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POLYPHONIC HMIMixing Music and
Math
2
Introduction
Polyphonic HMI- subsidiary of Grupo AIA
Founded in 2002
AIA’s first foray into entertainment sector
Established to market AI tools
Polyphonic was formed to predict the commercial success of music using Grupo AIA’s artificial intelligence tools
Experienced advisory board
Fixed annual operating costs ~$500,000
Product: HSS-Analyze > 25 mathematical characteristics of a song; compare with past hits; determine if song will be a success
4
Product Introduction
Determine a songs hit potential
Polyphonic HMI Human Media Interface
Compare with past music hits
Analyze mathematical characteristics
HSSHit Song Science
5
HSS: Hit Song Science
“Hit Song Science is to the music industry what the X-ray machine was to medicine. The first time someone told a doctor he could look inside a patient’s body without cutting it open, it probably sounded like science fiction too.”
- Mike McCready, CEO of Polyphonic
6
HSS: Hit Song Science
MISS!!
HIT!!
song being tested
7
HSS: Hit Song Science
Artist Song Title HSS Ratin
g >7.00
Weeks in the
Singles Top 40
Highest Chart
Position
Outkast Hey Ya! Yes 29 1
Clay Aiken This is The Night Yes 6 1
Santana Feat, Alex Band Why Don’t You & I Yes 28 6
R. Kelly Step in The Name of Love
Yes 22 9
Monica So Gone No 13 9
t.A.t.U All The Things She Said Yes 26 12
Daniel Bedingfield If You’re Not The One Yes 15 12
Uncle Kracker Feat. Dobie Gray
Drift Away Yes 17 13
Brad Paisley I Wish You’d Stay No 0 --
Jennifer Hanson Beautiful Goodbye No 0 --Hit Song Science’s Success Rates: A Sample
8
Objectives/Goals
To launch an innovative technology tool – Hit Song Science (HSS)
Poor initial response
Company facing financial issues
Devise a good marketing strategy to increase sales
Identify the right customer base, look at the pricing model, position the product and market it accordingly in the music industry
No direct competitors with similar tools to offer the music industry
Need to better position itself in the music industry
9
SWOT Analysis I
N T
E
R
N
A
L
Strengths Weaknesses Product Uniqueness
Strong Origin
Knowledgeable Board
Members
Industry Resistance
Limited financial budget
Possible product deficiency
E
X
T
E
R
N
A
L
Opportunities Threats 32 billion dollar
industry
Increase profits
Falling music sales
Resistance to change
“Instinct & guts” technique
10
Competitor Analysis
Few tools serve as competition Talented record execs like Clive Davis, use their
ears to determine if a song is a hit or not Many companies use gut instinct technique, but
limited by its ability to maintain talented & foreseeing executives
MR companies provide “call-out research” for record companies
Pre-scripted screening process limits research limits ability to predict crossover hits
Historic Success rate: 10% (only one of 10% of the 3000 singles make it to the top 40 Billboard singles charts)
11
Polyphonic HMI
Environment
Social Social & &
Cultural Cultural
Political Political & &
LegalLegal
TechnologicalTechnological
EconomicEconomic
12
Environment
Political & Legal
Economic
Bribery outlawed in the 1960s Dependency on independent promoters Widespread accessibility of music Internet power
Unknown artists Single costs > $300,000 Marketing established star cost > $1 million Only 15% of music titles profitable Only 10% of 3,000 singles make the Top 40 5 record companies control 75% of market
13
Environment
Social & Cultural
Technological
Producers career tied to success of artists Typical A&R people career span of 3-4 years Talent agents extract 25-40% of artist’s income Executives unique ability to realize hits “Call-out research"
Majority of recorded music distributed on CDs Use of MP3s rising Number of digital downloads increased Online and offline piracy increasing
14
Market SegmentationSegment 1: Record Companies
Opportunities & Threats
Biggest market segment
Huge potential
5 big record companies
10K companies in US
Small # of potential buyers
Easy production & marketing
High fixed costs
