Song Maestro Jace Silva, a budding entrepreneur from Mississauga, Ontario, was preparing to appear on the American reality television show Shark Tank. Like a similar Canadian television show – Dragon’s Den – entrepreneurs pitched their business ideas to successful businesspeople and venture capitalists hoping to win an investment. Jace didn’t like to boast but his tone was confident and assured. “The music industry has always used two criteria to determine if a song will be a success: 1) it sounds like a hit; and 2) the song and artist can successfully be brought to the market. While the industry pays professionals to determine if a song sounds like a hit, they only have a 10% success rate – only one in ten songs that get promoted ever hits the charts. The new technology that I invented adds a third criterion – that it has optimal mathematical patterns. With it, I can significantly increase success rates. Song Maestro generated unusually high scores for Adele, a British singer who most industry insiders expected to have limited commercial impact but whose album later rose to the top of the charts. It also correctly predicted each of the hits of the band Maroon 5.”
To date, Silva had invested nearly US$400,000 of his own funds developing Song Maestro (much of it to legally acquire a database of songs). He felt he needed US$100,000 to bring the service to market though he still was not certain of the ideal target customer for the service. He hoped to find an investor willing to give him the money for 20% of his company. Even if his appearance failed to gain an investor, he hoped the exposure would either generate sales leads or other investors. He was not worried about attracting copycats. Though he could not patent Song Maestro, he was certain no one could reproduce his technology.
The Song Maestro Technology To create Song Maestro, Silva – with Ph.D.’s in both mathematics and engineering – analyzed thousands of songs released by music labels since the 1950’s. His database was updated weekly with new releases. He devised a way to “listen” to a piece of music and isolate particular patterns. The process, known as “spectral deconvolution,” considered over 25 characteristics including melody, harmony, tempo, pitch, octave, beat, rhythm, duration, fullness of sound, noise, sonic brilliance, and chord progression. Based on its mathematical characteristics, each song was then mapped onto a multidimensional grid called the “music universe.” Songs with mathematical similarities were positioned very close to one another in this universe. This organization could create groupings which appeared counter-intuitive. As Silva explained, “a Beethoven composition could fall very close to a song by rock band U2 or pop singer Mariah Carey.”
Using this feature of Song Maestro alone, it would be possible to develop a music recommendation system. When a shopper entered a music store (or its online equivalent), s/he could share the names of some favourite songs. Song Maestro could see where these songs fell
This case was written by Marvin Ryder. Case material is prepared as a basis for classroom discussion only. Copyright 2012 by Marvin Ryder, DeGroote School of Business, McMaster University, Hamilton, Ontario. This case is not to be reproduced in whole or in part by any means without the express written consent of the author.
in the “music universe” and then recommend other music with similar mathematical patterns. “I believe that people don’t just like a certain genre of music but that they like specific mathematical patterns that transverse music genres. Genres are just old-fashioned, marketing terms,” stated Silva. Song Maestro could be licensed to physical retailers (like Best Buy or Virgin Megastores) or e-tailers (like iTunes) for up to US$250,000 a year. Silva felt that the cost would be more than offset by increased sales.
Because so many physical record stores had closed in the 2000’s, Silva took his analysis to a new level. He looked at songs that had made it to the Billboard Hot 100 list (compiled by Nielsen Broadcast Data Systems and Nielsen Soundscan and published in the American music trade publication Billboard Magazine). He found that hit songs had common mathematical properties – there were only about 60 hit “clusters” in the music universe. The extent to which new releases “fit” those clusters should indicate their hit potential. Using Song Maestro, the closeness to a cluster was indicated with a “hit” score on a scale of 1 to 100 (he borrowed this approach from the old American Bandstand television show) with higher scores indicating a greater hit potential. The clustering technique also allowed Song Maestro to provide insights into the coherence of an album, that is, the extent to which songs fell into the same or nearby clusters. It could produce a list of the album’s songs with similar mathematical properties.
