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Group assignment - Polyphonic HMI Case

“The challenge of marketing a highly innovative product in the music industry”

Group assignment - Polyphonic HMI Case “The challenge of marketing a highly innovative product in the

ERASMUS UNIVERSITY ROTTERDAM Erasmus School of Economics

Seminar Innovation & Marketing, 2015 Prof. Dr. S. Stremersch

Date: 26-01-2015

Xiao Li:

Arjan den Besten:

414257xl

415298ab

Thomas van Huijgevoort: 415028th

1.Introduction

Polyphonic HMI, a subdivision of Barcelona-based Grupo AIA, is charged with applying the parent company’s artificial intelligence and natural science ideas and products to the music industry. Polyphonic is releasing Hit Song Science (will be referred to as HSS), a software product used to predict the potential success of songs by mapping their mathematical properties and matching those to previous hits. This case study solution will address the challenges faced by the company and will provide recommendations for

solving

these

challenges.

The aim of this group assignment is to find a clear answer on the following question:

What is the target market that Polyphonic HMI should be pursuing with HSS, and which marketing strategy should the company use?

To find a solution to this issue, first the challenges that Polyphonic HMI is facing will be looked at and then a number of recommendations will be given considering the future operations for Polyphonic HMI.

2. Challenges

There are two challenges that Polyphonic HMI currently faces. The initial sales pitches of Polyphonic HMI met with resistance. Many people simply can’t imagine that science might play a role by investigating whether a song becomes a hit or not. The biggest challenge for Polyphonic HMI is that the company, up until this point, can’t convince the decision-making unit within target customer firms that science is a great option to forecast whether a song becomes a hit or not.

Secondly, Polyphonic HMI was targeting their product at the record company executives and they were not very enthusiastic about the product. This DMU (Decision Making Unit) was not convinced of the involvement of science to find out if a song becomes a hit. Polyphonic HMI has to target a different DMU where they can more easily sell their product to. A&R (artist-and-repertoire) people who work for the Record Labels might be a more suitable group to target as DMU. This is elaborated in our recommendations.

3.Recommendations

3.1 Target market

Competitor Analysis:

Looking at the product Polyphonic HMI has to offer, the company is in fact a pioneer. As McCready is saying in the case on page 1, Polyphonic HMI created a new piece of technology. It is a new product in the music industry and it will take some time before it will be adapted in the market. Polyphonic HMI has a first-mover advantage, which provides the company with significant opportunities for quick expansion.

Customer Analysis:

Market segment for HSS

The HSS technology works best for the mainstream music audience, as in the past, many comparable songs have been indexed by the technology and therefore it serves as the best predictor for future success with these types of songs. Polyphonic HMI must make

sure that it chooses the specific segment, that has the highest market share in the mainstream music market. In exhibit 6 of the case study, it can be seen that in the U.S., the five major record companies have 84% market share in the market of music sales (2002). On a worldwide basis, this figure is 75%. From this, it can be concluded that if Polyphonic targets the five largest record companies, it will be able to capture the largest part of the market. Acquiring these five companies as key customers seems like a straightforward first step for Polyphonic HMI.

In previous attempts to market the HSS technology, Polyphonic has ran into the challenge that the decision making unit (DMU), in this case the CEO’s of record companies, couldn’t be convinced of the potential need and benefit for the HSS proposition. This problem has already been mentioned in the ‘challenges section’. A suggested solution is to target a different DMU within the company. In this case it would be best to contact the A&R executives within the five major record companies. The reason for this is that A&R executives are the people who are responsible for assigning artists’ work to the record company and who are continuously looking for new talents. Specifically, these people get judged upon the quality of the work of new artists. In the end HSS technology could support the A&R executives in accomplishing their goals.

