Business Plan for a Music Production Company

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					Business Plan For A Music Production Company

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Table of Contents

1. Executive Summary Business Opportunity Product/Service Description 2. Company Background Business Description Company History Current Position and Business 3. Business Plan For A Music Production Company

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4. Services

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5. The Industry, Competition, and Market Market Definition Primary Competitors Customer Profile 6. Marketing Plan

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7. Financial Plan Investment Plan Break-even Analysis Liquidity Plan Earnings Plan Risk Analysis 8. Conclusion

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Business Plan For A Music Production Company

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1. Executive Summary
The company develops music and other digital media products. It also provides a source for legal and free music downloads from its own production and third-parties. It is possible to download all music products as MP3s. The pricing policy provides unlimited downloads for all members. The platform also enables artists to distribute and promote their music. Profits are from production for companies and individuals as well as download sales and advertisement. The revenues of the first year are between $150,000 and $250,000. The goal of this start-up is the operation of a music production company. The expected number of customers is between 1,000 and 5,000. 1.1 Business Opportunity The company expects that the recorded music industry is undergoing significant change, with the primary means of distribution transitioning from physical formats like compact disc to digital formats accessed over the Internet and wireless and cable networks. This change is occurring as a result of the popularity and proliferation of personal computers and portable digital music players like the Apple iPod and consumer acceptance and the music industry’s endorsement of legitimate digital music sales. On the other hand also the production processes will change. The company intends to become a leading producer and supplier of media and entertainment products. The company also plans to continue to pursue and expand relationships with leading distributors in each of the media product categories and in new product categories, to establish joint ventures and strategic relationships with major firms and service providers, and to enter into arrangements with other e-commerce companies. Music and media entertainment products are distributed broadly through a variety of distribution channels. Out-of-home distribution channels include stores and retail companies. In-home distribution channels include music downloads. Currently, music studios distribute their products approximately two months after retail release to the home and internet market. The company expects to enter into marketing agreements with certain consumer or retail companies and large e-commerce companies in order to market the music recordings directly to consumers, who will be encouraged to purchase these recordings at an online music store. The company intends to pursue a strategy aimed at delivering sustainable growth in earnings and company value. The company expects that the highly fragmented online media market and its anticipated growth provide an opportunity for expanding the company’s business and increasing its overall market share. The key strategies of the company are to: produce high quality music

Business Plan For A Music Production Company increase the number of customers make strategic investments improve service and product quality 1.2 Product/Service Description The company intends to become a leading producer and supplier of music, media and entertainment products over the internet. The company generates revenues primarily through selling products and the distribution of licenses. The company utilizes proprietary technology developed in-house to produce and manage the production, processing and distribution of music products.

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The provided rights generally allow the company to electronically distribute, market, promote and sell the available music recordings, including by digital download and by digital transmission such as streaming media and downloads to mobile phones. The internet and mobile technology now make it economically feasible for online music stores to make virtually an unlimited number of music recordings available to consumers for purchase at any time. Sophisticated online search tools permit consumers of music and other sound recordings to identify and purchase many previously inaccessible recordings. Figure 1.1 shows the distribution of revenues.

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2. Company Background
The proprietary music production technology enables the company to create a customized product for each subscriber in a cost effective way. In comparison, most music production and entertainment service providers have only limited capacities and high development and production costs. The company is an internet media and content company that offers a network of aggregated content distributed primarily on the own platform serving business professionals and consumers. It will become one of the most widely used platforms for music downloads and similar products. The company makes its basic properties like information, search engine, media content available without charge to users and generates revenue primarily through the sale of downloads. Additional advertising on the platform is sold through the company's internal advertising sales force and thrid-party agents. 2.1 Business Description The company's performance is substantially dependent on the efforts and performance of its senior management. The company has a strong management team with significant experience in the online industry, the leisure and entertainment sector, information technology, payment processing, media, e-commerce and customer support. 2.2 Company History The company was incorporated in 2004. The company begins commercial distribution of the services in the fourth quarter of 2006. The fiscal year of the company is the calendar year and the life expectancy of the company is unlimited.

The company plans to have 20 employees in the first business year. Competition for qualified sales, marketing, and technical personnel is intense as these employees are in limited supply, and the company might not be able to hire and retain sufficient numbers of such personnel to grow the business. The company plans to substantially expand the sales operations and marketing efforts, both domestically and internationally, in order to increase market awareness and sales of services and products. The company will also need to increase technical staff. Figure 2.1 shows the current distribution of labor costs for each segment.

