Business IA

Business and Management IA

Should RS PLC (an entertainment company) open an online music store to increase revenue?

Written By:

Student Name: Rock Chetchotisak Student (IB session) Number: No exam Subject and Level: Business HL Internal Assessment International School of Bangkok Teacher: Jonathan Lorence Date of Submission: 08 March 2010 Word Count: 1817

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Table of Contents Page Letters of authentication…………………………………………………………3 Acknowledgement……………………………………………………………….5 Executive Summary……………………………………………………………...6 Research Proposal………………………………………………………………..7 Action Plan……………………………………………………………………….9

Introduction……………………………………………………………………...10 Procedure/Methodology…………………………………………………………11

Main results and findings………………………………………………………..12 Analysis and discussion………………………………………………………....15 Conclusions and Recommendations…………………………………………….18 Bibliography and references…………………………………………………….20 Appendices………………………………………………………………………21 Appendix 1: RS PLC’s SWOT analysis…………………………………………….21 Appendix 2: RS PLC’s PEST analysis……………………………………………...23 Appendix 3: Interview with key mangers of RS PLC………………………………24

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Acknowledgement To Whom It May Concern: I would like to acknowledge Pornpan Techarungchaikul, the Chief Operating Officer and Sutthimet Solthong, the Vice President of the marketing team for his and her assistance and expertise in helping me to complete this investigative project. Without the time and trust they provided, this project would not have been possible.

Sincerely, Chot (Rock) Chetchotisak IB Business Student International School of Bangkok

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Executive Summary RS PLC is an entertainment business established for over 25 years. Its initial aim is to become the Entertainment Network with a variety of entertainment contents. RS PLC is currently facing the problem of decreasing physical sales of CDs in the music market. This is due to the accessibility of illegitimate music downloads through the Internet. Internet usage is a growing trend and is predicted to be growing continuously in the future. Therefore, to compensate with this issue, RS is considering whether or not to open up an online music market. This paper analyzes the question, “Should RS PLC (an entertainment company) open up an online store for music sales?” The analysis is based upon primary research including an interview with key managers (Appendix 3) and numerous secondary researches including numerous annual reports, statistic and plus additional information of an international firm is also used in the analysis. In addition, business tools were also use, including the SWOT analysis, PEST analysis (Appendix 1 & 2) and the payback period calculations. According to the information gathered and analyzed, a final conclusion turns out to be that RS PLC should definitely raise finance and open up an online music store.

Words: 193

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Research Proposal Research Question Should RS PLC (an entertainment company) open an online music store to increase revenue? Rationale RS PLC is facing with a decline rate of physical CD sales. This is due to the existence of illegal downloads online and along with the economic recession which may have resulted in a lower disposable income for the consumers. The opportunity exists where RS PLC is considering whether to open an online website to sell music online or not. Theoretical Framework I plan to analyze both financial and non-financial data by using numerous business tools. These include SWOT and PEST analysis in order to assess both the internal and external factors that are relevant to the issue. Also, whether RS should open up an online music store or not will be determined by using a payback period, which will show the time it takes for the business to earn enough profits to repay its initial cost. Areas of the syllabus to be covered 1.3 ORGANIZATIONAL OBJECTIVES 1.6. ORGANIZATIONAL PLANNING/DECISION-MAKING 1.7 GROWTH AND EVOLUTION 3.2 INVESTMENT APPRAISAL Methodology Primary research: Interview key managers for information including the company’s history, their past, current and future positioning of the company, the targeted market/consumers, their current and future marketing strategies, the initial cost of opening an online website and the expected gain yearly. Secondary research: 5

Review secondary sources of RS PLC regarding its sources of revenue and also its current (2008) financial position. In addition to those of RS’s I will also review other firms in relation to the research.

