Purpose Of The Report To reduce the volatility inherent in the music development process and produce a consistent revenue stream for our business and customers via suggested marketing strategies, this report will address and analyze the issues and make recommendations for Polyphonic.
Situation Analysis—Company, Product, Competitors, Consumers And Swot Analysis Company Polyphonic HMI was established to help market Grupo AIA’s artificial-intelligence tools to the music industry. Grupo AIA headquartered in Barcelona, Spain, specializes in using its knowledge in the fields of artificial intelligence to solve complex business problems.
Polyphonic is introducing Hit Song Science (HSS), a service that employs AI technology to analyze the mathematical characteristics of music and compare them to past music hits. This enables the determination of a song’s potential for success. HSS can be invaluable for record labels, producers, and unsigned artists. However, to successfully penetrate these target markets, an effective marketing plan must be devised to overcome any potential resistance. In terms of competition, Polyphonic is unique in its use of AI technology for this type of service, setting it apart from the intuition-based approaches used by record executives and producers (Exhibit 1).
These record executives rely on various call-out services, including internet polling, call-out studies, and focus groups. While these services are well-established, traditional research methods can only accurately identify Top 40 singles with a success rate of 10%, compared to HSS’s impressive success rate of 80%. The call-out research services hover between indirect and direct competition. The smallest segment of these executives, representing only a few thousand representatives and known as Consumers Record Label (A) Executives, build their reputations based on their ability to choose popular songs successfully. They prioritize economic returns and are willing to invest more money in market research.
HSS has the potential to be the primary method for evaluating new artists and assisting in album production. However, some A Executives may believe that their “good ears” are more reliable. Producers make up the second largest group of customers, with many members. Their success depends on ensuring the success of their artists by creating songs that will resonate with the general audience. This can lead to significant revenue through royalties from successful songs. Approximately 10,000 artists are signed to labels in the US and Europe.
A considerable number of individuals are seeking to obtain a contract. If Polyphonic HMI can offer these individuals affordable licenses for their technology, they will be drawn to the company. Although some artists may initially have concerns about losing their artistic integrity and originality because of HSS, ultimately, HSS could provide certain artists with an advantage. Retailers serve as vital intermediaries in the buyer-seller transaction, with approximately 30,000 albums being released each year.
Retailers understand the opportunity costs linked to shelf space, but these costs can be eliminated with the implementation of HSS. HSS is a distinctive product that has a strong position in the music industry market. By using HSS, retailers can evaluate an album’s sales potential before investing in its marketing efforts. This helps filter out music and reduces missed opportunities for record labels, allowing them to allocate larger promotional budgets with minimal risk of failure. Moreover, record labels gain the ability to assess unsigned artists’ potential before offering them a record deal.
HMI faces significant challenges due to its unstable financial situation and limited funding. However, the main obstacle lies in convincing the industry that HSS has the potential to be the most effective predictor of music hits. Additionally, HSS is reliant on past hits as a basis for predicting future successes and lacks the ability to offer specific recommendations for improving a song once it has been analyzed. Moreover, the software is not designed to identify emerging trends in the industry.
The music industry offers immense opportunities, with a market potential of $32 million, which HSS can tap into to make a significant impact. HSS has the potential to either validate or challenge the opinions of industry experts regarding an artist’s work. Nevertheless, there are also threats to consider. The music industry is currently witnessing a decline in sales volume, experiencing a 10.4% decrease in growth in the U.S. in 2002. Additionally, HSS faces challenges in an industry that heavily relies on subjective instincts. To gain a better understanding of the industry, conducting a comprehensive analysis using S.T.P and 4P’s Analysis (which involves segmentation, targeting, and positioning) can be beneficial.
Three customer segments are identified—Artists, Producers, and A Executives. Artists would seek HSS to choose a suitable breakthrough demo. They have a limited budget and may worry that HSS will hinder their creativity, thus limiting the extent of its use. Producers may be concerned about losing the emotional and artistic aspects of music but may see value in using HSS to refine songs. Although the smallest segment, A executives would primarily use HSS as an alternative approach for evaluating incoming artists and aiding in album production.
