CASE 2

Pandora is the Internet’s most successful subscription radio service. In May 2014, Pandora had 77 million registered users. Pandora accounts for over 9 percent of total U.S. radio listening hours. The music is delivered to users from a cloud server, and is not stored on user devices. It’s easy to see why Pandora is so popular. Users are able to hear only the music they like. Each user selects a genre of music based on a favorite musician or vocalist, and a computer algorithm puts together a “personal radio station” that plays the music of the selected artist plus closely related music by different artists. The algorithm uses more than 450 factors to classify songs, such as the tempo and number of vocalists. These classifications, in conjunction with other signals from users, help Pandora’s algorithms select the next song to play. People love Pandora, but the question is whether this popularity can be translated into profits. How can Pandora compete with other online music subscription services and online stations that have been making music available for free, sometimes without advertising? “Free” illegally downloaded music has also been a significant factor, as has been iTunes, charging 99 cents per song with no ad support. At the time of Pandora’s founding (2005), iTunes was already a roaring success. Pandora’s first model was to give away 10 hours of free music and then ask subscribers to pay $36 per month for a year once they used up their 10 free hours. Result: 100,000 people listened to their 10 hours for free and then refused to pay for the annual service. Facing financial collapse, in November 2005 Pandora introduced an ad-supported option. In 2006, Pandora added a “Buy” button to each song being played and struck deals with Amazon, iTunes, and other online retail sites. Pandora now gets an affiliate fee for directing listeners to sites where users can buy the music. In 2008, Pandora added an iPhone app to allow users to sign up from their smartphones and listen all day if they wanted. Today, 70 percent of Pandora’s advertising revenue comes from mobile. In late 2009 the company launched Pandora One, a premium service that offered no advertising, higher quality streaming music, a desktop app, and fewer usage limits. The service costs $4.99 per month. A very small percentage of Pandora listeners have opted to pay for music subscriptions, with the vast majority opting for the free service with ads. In fiscal 2013 Pandora’s total revenue was $427.1 million, of which $375.2 million (88 percent) came from advertising. Pandora has been touted as a leading example of the “freemium” revenue model, in which a business gives away some services for free and relies on a small percentage of customers to pay for premium versions of the same service. If a market is very large, getting just 1 percent of that market to pay could be very lucrative— under certain circumstances. Although freemium is an efficient way of amassing a large group of potential customers, companies, including Pandora, have found that it is challenging to convert people enjoying the free service into customers willing to pay. A freemium model works best when a business incurs very low marginal cost, approaching zero, for each free user of its services, when a business can be supported by the percentage of customers willing to pay, and when there are other revenues like advertising fees that can make up for shortfalls in subscriber revenues. In Pandora’s case, it appears that revenues will continue to come overwhelmingly from advertising, and management is not worried. For the past few years, management has considered ads as having much more revenue-generating potential than paid subscriptions and is not pushing the ad-free service. By continually refining its algorithms, Pandora is able to increase user listening hours substantially. The more time people spend with Pandora, the more opportunities there are for Pandora to deliver ads and generate ad revenue. The average Pandora user listens to 19 hours of music per month. Pandora is now intensively mining the data collected about its users for clues about the kinds of ads most likely to engage them. Pandora collects data about listener preferences from direct feedback such as likes and dislikes (indicated by thumbs up or down on the Pandora site) and “skip this song” requests, as well as data about which device people are using to listen to Pandora music, such as mobile phones or desktop computers. Pandora uses these inputs to select songs people will want to stick around for, and listen to. Pandora has honed its algorithms so they can analyze billions more signals from users generated over billions of listening minutes per month. As impressive as these numbers are, Pandora (along with other streaming subscription services) is still struggling to show a profit. There are infrastructure costs and royalties to pay for content from the music labels. Pandora’s royalty rates are less flexible than those of its competitor Spotify, which signed individual song royalty agreements with each record label. Pandora could be paying even higher rates when its current royalty contracts expire in 2015. About 61 percent of Pandora’s revenue is currently allocated to paying royalties. Advertising can only be leveraged so far, because users who opt for free ad-supported services generally do not tolerate heavy ad loads.

