Group assignment - Polyphonic HMI Case

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

ERASMUS UNIVERSITY ROTTERDAM

Erasmus School of Economics
Seminar Innovation & Marketing, 2015
Prof. Dr. S. Stremersch
Date: 26-01-2015

Xiao Li:
414257xl
Arjan den Besten:
415298ab
Thomas van Huijgevoort: 415028th

1.Introduction

Polyphonic HMI, a subdivision of Barcelona-based Grupo AIA, is charged with applying

the parent companys 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 cant 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, cant 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 CEOs of record
companies, couldnt 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-orbreak 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&Rs, 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 executives 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.