Both producers and artists often invest heavily in research, but only achieve a 10% success rate. On the other hand, advertisers are expected to have a higher utilization rate, making it the most profitable sector. The advertising strategy for HSS should focus on positioning it psychologically. Polyphonic must change the mindset of executives in the advertising industry. One approach is for Polyphonic to position HSS as “the wave of the future” and at the same time ridicule intuition and call-outs as outdated. Additionally, psychology can be combined with functionality by promoting HSS’s high identification rate. Product
HSS has an 80% success rate in identifying Top 40 singles. If this success carries over consistently in the music industry, releasing these potential hits could increase profitability and save money for labels. Therefore, HSS could assist the industry in boosting profits by testing hit potential. Labels save a significant amount from not marketing an unsuccessful song, including promotion fees, radio airplay, and call-out research. Artists, record companies, and producers could receive larger shares of the revenue generated from a hit.
Placement & Promotion The optimal strategy for placement and promotion would involve utilizing a website, as this method offers cost-saving benefits. It is recommended that Polyphonic establish an interactive and secure online process to facilitate customer requests for analysis, as well as provide personalized access to prospective clients. Additionally, Polyphonic can promote their product by offering free song analysis demonstrations on their website. To further promote the website, advertising in music industry magazines, participating in tradeshows, and engaging in proactive sales directly to record labels would be effective. Polyphonic can leverage the networking and promotional abilities of Thomas Mattola and Mike McCready to enhance the visibility of their music analysis service. Price
It is essential to analyze the costs and revenue of a record label both before and after implementing HSS in order to develop an appropriate pricing strategy. In 2002, CD albums were sold at a price of $16.99 per album in the U.S., resulting in a total sales volume of 803,000,000 units. Retailers purchase each CD album for $10.50, generating a revenue of $8,431,500,000 for the record labels. The cost associated with promotion equals 30% of $10.50 ($3.15 per album), leading to an expense totaling $2,529,450,000 for the labels.
If we consider a hypothetical label with a market share amounting to 20%, the projected cost for promotion would be approximately $505,890,000.
In the U.S., roughly 3,000 singles are released annually and only around 10% manage to make it onto the Billboard Top 40.
Approximately 300 singles per year enter the Top 40 chart. For a fictional record label that holds a 20% market share, they release an average of 600 singles, out of which 60 will make it to the Top 40. The total amount of money spent on promotion, divided by the 600 albums released, results in an average expense of $843,150 per album.
With the implementation of HSS, the accuracy in identifying Top 40 singles increases from 10% to 80%. Therefore, to maintain the same market share, the number of singles promoted needs to be reduced from 600 to 75. Assuming that record labels still require $843,150 for each album’s promotion expenses, the total cost will amount to $63,236,250.
By implementing HSS, the reduction in promotion will amount to $442,653,750. There are three available call-out research methods: internet pole per song costing $3,000, Call-out studies per song costing $5,000-7,000, and focus groups per song costing $10,000. Each option is equally available for labels and each song is conducted using only one of these methods. Therefore, the average expense would be $6,333 per song. If Polyphonic matches this expense for HSS price, which is $6,333 per song, and assuming the labels use HSS for every song, the maximum cost would be $37,998,000.
However, the savings on total cost that the labels can make still amount to $404,655,750. Polyphonic has invested $600,000 in developing HSS. Although this cost is considered sunk and is not factored into the pricing of the product, it is included in the breakeven calculation. The fixed costs for operating HSS are $500,000 per year. By analyzing each album, we determine that the variable costs are $300 per album or $30 per song. To break even, approximately 80 songs ($500,000/($6,333 – $30)) need to be sold. See Appendix Exhibit1 for Porter’s Five Forces Analysis and Exhibit 2 for SWOT Analysis.
