Contents

Introduction:..........................................................................................................................................2
Industry Set-up:....................................................................................................................................2
The Monetisation of Bollywood Music:.................................................................................................3
Activities / Value Addition of the Music Label:..............................................................................3
Assessment of Value of Music:......................................................................................................3
Negotiation & Acquisition of Music:..............................................................................................4
Promotional Activities:..................................................................................................................4
Identification of Monetisation Avenues:.......................................................................................4
Sales of Music to Various Entities:.................................................................................................4
Monitoring and Verification of End Use:.......................................................................................5
Collection of Royalties:..................................................................................................................5
Payment of Royalties:....................................................................................................................5
Anti-Piracy Measures:....................................................................................................................5
PORTERS 5 FORCES ANALYSIS – Business of Music Labels.....................................................................5
Threat of New Entrants/Potential Competitors.............................................................................5
i. Government Regulations:......................................................................................................6
ii. Economies of Scale................................................................................................................6
iii. Product Differentiation..........................................................................................................6
iv. Cost Advantages Independent of Scale..................................................................................6
Contrived Deterrence..................................................................................................................7
THREAT OF SUBSTITUTTES...............................................................................................................7
BARGAINING POWER OF SUPPLIERS...............................................................................................7
Concentration of Suppliers..........................................................................................................7
Supplier Uniqueness....................................................................................................................7
Threat of Credible Forward Integration......................................................................................8
Importance of Music Label to Suppliers.....................................................................................8
BARGAINING POWER OF BUYERS....................................................................................................8
Concentration of Buyers..............................................................................................................8
Differentiation..............................................................................................................................8
Significance of the procurement value as a proportion of Buyers’ total cost.........................8
Profitability of Buyers..................................................................................................................9
Ability to backward vertical Integrate........................................................................................9
Profitability of Existing players:...........................................................................................................10
Saregama.........................................................................................................................................11
 Sony Music......................................................................................................................................11
Zee Music Company........................................................................................................................12
Determine if there are any inherent problems with the current model; what are the solutions to
them if any..........................................................................................................................................12
Music Label’s Risk Return Trade-offs:..............................................................................................13
Comparison with Other Industries...................................................................................................15
Should FSS be monetizing its Music Assets directly through a Strategic Alliance?..............................16
Motivations for getting into strategic alliance:................................................................................17
Exploiting economies of scale......................................................................................................17
Learning from competitors..........................................................................................................17
Managing risk and sharing costs..................................................................................................17
Facilitating tacit collusion............................................................................................................17
Low-cost entry into new markets................................................................................................17
Low-cost entry into new industries.............................................................................................17
Low-cost exit from industries......................................................................................................17
Managing Certainties...................................................................................................................17
CONCLUSION.......................................................................................................................................19

Industry Set-up: Artists ( Lyricists, Singers,

Composers etc.)

Production Company

h.

SUMMARY
Music Label ( Distribution Company)
Threat of New Entrants

TV Channels / Sync Radio Stations / Live Ring Tones / Ring Physical Retailers / Digital Retailers / Digital
Licenses for Movies Performance / Clubs Back Streaming Companies
 High

Supplier Power Industry Rivalry Buyer Power

Medium High

Low

Threat of Substitutes

Revenues from Digital Music in India (US$ in Millions)5

17.7; 25% 1.5; 2%
10.3; 14%

4.4; 6%

38.3; 53%

Subscription Streams Ad-Supported Streams Video Streams

Mobile Personalisation Downloads
Report to be submitted to the CEO- Fox
Star Studios
Introduction:

The music industry in India has come a long way from its humble origins during the pre-
independence era to generating sales of Rs.725.6 crores in the year 2017 1. While initially
1,2
https://www.thenewsminute.com/article/music-streaming-drives-27-cent-growth-indian-music-industry-
79900
 starting out with sales of Phonograph records, the industry has seen the rise and fall of many
technologies such as the music cassette, music CD and DVD. Post emergence of the internet, the
industry saw a massive disruption in the traditional business model, which has resulted in
shrinkage of the sales of physical products. Digital consumption of music (through paid-
downloads and streaming) has exploded and is now the dominant mode of listening. “The
revenues from digital music now amount to over 91 per cent of the Indian recorded music industry
revenue.”2

Industry Set-up:
Artists ( Lyricists, Singers,
Composers etc.)

