Polyphonic

Business 2010
Strategy

Marketing Plan
 Table of Contents
Table of Contents....................................................................................................... 2

Target Market.............................................................................................................3

The Five Major Record labels...................................................................................3

Size...................................................................................................................... 3

Growth................................................................................................................. 3

Profitability...........................................................................................................4

Artists...................................................................................................................... 4

Size...................................................................................................................... 4

Growth ................................................................................................................ 4

Producers................................................................................................................4

Size...................................................................................................................... 4

Profitability ..........................................................................................................5

Marketing Plan............................................................................................................5

Positioning Decision................................................................................................ 5

Product decision...................................................................................................... 6

Pricing decision.......................................................................................................6

Distribution decision................................................................................................6

Promotion................................................................................................................6

Future Markets........................................................................................................7

EXHIBITS AND TABLES................................................................................................8

Polyphonic HMI is a start-up technology company with a single potentially marketable product:
Hit Song Science (HSS). HSS is an artificial intelligence tool that analyzes the mathematical
characteristics of a song and then compares it with characteristics of past music hits, thus making
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it possible to determine a song’s hit potential. By late 2003, the company had been unsuccessful
in marketing the product; moreover, these past failures had now left Polyphonic HMI with a
“shoe string” budget of $150,000, with which to identify a suitable target market, develop a
marketing plan, and generate revenue relatively quickly.

Target Market

HSS technology is most applicable to songs targeted at the general mainstream music audience
market. The estimated 2500 albums marketed to this audience accounted for retail sales of
$75,000 (low) to $10.7 billion (high). Therefore, Polyphonic HMI must choose the market
segment that has the largest share of this mainstream market. Three potential target markets were
analyzed: record labels, producers and unsigned artists. Amongst these three potential target
markets, the five major record companies account for 84% of the retail sales of the global music
market, which is valued at $32 billion (“see Table A”). Analysis of the three segments based on
size, growth, profitability and ease of access, identified that Polyphonic should target the five
major record labels. Here, Polyphonic HMI had the greatest potential for market success and
penetration1.

The Five Major Record labels

Size
Since the five companies account for 84% of sales, we estimate that they produced 84% of the
2,500 albums released to mainstream audiences each year. Therefore, this market is undeniably
the most lucrative. However, in order to deliver the right marketing message for initial sales and
product longevity, the target audience within the record label needed to be identified.

Past pitches to record label presidents have been met with resistance. These executives strongly
believe in the “mystique of music”, and may not be readily willing to adopt this technology.
However, artist-and-repertoire (A&R) executives are “young people who really like music and
who have convinced somebody that they have ‘good ears.’” The success of an A&R’s career
depends solely on the success of the artists under their care. Polyphonic HMI should target this
group of young, ambitious managers. The real value proposition for an A&R executive is that the
HSS technology can identify, with higher certainty, songs that can become hits. Moreover, they
can use this knowledge to leverage the marketing process in releasing this song before others.
Inherently, these songs will drive their album sales and contribute to their career advancement.

Growth
The A&R’s have a considerable budget of up to 15% of sales revenue. Therefore, paying a
reasonably priced upfront-fee for the HSS technology would be a very small portion of this total

1
“Table 1” shows a summarized market size potential.
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budget (“see Table A”).This segment offers the best and quickest potential for Polyphonic, as
the fees will assist in breaking even in the short run. In the long run, Polyphonic should collect
royalty fees, as high as 0.5 - 1% of sales revenue, from the label companies. Breakeven analysis
shows that if a royalty model were in place, Polyphonic could cover fixed costs with, as few as,
2.5 hit albums (“see Table D & E”). Additionally, since label companies make huge investment
in promotion and production, at least $400,000 per album, it is in their best interest to identify
unsuccessful albums early in the process.

Profitability
Table 2 shows that A&R/record companies have the largest CLV.

Artists
Size
The market size of this segment is quite small. There are about 10,000 signed artists, who are
required to deliver several albums, say 3, over a period, such as 3 years i.e. one signed artist
produces one album per year on average.

The unsigned artists often send three to four hundred demo songs per week to label companies -
about 1,560 albums/year. However, due to financial burden of such artists it will not be feasible
to capture this market, as most of them would be reluctant to pay a fee or even royalty.

Growth
Signed artists are typically paid an up-front fee plus 5% - 15% of sales revenue, provided the
sales have exceeded the label company cost. In fact, the up-front fee is actually considered as a
loan. Unless the first song gets into the top 40 mainstream music singles list, with sales
exceeding the companies cost (“from case Table A”), signed artists have relatively low chances
of making money. In a minimalistic view, there is an opportunity to charge a small upfront fee,
but it would be hard to tie in a royalty fee. Thus, the growth potential for this segment is very
minimal.

Profitability
Table 2 shows CLV of signed and unsigned artists, assuming retention rate of 0.8, and discount
rate of 0.1. Both have the lowest CLV.