Market segment size

In the case, it is said that 15% of all the revenues of the five major record companies are spent on A&R activities, which is exactly the segment that Polyphonic HMI is targeting for HSS. This 15% of the total estimated revenues coming from the 2500 albums that are annually estimated to be sold by the five major record companies, is $1.35 billion in

total. As this is the total A&R spending of this segment and taking into account that HSS is a complementary market research activity (as mentioned in the case), the total market potential lies slightly above or below $1 billion, for the HSS technology in this market segment.

Market segment growth

The growth that Polyphonic HMI can achieve in this segment is significant. The company can charge a fixed upfront fee (around $1500 - $3000 per song) for analyzing the song and a royalty fee of 1% to 2% of the total revenues earned by the song. Of the 15% of expenditures on A&R activities, the fixed upfront fee is a relatively small proportion and can easily be budgeted by the A&R executives (as can be calculated by multiplying the market value from exhibit 4 by 84% out of exhibit 6, and then times 15%). Next to this, the segment consists of only 5 major record companies, which suggests that it is overseeable how much effort has to be put in, in quickly generating new business out of this segment. For these reasons and looking at the competitive position of Polyphonic HMI, this market segment displays significant growth opportunities.

3.2 Marketing strategy

Positioning: emphasis on the value proposition

To launch the HSS technology, it is very important to stress the key features to the target

group, namely the A&R executives. The A&R executives play the role of an in-house producer, who are responsible for a lot of things enclose the “scoring-hit” process, and act as a pivot between the label, the artist and the company itself. To emphasize the

benefits for A&R thus becomes the first task to commence with. The benefits of HSS

consists the following aspects:

  • 1. For artists: Given the fact that the first single can generate a make-or-

break situation particularly for new artists, the decision of choosing the first

single to release becomes crucial. HSS can help examine the whole album and

offer advice on the potential of certain singles, thus increase the chance of “make”

and reduce the risk of “break”.

  • 2. For companies: HSS benefit companies in a similar way that it benefits

artists. By helping to decide which song of the album to release first, and to get on

the radio, which is a primary way to advertise. MRS assists the company to

achieve higher expectations.

  • 3. For producers: A producer is expected to be able to see the characteristic

of an artist and match him/her with a suitable song that has the potential to be a

hit. The fact is only few hundreds out of thousands can have a hit once in a while.

HSS could add value here, by simplifying the process of selection of songs and

enhancing the accuracy in prediction of potential hits. So, MRS offers a reliable

reference for the producers other than their “gut instinct”.

Promotion strategy:

To promote HSS, the usage of real life examples is highly recommended. Brochures can

be used to raise awareness among labels and A&R’s, in which the previous analysis of

Maroon 5 is presented and compared with the real outcome.

Another suggestion is offering free trials to perceived customers, because free trials

provide zero risk towards testing the product, and hence can encourage potential

customers to get to know the product better. When customers are satisfied with the

outcome, words will be spreaded. Lastly, promote the product via word-of-mouth. For

example, as Bunt from Hollywood Records described, his “experience with Hit Song

Science has been fantastic”.

Price strategy:

A two-stage charging process is suggested. First stage refers to the fixed charge of using

the HSS, recommended charging range is from $1500 to $3000 per single, given the

average of the callout studies ($6000) and the average cost of internet polling studies

($3000). The suggested price is set lower than the average cost of internet and callout

studies, because the HSS is considered as an supplement reference to the labels, rather

than a replacement of an A&R executive’s tools to evaluate songs’ potential. Moreover,

when customers request a whole album test, for instance, the bundle price for an entire

album (e.g. ten singles) should be lower than the accumulated 10 song charge. For the

second stage, if HSS has successfully predicted the hit, a negotiable minimum royalty of

1% of the suggested retail price should be charged, given that an outside producer

normally gets a royalty from 1% to 5%.

Distribution strategy:

Direct marketing would be the optimal approach in selling HSS, based on the fact that

there are only five major record companies. With direct marketing Polyphonic can reach

its perceived customers most efficiently, therefore encourage customers’ interest and

motivation in free trials, and eventually lead to possible long-term cooperation.