According to Silva, “I can take an unreleased album and examine how the songs on that album map onto the clusters. If a song falls within one of these clusters, I can’t necessarily say that it will be a hit. I just know that it has the potential. The song must still sound like a hit, be promoted like a hit, and the artist must be marketed correctly. But if a song falls outside of the clusters, I know it will probably not become a hit. Aggregating the values from all the songs, I can also make predictions about the popularity of the entire album.”
By giving higher weights to songs with higher sales levels, Silva was able to determine the popularity of various clusters. He could also segment the database by year so he could adjust clusters for changing music tastes. Generating a report on an album of ten to twelve songs was relatively cheap and quick – it cost him US$300 for the two hours of analysis.
The Music Industry Worldwide revenues for CD’s, vinyl, cassettes and digital downloads fell from US$36.9 billion in 2000 to US$15.9 billion in 2010. Geographically, the largest market was the United States. (See Figure 1) About 30% of all recorded music was produced there and the retail market was roughly 40% of worldwide sales. European countries accounted for 34% of worldwide sales with the United Kingdom, Germany, France, Italy and Spain being the largest component markets. While music was as popular as ever, industry insiders attributed the decline in revenues to online and offline piracy.
The music recording process typically started with the artists who wrote song lyrics, composed music, and performed it. Recognized “talent” and some new artists had contracts with a “label” within a record company that stipulated the terms under which they were to deliver one or more albums over a certain period and work exclusively for that label. They were supported by legal advisors, managers, and agents who helped negotiate contracts, book concerts, and
schedule recording sessions. Experts estimated that there were 10,000 artists with a record contract in the U.S. and Europe but only several hundred with some name recognition and commercial success. Hundreds of thousands of individuals or groups were hoping to secure such a contract. “Every high school has a band who thinks it will be the next big thing,” said Silva. Unsigned artists often used “demo” (demonstration) recordings to attract a music publisher’s interest. It was estimated that record companies received 500 demos each week but less than 1% led to record contracts.
There were five big record companies, “the majors,” that controlled 75% of the global recorded music business: BMG Entertainment, EMI, Sony Music, Universal Music Group, and Warner Music Group. (See Figure 2) Each of those companies had various labels and music publishing companies under their umbrellas. For example, Universal Music Group incorporated at least a dozen labels aimed at the U.S. market including Motown, Interscope, Geffen, MCA, Universal Classics, Universal Records, Universal South, and Universal/Island. It had three dozen labels aimed at international markets. Some labels covered all music types while others specialized in music genres. In the U.S. alone, there were a thousand small and mid-sized recording companies. When labels signed an artist, they typically had an in-house A&R (artist-and-repertoire) producer guide the project. These people were typically young, enjoyed music, and were believed to have “good ears” (i.e., that they could pick hits). A&R producers looked for talent, found songs that they could record, selected the best producer for each project, participated in the recording process, and checked the master recordings. Each A&R producer mentored 20 artists through their early career development and had a vested stake in their success. Most A&R producers only lasted three to four years because of lack of success. Those with greater success had a longer career span and became well known in the music industry. Established artists generated 90% of a record company’s sales but without successful new talent revenues would decline over time.
Artists could also work with independent producers. Like A&R producers, they would help the artist select music and develop a musical style, oversee recording schedules, recruit sound engineers, and watch over recording budgets. Perhaps an independent producer said it best, “A producer can be responsible for a lot of things – writing the song, recording the song, mixing and editing it, making sure it has the right vibe. The producer is the pivot between the label, the publisher, the manager, and the artist. A good producer can see what an artist is supposed to sound like and come up with the right sound, or take an artist who has a vision and help him or her realize it. I once saw a performance by a young woman and had a strong feeling that she could be a star. I found a sound that worked for her and helped her score several huge hits.” There were 20 to 30 producers who were responsible for the majority of Top 40 success, a larger group of a few hundred producers who had a hit once in a while, and thousands of people trying to establish themselves as producers.