Production Company

The above chart represents (approximately) the flow path of music from its creators to the end
consumers. A sound track (normally along with other tracks to comprise an album) is
Music Label ( Distribution Company)
requisitioned by a Film producer either by engaging a music director for a lump sum (who
would in turn hire the singers, lyricists etc.) or by separately engaging individual artists (who
would then workRadio
together to deliver
Stations / Live sound tracks).
Ring Tones / Ring Physical Retailers / Digital Retailers / Digital
TV Channels / Sync
Licenses for Movies Performance / Clubs Back Streaming Companies
Given that a song is normally used in a movie, the movie producer uses the song to promote the
movie itself. This invariably leads to the association of every song with a movie and
consequently the success of a song heavily depends on the success of the movie (there are rare
exceptions wherein the songs are a commercial hit despite the movie failing to become a hit).
Retail Consumer
The Monetisation of Bollywood Music:
Apart from the theatrical release of a movie, the producer also sells the music tracks to a Music
Label either for a fixed period or in-perpetuity. The Music Label acts as a distributor and further
sells the music to other entities (who act as retailers) who in turn sell the music to final
customers.

Activities / Value Addition of the Music Label:

Assessment of Value of Music:
To begin, the Music label needs to assess the value of a music track record or an album
before acquiring its rights from a movie producer. This is a very crucial exercise which is
also (unfortunately) a very subjective one. This is because it is very difficult to predict
(with any degree of accuracy) the commercial success of an artistic piece of work. The
potential value of a song depends on various factors such as the commercial success of
the movie, the “catchiness” of the song itself, the language of the song, the language of
the movie, the star cast etc. The difficulty of valuing a song is very understandable given
that it is tough to value even financial assets which have fairly predictable cash flows
associated with it due to uncertainties such as credit risk, interest rate risk, exchange
rate risk, government risk etc. But the music labels must have some amount of expertise
in valuing track records. This skill has most likely been developed over years of
experience in the industry and it is very difficult to acquire the skills or replicate it (by
organic methods) by a newcomer in the industry.

Negotiation & Acquisition of Music:

After valuing the music, the Label needs to acquire the music for a price that is lower
than its estimated value. This involves negotiation with the producers on the different
terms of the contract which includes things like payment terms, amount of royalties,
geographical restrictions, sharing of risk and promotional expenditures. There could
also be other factors like the reputation of the Music Label, prior experience in dealing
with the producers and association with other players that may influence the specifics of
the contract.
Promotional Activities:
The music label is generally responsible for marketing the music through various online
and offline methods. The contract with the production company clearly details the
amount of money that has to be spent by the Music label on “Publicity and Marketing”
expenses. These activities are to be carried out in concert with the producer because of
the symbiotic relationship between a film and its songs. It would be in the best interest
of both the parties to make sure that the total marketing budget is used in the most
efficient manner in terms of choosing the appropriate medium, target group etc.

Identification of Monetisation Avenues:

In today’s dynamic world, tapping into all possible avenues for monetisation of Music is
very crucial. Even though various avenues such as Radio, Digital streaming, Digital
downloads, Sync Licenses and Advertisements already exist, a Music label has to
constantly be on its toes to ensure that it is able to identify emerging trends and adapt to
disruptions that threaten to upend existing modes of music consumption as well as
business models.

Sales of Music to Various Entities:

Once the music label acquires a copyright in a song, it sells licenses to various other
entities, who in turn monetise the music by making it available to the general public. The
licenses are given to entities such as Music Streaming companies, Radio stations, Digital
download stores etc. This involves negotiations with various entities and perhaps
dealing with different business models in order to ensure that the Music label is
maximising its revenues.