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2.3 Current Position and Business The company believes that it has a scalable, low-cost business model designed to maximize the revenues and minimize the costs. In order to manage and contain customer acquisition costs, the company primarily utilize pay-for-performance marketing programs. The growing adoption of the web represents an enormous opportunity for businesses to conduct commerce over the internet. The ability to successfully offer products and services and implement the business plan in a rapidly evolving market requires an effective planning and management process. Future expansion efforts could be expensive and require additional resources. The company plans to continue to increase, the scope of the operations at a rapid rate. The company expects that its continued growth and profitability will depend in large part on its ability to increase its brand name awareness and to provide its customers with superior community and music experiences.

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3. Business Plan For A Music Production Company
The company produces music and related media products. The company has its own technical equipment with a scalable system to meet the requirements of the customers. The company also offers users the opportunity to join one of the world's largest music download platforms. Any visitor to this platform can browse over 60,000 items for sale, many of which are unique or otherwise hard to find, organized across 37 product categories. The scalable infrastructure and online interface eliminate the need for expensive retail distribution and allow the company to service the large and expanding subscriber base from one primary distribution center. The company utilizes proprietary technology developed in-house to manage all processes. The company offers a comprehensive suite of products and services through its media platform. The music recordings are from various genres and time periods and include new and past hits, top sellers, chart hits, world music, previously unreleased music recordings, live performances, sound tracks, music that may no longer be readily available and other music. The company's platform, which can be accessed through the web site, provides users with premier internet navigation functionality, personalized information resources and online community products. These products and services are developed internally by the company to increase the number of music downloads.

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4. Services
The market in which the company competes is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. This means that a core focus will be placed on the detection of new trends and the development of new services. The company plans to expand its operations by developing and promoting new and complementary services, products or download formats and expanding the breadth and depth of services. This will increase revenues in the long run. The company also plans to enter into co-marketing and service agreements with certain internet, consumer and retail companies in order to offer new services for the customers and find new customers.

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5. The Industry, Competition, and Market
A careful analysis of the market and competitive forces in this industry is a key element in assessing the business potential of the project. This analysis will provide marketing and sales data that are indispensable to optimally develop the business potential. Market is defined as the market where the company plans to operate in the next four years. 5.1 Market Definition The digital music market represents a new opportunity for record labels, artists and other owners of music recordings, but also presents significant challenges. Key revenue in this market can be generated from the licensing of rights to manufacture and distribute music and similar or related commercial articles, and the company expects that similar revenue opportunities will likely exist in new and emerging technology markets, such as cell-phone music distribution. The legitimate digital music industry emerged in 2003 with the introduction of online music stores. Industry sources estimate that the worldwide recorded music market was approximately $32 billion in 2004, and the digital music segment of this market represented approximately 1% in 2004. Industry sources reported that downloaded digital music increased to 6% of the total music market during the first half of 2005, and project that the digital music segment will represent approximately 25% of all recorded music sales in 2010. Figure 5.1 shows average growth figures in revenues of all available companies in the specified market during the past five years. Despite slowing global economic growth in general a lot of companies with an international focus and new services have experienced constant growth rates of more than 35%. For 2005 a growth rate of 40% is expected with a strong development in the third and fourth quarter.

5.2 Primary Competitors The company currently faces measurable competition from other music production companies. The local industry is comprised of a few large, well-known companies, several mid-sized companies like this company, and a large number of relatively small

Business Plan For A Music Production Company independent companies. Several new companies have emerged producing similar services. To further examine the competitive environment it is necessary to define the players in that environment. Figure 5.4 shows the size of businesses in this market segment. The numbers are based on average revenues of companies that run their business more than five years.

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The company believes that the products and services are not easily substitutable with the products of the competitors due to the level of technology, but nonetheless the company must constantly maintain the technology developments.

5.3 Customer Profile The company markets and sells the products worldwide through a combination of an own Internet platform and third-party internet provider to all kinds of customers. This includes private and business customers. Figure 5.2 shows the demand for the described services. Numbers are based on average revenues per customer of a particular group multiplied by the number of customers in the respective group. This gives total demand share per group. Figure 5.3 shows revenues by yearly income of private persons. The figure shows revenues generated per income group. Numbers are based on the average income per customer and the number of customers per income group. As can be seen customers in the middle income segment generate the highest revenues. High-use, low-income groups, such as students, generate relatively low revenue streams.

