Profit from Modern Day Music

   Between 1999 and 2011, the record industry shrunk by 64%.  With the advent of digital music, musicians were forced to find other streams of revenue as opposed to relying on record sales and touring.  Several qualities of digital music forced this change; those being the companies hosting the music downloads taking a cut, consumers newfound ability to buy only a song from an album as opposed to the entire album, music streaming, and digital piracy.  Ironically, the underlying structure of these services, the Internet, both undermines and supports artists.  With the help of the Internet, artists are able to reach listeners all over the world.  Unfortunately, the Internet also enables all the factors listed above, to the detriment of the profits of the artists.  For instance, the average iTunes user averages .25 albums a year, which equates to nowhere near enough album sales to fund an industry.

   Musicians have combated the downfall of the record industry by increasing sales of merchandise, accepting movie and TV licensing, creating fashion lines and beauty products, using crowdfunding websites such as Kickstarter, and finally, selling premium content. Items such as clothing are often sold at live concerts, so musicians that do not have the fan base to tour or play in concert are left without this option of revenue.  Rolling Stone estimates that bands such as One Direction net up to $225,000 per every show in merchandise sales.  Musicians, provided they have a hit song, are entitled to licensing fees when that song is played in a movie or television show.  Green Day licensed their song “99 Revolutions” for the movie “The Campaign” and made hundreds of thousands of dollars as a result.  One copyright licensing agent commented, “There was once a time where it was completely uncool for a band to allow their music to go on a TV commercial.  Now if you get your song on a TV commercial it’s high five, it’s great, everybody’s happy for you.”  Artists have also taken to using their fame to promote select beauty products.  One example is Justin Bieber, whose perfume “Someday” netted a three million dollar profit upon the summer of its release.  Obviously, this stream of revenue requires sufficient fame, and is therefore not an option for every musician.  That being said, musicians who are not yet famous enough to rely on these streams of revenue have taken to using crowdfunding websites such as Kickstarter in order to fund their projects.  Rolling Stone estimates that artists average around $200,000 in crowdfunding profits, which is a substantial dent in any expenses associated with creating music.

   It seems that the primary way musicians will profit in the digital age is by releasing exclusive content with their albums.  One Nielsen study found that a fifth of listeners would be willing to pay for exclusive content if given the opportunity, and that in-between 560 million and 2.6 billion dollars in revenue is possible if artists begin to increase the amount of exclusive content they release.  One such artist that uses this strategy is Nipsey Hussle, a rapper from Los Angeles.  He has released two studio albums, and each time has released his album for free but also offered a small number of copies of the album with exclusive content.  This strategy has proved profitable, as Nipsey made $60,000 the week his second studio album debuted from sales of exclusive material.  While music is far from unprofitable, it is obvious that musicians can no longer rely solely on record sales as a source of revenue.


Why PSA Plans to Acquire Opel and Vauxhall

As Matthew posted, the French automaker Peugeot (also known as the PSA group) has been examining the prospect of purchasing two European subsidiaries of General Motors (Opel and Vauxhall). In fact, PSA is set to make the deal this Monday. Both Opel and Vauxhall have been financially draining for GM, so there is understandably some confusion as to why Peugeot would seek to acquire the companies. As Professor Smitka has said in class, two money-losing companies do not create a profitable company, but one larger money-losing company.

PSA only recently began to profit-the company’s 1.2 billion euro profit in 2015 was the companies first profitable year since 2011.

Income Statement (mil) 2015 2014 2013 2012 2011
Revenue $59,733.53 $65,159.308 $74,460.294 $73,271.889 $77,580.049
Gross Profit $11,107.448 $10,749.882 $11,186.252 $10,392.276 $13,244.237
Operating Income $2,107.432 $126.412 $-1,852.904 $-6,279.768 $1,162.82
Net Income $982.158 $-858.143 $-3,189.582 $-6,620.715 $761.401
Diluted EPS $1.14 $-1.4 $-9.32 $-20.62 $3.31

Along with this profit, PSA reported a 5.7% surge in sales. For comparison, in 2014, PSA posted a 555 million euro loss. The company took a major hit during the global financial crisis, and as a result was bailed out by the French state and Dongfeng Motor Corp. Both entities took a 14% stake in the company. After some restructuring, PSA began to make the proverbial climb back to a profitable future.

PSA CEO Carlos Tavares has commented on the purchase of Opel and Vauxhall, saying that he believes acquiring both companies would be a strategic purchase for PSA. Tavares believes that, based on the past financial performance of PSA, his company has the expertise to advise the current staff at Opel in a way that will positively affect profits. Tavares also believes that PSA would profit in terms of shared technology and purchasing power. The vehicles produced by PSA and Opel/Vauxhall share underlying technological platforms, which could result in significant cost savings for all the companies. PSA believes that a joint company consisting of PSA, Opel, and Vauxhall could sell more than 5 million cars annually, and improve the geographic range of each individual company in terms of where cars are sold.

Additionally, PSA, Opel, and Vauxhall are based in separate countries, which creates the potential for a “European car champion”, as Tavares termed it. However, the three countries are all intent on jobs remaining within their borders, especially the UK post Brexit.

In summary, PSA would acquire Opel and Vauxhall in order to combine engineering platforms and therefore realize cost savings, as well as to gain purchasing power and geographic sales range. Only time will tell if this “strategic” purchase pays off.