Monitoring and Verification of End Use:

One may be mistaken to think that a Music Label, can sit back and relax, once a license is
sold. It is important to monitor the licensee(s) to ensure that it is acting as per the
license agreement. This could be a tedious and time-consuming task but it is absolute
essential to monitor. Indian firms do not have a reputation of performing contractual
obligations and litigation (or even arbitration) is a very length process and could
involves a lot of money.
Collection of Royalties:
Ensuring that the money is paid on time i.e actual collection is a very important function
in any business. It involves a constantly monitoring the financial health of the entities to
whom credit is given, physical collection on time, giving reminders and perhaps even
conducting litigation.

Payment of Royalties:
The music label is also responsible for payment of royalties to the original artists. This
payment is in addition to the fee payable to the production company for getting the
songs. This is because the law mandates royalty sharing agreements and these rights
can neither be transferred or waived.

Anti-Piracy Measures:
Piracy is the biggest bane of this industry. Ever since the internet took off in a big way,
the general public has found it easy to just download music (illegally) from websites
instead of actually paying for them. While the response to it has been slow, copyright
owners have indeed begun to fightback and most large players have dedicated teams
which are constantly on the lookout for potential copyright violators.

PORTERS 5 FORCES ANALYSIS – Business of Music Labels

Threat of New Entrants/Potential Competitors
To assess the threat of potential entrants, an analysis of the determinants of the barriers to
entry needs to be carried out.

i. Government Regulations: There is no law which either restricts or regulates the

entry of firms or its activities as a Music Label. This is means every company can
begin of process of buying copyrights and issuing licenses as and when they
choose to do so.
Net Effect: HIGH

ii. Economies of Scale: There is an element of economies of scale but it is not in

the usual manner of enjoying a lower unit costs of production. This is mainly
because, in the digital age, the marginal cost of issuing another license for is
virtually nil. But it does make a difference in smaller ways. Music labels will be
able to lower their administrative costs, marketing expenses and employee
 expenses on a per sound recording basis when they are dealing with a large
number of sound tracks when compared to a smaller music label.
Net Effect: HIGH

iii. Product Differentiation: The Music label industry does not have a lot of product
differentiation. Of course, there may be a few differences in the way contracts
are structured with the artists/production companies and digital streaming
companies, the core operation of giving music to retailers does not change. Low
levels of brand identification and customer loyalty also lowers the product
differentiation.
Net Effect: HIGH

iv. Cost Advantages Independent of Scale: While there are no proprietary

technologies, no advantages due to favourable geographical location or learning
costs, or specific “know-how” requirements, there is a slight advantage with
respect to access to raw materials. Production companies and artistes
sometimes prefer to work with existing and well-known music labels rather than
new entrants. But this is mainly caused due to information asymmetry as the
artists are not in a position to evaluate a newcomers credibility and do not want
to take on any additional risk.
Net Effect: MEDIUM TO HIGH

Contrived Deterrence
The incumbents are perhaps a bit likely to undertake measures to deter
incumbents such as making investments in Artists or committing to pay
significantly higher amounts of money for a music album, but on an overall level,
there doesn’t seem to be a very strong threat of the same.
Net Effect: HIGH

Besides, there is always the risk of forward or backward integration by existing companies.
Case in point is the recent development in which a competitor (ZEE) had engaged in
forward integration and started its own music label to market the songs which its studios
made. This threat always very likely especially when the profits or perceived profits of a
music label is high.

Therefore, the threat of new entrants is MEDIUM TO HIGH

THREAT OF SUBSTITUTTES
There is no significant threat of substitutes when we are looking at the market for music.
Humans have enjoyed music for many centuries and it is doesn’t seem likely that they will
stop consuming music

Therefore, the threat of SUBSTITUTES is LOW.

BARGAINING POWER OF SUPPLIERS

Concentration of Suppliers
The suppliers of music are very fragmented. There are a lot of production houses
with new entrants regularly trying out their luck. Also, there are lot of regional
producers who cater to a specific market and would not venture out of their
traditional strongholds.

Supplier Uniqueness
Even though the genre of music produced by an entity is not unique, one must
not forget the fact that no two music records are the same. Every single track is
quite unique and a Label cannot “switch” its suppliers (so as to say).