Producers
Size
The market size of this segment is the smallest. We will focus the analysis on the top 30
producers and the few hundred producers who have occasional hits. Outside producers are paid a
production fee, which is at least $100,000, plus 1% - 5% of the sales. Outside producers are
estimated to have produced 16% of the 2500 albums (“from case Exhibit 6”). The remainder is

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by the five major record companies who typically hire in-house producers. Since part of
producers’ compensation is tied to sales, it is possible to charge outside producers a sale-based
royalty fee. Table B shows the market size based on $1,000 fixed fee and 0.1% royalty fee.

Growth
This segment does not have much growth since the market size is limited by the small shares that
outside producers have.

Profitability
Table G shows CLV of outside producer.

TABLE 1: COMPARISON OF SIZE, GROWTH, AND PROFITABLE

Artists Producer A&R/label

s companies
Size Small smallest largest

Growth smalle small largest

st
Profitabilit Lowest Low highest
y

Marketing Plan

In order to target A&R’s, HSS should position the technology as one that will provide a
competitive advantage over other executives, and in-turn increase their chances of career
longevity and advancement.

Positioning Decision
In particular, Polyphonic should target A&R’s within the five major label companies. The most
successful campaign will likely involve an elevator-pitch-like presentation that emphasizes
HSS’s technological advantage of increasing the odds of picking a hit, and thereby motivating
higher revenues and profitability for the represented artist. Additionally, Polyphonic should
include a satisfaction guarantee clause, wherein A&R’s are refunded their monies, reducing their
down-stream risks. It would not be wise for Polyphonic to offer free-trials due to the limited
advertising budget. Our positioning/advertisement is below, which emphasis the key main
aspects discussed above.

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 HITS are Our Business
HSS Technology: The cutting edge
advantage. Take the power to pick the
hit and beat the competition

tDon’
leave it to chance alone. Let us help you win it!

HSS could increase your odds of success Eightin just 2 hours

- Fold
Satisfaction guaranteed!

Product decision
Polyphonic will run the software on an entire finished album, and use HSS score to suggest
which single has the greatest potential to become a hit.

Pricing decision
A&R executives are charged a small up-front fee in the range of $1,000 to $3,000. This fee
should be smaller compared to internet or call-out research charges, as customers are most likely
to use it as a supplement rather than a replacement of traditional research. A post-release analysis
will likely confirm the utility of HSS technology in picking hit songs. After Polyphonic
establishes the creditability and a brand identity, it should charge record label companies a
minimum royalty fee of 0.1-1% of retail sales. This will, not only, allow Polyphonic to
breakeven quickly, but also, catapult them as market leaders.

Distribution decision
Since there are only about 250 A&R executives within five major companies, Polyphonic can
use proactive selling approaches such as direct marketing. This approach will assist them with
generating much needed cash relatively quickly.

Promotion
CLV for A&R plus label companies are quite high. A satisfaction guarantee can act, in many
ways, as a free-trial. Furthermore, it offers the customer a lowered risk entry into testing the
technology.

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Future Markets

The goal of polyphonic in 2003 is to generate quick revenues by targeting a specific market
segment. As the HSS brand grows, there are a numerous future growth opportunities, including
pursuing producers or unsigned artists. Eventually, the HSS score in the music industry should
be analogous to a FICO score in the consumer lending industry. Additionally, HSS can leverage
their technology as a suggestion engine for sites like ITunes, similar to Amazon’s current offers
of reading suggestions. If marketed successfully, Polyphonic has the potential to become a
profitable business and develop as a brand identity within the music industry market space.

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EXHIBITS AND TABLES

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 TABLE A. MUSIC MARKET SEGMENTATION ANALYSIS – RETAIL SALES
Worldwide Music Market
North America CD Album Market $ 32 Billion
% Market share of 5 Major Record Labels 84%
Estimated Revenues of 2500 Albums released
targeted at a mainstream audience
High $ 10.7 Billion
Medium $ 700 Million
Low $ 750,000
Estimated Revenues of 2100 Albums targeted at a
mainstream audience (84% Market Share) released
by 5 Major Labels $ 9 Billion
High $ 588 Million
Medium $ 630,000
Low
% of Revenues 5 Major Labels spent on Marketing 30%
and Promotion
% of Revenues 5 Major Labels spent on A&R expenses 15%
Market research expenses per song $3000-$10,000
Estimated Revenues of 400 Albums targeted at a
mainstream audience (16% Market Share) released
by independent producers $ 1.7 Billion
High $ 112 Million
Medium $ 120,000
Low

TABLE B. MARKET SIZE ANALYSIS: TOTAL ALBUMS AND SALES REVENUE

albums/year Total U.S. market size $12 Billion

signed artists 10,000 outside producer shares 16%

unsigned artists 1,560 royalty fee 0.10%

producers 400 fixed fee $1,000

label companies 2100

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TABLE C. ESTIMATED REVENUES RETAIL SALES FOR SINGLES AND ALBUMS PER RELEASED TARGETED AT MAINSTREAM
BY
AUDIENCE: TOTAL MARKET SEGMENT
T D. M P
TABLE E. HSS BREAKEVEN
ABLE ARKET Estimated
OTENTIAL FOR HSS
ANALYSIS:RevenuesTECHNOLOGY
ROYALTY MODEL per: (R MODELOF
Estimated
PERCENTAGE
BYOYALTY (BYRPTotal - ARLBUM
Market
SALES
ERCENTAGE
ETAIL ) OF SALESA )T–OP 40
Segment
ETAIL WITH
A LBUM WITH A T
release (per $1,000) SINGLE (per $1,000) OP 40 S INGLE

