Polyphonic HMI, Company Analysis DECISION PROBLEMS Polyphonic HMI is in the process of establishing their Hit Song Science technology in the music industry. Major issue is the choice of a target market that would make most effective use of limited $150,000 marketing budget. Following this decision, Polyphonic HMI also needs to determine its key marketing strategies such are pricing, positioning of the product for the target market in order to maximize the profits. ANALYSIS OF INDUSTRY (based on Porter’s 5 Forces)
The music industry is highly competitive. The key players in the industry are the artists who write, compose, and perform the music; record companies who publish the music; and producers who help the artist select music and develop the style. Buyer power is high in the music industry as consumption patterns and consumers’ preferences of artists and styles directly affect revenues and profits of retailers, record companies and also determine the success of artists, songs and albums.
Conversely, supplier power in the music industry is relatively low as majority of the successful albums and singles are created by the limited amount of contracted established musicians (page 6). The threat of potential entrants in this industry is low since regardless of thousands musicians trying to get into the industry, very few would pass screening process and will get even an opportunity for success. Nowadays there are issues of on and offline piracy that have direct negative effect on the growth of the music industry, especially in USA (-10. 4%).
There are currently five big companies that dominate the recorded music business; however, other smaller labels exist. (page 5). Lastly, the threat of substitutes is low; music is a source of entertainment that cannot be easily substituted. Due to emotional connections loyal music fans of certain artists and genres of music will not look for and possibly will not find a replacement. COMPANY ANALYSIS (base d on SWOT) Strengths: Polyphonic HMI’s top management team is a strong asset of the company that has essential for success experiences and knowledge regarding he music industry. The first mover position of the company increases competitive advantage. Assuming that HSS has a patent for its technology, potential competitors will have difficulty entering the market, especially after Polyphonic HMI will establish itself as a market leader. Lastly, Polyphonic HMI’s HSS has a prediction success rate of 80% making product appealing for the targeted consumers. Weaknesses: Polyphonic is a new company and therefore lacks vital market research and general market information about consumers.
In addition, they are a subsidiary of Grupo AIA who are currently unfamiliar with the industry. Limited marketing budget of only $150,000 hinders company’s ability to fully position and promote itself in the industry. Opportunities: Since USA record music sales are declining and other research alternatives are expensive (costing up to $10,000 per song), Polyphonic could potentially capture the majority of record companies’ labels to provide scientific predictions and estimates for making better business decisions. First mover position increases competitive advantage.
Threats: Expiration of the patent in the next few years will allow competitors to encroach in the market and engage in price wars. Currently, other versions of market research already exist and are well-established in the music industry such as calling-out (page10. Lastly, because of the novelty of HSS, many potential consumers who are used to “gut judgements” are sceptical of HSS ability to accurately pick out hit songs. EVALUATION OF ALTERNATIVES Alternative 1: Target Record Labels (potential market size 30,000 albums/ year.
Pros: An average of 80% of albums identified by HSS software materializes into financial success, as opposed to the industry average of only 10% where traditional ‘hit’ identification methods are used. HSS provides record label with a means to reduce the costs associated with unsuccessful singles and albums. The release of a single usually involves at least $300,000 in marketing expenditures (page8), and even higher for established artists. Essentially, music single failures can be reduced from 9 out of 10 releases to 2 out of 10 releases.
This in turn saves the labels up to $100,000 per album in research and focus group costs (page10) and provides greater ROI. This higher success rate also comes at a lower cost than traditional methods used by record labels. Focus groups are the most common method used for identifying potential ‘hits’ but results are inconsistent. Since HSS highly beneficial to Labels, it has good chance to capture decent size market share. Cons: Risky. Company might not get reasonable market share since record labels may be hesitant to adopt the new not 100% certain technology.
The credibility of the software is the main issue that could potentially restrict market penetration. Alternative 2: Target Unsigned Artists (optimistic potential market size 20,800 demos/ year). Pros: Unsigned artists are highly motivated and desperate to gain exposure. This technology provides an opportunity for individual artists to assess the ‘hit’ potential of their recordings while offering artists an indication of commercial success. Results from the HSS software allow artists to adjust their music in order to better match consumer tastes and preferences.
Cons: Targeting unsigned artists is restrictive in terms of long term company profitability. This market may have much lower levels of capital to invest compared with record labels. Although these artists may be determined to succeed they are unlikely to possess the financial backing that a signed artist would, which may reduce their ability to purchase the product. The market for HSS is estimated to be 20,800 unsigned artists; however, it is unlikely that these potential customers will repeatedly use HSS and access to commercial success is ultimately in the hands of the record label and producers.
If compositions that artists are emotionally attached to score lower than 7, they may decide against using the software again as they may perceive the results to be an unfair indication of their recordings, which lowers Polyphonic profit potential. Negative word of mouth from unsatisfied consumer reviews could damage the product’s reputation. Worth to notice that not all artists are looking for mainstream success and therefore will not be attracted to the product, as their works are an artistic expression of themself’s, so `hit `potential rated by software software may not be at all attractive.
Alternative 3: Target Producers (estimated potential market size of 10,000 albums/ year). Pros: HSS is an assisting tool to developing hit records and singles. Opportunity to receive royalties from retail sales of successfully predicted singles/albums. Cons: Producers rely on experience, skill and gut feelings when producing music, so HSS may be viewed as an immediate threat to their trade. The market size of producers is also relatively small and would require significant market penetration in order to be a success.
