1 / 9

Music Industry Performance

Music Industry Performance. How has it changed in the digital age?. Profits: Warner Music Group.

darva
Download Presentation

Music Industry Performance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Music Industry Performance How has it changed in the digital age?

  2. Profits: Warner Music Group “OIBDA reflects our operating income before non-cash depreciation of tangible assets, non-cash amortization of intangible assets, and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets.” Net Loss results from subtracting interest expenses and income taxes from Operating Income.

  3. Deadweight Loss • DWL = ½ ΔP ΔQ = ½ (P-MC)(Qc-Q1) • Lerner Index and the Price-Cost Margin • (P-MC)/P = -(1/Ep) • Note: -Ep = [P/(P-MC)] • If we assume profit-maximizing behavior • DWL = ½ PQ(-Ep)[(P-MC)/P]2 • Substituting for (-Ep) gives • DWL = ½ PQ[(P-MC)/P]

  4. Price and Costs

  5. DWL Calculations • Physical CD • DWL = ½ PQ[(P-MC)/P] • Price = $15.99, Q = 100,000 • MC = $0.80 + $0.96 + $0.80 + $1.60 = $4.16 • [(P-MC)/P] = ($15.99 - $4.16)/$15.99 = 0.74 • DWL = (0.5)($1.599 million)(0.74) = $591,630 • For Price = $11.99, Q = 1 million • [(P-MC)/P] = ($11.99 - $4.16)/$11.99 = 0.65 • DWL = (0.5)($11.99 million)(0.65) = $3,896,750 • Album Download • DWL = ½ PQ[(P-MC)/P] • Price = $9.99, Q = 100,000 • MC = $0.10 + $0.50 + $1.00 = $1.60 • [(P-MC)/P] = ($9.99 - $1.60)/$9.99 = 0.84 • DWL = (0.5)($999,000)(0.84) = $419,580

  6. DWL with Revenue Sharing • Labels split revenue with download retailers 70%/30% • Labels prefer P & Q defined by (0.7-0.15)MR = MC = 0 • Or that the retailer maximizes revenue, MR=0 • Ep = -1 • DWL = ½ PQ(-Ep)[(P-MC)/P]2 • Retailers prefer P & Q defined by 0.3MR = MC • Learner Index becomes [(P – 3.33MC)/P] = -1/Ep • DWL = ½ PQ[(P-3.33MC)/P] • Suggests that retail price is negotiated along with the revenue sharing proportion

  7. DWL with Revenue Sharing • Suppose Price is set by Labels to maximize revenue (see graph). • DWL = ½ PQ(-Ep)[(P-MC)/P]2, • P = $9.99, Q = 100,000 • DWL = ½(999,000)1[(9.99-0.1)/9.99]2 • DWL = (499,500)(0.9899)2 = (499,500)(0.98) • DWL = $489,510 • For Q = 1 million, DWL = 10($489,510) = $4,895,100 • Note: • Higher MC reduces DWL • True Ep < 1 and this also reduces DWL

  8. Performance Conclusions • Profit is an unreliable performance measure • DWL appears to have fallen for digital downloads relative to physical CDs • DWL even lower for file-sharing (graph) • Product Variety? • Does product variety offset DWL? • Progressivity? • Has the industry embraced new technology to reduce costs and introduce new products?

  9. References • “Warner Music Group Corp. Reports Results for the Fiscal Fourth Quarter and Full Year Ended September 30, 2012.” Dec. 13, 2012, http://www.wmg.com/ .

More Related