Threat of Credible Forward Integration

Looking closely at the producers, as mentioned above, the risk of forward
integration is constantly there. Any studio, which is regularly in the business of
movie production or distribution, can threaten to become its own music label.

Importance of Music Label to Suppliers

As of now, Music Labels are critical for music suppliers. The two industries have
different strengths and it would be difficult for a music producer to reach out to
the vast majority of the population without the services or expertise of a music
label.

Therefore, the Bargaining power of Suppliers is MEDIUM.

BARGAINING POWER OF BUYERS
Concentration of Buyers
Given the recent proliferation of many OTT platforms, which add to the already
high number of entities buying music (such as Radio stations, Live performance,
clubs, TV channels etc.), the bargaining power of buyers is relatively weak.

Differentiation
As noted above, there is not much differentiation between the kind of music.
Even with respect to the kind of services that a Music label offers, there is not
much of a differentiation factor and this puts the music label at a weaker
position when compared to the buyers.

Significance of the procurement value as a proportion of Buyers’ total cost

It would not be an understatement to say that the cost of content is the biggest
expense for music retailers. Therefore, it is likely that they would be really
concerned about the cost of music and hence concerned about methods to
reduce the same.
But a mitigating factor is that some of these OTT firms offer their services as a
way to attract customers to their other (more lucrative) business. Ex: Amazon
Music, Wynk, Apple Music etc.

Profitability of Buyers
Though we do not have exact numbers for Amazon Prime or Apple Music, it is
widely believed that these companies or divisions are not making any profits. In
fact, even Spotify and Pandora (the largest players) are not currently profitable. 2
This makes them more sensitive to their costs and therefore insist on the lowest
possible cost.

Ability to backward vertical Integrate

The OTT players have already begun attempting backward integration 3. Though
it remains to be seen if they will be successful, there is no doubt that the Labels
need to differentiate themselves in order to stay above the rest of the fray.
2
https://www.fastcompany.com/40434818/why-2017-is-the-year-of-reckoning-for-the-streaming-music-
business
3
https://www.recode.net/2018/6/8/17441544/spotify-daniel-ek-direct-deal-music-labels
 Therefore, the Bargaining power of Buyers is High.

SUMMARY

Threat of New Entrants

High

Supplier Power Industry Rivalry Buyer Power

Medium High

Low

Threat of Substitutes

Therefore, we can safely conclude that the level of competition/ rivalry is quite high. This
analysis gives us a prima facie answer to the question of whether FSS should become a
music label.

Profitability of Existing players:

We now take a quantitative approach and look at the results of a few players to get an idea
about their financial well-being. I’ve examined the financial statement of 2 publicly listed
companies and 1 private company.

Revenues:
 Revenues from Digital Music in India (US$ in Millions)5
17.7; 25% 1.5; 2%
10.3; 14%

4.4; 6%

38.3; 53%

Subscription Streams Ad-Supported Streams Video Streams

Mobile Personalisation Downloads

Challenges: Neither of the two publicly listed companies are pure play music labels. While
one of them had started off as a music label, it has now diversified itself into production of
movies, regional TV shows and even publishing magazines. It has also started selling
physical products (stylised music players) along with becoming an OTT player offering both
subscription based streaming as well as paid downloads. The other company is a
conglomerate which has only recently ventured into the Music label business. Therefore,
comparison with a pure play music label may not be truly accurate. Another issue is that the
quality and quantity of disclosures of private company is far lower than that of a public
company.

Saregama
Saregama, one of India’s veterans in the music publishing business, is a great place to
start.

2015-16 2016-17 2017-18

Revenues (Rs. Cr) 233.84 227.72 366.77
Profits (Rs. Cr) 6.83 5.95 28.30
Net Profit Margin 2.92 2.61 7.71
(%)
Return on Assets (%) 2.47 1.49 4.89
Return on Equity (%) 3.87 1.98 7.37
 A quick perusal of the above table shows that the company’s business is not a very
attractive proposition. The Net Profit margin in the first 2 years is dismal at about 3%
and even in the latest year, it is only at 7.71% (attributable mainly to a change in
inventory values i.e only an accounting illusion and not reflecting any fundamental
changes in the business). Apart from this, other profitability ratios such as RoA and RoE
are also quite anaemic. We also have to keep in mind that the latest years numbers have
gone up partly because of sales of the company’s high margin physical products 4.