May antagonize producers
Bands may renegotiate contracts
Value Drivers
Shrinking music market
Selective consumer spending behavior
Expensive marketing cost > $300K for unknown artist
< 15% of music titles profitable
Need high predictability of success
Can save marketing costs
Reduce fixed costs
Less sensitive to price
Bigger budget
HSS success rate- 80%
Marketing PlanMarketing Plan
15
Market SegmentationSegment 2: Producers
Opportunities and Threats 20-30 very successful
producers Few 100 occasional hit
producers Mass marketing – minor
producers Deal with thousands of artists Responsible for bringing out
best abilities in artists No success guarantee for
songs created based on experience
Large customer segmentation High frequency of use Challenge – May not be well
received Direct threat to their expertise
Value Drivers Like to know if song will be a
hit Difficult decision to choose
HSS Decision process- info search
& alternative evaluation won’t occur
Scarce post-purchase behavior
for lack of precedents Most songs not accepted by
listeners Need recognition not directly
connected to motivation HSS – Reduced risk Help diminish uncertainty
before releasing a song
Marketing PlanMarketing Plan
16
Market SegmentationSegment 3: Unsigned Artists
Opportunities and Threats Very high potential and large
quantity New entrants tempted to buy HSS Multiple uses for HSS Market potential directly related
to size of market High cost of sales Not an effective target market Limited marketing budget Consider ability to penetrate
market cost effectively Demographic data – MR studies May reject ‘potential hit’ songs Could decrease artist creativity
Value Drivers Create & promote a
website Exploit demographic
knowledge Market in musical-oriented
& youth-oriented periodicals
Market on the internet Explore advertising to
normally much dispersed bands
Demographic – Computer literate, willingness to spend money on their music
Resistant artist mindset to ratings or scoring of a perceived piece of art
Marketing PlanMarketing Plan
17
Proposed Marketing Strategy
Promotion
Price
Product
Place
TargetMarket
18
Proposed Marketing Strategy
Target Segment - Record Companies Reduce capital risk profile of record company
invested per album/artist Improve company profits from summation- increase
in total number of hits per year Increase company profits from augmentation-
increase income per hit due to more effective marketing
Largest players in the music industry (supplier of capital)
In best position to pay for HSS Handle the most artists which would correspond to
the highest potential volume needed for HSS
19
Market SegmentationSegment 1: Record Companies
BMG11%
EMI12%
SONY14%
Universal24%
Warner14%
Other25%
Major record companies’ share of music sales (2002)
Label President
Label President
A&RA&RMarketingMarketing Administration
Administration
ArtistsArtists ProducersProducers EngineersEngineers
PublicityPublicityAdvertisingAdvertising Promotion PromotionSalesSales
Typical organization of a record label
20
Proposed Marketing Strategy
Product Based on spectral de-convolution Success measured by song reaching Billboard Top 40 Tool for deciding which songs be released as singles Direct connection between albums having a Top 40 single &
albums making a profit L, M, H income of a top 40 hit produces income 1x, 2x, 20x
of high estimate for a single not on Top 40 L, M, H income of album with a top 40 hit produces income
1x, 6.3x, 13.3x of high estimate of album w/o Top 40 hit Crucial in companies maximizing potential profits Offered as a consulting service on a per album basis Can consider licensing its software in future Need proper promotion, advertising and publicity
21
Proposed Marketing Strategy
Price Polyphonic incurs the following costs
Fixed Costs : $500,000
Development Cost : $600,000
Cost per album : $300 In 2002, average price per CD was $14.99 In 2002, net revenue ~ $2,529M Big 5: each average revenue: ~ $379M Big 5: each will release 450 singles of which 45 will make the Top
