BFN PREMIUM STOCK PICK NEWSLETTER
February 28, 1999
Issue #4
A Business Financial Network Publication
bizfn.com
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Hello Premium Newsletter Subscribers,
We want to thank those of you who sent us your comments, questions, and
observations regarding Filtered Souls Entertainment (FSOL otc bb). In this
issue, we respond to several questions made by one diligent reader and give
you one reader's thoughts regarding FSOL's most recent press release.
We look forward to more of you participating in the coming weeks. Hopefully
you find this interactivity and reader commentary useful. Please send
feedback, comments, and questions related to specific stocks to:
alexsvs@erols.com and iwyatt@bizfn.com
Reaction To Hiring of Shanon Thames:
"I guess I should have known that a lot of people wouldn't associate Shanon
Thames with Barry Gordy and MoTown Music. But, having lived in the Detroit
area all my life and lived during the growth of MoTown, I assumed everybody
knew that and as far as I was concerned that was a lock. I didn't need
anyone to twist my arm to convince me that this was a great stock. I
think that the potential may be even greater that what some people may
think."
The following is our response to a reader's questions about FSOL:
Question #1
In your music industry analysis, it is not clear how large the market is for
Rap and R&B (R R&B) categorized by age groups. For instance, the report
states that "the under 30 demographics accounted for 50+% of music sales" in
1997. I wonder how many of the under-30s actually purchased R-R&B. I could
assume that only 5.6% of the under-30s (50%*11.2%) was representative of the
1997 music market. This would significantly narrow your estimated market
size for FSOL.
Response:
We do not have precise figures, but the overwhelming majority of rap music
is purchased by the under-30 crowd. As I noted in the full report, there
are very favorable demographic and economic factors which favor higher
overall music sales by this group. The tastes of this group are also
favorably inclined towards Rap and R&B, so the impact on music sales in this
genre will be even more favorably leveraged.
Question # 2
In your projection section, I can see that FSOL's net profit margin would
rise from 67% (300,000 albums sold) to 86% (1MM sold). This is not exactly
in line with the industry average margin. Granted that there might be
economies of scale, I would imagine with 300% growth of album sales, FSOL's
overhead is not likely to be maintained at $180M per year.
Response:
The "industry average margins" are certainly not that high, but Filtered
Souls Entertainment is in the highest potential margin sector of the
industry, the record label. Distributors, music stores, manufacturers, and
even artists do not have such fat margins. Record labels put up a
significant initial expense to develop and promote an artist, but the
incremental expenses do not increase proportional to record sales. Word of
mouth and free exposure through radio and videos does a lot of the promotion
for the company. It is almost perfectly analogous to rolling a snowball
down a hill. It takes a large amount of effort to get the ball rolling, but
it gathers its own momentum and does not require as much effort after the
initial push. Overhead will likely increase, but that will be the result of
success that will attract more artists to the label. That means more
streams of revenue to offset the overhead and increase earnings.
Question #3
My other major concern would be competition and distribution. I am not an
expert in the music industry at all. But I understand the value of an
artist. Once the artist is accepted by the general public based on his/her
music, personality, mass appeal and so forth, he/she would demand higher
royalties. Otherwise, he/she may leave FSOL for other firms. In a sense
this becomes competition among recording companies in retaining talented
artists. How will FSOL win in this competition given its limited reserves?
Response:
The five artists listed are all signed to multi album deals - 4 albums.
There are increased royalties built in for artists if milestones are met
regarding album sales.
Question #4
Distribution is another form of competition among these firms. To gain
display and space in music stores, FSOL may resort to a certain degree of
discounts, which in turn erodes into its Net Margin. Distribution over the
internet may be a cheaper way to go (via Amazon, Cdnow, etc), but these web
sites may not be so willing to deal with locally known artists, or small
firms. In other words, FSOL may not have enough buying power. It may be
helpful if FSOL develops some alliance with smaller regional internet
retailer to distribute its albums. Another way of internet distribution is
using digital recording and allowing buyers to download for a fee. This
approach is still under development due to piracy, security and pricing,
amount other issues.
Response:
Much of the issues related to distribution will be answered when Filtered
Souls Entertainment and Skyline Records announce their global distribution
deal.
Question # 5
The report also mentions that a few major music chains are willing to give
prominence shelf spaces to FSOL. Any strings attached to this special
arrangement? If so, what would be the effect on FSOL's future margins?
Response:
The strings attached to this deal are between the distribution company and
the music store chains, not with the record label. The distribution
company's cut is predetermined and put forth in the contract between the
record label and distributor. FSOL will be signing a deal with one of the
Big 6 distributors very soon according to our sources. |