Anticipated Difficulties Possible problems:

Possible solutions:

Interviewees may not understand what the

Speaking in my mother language can solve

questions are asking for

the issue

Biased view from the interviewees

Also use the data from the company

regarding their self interest in the business

website

Limited accessibility to company’s

Being related to the major shareholder may

documents

help with the data collection

Data collection may not be precise enough

Graph and add data to appendix

for the company to use

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Action Plan Dates

Activities

Nov 2009

Selecting topic

Nov 16 2009 – Nov 21 2009

Research company profile and contact information of the company

Nov 22 2009 – Nov 25 2009

Write research proposal

Nov 25 2009

Submit research proposal

Nov 26 2009 – Dec 10 2009

Review proposal

Dec 20 2009 – Dec 30 2009

Prepare raw data and interview questions

Jan 5 2010

Arrange and conduct an interview with Pornpan Techarungchaikul

Jan 10 2010 – Jan 20 2010

Gather and review secondary sources such as company’s Annual reports and other resources; internet

Jan 21 2010 – Feb 2 2010

Analyze information gathered

Feb 3 2010

First draft submission

Feb 3 2010 – March 7 2010

Refine draft

March 8 2010

Final submission

Words: 453

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Introduction RS PLC has been in the entertainment business since 1981, entertaining countless numbers of audiences nationwide. RS aims to become the Entertainment Network, comprising with content as such as record making, radio broadcast, T.V. Publishing, Sports and Showbiz (About R.S).

RS operates in a secondary and a tertiary business sectors mainly in the mass market along with numerous sub niche markets. RS is considered to be a medium to large firm comprising with over 1500 employees. RS initially began with a record making business and this branch of business is considered to be its core competency (Pornpun).

However, while RS is on its way in expanding to become the full Entertainment Network, it has been facing an ongoing problem of decreasing revenue from physical sales of CDs (About R.S). Therefore, since the business relies heavily on records making, the fallen CD sales is resulting in a major revenue breakdown for RS during the past years.

Consequently, RS has the option between running against the trend and stay with their current way of operation or to run after the consumers and the new technology. This has therefore led me to the following research question:

Should RS PLC (an entertainment company) open an online music store to increase revenue?

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Procedure/method Primary research was done through a detailed interview with Pornpan Techarungchaikul, the Chief Operating Officier and Sitthimet Solthong from the marketing team. Questions were asked based upon RS’s current market position and strategies, as well as the current situation of the economy. Both internal and external factors were discussed, allowing me to draft several business tools in relation to the research including SWOT analysis and PEST analysis. Financial estimates based upon the research proposal were given; allowing me to calculate the payback period of the proposal

Secondary research was also obtained from RS’s staff directly and also via RS’s homepage. These include corporate information, financial report and a graph showing the predicted trend of growth in the business. The information allows me to see RS’s past and current financial position, where its sources of revenue come from and the market that they predicted. Not only that, further information relating to the issue was also obtained via internet regarding the growth rate of the already existed online store “iTune.” All these information allows me to have a better understanding of both external and internal situation of the issue, thus enhancing the analysis of the proposal.

However, it must be noted that secondary researches are outdated since only 2008 is available at the latest. Therefore, further validation is needed.

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Main results and findings Figure 1: Table outlining revenue recognition based on each RS’s business sector

The diagram clearly shows the decreasing revenue from music sales both in terms of baht and as a percentage of the business as a whole. According to the graph, from the year 2006 to 2008, music sector is on its downturn and it is likely to continue on decreasing.

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Figure 2: Tables outlining financial statements

The diagram shows the current (2008) financial position of RS. It can be seen that RS has not been doing well since 2006 and that both its total assets (current and non-current) has decreased year by year.

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Figure 3: Graph showing sales of physical, mobile, online and showbiz from the year 2007 to the predicted year of 20012

The graph shows the decreasing trend of physical CDs sales for RS in comparison to others (online, mobile and showbiz). Figure 4: Graph showing music sales from iTune store from 2003-2007

The graph shows that since year 2004, online music sales has been increasing rapidly throughout year 2007 based upon one of the largest online music store ‘iTune.’