Sony Music
2015-16 2016-17
Revenues (Rs. Cr) 168.12 184.35
Profits (Rs. Cr) 14.04 39.95
Net Profit Margin
(%) 8.35 21.67
Return on Assets (%) 16.86 37.74
Return on Equity (%) 30.64 61.41

Sony’s FY 17 results were strong primarily due to doubling of revenues in its Artist
Management and Branding business. Unfortunately, due to the private nature of the
company, it is hasn’t disclosed the segment-wise breakup of its revenues (nor its FY18
results so far). So we don’t know what proportion of its revenue is derived from Artist
Management and Branding segment. Also, Sony probably benefits from a strong
parentage as its parent company is one of 3 biggest music labels in the world.

Zee Music Company

Zee Music is not a standalone entity but a part of Zee Entertainment, which is a
conglomerate which has interests in TV channels, movie productions, live events and
OTT platforms.

2016-17 2017-18
Revenues (Rs. Cr) 5372 6777
Profits (Rs. Cr) 968 1911
Net Profit Margin
(%) 18.02 28.20
Return on Assets (%) 12.67 21.12

4
https://economictimes.indiatimes.com/markets/stocks/news/saregama-connects-with-consumers-hits-the-
right-notes/articleshow/61858145.cms
 Return on Equity (%) 22.27 32.84

While details about individual business heads are not available, the revenue from sale of
music is estimated only to be a small fraction of the topline. But the fact that they
haven’t given out specific numbers itself indicates (to a limited extent) that the results
were probably not too upbeat.

Determine if there are any inherent problems with the current model;
what are the solutions to them if any.

5
Traditional Risk Return Trade-offs:
Under normal circumstances, there are 2 classes of stakeholders in a company:
Shareholders and Bondholders or creditors. These 2 classes of stakeholders differ in the
kind of risk-reward combinations that they are entitled to. While shareholders are liable
to lose their entire capital invested, they are still happy because they are entitled to an
unlimited upside. The creditors, on the other hand, are a risk averse lot. Not matter how
well the company does, they are only entitled to their principal and interest; but they
have a higher priority in getting back their money. The shareholders will normally not
get any money unless the creditors are paid back in full.

Company makes Profits Company makes Losses

Creditors Principal + Interest Principal + Interest
Shareholders All profits Residuals

Music Label’s Risk Return Trade-offs:

One of the problems of the current model is that incentives are skewed and that the
traditional concepts of compensating risk takers are not being applied. Most labels
acquire a sound track for a fee which is paid upfront. At this point, the Label has no idea
how much it will make out of this sound track. If the music label is able to recoup its
original acquisition cost, marketing expenditures, and occasionally an additional profit
around 10%, any additional revenues is split between the label and the original

5
https://www.medianama.com/2017/07/223-india-digital-music-industry/
copyright holders. It is important to note that there are no clawback provision in case of
losses, and Label bears all the losses.

Evaluating this arrangement from the perspective of the Copyright owners, it is actually
an excellent contract. They receive an upfront fee immediately, and in the event that
song does really well, they could receive further royalties i.e they can profit from the
upside while having no downside at all.

Payoff Graph – Copyright Owners

Y- Axis:- Payoff to the Copyright Owner; X- Axis:- Revenue earned from the content
Point A: Upfront Acquisition Fee; Point B: Breakeven point for the Label

This graph resembles that of a LONG CALL option except that their payoff is positive
under all circumstances i.e the cost of the Call option is a negative costs. As long as the
initial acquisition cost is above the cost of production, the producers have guaranteed
profits.

But evaluating this agreement from the perspective of the Labels, one cannot help but
wonder why they would sign up for such an one sided contract. When they make an
investment in acquiring content, they are taking up substantial risk. Its not the taking on
the risk which is a problem; rather the fact that they are not being compensated enough
for taking on the risk.

