order to sell more CD’s offer something
that you cant get with a digital download
 Music videos
 Video games
 Special offers on further product s to buy (T-shirts, concert
tickets)
Customer may prefer a product like this as opposed to
a digital download-more bang for their buck
Consumers are using computers more and more in their
everyday lives. They access the internet to do their shopping
around Christmas time and other events throughout the
year. With closure of such institutional record outlets such
as Tower Records and Silver Platters, it has shown that the
Compact is slowly becoming a thing of the past. The rise of
sites such as EBay, iTunes, Rhapsody, and Amazon.com has
shown the strength of the mp3 and digital download sales.
In order for Columbia records to survive in this new age
market they must seriously consider the Digital download
as a viable source of income. The record buying public is
feeling more comfortable doing their shopping online and in
some cases even prefers it. Columbia must take this fact into
consideration if it is to stay alive in the record buying
industry.
Will MP3's take over CD's in the future?
 http://www.tomshardware.com/forum/47805-6-will-future

Music industry blames MP3 for sagging sales, Beth Lipton Krigel
Staff Writer, CNET News
 http://news.cnet.com/Music-industry-blames-MP3-for-sagging-sales/2100-1023_3-223531.html

Are iTunes Sales Up Or Down? Antone Gonsalves InformationWeek December 14, 2006
02:48 PM
 http://www.informationweek.com/news/internet/ebusiness/showArticle.jhtml?articleID
=196604330

Did iTunes Kill the Record Store?


 http://www.roughlydrafted.com/RD/RDM.Tech.Q1.07/1C726ADF-0ED1-42D0-93D9-
4FA4E698E94A.html
CD vs. digital distribution
common initial assumptions

Investment outlay of $115,000


First year sale of 35,000 albums
Growth rate of -5% (market saturation causing
decrease in sales in the following years)
Tax rate of 40%
Weighted average cost of capital of 10%
CD production cash flow table
Operating Cash Flows 2008 2009 2010 2011 2012

Units sold 35,000 33,250 31,588 30,008


HIGH VARIALBLE
COSTS INCLUDE
Sales price BOTH PRODUCTION $14.00 $14.00 $14.00 $14.00
& DISTRIBUTION
Sales revenues EXPENSES $490,000.00 $465,500.00 $442,225.00 $420,113.75

Variable costs $245,000.00 $232,750.00 $221,112.50 $210,056.88

Fixed operating costs $20,000.00 $20,000.00 $20,000.00 $20,000.00

EBIT $225,000.00 $212,750.00 $201,112.50 $190,056.88

Taxes on operating income (40%) $90,000.00 $85,100.00 $80,445.00 $76,022.75

NOPAT $135,000.00 $127,650.00 $120,667.50 $114,034.13

NET CASH FLOW ($115,000.00) $135,000.00 $127,650.00 $120,667.50 $114,034.13

DESITE THE SAME NUMBER OF


SOLD UNITS THE NET CASH FLOW
SUFFERS FROM COSTS RELATED
TO PRODUCTION OF CD’s
Online distribution cash flow
table
Operating Cash Flows 2008 2009 2010 2011 2012

Units sold HIGHER FIXED 35,000 33,250 31,588 30,008


COSTS ARE
Sales price RELATED TO THE $10.00 $10.00 $10.00 $10.00
INCREASED
SERVER AND WEB
Sales revenues $350,000.00 $332,500.00 $315,875.00 $300,081.25
MAINTANANCE
EXPENDITURES
Variable costs $52,500.00 $49,875.00 $47,381.25 $45,012.19

Fixed operating costs $40,000.00 $40,000.00 $40,000.00 $40,000.00

EBIT $257,500.00 $242,625.00 $228,493.75 $215,069.06

Taxes on operating income (40%) $103,000.00 $97,050.00 $91,397.50 $86,027.63

NOPAT $154,500.00 $145,575.00 $137,096.25 $129,041.44

NET CASH FLOW ($115,000.00) $154,500.00 $145,575.00 $137,096.25 $129,041.44


DESPITE THE SAME NUMBER OF SOLD
ALBUMS NET CASH FLOW FROM ONLINE
DISTRIBUTION BENEFITS FROM LOWER
PRODUCTION & DISTRIBUTION COSTS
Net Present Value/Internal
Rate of Return

Online distribution
NPV $336,904
IRR 124.4%

CD distribution
NPV $281,769
IRR 106.8%
Scenario Analysis
variable growth
probability sales price unit sales NPV
costs rate

best case 25.00% $12.50 43,750 $1.13 30.00% $691,738

base case 50.00% $10.00 35,000 $1.50 0.00% $336,904

worst case 25.00% $7.50 26,250 $1.88 30.00% $70,740

AT THE BEST CASE


EVEN IF THE PROJECT’S
WITH THE GROWH
SALES PRICE AND UNITS
RATE OF 30% THE
SOLD DECREASE BY 30% AND
NPV INCREASES
VARIABLE COSTS INCREASE
MORE THEN 2 FOLD
BY 30% THE PROJECT’S NPV
STAYS POSITIVE IN COMPARISON
WITH THE BASE
CASE SCENARIO