High turnover of producers requires continuous promotion to reach new incoming producers and limited free trails may have to be an ongoing expenditure. Ongoing promotional costs may outweigh the potential returns the producer industry offers. RECOMMENDATIONS After careful analysis, our team recommends for Polyphonic to target Record Labels that currently have the greatest market potential, with over 30,000 albums produced each year. This market is least price sensitive as Label Records have relatively more capital to invest than the other two alternatives.
Warner Music Group, for example made over $1. 7billion in 2003 (page 6). Polyphonic can charge higher prices and potentially enjoy higher profits and ROI. In addition, Record Labels are directly affected by the success of songs that are ranked in the Top 40 Chart position, with a high estimate of bringing up to $40,000,000 in revenue (page 9). We believe that Polyphonic HMI could optimistically capture 10% of the market knowing 80% of successful predictions. HSS should be presented to record labels as an aid tool in decision making process of which albums and singles should be released.
In order to capture 10 % of the record label market, Polyphonic HMI price has to be a minimum of $466. 67 to break-even (Appendix 3). Therefore, in order to gain a profit margin of 30%, we recommend the price of $606. 67 per album. This price is still considerably lower compared to the market research record labels currently conducted. RISKS AND MITIGATION Major risk Polyphonic faces is the power of traditional approach inside music industry. Top successful A are used to rely on their gut feeling and intuitive ability to acoustically recognize hit song among thousands of songs that will never make it to the Top 40.
That conservative approach has achieved results and the novelty of mixing art with mathematical approach might not be appealing. Another risk Polyphonic has to take is how the accuracy or inaccuracy of HSS ratings will affect consumer trust and therefore the desire for the future partnership. 80% rate of successful predictions still means 20% of failure rate. HSS is becoming an easy substitute of well-established costly yet trustworthy market researches such are call-out and focus groups. The risk of not matching record company’s expectations on the quality and diversity of results though remains.
It is possible to decrease these risks if R budget will be increased and aimed at improving current technology to reduce failure rates of predictions. Establishing more personal customer relationships will strengthen trust and cooperation and decrease potential customer turnover rates. The increase of $150,000 marketing budget could also play vital role in improving marketing efforts to achieve better business results. We do not recommend free trials at this point due to the same limited budget. APPENDIX
Break- Even Analysis = Fixed Cost / Contribution Margin per album Fixed Cost Fixed Operating Cost (page 2)$500,000 Variable Costs To analyze each album$300 Number of songs per album$10 Cost to analyze each song $30 1. Unsigned Artists 300 demos a week15600 400 demos a week20800 Total target market potential15600-20800 demos / year 2. Record Companies 30,000 full albums brought to the market per year Total target market potential30,000 albums a year 3. Producers 1600 producers (page 12) 10,000 artists (page 12) Pessimistic Estimate (on average)0. albums per artist a year Optimistic Estimate (on average)1 album per artist per year Total target market potential5000-10000 albums a year Break-Even Analysis – Record Label Market ShareBreak Even VolumeFixed CostContribution MarginB/E Price Profit Margin: 30% 1%300$500,000$1,666. 67$1,966. 67$2,556. 67 2%600$500,000$833. 33$1,133. 33$1,473. 33 3%900$500,000$555. 56$855. 56$1,112. 22 4%1200$500,000$416. 67$716. 67$931. 67 5%1500$500,000$333. 33$633. 33$823. 33 6%1800$500,000$277. 78$577. 78$751. 11 7%2100$500,000$238. 10$538. 10$699. 52 8%2400$500,000$208. 33$508. 33$660. 83 %2700$500,000$185. 19$485. 19$630. 74 10%3000$500,000$166. 67$466. 67$606. 67 11%3300$500,000$151. 52$451. 52$586. 97 12%3600$500,000$138. 89$438. 89$570. 56 13%3900$500,000$128. 21$428. 21$556. 67 14%4200$500,000$119. 05$419. 05$544. 76 15%4500$500,000$111. 11$411. 11$534. 44 16%4800$500,000$104. 17$404. 17$525. 42 17%5100$500,000$98. 04$398. 04$517. 45 18%5400$500,000$92. 59$392. 59$510. 37 19%5700$500,000$87. 72$387. 72$504. 04 20%6000$500,000$83. 33$383. 33$498. 33 Break-Even Analysis – Unsigned Artists Market Share 1%156$500,000$3,205. 13$3,505. 13 2%312$500,000$1,602. 56$1,902. 6 3%468$500,000$1,068. 38$1,368. 38 4%624$500,000$801. 28$1,101. 28 5%780$500,000$641. 03$941. 03 6%936$500,000$534. 19$834. 19 7%1092$500,000$457. 88$757. 88 8%1248$500,000$400. 64$700. 64 9%1404$500,000$356. 13$656. 13 10%1560$500,000$320. 51$620. 51 Break-Even Analysis – Producers Market Share 1%100$500,000$5,000$5,300 2%200$500,000$2,500$2,800 3%300$500,000$1,667$1,967 4%400$500,000$1,250$1,550 5%500$500,000$1,000$1,300 6%600$500,000$833$1,133 7%700$500,000$714$1,014 8%800$500,000$625$925 9%900$500,000$556$856 10%1000$500,000$500$800