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Analysis and discussion First of all due to the secondary information about RS, it can be seen that RS isn’t in a very good financial position. The business hasn’t been doing well in the past years (figure 2). This means that if it were to open up another business industry (online website), it needs to consider carefully due to its budget. Therefore, in order to determine the decision, additional information both financial and non-financial are needed to be taken into account.

In the present, the service of Apple’s iTunes and music-streaming service Spotify have enjoyed an enormous success of selling legitimate digital music in countries such as US, UK and Japan (Apple iTunes…). While such industries continue to grow (figure 4), Thailand’s physical CDs sales continue its downfall. So the question whether where the consumption went off to only falls down to one possibility, the illegal online downloads (Album sales…)).

There are now more than 400 licensed music services available around the world, unfortunately, the services alike have not yet been available in Thailand (Pornpun). According to the Ansoff matrix (figure 5), the proposal is considered to be a market development. Figure 5: The Ansoff Matrix

Products Existing

New

Existing

Market penetration

Product development

New

Market development

Diversification

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Market

A market development is a medium-risk growth strategy. It focuses on the business selling existing products using new distribution channels to sell which in this case is through online channel. Although this type of strategy is considered to be risky if the business is unfamiliar with the market conditions (Anoff’s product…), as Pornpun said that RS is consisted with many young blood workers whom are suitable for such market. Also most of RS’s targeted consumers have access to Internet. Thus, this seems like a good investment for RS as it seems to be the best alternative out of all and it will be an advantage for RS since they are familiar with the product that is being marketed.

Financial analysis An investment appraisal is the quantitative techniques used to calculate the financial costs and benefits of an investment decision (Hoang). According to the interview, financial data was given; allowing me to calculate the payback period of opening up an online store. Adding up the equipment cost, the server cost, the website designer, research, marketing and staff; the estimated initial cost of opening up an online store is said to be approximately 10 million baht. Moreover, if the investment is undertaken, the expected revenue yearly is predicted to be 20 millions with gross margin of 30% as the revenue will be distributed between the department and the contents owner (Pornpun). These figures are calculated in the figure below. Figure 6: Calculating Payback period Payback period = Initial investment / Contribution (per month) Initial cost is 10,000,000 baht Predicted revenue is 30,000,000 baht Predicted profit is 30% of 20,000,000 baht = 6,000,000 baht

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Payback period = 10,000,000 baht / (6,000,000 baht / 12 months) = 20 months = 1 years and 8 months A 1-year and an 8 months time that it takes for RS to repay its initial cost for the investment is considered to be relatively short payback period (Hoang), thus this investment may seem to be acceptable to undertake.

Non-financial analysis According to the SWOT and PEST analysis (Appendix 1 & 2), it can be seen that consumers’ behaviour is changing worldwide, including Thailand. Most consumers are now able to reach the technologies more accessibly such as in school, university, office, home, Internet café, coffee shop and others. Adding to it with RS’s strength as a teen-pop music provider targeted among teens and pre-teens that are the population with access to the Internet, these clearly provide opportunity for RS to deliver its contents to its consumers online.

The second opportunity lies under the advent with 3G bandwidth and hi-speed Internet throughout Thailand. The 3G launching will also allow RS to offer a variety of content online more readily. This also responds well with a Consumer’s Lifestyle research study of RS that indicates that its target customers spend at least 15 hours per week online. They also want the services that can accommodate their “digital lifestyle” where everything has to be constant updated, user-friendly and conveniently (Appendix 1 & 2).

As with already existed contents of product with the suitable young blood workers, along with the availability of many distribution channels, RS is more than ready to head into the online

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market. Therefore, the opportunity lies whether or not RS should completely quit its reliance on physical CDs sales and focus on launching a complete legitimate music retail websites.

