../../../MY_DOC%7E1/MY_DOC%7E1/ECONNEWS/South-Western%20College%20Publishing%20-%20Economics  
Money for Nothing
Subject Profit maximization
Topic Profit maximization and the firm
Key Words Contract, sales, companies, marketing costs
News Story

EMI, the parent company of Virgin America Records, has bought out the remainder of Mariah Carey's multi-album contract for $28 million after less than a year. Ms Carey will also be allowed to retain the $21 million she received when she signed with Virgin in April 2001. The separation results from the failure of her last album Glitter, which sold only 2 million copies, a big disappointment in view of Ms Carey being the biggest selling female artist of the last decade with 40.4 million sales in the U.S. and an estimated 120 million world-wide.

This is symptomatic of record companies increasingly shedding artists rather than cultivating them for success in the long term. The reasons are that artists have shorter periods of popularity, and marketing costs are higher. The decrease in music sales of 10 percent in 2001 did not help, either. Classic bands that stay around for years, like U2 and The Rolling Stones, are rare nowadays.

In addition, there are more records being released now, and they each sell fewer copies. In 2001, there were more platinum (million-selling) records than in any year since 1994. Record companies appear to be looking for more successful but small-volume records.


(Updated April 1, 2002)

Questions
1. It is estimated that Mariah Carey's contract was for $100 million.
a) What would have been the marginal cost of continuing Ms Carey's contract?
b) Explain how EMI would go about estimating the marginal revenue of Mariah Carey's contract, based upon the information in the article?
c) Given your answers above, was EMI likely to maximize its profits by buying out Ms Carey's contract? Explain your answer.
2. Mariah Carey is not alone in having difficulty to negotiate and maintain a long-term contract. Explain how the following factors make such contracts increasingly unprofitable for record companies:
a) shorter periods of popularity
b) higher marketing costs
c) lower sales in the industry in general
3. Mariah Carey is not alone in having difficulty to negotiate and maintain a long-term contract. Explain how the following factors make such contracts increasingly unprofitable for record companies:
a) shorter periods of popularity
b) higher marketing costs
c) lower sales in the industry in general
Source Ashling O'Connor, "Music Business Counts The Cost Of Fading Stars," Financial Times, January 24, 2002.

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