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 SOOT) Strengths: Polyphonic Whim’s top management team Is a strong asset of the company that has essential for success experiences and knowledge regarding the music industry.
The first mover position of the company increases competitive advantage. Assuming that HAS has a patent for Its technology, potential competitors will have difficulty entering the market, especially after Polyphonic HIM will establish itself as a market leader. Lastly, Polyphonic Whim’s HAS 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 Group AI who are currently unfamiliar with the Industry. Limited marketing budget of only SSL 50,000 hinders company’s ability to fully position and promote itself in the industry. Opportunities: Since USA record music sales are declining and other research potentially capture the majority of record companies’ labels to provide scientific reductions and estimates for making better business decisions. First mover position increases competitive advantage.
Threats: Expiration of the patent in the next few [ears 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 (page. Lastly, because of the novelty of HAS, many potential consumers who are used to “gut Judgments” are skeptical of HAS 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 HAS software materializes into financial success, as opposed to the industry average of only 10% where traditional ‘hit’ Identification methods are used. HAS 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 (page), and even higher for established artists. Essentially, music single failures can be reduced from 9 out of 0 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 (page) 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 HAS 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/ Hear). 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 HAS software allow artists to adjust their music in order to better match consumer tastes and preferences.
Cons: Targeting unsigned artists is extractive 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 signed artist would, which may reduce their ability to purchase the product. The market for HAS is estimated to be 20,800 unsigned artists; however, it is unlikely that these potential customers will repeatedly use HAS 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 be attracted to the product, as their works are an artistic expression of themselves, 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: HAS 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 HAS may be eddied 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. Billion in 2003 (page 6). Polyphonic can charge higher prices and potentially enjoy higher profits and ROI.
In addition, Record Labels are directly effected 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 HIM could optimistically capture 10% of the market knowing 80% of successful predictions. HAS 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 HIM price has to be a minimum of $466. 67 to break-even (Appendix 3).
Therefore, in order to gain a profit margin of 0%, 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&R 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 HAS ratings will affect consumer trust and therefore the desire for the future partnership. 80% rate of successful predictions still means 20% of failure rate. HAS 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 f R budget will be increased and aimed at improving current technology to reduce allure rates of predictions.