Conclusion and Recommendations In the digital era of music industry where the IP protection cannot be enforced strictly, RS has been facing with the ongoing decline in its physical CD sales over the past years. This is due to the change in technology, economic environment and also consumer tastes and preferences (Appendix 1 & 2). Based on the findings, RS has no option in running against the trend. What RS needs to do is to run after consumers and the new technology to remain competitive in the entertainment market.

In a digital world, the online offering seems to be the alternative source of revenue that RS must capitalize. RS’s core competency is records making, it can make use of this know-how in order to reduce risk in developing an online market.

Using Investment Appraisal technique such as Payback period does appear that it only takes relatively short amount of time for RS to repay its initial cost of investment; little to 20 months. In addition, online business is a fast moving culture, RS would need to act hastily in order to catch up with the trend (Pornpun). If the decision is executed with a thoroughly understanding of customer’s ever changing digital lifestyle, it will help them assure its customer base.

Recommendations: My recommendations for RS would be:

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•

Gain a better understanding of the consumers since my data lack the information since

international school students aren’t application to the research. •

Gather money to finance the proposed investment. This can be done using both internal

finance and external. Appropriate internal finance apart from working capital and retained profits can also include selling assets since if RS is considering quitting its reliance on physical CD sales, they may have a number or dormant assets (unused assets) to sell off. External finance may include share capital, as RS is a limited company and from sponsorships. Bank loans aren’t recommended since RS isn’t in a very good shape financially; therefore the risk of borrowing is too high. •

Acts upon the proposed decision hastily as it may take sometimes to establish a new

department within the business because of the equipments, the designing and the staffs needed.

However, note that if this proposal were to be undertaken realistically, more research is definitely needed since my analysis is fairly limited especially with a superficial financial analysis and also the majority of the research was done primary from the two interviews with RS’s staffs. Therefore, the analysis may be relatively one-sided and that further gatherings are needed in order to have a clearer picture of the situation.

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Bibliography and references “About RS.” RS Public Limited Company. N.p., 28 Jan. 2010. Web. 28 Jan. 2010. . “Album sales plunge, digital downloads up.” MSNBC. N.p., n.d. Web. 28 Feb. 2010. . “Ansoff’s product /‌ market matrix.” tutor2u. N.p., n.d. Web. 6 Mar. 2010. . “Apple iTunes Usage Grows 69% Over Past Year - US Broadband Penetration Climbs to 77.7% Among Active Internet Users - December 2006 Bandwidth Report.” Website Optimization. N.p., n.d. Web. 28 Jan. 2010. Hoang, Paul. Business and Management. Victoria: n.p., 2007. Print. “Investment Appraisal.” TimeWeb. N.p., n.d. Web. 6 Mar. 2010. .

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Appendices Appendix 1: RS PLC’s SWOT analysis Situation analysis in which internal strengths and weaknesses of an organization, and external opportunities and threats faced by it are closely examined to chart a strategy. Strength - RS owns a variety of contents and this enables the company to be able to release its contents promptly through all distribution channels including its online channel. - RS has good target segmentation and this enables the company to deliver the right contents to the right target group. Focusing on pre-teen and teen segments while also providing mass and urban pop. - RS owns many distribution channels (i.e. TV program, Cable, Radio, etc.) and this facilitates the company to promote its online business through other channels effectively. - RS has young blood management for online business. The management and team members are very keen to make their business become more up to dated to be able to satisfy consumer’s lifestyle and need. - RS has updated technology to facilitate the online system to be more effective. The company continuously invests in advanced programs to serve the advanced online system to be more effective. Weakness - Product life cycle of RS contents is quite short especially for online business which is very fast moving channel comparing to other distribution channels in music market. Since online contents are very fast moving and have to be always changed to be up to dated, RS is therefore quite difficult to gain long-term revenue from each content. - Success in online business of RS Company is quite limited to pre-teen and teen segments. However, the company is not doing well with mass and urban pop which also have potential for online business for RS.