CASE 2 QUESTIONS:

1. What type of e-commerce is Pandora? What is Pandora’s ecommerce business model? Explain your answer?

2. What ecommerce revenue models are Pandora using? How does Pandora generate money with the revenue models? Explain your answer?

3. For Pandora, what business strategies are being supported by the use of data mining? Explain your answer.

BandHub Pte Ltd is a company incorporated in Singapore and adopts the Singapore Financial Reporting Standards (SFRSs). It provides voice and data services as well as sells handphones. On 1 January 20X1, BandHub enters into sales contracts with two different customers: Customer X and Customer Y. Both customers choose the same handphone and the same monthly service plan. The standalone selling price for the handphone is $480 (cost of the handphone is $350) and the standalone selling price of the service plan is $60 per month. Customer X purchases the handphone for $480 and enters into a cancellable contract to receive the voice and data services for $60 per month. Customer Y enters into a 24-month service contract for $60 per month and pays $200 for the handphone.

(a) Determine the allocation of the transaction prices for both customers and the revenue to be recognised for the month of January and February. Explain your answers using FRS 115 - Revenue from Contracts with Customers.

(b) To activate the voice and data services, Bandhub Pte Ltd charges the customers an upfront, non-refundable fee of $12. How should this activation fee be treated under FRS 115 - Revenue from Contracts with Customers.

1) A financial analyst would like to construct a 95% confidence interval for the mean earnings of a company. The company's earnings have a standard deviation of $12 million. What is the minimum sample size required by the analyst if he wants to restrict the margin of error to $2 million?

2) A budget airline wants to estimate what proportion of customers would pay $10 for in-flight wireless access. Given that the airline has no prior knowledge of the proportion, how many customers would it have to sample to ensure a margin of error of no more than 5% for a 95% confidence interval?

3) A job candidate with an offer from a prominent investment bank wanted to estimate how many hours she would have to work per week during her first year at the bank. She took a sample of six first-year analysts, asking how many hours they worked in the last week. Construct and interpret a 95% confidence interval with her results: 64, 82, 74, 73, 78, and 87 hours.

A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $177 in either case.

Omaha Kansas City

Annual fixed costs ($ millions) $ 1.2 $ 1.3

Variable cost per unit $ 27 $ 42

Expected annual demand (units) 9,750 10,350

Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.)

Which would produce the greater gross profit of $ ______________.

Brazos Higher Education Service Corporation, Inc., was a nonprofit student loan company. Brazos allowed one of its employees to store customers’ personal financial information on a laptop with an unencrypted hard drive. The laptop was subsequently stolen from the employee’s home during a robbery. Brazos had no way of knowing which customers’ information was contained on the laptop’s hard drive or whether the information would be accessed by a third party. As a precaution, Brazos notified all of its customers that their information may have been accessed by a third party and offered each customer six months of identity-theft monitoring. One customer, Guin, brought suit against Brazos for negligence, claiming that Brazos had failed to adequately protect his financial information, thereby causing Guin harm. Guin’s information was never accessed by a third party, and Guin never suffered identity theft. How might other businesses be affected if Guin’s lawsuit succeeded? Do you think Brazos was wrong to store its customers’ financial information on an unencrypted laptop hard drive? [Stacy Lawton Guin v. Brazos Higher Education Service Corporation, Inc., 2006 U.S. Dist. LEXIS 4846 (2006).]