40 Assuming marketing costs of $300,000 per single HSS can predict hits with an 80% success rate An album would comprise of 10 singles Big 5: each company need to spend about $135M
22
Proposed Marketing Strategy
Price (continued) With 60% success rate- company need to promote 180
singles amounting to total savings of $81M Max price of $180K per album will allow record companies
to experience the same costs We propose an initial price of $25K per album ($2.5K per
song) Compares favorably with existing research methods
including Call-Out Research ($5-7K per song if performed by telephone, $3K if performed by internet)
Cost of focus group research- $100K per album ($10K per song)
23
Proposed Marketing Strategy
1994 1995 1996 1997 1998 1999 2000 2001 2002
CD Album Units Shipped Dollar Value
6628465
7239377
7799935
7539915
8471141
6
9391281
6
9431321
5
8821290
9
8031204
4
CD Single Units Shipped Dollar Value
953
22111
43184
67273
56213
56222
34143
1779
520
Cassette Units Shipped Dollar Value
3452976
2732304
2251905
1731523
1591420
1241062
76626
45363
31210
Music Video Units Shipped Dollar Value
11231
13220
17236
19324
26496
17311
15202
10138
452
DVD Audio Units Shipped Dollar Value
--
--
--
--
--
--
--
06
09
DVD Video Units Shipped Dollar Value
112
366
380
8191
11236
Other Units
Shipped Dollar Value
106571
96528
90510
72527
60650
39419
23261
16191
996
Total Units 1123 1113 1137 1063 1124 1161 1079 969 860
Total Value 12068
12320
12534
12237
13711
14585
14324
13741
12614
US Music Manufacturers’ Unit Shipments & Dollar Value (in millions)
24
Proposed Marketing Strategy
Projected Revenue
Year 1 Year 2 Year 3 Year 4
Income Albums Produced Per Year 2500 2500 2500 2500
Target Market (% of World Market) 14% 75% 75% 85%
Total Potential Albums 350 1875 1875 2125
Percentage of Potential Albums Analyzed 20% 20% 30% 40%
Albums Analyzed 70 375 562.5 850
Price Per Album(10 Singles) Analyzed $25000 $25000 $25000 $25000
Total Revenue $1,750,000
$9,375,000
$14,062,500
$21,250,000
Expense Variable Cost ($300 per album analyzed) $21,000 $112,500 $168,750 $255,000
Promotion 5 free albums/Record Co $1,500 $6,000 $45,000
Marketing Cost excluding 5 free albums $148,500 $194,000 $200,000 $155,000
Fixed Cost $500,000 $500,000 $500,000 $500,000
Development Cost $600,000
Volume Discount $290,500 $1,556,250 $2,334,375 $3,527,500
Total Cost $1,560,000
$2,362,750 $3,203,125 $4,437,500
Profits Gross Profits $190,000 $7,012,250
$10,859,375
$16,812,500
Discount Rate 1 1.16 1.35 1.56
Net Present Value Profit $190,000 $6,045,043 $8,043,981 $10,777,24
4
Cumulative Net Present Value Profit $190,000 $6,235,043
$14,279,025
$25,056,268
Cumulated Return on Investment (ROI) 12% 64% 254% 382%
DR=[1 +(i * rf )] * nrf=2, Interest rate 8%
25
Proposed Marketing Strategy
Placement (Distribution) - Implementation Leverage the reputations of its board members Initially target only one of the five major record companies Gain credibility- present past samples of HSS analysis reports Communication- internet or phone Internet distribution channel allows time flexibility Helps reduce labor-intensive tasks Provide analysis report & advice on the marketing campaign Info on updated clusters of recent hits can give a direction about
new trends & style of music to focus Provide insight into the order of singles for marketing promotion
to maximize sales Unique consulting services makes it harder for market imitators
& creates higher switching costs
26
Proposed Marketing Strategy
Placement (Distribution) - Market Coverage Big five players in the industry Mid-sized Record Companies
Promotion Public Relations
- Use existing network Advertising for HSS recognition
- website & product brochures Initial “freebies” for record labels
- Offer free trials to potential customers
- 4 historical albums and 1 current album
- Offer historical data of all songs
- Volume Discounts
27
Conclusion
Polyphonic has the potential to revolutionize the music industry
HSS technology 80% success Better than Vegas
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