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 launching Hit Song Science (HSS) which analyzes the mathematical characteristics of music and compares them to past music hits, making it possible to determine a song’s hit potential. HSS could be valuable for three target markets: record labels, producers, and unsigned artists. Once a decision is made on the target market, a suitable marketing plan will need to be developed that helps overcome the likely resistance. Competitors Polyphonic is the only company attempting to provide this type of service using AI technology. It competes indirectly with the intuition of record executives and producers (Exhibit 1).
These record executives also rely on call-out services such as: internet poling, call-out studies, and focus groups. Although these services are more established, traditional research methods only identify Top 40 singles at a success rate of 10%, compared to 80% success rate of HSS. The call-out researches are at a fine line between indirect and direct competition. Consumers Record Label (A) Executives, the smallest segment with less than a few thousand representatives, gain their reputations based on their ability to successfully select hits. They are more focused on economic returns and may spend more money on market researches.
HSS could become the primary vehicle to evaluate incoming artists and assist in album production. However, some A Executives might feel that HSS is inferior to their “good ears”. Producers are the second largest customer segment with thousands of members. The way they succeed is by making their artists successful. They could maximize his or her time and effort in developing songs that will best suit the general audience. By doing so, producers will earn plenty of revenue via royalties from successful songs. Artists, approximately 10,000, signed to labels in the US and Europe.
There are hundreds of thousands of hopeful wishing to secure a contract. If Polyphonic HMI could find a way to license its technology to these individuals at reasonable costs, these artists will flock to the company. At first being concerned with artistic integrity and originality, some artists may find that HSS removes too much creativity from the process, but in the long run, HSS could be the edge some artists need. Retailers are essential middlemen that facilitate the transaction between a buyer and a seller as approximately 30,000 albums are brought to the market on an annual basis.
Retailers are conscious of the shelf space opportunity costs. Having HSS in place will eliminate such costs. SWOT Analysis STRENGTHS—HSS is a unique product well positioned to break into the music industry. With HSS, it is possible to evaluate an album’s sales potential before investing to market it. It would efficiently filter music and reduce the chances of missed opportunities, thus allowing record labels to have bigger promotional budgets at low risks of failure. Record labels would also have the ability to test unsigned artists potential before offering a record deal.
Weaknesses—HMI’s precarious financial position with limited funds are tremendous challenges to overcome, but the biggest hurdle is to convince the industry that HSS could be the best predictor of potential music hits. Other inherent weaknesses are the overreliance of HSS on historical hits as the baseline for predicting future hits and its inability to provide specific guidelines to improve a song once it is analyzed. Furthermore, the software is not geared to pick up innovative trends in the industry.
Opportunities—The landscape is a 32 million-dollar-industry, offering tremendous market potential for HSS. HSS could revolutionize the industry by either reaffirming the gut instincts of the top minds in the industry or giving them a tool to review their opinions on an artists’ piece of work. Threats—Music industry is presently undergoing a gradual decline in sales volume. Annual growth in U. S. declined by 10. 4% in 2002. HSS faces increasing resistance in an industry ran subjectively on gut instincts (Exhibit 2). Dynamic analysis—S. T. P. and 4P’s Analysis Segmentation, Targeting, and Positioning (STP)
Three potential customer segments are identified—Artists, Producers, and A Executives. Artists would look to HSS for selecting an appropriate breakthrough demo. They have tight budget and may be afraid that HSS will remove creativity, which might not allow extensive usage of HSS. Producers, may concern with losing the motional and artistic qualities of music, but may value HSS as a tool to polish songs. Though the smallest segment, A executives would primary use HSS as a substitute method for evaluating incoming artists and assisting in album production.
They frequently spend a lot on research, only yielding a 10% hit rate. A are expected to have a higher rate of utilization as compared with either producers or artists making it the most profitable segment. Advertising should position HSS psychologically. Polyphonic needs to change A executive’s way of thinking. Polyphonic could position HSS as “the wave of the future”, while mocking intuition and call-outs as something antiquated. Psychology can also be paired with functionality, by promoting HSS’s high identification rate. Product
HSS could correctly identify Top 40 singles at success rate of 80%. If this type of success translates over consistently in the music industry, then the release of these potentially hit could not only increase profitability but also create savings for labels. Thus HSS could help the industry increase profit by testing hit potential. Labels save lots from marketing an unsuccessful song, including promotion fees, radio airplay, and call-out researches. Artists, record-companies, and producers might receive bigger shares from the revenue garnered from a hit.
Placement & Promotion The best placement would be through a website because this will cut down on overhead. Polyphonic should set up an interactive secure online process to enable customers to process requests for analysis and deliver personalized access to potential clients. Polyphonic can also demo their product online by offering free song analysis. The website could be promoted through music industry magazines, tradeshows, and pro-active selling directly to the labels. Polyphonic can utilize Thomas Mattola and Mike McCready to network and promote HSS. Price
To develop the correct pricing strategy, the record label’s costs and revenue must be analyzed before and after HSS implementation. In 2002, 803,000,000 CD albums are sold in U. S. at $16. 99. Since retailers pays $10. 50 for each CD album, the revenue taken in by record labels is $8,431,500, 000. The labels’ cost on promotion equals to 30% of the $10. 50 or $3. 15 per album. Thus, the total expense will be $2,529,450,000. Given a hypothetical label with 20% market share, the expected cost on promotion will be $505,890,000. In U. S. , 3,000 singles are released per year; of which 10% make the Billboard Top 40.
Roughly 300 singles make the Top 40 per year. For the hypothetical label with 20% market share, on average, 600 singles will be released of which 60 will make the Top 40. The total expense on promotion divided by 600 albums will give the average expense of $843,150 per album. With HSS, the success rate in correctly identifying Top 40 singles will move from 10% to 80%, so the promotion poll size will reduce from 600 to 75 in order to maintain the same share. Assuming labels still need $843,150 per album on promotion, but the total cost will be $63,236,250.
The reduction on promotion will be $442,653,750 after implementing HSS. There are three call-out research methods available; the cost is $3,000 for internet pole per song, $5,000-7,000 for Call-out studies per song, $10,000 for focus groups per song. Assume the above options are equally available to be used for labels and each song is conducted by only one of these. Thus, the average expense would be $6,333. If Polyphonic matches this expense of these research methods for HSS price, $6,333/ song, and assuming the labels run HSS for every song, the maximum cost is $37,998,000.
However, the labels can still save $404,655, 750 on total cost. Polyphonic has spent $600,000 to develop HSS, since this is a sunk cost we do not take it into consideration when pricing the product; however, we put this figure in breakeven calculation. The fixed costs associated with running HSS are $500,000 per year. Analyzing each album gives the variable costs, which is $300/album or $30/song. It will take around 80 ($500,000/ ($6,333 – $30)) songs to break even! Appendix Exhibit1. Porter’s Fiver Forces Analysis Exhibit 2 SWOT Analysis