POLYPHONIC HMI

Mixing Music and Math

 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

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HSS Analysis Report

Song: Don’t Know Why

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Product Introduction
Polyphonic HMI
Human Media Interface

HSS
Hit Song Science

Analyze mathematical Compare with past

characteristics music hits

Determine a songs
hit potential

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 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

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 HSS: Hit Song Science
HIT!!

song being
MISS!!
tested

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 HSS: Hit Song Science

Artist Song Title HSS Weeks in Highest

Rating the Chart
>7.00 Singles Top Position
40
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

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 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

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 SWOT Analysis
I Strengths Weaknesses
N
T  Product Uniqueness  Industry Resistance
E
 Strong Origin  Limited financial budget
R
N  Knowledgeable Board  Possible product deficiency
A
Members
L

E Opportunities Threats
X
T
 32 billion dollar industry  Falling music sales
E  Increase profits  Resistance to change
R
 “Instinct & guts” technique
N
A
L

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 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)

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 Environment

Political
&
Economic
Legal

Polyphonic HMI

Social
& Technological
Cultural

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 Environment
 Political & Legal

 Bribery outlawed in the 1960s

 Dependency on independent promoters
 Widespread accessibility of music
 Internet power

 Economic  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

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 Environment
 Social & Cultural

 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"

 Technological
 Majority of recorded music distributed on CDs
 Use of MP3s rising
 Number of digital downloads increased
 Online and offline piracy increasing

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 Marketing
Marketing Plan
Plan

Market Segmentation
Segment 1: Record Companies
Opportunities & Threats Value Drivers
 Biggest market segment  Shrinking music market
 Huge potential  Selective consumer spending behavior
 5 big record companies  Expensive marketing cost > $300K for
 10K companies in US unknown artist

 Small # of potential buyers  < 15% of music titles profitable

 Easy production & marketing  Need high predictability of success

 High fixed costs  Can save marketing costs

 May antagonize producers  Reduce fixed costs

 Bands may renegotiate  Less sensitive to price

contracts  Bigger budget
 HSS success rate- 80%
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Market Segmentation
Segment 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
Marketing
Marketing Plan
Plan
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
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Market Segmentation
Segment 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
Marketing
Marketing Plan
Plan
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
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Proposed Marketing Strategy

Place

Target
Promotion Market Product

Price

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 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

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 Market Segmentation
Segment 1: Record Companies

BMG Label President

Other 11%
25%
EMI Marketing A&R Administration
A&R Administration
12%

SONY
Warner Artists Producers Engineers
14%
14%

Universal
24% Sales Promotion
Promotion Advertising
Advertising Publicity

Major record companies’ share

Typical organization of a record label
of music sales (2002)

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 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

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 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

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 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)

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 Proposed Marketing Strategy

1994 1995 1996 1997 1998 1999 2000 2001 2002

CD Album 847 939 943 882 803
662 723 779 753
Units Shipped 1141 1281 1321 1290 1204
8465 9377 9935 9915 6 6 5 9 4
Dollar Value
CD Single
9 22 43 67 56 56 34 17 5
Units Shipped
53 111 184 273 213 222 143 79 20
Dollar Value
Cassette
345 273 225 173 159 124 76 45 31
Units Shipped
2976 2304 1905 1523 1420 1062 626 363 210
Dollar Value
Music Video
11 13 17 19 26 17 15 10 4
Units Shipped
231 220 236 324 496 311 202 138 52
Dollar Value
DVD Audio
- - - - - - - 0 0
Units Shipped
- - - - - - - 6 9
Dollar Value
DVD Video
1 3 3 8 11
Units Shipped
12 66 80 191 236
Dollar Value
Other
106 96 90 72 60 39 23 16 9
Units Shipped
571 528 510 527 650 419 261 191 96
Dollar Value
Total Units 1123 1113 1137 1063 1124 1161 1079 969 860
Total Value 1206 1232 1253 1223 1371 1458 1432 1374 1261
8 0 4 7 1 5 4 1 4
US Music Manufacturers’ Unit Shipments & Dollar Value (in millions)
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 Proposed Marketing Strategy

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 $1,750,00 $9,375,00 $14,062,50 $21,250,00
0 0 0 0
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 $1,560,00 $2,362,75 $3,203,125 $4,437,500
0 0
Profits Gross Profits $190,000 $7,012,25 $10,859,37 $16,812,50
0 5 0
Discount Rate 1 1.16 1.35 1.56
Net Present Value Profit $190,000 $6,045,04 $8,043,981 $10,777,24
3 4
Cumulative Net Present Value Profit $190,000 $6,235,04 $14,279,02 $25,056,26
3 5 * rf )] * n 8
Projected Revenue DR=[1 +(i
rf=2, Interest rate 8%
Cumulated Return on Investment (ROI) 12% 64% 254% 382%

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 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

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 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

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 Conclusion

 Polyphonic has the potential to revolutionize the music industry

 HSS technology
 80% success  Better than Vegas

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