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6. Marketing Plan
Effective marketing together with consistent promotion are the keys to success online. The company focuses on a comprehensive web marketing and classical marketing strategy designed to attract new customers, convert leads into sales, and maximize the revenue. In the start-up phase it is a central task of the marketing concept to establish a name recognition and own trade mark. Several marketing and sales promotion strategies are available in the online industry. Figure 6.1 shows different marketing elements and their use in marketing strategies as well as their estimated potential success factor. Later on the strategy will primarily be targeted to gain new customers and create customer loyalty of repeat customers. The figure can serve as a direction for the planning of a marketing and sales promotion strategy. The numbers are based on comparable businesses. The company sells a significant majority of its products to selected retailers. To maintain its high quality reputation and generate retailer loyalty, the company does not sell its products through price sensitive general discount warehouses, department stores or membership clubs. The company believes its selective retail distribution strategy helps its retailers to maintain profitable margins and maximize sales of the products. Online marketing The company has the budget and strategy that allows it to use dozens of traffic providers to link to its core web site. It carefully tracks not only expenditures but also the ROI from each source. Print advertising Newspaper advertising is an integral and desired part of the marketing strategy. Sales promotion Sales promotion strategies have temporary effects only. Sales promotion will be used for a limited time to increase the number of customers. Direct marketing The company believes that superior customer service can significantly enhance its marketing efforts. Accordingly, the company maintains an in-house customer call center whose representatives provide service assistance to customers and field calls resulting from the company's direct response advertising. The company also outsources a portion of its call center activities. The company provides its staff with computerized access to its database enabling call center representatives to guide consumers to the products.

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7. Financial Plan
The financial plan is the key factor for the success of a business start-up. Investors and banks will base their funding decision on the information given in this plan. Besides a plan of the financial needs, this plan must insure that the business is always liquid and ultimately profitable. Since the sales and earnings projections in the business plan are based on expectations, the financial plan has to be revised and refined on a constant basis so that discrepancies can be uncovered and solved instantly. The inputs for this financial plan are based on other companies that serve as a group of comparable firms as well as the company's own estimates based on the planned business environment. Revenue estimates are conservative and expense projections include a cushion for unforeseen contingencies. All figures are refined by statistical simulations. The most important features of the financial plan and the financial strategy can be summarized by the following points. To date, first revenues have been derived primarily from the sale of products and services. These revenues constituted 80% of total revenues. Services revenues will increase each quarter during primarily due to the expansion of the service capabilities by hiring additional service personnel and to the increase in the number of customers. Operating expenses will increase as a result of the growth strategy, and the company also expects to increase the operating expenses as it continues to execute the business strategy. This increase in operating expenses may not result in an increase in the net revenue and the anticipated net revenue may not be sufficient to support these increased expenditures. The company anticipates that operating expenses and working capital will constitute a material use of the cash and cash equivalents. The company anticipates making capital expenditures in the ordinary course of business of approximately $1.5 million in the balance of 2007, which includes implementing a customer management and administration system at an estimated cost of $0.9 million. The growth rates of the whole company are expected to be very strong in the first three years of the business. Revenue and profitability for the company is reliant on, among other things, the level of acceptance of the company’s products in international markets. The company will proceed with the strategy of increasing revenues by cross-selling to an existing customer base. The gross margin is high for all four years. Since this ratio only takes into account sales and variable costs, this ratio is a good indicator of a firm's efficiency in producing and distributing its products. The sales margin is expected to be 15% to 20%. The profitability is driven by the ability to control operating expenses, which have declined in past years due to cost-control measures other businesses in the industry have taken, such as employee reductions.

Depending on the initial investment sum cost and revenue estimates vary. Figure 7.1 shows

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the expected relationship of cost and revenues. As can be seen the relationship is not linear everywhere but costs decrease relative to sales. This effect is due to the better utilization and efficiencies of personnel and rising revenues with stable costs. The details of the financial plan are laid out in more detail as follows: Section 7.1 gives an investments schedule. This includes all investments necessary during the start-up phase. Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Every additional sales dollar adds to profit and vice versa. Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimates from Section 7.2. Liquidity must always be positive. Section 7.4 contains a long-term profit projection for the first four years of business. The projection shows that the critical amount of revenues at which the business is profitable and how profit develops over time. Section 7.5 provides a risk analysis. The risk analysis contains critical factors that may impact the financial numbers presented in this plan.

7.1 Investment Plan The investment plan comprises primary capital needs for the foundation and operation of the business. The plan also includes initial marketing and sales promotion expenses. The figures are based on comparable businesses.

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7.2 Break-even Analysis The break-even analysis shows how earnings rise as a function of sales. The break-even point is the point at which revenues from sales cover total costs (fixed costs and variable costs rising with sales). This analysis is important for the development of the liquidity plan and the pricing policy. If the break-even point is not achieved in the long run, the business loses liquidity and may become insolvent. This requires that a critical amount of revenues must be generated. At a sales revenue of $700,000 and given total costs the business will begin to generate a profit. Fixed costs of this business are estimated at $100,000 to $200,000 and variable costs are estimated at $500,000. In this case, fixed costs are expenses that do not vary with sales volume. These costs have to be paid regardless of sales. Variable costs vary directly with the sales volume. At an estimated revenue of about $1,900,000 after two to three years profits are expected to rise to $130,000. This represents a revenue margin of about 7%. These estimates are realistic in this market segment and comparable to similar businesses.