For each assigned case, analyze the issue based on the following criteria:

e.       Identify the parties involved in the case dispute (who is the plaintiff and who is the defendant).

f.       Identify the facts associated with the case and fact patterns.

g.      Develop the appropriate legal issue(s) in question (i.e., the specific legal issue between the two parties).Provide a judgment on who should win the case - be clear.

h.      Support your decision with an appropriate rule of law.

i.        Be prepared to defend your decision and to objectively evaluate the other points of view.

j.        Purpose

ACT 205 Spring 2018 - 2019 The Accounting Equation Neal decides to open a computer programming service which he names Microsoft. 1. On January 1, 2018, Neal invests $15,000 cash in the business. 2. Microsoft purchases computer equipment for $7,000 cash. 3. Microsoft purchases computer paper and other supplies for $1,600 from ABC Supply Company expected to last several months. ABC agrees to allow Microsoft to pay this bill in February. 4. Microsoft receives $1,200 cash from customers for programming services it has provided. 5. Microsoft receives a bill for $250 from the Daily News for advertising but postpones payment until a later date. 6. Microsoft provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and bills the customers with the remaining balance. 7. Microsoft pays the following expenses in cash for January: rent $600, salaries of employees $900 and utilities $200. 8. Microsoft pays its $250 Daily News bill in cash. 9. Microsoft receives $600 in cash from customers who had been billed for services in transaction number 6. 10. Neal withdraws $1,300 in cash from the business for his personal use. Required: A. Show the effect of the above transactions on the accounting equation. Cash (asset) increased by $15,000; and Ray Neal’s Capital (owners equity) increased by $15,000 Sep. 2 Microsoft purchases computer equipment for $7,000 cash [Equipment (assets) increased by $7,000; and Cash (asset) decreased by $7,000] Sep. 3 Microsoft purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account [Supplies (assets) increased by $1,600; and Accounts Payable (Liability) increased by $1,600] Sep. 10 Microsoft receives $1,200 cash from customers for programming services it has provided[Cash (assets) increased by $1,200; and Service Revenue (revenue) increased by $1,200] Sep. 15 Microsoft receives a bill for $250 from the Daily News for advertising but postpones payment until a later date[Advertising Expense (expense) increased by $250; and Accounts Payable (liability) increased by $250] Sep. 20 Microsoft provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account [Cash (assets) increased by $1,500; Accounts Receivable (asset) increased by $2,000; and Service Revenue (revenue) increased by $3,500] Sep. 25 Microsoft pays the following expenses in cash for September: store rent $600, salaries of employees $900 and utilities $200[Rent Expense, Salaries Expense, Utility Expense (expenses) increased by $600, $900, and $200 respectively; and Cash (asset) decreased by $1,700] Sep. 27 Microsoft pays its $250 Daily News bill in cash [Accounts Payable (liability) decreased by $250; and Cash (asset) decreased by $250 Sep. 28 Microsoft receives $600 in cash from customers who had been billed for services [in Transaction Sep. 20] Sep. 30 Ray Neal withdraws $1,300 in cash from the business for his personal use[Cash (asset) decreased by $1,300; and Ray Neal’s Drawings (owners equity) decreased by $1,300] B. Prepare the financial statements of Microsoft on January 31, 2018. • Income Statement • Statement of Owner’s Equity • Balance Sheet Assets = Liabilities + owner's Equity Cash +Equipment +Supplies +Accounts Receivable = Accounts Payable +Capital +Revenues -Expenses -withdrawal 1 +15,000 = +15,000 15,000 = 15,000 2 -7,000 +7,000 = 8,000 +7,000 = 15,000 3 +1,600 = +1,600 8,000 +7,000 +1,600 = 1,600 +15,000 4 +1,200 = +1,200 9,200 +7,000 +1,600 = 1,600 +15,000 +1,200 5 = +250 -250 9200 +7,000 +1,600 = 1,850 +15,000 +1,200 -250 6 +1,500 +2,000 = +3,500 10,700 +7,000 +1,600 +2,000 = 1,850 +15,000 +4,700 -250 7 -1,700 = -900 -600 -200 9,000 +7,000 +1,600 +2,000 = 1,850 +15,000 +4,700 -1,950 8 -250 = -250 8,750 +7,000 +1,600 +2,000 = 1,600 +15,000 +4,700 -1,950 9 +600 -600 = 9,350 +7,000 +1,600 +1,400 = 1,600 +15,000 +4,700 -1,950 10 -1300 = -1,300 8,050 +7,000 +1,600 +1,400 = 1,600 +15,000 +4,700 -1,950 -1,300

A shipping company handles containers in three different sizes: (1) 27 ft3 (3 Ý 3 Ý 3), (2) 125 ft3, and (3) 512 ft3. Let Xi (i = 1, 2, 3) denote the number of type i containers shipped during a given week. With

(a) Assuming that X₁, X₂, X₃ are independent, calculate the expected value and variance of the total volume shipped. [Hint: Volume = 27X₁ + 125X₂ + 512X₃.]