Expecte # Estimate
o f Royalty
Low HSS Revenue
ModelMediu– 0.5%per Release: Low
High Estimate
Royalty HSSMedium
Model Revenue
– 1% High per Release:
d Expectedr e l Royalty
e saLow
se Model –
m
Medium0.5% High Royalty
Low Model – 1%
Medium High
Expecte
Revenues Low
Revenue Medium High Low Medium High
s d
Unit $ $ $ $ $ $
Revenue2,7001 , 5 0$ 0 . 0 0 1 0$ , 0 0 0 . 0 0 $ 2 0 0 , 0 0 0 . $0 0 3 ,0 0 0 .0 0 $
Single
contributio $
2 0 ,0 0 0 .0 0 4 0 0 ,0 0 0 .0 0
s
Not
n Top - 1 0 .0 0 1 0 0 .0 0 - 2 7 ,0 0 0 .0 0 2 7 0 ,0 0 0 .0 0
40Album
Breakeven $ 416 $ 51.5 $ 2.5 $ 185 $ 25 $ 1.25
Top
Single 40
(TBEUV) #300 1 ,5 0 0 .0 $ 0 1 0 ,$0 0 0 . 0 0 2$ 0 0 , 0 0 0 . 0 $0 3,000.00 $ 2 0 ,0 0 0 .0 0 $ 4 0 0 ,0 0 0 .0 0
Top
of 40
Albums 1 0 0 .0 0 2 0 0 .0 0 2 ,0 0 0 .0 0 3 0 ,0 0 0 .0 0 6 0 ,0 0 0 .0 0 6 0 0 ,0 0 0 .0 0
Album 2,250 $ $ $ $ $ $
Not Top - 9 0 .0 0 3 0 0 .0 0 - 2 0 2 ,5 0 0 .0 0 6 7 5 ,0 0 0 .0 0
40
Album 250 $ $ $ $ $ $
Top 40 3 0 0 .0 0 2 ,0 0 0 .0 0 4 0 ,0 0 0 .0 0 7 5 ,0 0 0 .0 0 5 0 0 ,0 0 0 .0 0 1 0 ,0 0 0 ,0 0 0 .0 0
Total $ $ $
Revenue 1 0 5 ,0 0 0 .0 0 7 8 9 ,5 0 0 .0 0 1 1 ,5 4 5 ,0 0 0 .0 0
s

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 TABLE F. MARKET PENETRATION: 10% (REVENUES FROM 250 ALBUMS ANALYZED)
Up front sales (250 x $3000) $
Total Market Size by Sales Revenue: 100% Market Penetration (Fixed fee -$1000 per album, 0.1% royalty)
750,000
Royalties from Albums that artists
reachproducers
top 40 A&R/record companies 20% of
Assumption:
fixed fee $11,560,000 $400,000 $2,100,000
– 0.5% $ albums using HSS reach
royalty fee 0 $1,920,000 $10,080,000
totalLow estimate $11,560,000 $2,320,000 75,000 top 40
$12,180,000
Medium estimate $
High estimate 500,000
$
10,000,00
0
Total revenue (Up-front sales + 0.5%
TABLE G. CLV ANALYSIS
Royalties)
retention rate 0.80
$ total sales 1.2E+10
Low estimate
discount rate 0.10 825,000mkt share 0.84
Medium
retention estimaterate)
rate/(1+discount 0.73 $
fixedHigh
fee estimate 1000.00 1,250,000
unit cost 300.00 $
royalty fee 0.00 10,750,00
0
CLV for Signed artist
albums/year/signed artist 1
contribution/customer year 1 year 2 year 3 year 4 year 5 CLV
700 509 370 269 196 142 1487

CLV for unsigned artist

#unsigned artists 20000
demo songs/year 15600
equivalent albums/year/unsigned artist 0
contribution/customer year 1 year 2 year 3 year 4 year 5 CLV
1000 40 29 21 15 11 116

CLV for producer

# producers 250
albums/year 400
albums/producer/year 2
total revenue 2270000
revenue/producer 9080
contribution/customer year 1 year 2 year 3 year 4 year 5 CLV
8600 6255 4549 3308 2406 1750 18267

CLV for A&R

#A&R 250
albums/year 2100
albums/A&R/year 8
contribution/customer year 1 year 2 year 3 year 4 year 5 CLV
5880 4276 3110 2262 1645 1196 12490

CLV for label companies

#companies 5
albums/year 2100 11 | P a g e
albums/company/year 420
contribution/customer year 1 year 2 year 3 year 4 year 5 CLV
1890000 1374545 999669 727032 528751 384546 4014544

CLV for A/R + label companies 4027034