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Increasing sales volume will increase pre-tax earnings margins but this development reverses when administrative costs begin to rise sharply. Up to a sales volume of $3,000,000 earnings margins rise to 9.5% after which the margin decreases to constant 8.5%. Figure 7.2 shows at which critical sales volume the business generates a profit. This serves as a base for a business and pricing strategy. Additionally the graph shows the amount of sales at which a marketing campaign can be run profitably.

7.3 Liquidity Plan The liquidity plan shows the amount of finances necessary to assure permanent liquidity of the complete business. The liquidity plan is based on four representative months of a typical business. Revenue estimates and costs are simulated from a standard normal distribution. Cash is constant at $1,000 for every month.

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7.4 Earnings Plan The earnings plan shows the results from ordinary operations. The plan is based on the first four years of business. Revenue estimates are drawn from a normal distribution with a strong estimated growth rate. Figure 7.3 shows net income.

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7.5 Risk Analysis The risk analysis considers critical factors that may lead to a failure of the business concept. Such factors can involve failures during the implementation phase as well as during operations. Such potential factors are ordered according to the probability at which they can arise. Shown are the key factors that led to the failure only. Data are drawn from surveys from 12 businesses with different services as well as revenue and cost structures. 1. The revenue comes from the sale of digital music recordings over the internet and wireless and cable networks, which is subject to unauthorized consumer copying and widespread dissemination on the internet without an economic return. Global piracy is a significant threat to the music industry generally. Unauthorized copies and piracy have contributed to the decrease in the volume of legitimate sales of recorded music and have put pressure on the price of legitimate sales. A change of the business process could result in increased expenses or delays in commercialization and therefore could delay revenues and adversely affect our future operating results.

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3.

Many of the competitors have similar products and services that have already been tested by the customers or are in development. The future success of the company will also depend in large part on the ability to attract and retain highly qualified service and management personnel. The company faces competition for personnel from other companies, academic institutions, government entities and other organizations. Behavior of Competition: Due to low entry barriers additional businesses can enter the market at low cost. Approximately 16% of insolvent businesses were driven out of the market by that competition. A better service concept, innovative ideas and concentration on core businesses are an easy means for an entrant to gain a competitive edge. The company has never generated positive annual cash flow from the core operating activities, and it may not generate nor sustain positive cash flows from operations in the future. The ability to generate sufficient cash flow will depend on the ability to successfully develop new services and to sell these services. Insufficient demand and customer loyalty: This frequently leads to business failure. This includes permanently low demand as well as a temporary collapse in demand. Often demand estimates were too optimistic at the outset. Such failures might also come from external shocks instead of operating deficiencies. Approximately 25% of businesses with insufficient demand go bankrupt. Since the expected frequency of business demand during the start-up phase are still low, a critical success factor is to focus promotional effort so as to generate customer loyalty early on, which will help minimize the effects of demand fluctuations. This is also important for the future development of the business. Implementation of the business plan and growth strategy depends on increasing the number of music recordings.

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8. Conclusion
The company expects that the recorded music industry is undergoing significant change, with the primary means of music distribution transitioning from physical formats such as compact disc to digital formats accessed over the internet and wireless and cable networks. This is occurring as a result of the popularity and proliferation of personal computers and portable digital music players like the Apple iPod, as well as consumer acceptance and the music industry’s endorsement of legitimate digital music sales. Worldwide shipments of portable digital music players are projected to grow 370% over the next five years, from 26.4 million units shipped in 2004, to 124 million units in 2009, according to a recent market research report. The company plans to become a leading publisher in the field of music. With world-class creative talent, a strong and experienced management team and advanced music production technology and techniques, the company makes high quality music products for a broad audience. Based on the knowledge of the industry and the announced release schedules of the competitors, the company expects to have a good product portfolio. For distribution a professional music platform with the newest technology is essential. This is the chance for new businesses with innovative ideas and new offerings to secure a large customer basis. Service and technology are factors that can earn a competitive edge. For a successful operation of a music production company 4 factors are critical and central to the business strategy: Cost management is a critical success factor for businesses in industries where margins are low. The expected margin for one product is between 3% to 5%. Service is very important. This will secure customer loyalty and optimize profitability in a market that is very competitive. The expected costs for additional service activities are between 5% to 10%. On the other hand, the expected additional growth rates due to new service activities are between 8% and 12%. The distribution is based on retail stores and an own online platform. The number of downloads has to be between 15,000 and 25,000 per month to ensure a profitable business.