Payoff Graph – Music Label

 B B D

A A C
Figure 2 Figure 3
Index: Point A: Upfront Acquisition Fee ;
Point B: Breakeven point for the Label;
Point D: Revenue sharing starts;
Point C: Value of Profit margin

After making the initial investment, every additional rupee of revenue proportionately
reduces its losses. This trend continues until the Label, recovers its acquisition costs,
marketing costs and sometimes a small additional profit (represented in Figure 3). Once
the Label breaks even (or after it makes a small profit) every additional unit of revenue
is split. Notice that the slope of the profit curve is lower.

Pre Break-Even Post Break-Even

Status Payoff Status Payoff
Artists/ Production Part Equity % of Profit
N.A Acquisition Price
Companies
Music Labels 100% Equity(Full Cost less Revenue Part Equity % of Profit
Losses)

Comparison with Other Industries

The model of the media industry is very similar to that of the Pharmaceutical Drug
Research industry. A Pharma company which is planning on launching a new drug takes
on considerable amounts of risk. The company has to decide on whether or not it wants
to pursue a particular drug even before it knows whether the drug will pass FDA
certifications. The total cost of launching a new drug could easily exceed $100 Million
dollars and even after that there is absolutely no guarantee of recouping its investment,
let alone making profit. In order to limit the risk of one unsuccessful drug making the
company bankrupt, that company usually spreads out its investments over multiple
drugs in the hopes that at least 1 of them will be a successful hit, and consequently will
generate enough profits to cover its losses and still have sufficient money left over to
justify its high risk profile. It is important to note that the pharmaceutical industry is
structurally more financially attractive than the media industry for many reasons such
as higher shelf life, lower price elasticity of demand and a worldwide audience. And
despite this, there have been many companies which have gone belly up.

The media industry also works in a similar manner. It takes a lot of investment in
acquiring content and if there are no risk adjusted returns, many companies are bound
to go out of business. All this points out to the fundamental need to earn higher risk-
adjusted returns, which can be achieved in the following ways:

1) Take on lower risk:

a. Risk Sharing agreements: In order to cover their downside risk, Music labels
should try and include clawback provisions which force the artists or
copyright owners to bear the brunt during difficult times

b. Fixed Fee Arrangements: Ultimately, there are certain activities (marketing,

anti-piracy, issuance of licenses) in which the Music labels have a
competitive advantage over the artists. The labels could offer their services
for a fixed fee (which covers their cost and also a profit margin) and thereby
completely avoid any risk relating to the commercial success of the music
track.

c. Syndicate: Music labels should not singularly acquire content and should
instead try to form a syndicate to fund the acquisition.

2) Earn Higher Returns:

a. Avoid Profit sharing agreements:

If Artists don’t share the downside, it is just not fair that they get to share the
upside. If Music labels can stop sharing profits, that could give their
profitability a huge boost.

b. Increase the Hurdle rate for profit sharing:

 If the abovementioned arrangements cannot be made due to any reason,
then the music labels should at the very least increase the hurdle rate after
which the profit sharing kicks in.

Should FSS be monetizing its Music Assets directly through a

Strategic Alliance?

Before we go into this question, it is important to devolve deeper into what exactly constitutes a
strategic alliance. “A strategic alliance exists whenever two or more independent organisations
cooperate in the development, manufacture, or sale of products or services.” 6 As the name
suggests it involves coordinated actions by entities towards a common goal.

Broadly speaking, there are 3 types of alliances: i) Non-Equity Alliances (ii) Equity Alliances and
(iii) Joint Ventures. Non-Equity alliances are arrangements wherein firms work together using
different types of contracts. Examples are distribution and supply agreements. Since the music
assets are sold to Music Labels, FSS is currently utilising Non-Equity Alliances for monetising its
music assets.

An Equity Alliance is one in which a firm purchases a stake in its partner company along with
using contracts. And a Joint venture is when a separate independent legal entity is created to do
business and all the cooperating firms own stakes in the JV.

Motivations for getting into strategic alliance:

Consistent with the theory of maximisation of shareholder wealth, firms would only engage in
strategic alliance if the Net Present Value of being in the strategic alliance is more than that of
being separately. But the realisation of additional benefits only happen on the following grounds
and therefore we shall briefly examine each of the grounds to see if it applicable to FSS.