(b) Would your calculations necessarily be correct if the X_i's were not independent? Explain.

The expected value would not be correct, but the variance would be correct

. Neither the expected value nor the variance would be correct.    

The expected value would be correct, but the variance would not be correct.

Both the expected value and the variance would be correct.

ACQUISITION PROGRAM

Acquisition of Varta AG (Germany)
In 2002, Rayovac acquired the consumer battery business of Varta AG of Germany. Varta was the leading European-based manufacturer of general batteries and 86% of its revenues were generated in Europe. Some overlap in Latin America permitted combined operations which solidified Rayovac’s market lead outside of Brazil. Too, the complementary geographic distribution of the firms’ production facilities and distribution channels was expected to yield greater access to global sourcing and generate cost savings of $30-40 million per year.

Acquisition of Microlite (Latin America)
In 2004 Rayovac acquired Microlite SA, the largest producer of consumer batteries in Brazil and owner of the Rayovac brand name in Brazil. It immediately realized a 50% market share in Latin America’s largest consumer market. Rayovac replaced Microlite’s management team with Rayovac veterans who reduced costs, increased efficiency, improved product packaging, and raised prices 16%. The Microlite business was also undercapitalized and losing money. It was considered by lenders to be a high risk and, consequently, paid very high interest rates. Rayovac immediately recapitalized the business, replacing high interest-rate loans with lower interest rate Rayovac-backed debentures. As a result of the acquisition, Rayovac expected to increase total Latin America revenues by approximately 50% in 2005.

Acquisition of 85% of Ningbo Baowang (China)

Located inNinghai, China, Ningbo Baowang was a major exporter of private label branded batteries. The company also sold its Baowang brand throughout China. Rayovac acquired the Chinese firm in 2004, hoping both to increase its presence in the rapidly growing Asian market and to add a low cost manufacturing subsidiary from which it could export Rayovac and Varta brand batteries to global markets. Rayovac replaced Ningbo’s management with its own to implement Rayovac process controls and management policies more efficiently. It also installed new manufacturing equipment that would allow it to produce over one billion Rayovac branded batteries a year beginning in 2005.  

Explain how this acquisition program helps Rayovac to capitalize upon its strengths and opportunities and neutralize its weaknesses and threats.

8.

In 1996, Marriott International made an issue of unusual bonds called liquid yield option notes, or LYONS. The bond matured in 2011, had a zero coupon, and was issued at $539.15. It could have been converted into 8.83 shares. Beginning in 1999 the bonds could have been called by Marriott. The call price was $610.71 in 1999 and increased by 5.0% a year thereafter. Holders had an option to put the bond back to Marriott in 1999 at $610.71 and in 2006 at $859.07. At the time of issue the price of the common stock was about $50.85. Assume annual compounding and a face value of $1,000.

a. What was the yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Yield to maturity _________ %

b. Assuming that comparable nonconvertible bonds yielded 10.7%, how much were investors paying for the conversion option? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Conversion option value ___________ $

c. What was the conversion value of the bonds at the time of issue? (Round your answer to 2 decimal places.)

Conversion value    _____________ $

d. What was the initial conversion price of the bonds? (Round your answer to 2 decimal places.)

Conversion price _____________ $

e. What was the conversion price in 2005? (Round your answer to 2 decimal places.)

Conversion price _______________ $

f. If the price of the bond in 2006 was less than $859.07, would you have put the bond back to Marriott?

g-1. At what price could Marriott have called the bonds in 2006? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Call price ___________ $

g-2. If the price of the bond in 2006 was more than the call price in part (g-1), should Marriott have called the bonds?