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Opportunity - Consumer’s lifestyle has been almost completely changed to digital and online consumption. Process has to be easy and convenient for consumers to reach desired contents. Online business, therefore, will be another big channel to enable consumers to get contents more easily and conveniently. - Most of consumers are able to reach new technologies including digital and online related technologies. We can see that consumers can use internet tools anywhere i.e. school, university, office, home, coffee shop, department store and other places. The more convenient consumers can reach the internet tools, the more opportunities RS can deliver and also sell its online contents to the target. - Trend of digital and online consumption has been spread out globally. This trend, for example 3G or Hi-Speed internet will help RS to have more opportunities to penetrate online music business. Threat - RS has both direct and indirect competitors for its online business both in domestic and international market. As online business is not only limited to music content providers but also community and other websites which indirectly serve music contents to their target, RS therefore has to indirectly compete with other competitors inevitably. - MP3 and other illegitimate music contents are spread out globally through internet and other channels. This matter will directly affects on RS’s ability to generate revenue from its legitimate music contents through its online business. - Fast Moving Culture of online business can also have a negative effect on RS online business. Contents provided on online business are much reliable on fashion and trend which are very fast moving and need to be always updated, if RS can not shift its strategy promptly, the company might not be able to match up with the new trend.

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Appendix 2: RS PLC’s PEST analysis Siuation analysis in which political-legal, economic, socio-cultural and technological factors are examined to chart an organization’s long-term plans. Political - Copyright issue that belongs to a small number of firms unlike the U.S. which belongs to producers. Economic

- Economic downturn; consumers confidence is affected by the current economy condition - Decrease in physical retail sales globally including Thailand

Social

- Trend of digital and online consumption has been spread out globally - Consumer’s lifestyle has been almost completely changed to digital and online consumption.

Technological

- Most of consumers are able to reach new technologies including digital and online related technologies. - MP3 and other illegitimate music contents are spread out globally

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Appendix 3: Interview transcript with Pornpan Techarungchaikul, the Chief Operating Officer and Sitthimet Solthong, the Vice President of the marketing department. Can you say a little about your company? RS was formed in 1981 firstly as records making studio. After a continuous success, RS has expanded its scope to include film and television series production and radio programming. Later on in 2003, the company was listed on the Stock Exchange of Thailand as R.S. Promotion Public Company Limited. In 2006, the company changed its name from R.S. Promotion to RS Public Company Limited and underwent rebranding in 2007 to identify itself as a broader media company rather than just a record label. What is your current market and finance position? Our market is considered to be a very competitive market and is continuing to be so. There are many industries out in the market. We are one of the leading company that targets mainly the mass market along with our core segment of teens and pre-teens. However the changing in technology, economy, and consumer taste and preferences especially the illegitimate download has really damaged our company. Our revenue has been on a downfall for the past years and our financial position isn’t really in a good shape. What is your business strategy to compensate with the issue? We have already started to decrease our reliance on CD sales and gain knowledge on consumers’ digital lifestyle. We established a digital & media department to satisfy the changing consumers’ behaviours such as mobile server for music downloads, and several beta online websites. I have come up with a research proposal of whether RS can move its operation to an online market by opening up an online music store what do you think? We definitely have thought about that, actually we already opened up a few although it cannot be called a complete online music store due to many reasons. However, we are continuing to head on with our shifting of operation from the physical world to the online world. If you were to estimate the initial cost of opening up an online store what would it be and what would you expect for its gain? An initial cost of opening up an online store would be: Adding up the equipment cost, server cost, cost of recruiting staffs, web designer, and research and development; the initial cost would be approximately 10 million baht.

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If the website is well established our expected gain would be around 20 million baht per year with a 30% gross profit margin as the revenue will be distributed between the songs owner and the department Can you provide me with your company’s SWOT and PEST analysis? Yes certainly (given me raw data) How are you planning to gain your finance? There are many ways that we can gain our finance it may be from our retained profits and also our daily working capital. These are internal sources and that external finances will sure come handy if we are actually planning on the investment.

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