6
See J.Barney, “Gaining and Sustaining Competitive Advantage” Pg 405
Exploiting economies of scale
Learning from competitors
Managing risk and sharing costs
Facilitating tacit collusion
Low-cost entry into new markets
Low-cost entry into new industries
Low-cost exit from industries
Managing Certainties

A. Exploiting economies of scale:

This is among the most commonly cited reasons for firms coming together. It is an
advantage if firms are able to reduce the fixed costs and/or variable costs and thereby
reduce the average cost of its products. In the context of FSS, there doesn’t seem to be any
advantages to having scale. The cost of creating content (i.e Music) is mostly a fixed cost,
and it does not reduce (at least not substantially) when a studio ends of producing more
music. Even if there are cost advantages to signing a long-term contract with a music artist,
given the unique nature of each song, the benefits of having the option of firing the current
director and hiring a different music director if the songs don’t perform well commercially
far outweigh any cost advantages.

B. Learning from competitors

This factor is not applicable in the context of FSS because the proposed strategic alliance in
not with a competitor but with a distributor. The unique nature of the business of creating
music assets where creativity is the predominant skill, hinders the application of many of the
principles of modern economics which are applicable to other firms.

C. Managing risk and sharing costs

This scenario is applicable on FSS’s costs associated with making movies. Since the cost of
making music tracks is quite small (in comparison with Movies), this is not relevant.

D. Facilitating tacit collusion

Tacit collusion is beneficial when there exists a scope for making additional profit from
cooperating on issues like pricing and production decisions. Again, this would not be
relevant in the context of FSS because FSS is not looking at colluding with its competitors.

E. Low-cost entry into new markets

 FSS is also not looking to enter into any new market (geographical areas) where it would
need the expertise of other players.

F. Low-cost entry into new industries

If entry into the music label industry required any special skills or knowledge, it would have
made it necessary for FSS to have partner from whom it could have derived those special
skills. But the nature of the music label business is not one which requires complex technical
skills. Besides, FSS is already in the media industry, which means it already has the contacts
and networking abilities to enter in this business, should it choose so.

G. Low-cost exit from industries

A motivation for ensuring that there is a low-cost method for exiting a particular industry is
very useful only if a new entrant is planning on investing a substantial amount of money. A
strategic partnership would be desirable because it would enable the other partner, who has
does not suffer from any information asymmetry, to buy out its stake without any reduction
in value. But because music assets cost substantially lower and that there would no
information asymmetry with respect to valuation of music assets, FSS does not need any
partners on this ground.

H. Managing Certainties
A final motivation is when the industry is very fast moving and there a lot of uncertainties to
navigate. In these circumstances, having a strategic partner is like having a real option (as
differentiated from financial option) which allows a player to either scale up or scale back
depending upon market conditions. Though the music industry is going through a lot of
changes, these changes are mainly in the methods of consumption of music by end
consumers. The fundamental business model of a music label (of being a distributor of music
assets) is not expected to change substantially and therefore FSS does not need any partners
even on this ground.

 Willingness of other players

The other important aspect that has to be looked into is the motivation of other players to enter
into a strategic partnership with FSS. In this context, there aren’t many benefits that an existing
music label would get from being associated with FSS. Of course, it would probably have a Right
 of First Refusal for every music track, but apart from that it there doesn’t seem to be much in
store. Given, that music labels would probably prefer to maintain their independence(in order to
gain access to all production houses) and not be too dependent on one particular production
house, it wouldn’t perhaps be great idea for a music label to be associated with FSS.

CONCLUSION
The business of music distribution is but a miniscule portion of the overall Bollywood industry.
While that itself should not be a deciding factor, FSS should take a decision keeping in mind the
objectives of engaging in only those activities in which it has a competitive advantage and which
can deliver superior returns to its shareholders. On both the abovementioned counts, the
proposition of the Music Label business does not seem attractive. Therefore, FSS should continue
with its existing business model and not look diversify into unattractive businesses.