Feasibility

VYP doesn’t have own studios, studio crew as it always hires them, but this fact can’t be appropriate for the market of corporate advertising, as it’s cheaper for the company to have its own resources.

4.2 Fee negotiation for new children’s programme

Following the success of a pilot programme, VYP has been commissioned to make the first series of 20 episodes of a children’s programme called Sammy the Squirrel. The commission for 20 programmes at £315,000 each equals commissioned revenues of £6.3 million (see Appendix 7, Variant 1). This single programme series commission represents over 20% of last financial year’s revenue and is a substantial volume of programme time.

The area of contract contention surrounds the ownership of merchandising rights. Although VYP has little skill in this area, and the level of merchandising sales is very difficult to predict, the sale of puppets and other items based on Sammy Squirrel would carry good margins. That is why the board is considering whether to accept a lower fee in return for a 40% share of the merchandising margin.

In case VYP accepts lower fees (Variant 2), the merchandising sales levels should amount to £22.05 million in order to reach the breakeven point, given VYP’s 40% share of the merchandising margin as justified in Appendix 7.

We have carried out some research based on the Teletubbies, a successful children’s TV programme of the late 1990’s produced by Ragdoll, to indicate likely sales levels. This programme seems to be comparable to Sammy the Squirrel as they both have similar format (puppet based children’s series) and the same target audience (pre-schoolers under 5) even though there is a 15-year span between the two launches. At the same time, this span can be ‘cancelled out’ by a simple correction for the inflation rate as well as the rate of population increase (see Appendix 7). Having made the detailed calculations, we assume the merchandising sales to rise beyond £31.8 million by the end of the first year. It exceeds the breakeven level by almost £10 million, giving to VYP ‘extra’ £975,000 of profits.

However, John Young is afraid that VYP may fail to meet the expectations due to lack of experience in merchandising that would involve design, manufacture, sales and marketing as well as distribution. But still there is technical feasibility for VYP to outsource this range of tasks, so that the merchandising of the intellectual property rights (IP rights) for Sammy the Squirrel may become a lucrative addition to its business strategy.

On the other hand, there exist certain risks when entering a new area. The risks identified below are those thought to have the most significant impact on the sales figures.

1) Underperforming. If the programme turns out to be unpopular with its viewers, the sales levels will most likely collapse. For instance, along with successful Teletubbies and Tweenies, there have also been some children's properties that have failed to break into the retail market, leading to a loss of £7.2m[1] for merchandise licensing. Nevertheless, levels of publicity got by comparable children’s TV series (those featuring puppetry) induce us to believe that there is every likelihood that Sammy the Squirrel will become well-liked by the viewers.

2) Regular media exposure. It might be the most substantial risk involved. Provided the broadcaster decides not to re-commission future series, the sales of merchandise will not meet our expectations either, as the demand is no longer fuelled. However, given the rave reviews on the pilot episode, the probability of such situation is low, since the broadcaster seems to be a party concerned when talking about the prospect of future sales, generating extra profits.

3) Piracy. Piracy might also pose serious danger to our merchandising profits. At the same time, it is up to VYP, as the IP right holder, to identify any infringement or counterfeiting on its IP rights and to decide what measures are to be taken. It is also necessary to obtain protection in all potential export markets in due time, if international sales are concerned.

4) Projected economic slowdown. Economic slowdown could lead to decreased licence fee income and reduced financial flexibility. High levels of uncertainty remain regarding the global economy, impacting the value of assets and investments. The actions to minimize these risks are to gain efficiencies by cooperation with partners and ongoing strategic initiatives and to build contingencies into financial plans.