The Role of Marketing The recording process ended with the delivery of a completed master copy of the album. At this point, the record company planned a promotional campaign for the album (or individual singles) and established a timeline for the physical or virtual production and distribution of the records. Generally, the record label president and marketing director made final decisions about promotional strategies but the A&R person often acted as an influencer/advocate on behalf of the artist. One of the most important decisions for a label was which single of an album (usually containing ten to twelve songs) to release first. Radio airplay was the primary advertising vehicle for popular albums. Music television was also an important advertising channel. A strong first single – particularly for new artists – was often a make-it-or-break-it decision. If the first single underperformed, the album could be left to “die” – the company would not release any more singles from the album and gave up on the advertising campaign. It could be the end of the artist’s career – a no-hit wonder!
Promoting music was expensive – the release of a single from an unknown artist involved at least US$300,000 in promotional expenditures. Campaigns involved anything from the production of music videos to concert tours, cooperative advertising with retailers, in-store merchandising materials, radio and television commercials, websites, social media, and press kits. To promote the song and get it played on the radio, free records and digital recordings were sent to hundreds of radio stations. Popular music stations only added four to six new songs per week to their play lists so competition for airplay was intense. For established stars, the promotion budget could swell to US$1 million. Labels did not expect to make that money back on single sales. The album delivered the largest share of revenues. Typically, the album and first single were released on the same date.
Recorded music was distributed either in a physical form (compact disk) or digital form (say through iTunes). Each year approximately 30,000 new albums were brought to the market. Not all of those albums were aimed at a broad, mainstream audience – about 2,500 albums released each year were accompanied by one or more singles. The physical distribution arms of the five majors accounted for the majority of shipments of discs.
Revenues and Costs The suggested retail price to consumers for a physical album was just under $17 in the U.S.; a physical music retailer paid about $10.50 for a CD. Physical CD singles were priced around $5.00. When distributed online, a single sold for between $1.00 and $2.00. Record labels sought a profit margin of 30% of the price to retailers after paying royalties to artists, fees to the publisher (about 5% of the price to retailers), manufacturing and distribution costs (about 10% of the price to retailers), A&R expenses (about 15% of the price to retailers), administrative expenses (about 10% of the price to retailers), and marketing and promotion costs.
Music generated three different royalty streams: 1) from the sale of music recordings; 2) from performance of the music (by radio stations, orchestras, nightclub singers, etc.); and 3) from accompanying visual images (say in a movie). A record company typically paid an artist an up-front fee and, once sales had passed a level that allowed the company to recover its costs, a royalty – between 5% and 15% of a record’s retail price depending on the artist’s track record and stature. Industry contracts generally dictated that most of the costs of making a record were to be repaid out of the artist’s up-front fee and royalties. Managers and talent agents were paid 25% to 40% of a performer’s income. Outside producers received a production fee and often a royalty of 1% to 5% of retail selling price. Production fees varied dramatically – from US$100,000 for a first record for a new artist to US$1,000,000 for an established artist.
In a typical year, in the U.S., the top 25 albums sold 3,000,000 units on average. The next 40 albums sold an average of 1,000,000 units. Industry experts estimated that less than 15% of music titles released were profitable. In the U.S., 3,000 singles were released annually and only 10% made it to the Billboard Singles Top 40 list. 2,500 albums were released annually and only 250 had a single that made it onto the Top 40 list (of course, a few had more than one single make it to the list). While 10% success was an industry average, the best A&R producers could sometimes average 13% to 16% success. Figure 3 shows estimated U.S. revenues for singles and albums under different scenarios.
Figure 3Estimated Revenues for Singles/Albums With & Without a Top 40 List Position
Expected Revenues for …
Single not reaching the Top 40 list
Single reaching Top 40 list
Album with single not reaching the Top 40 list
Album with single reading the Top 40 list
Most record companies engaged in research activities to help them forecast sales levels. “Everyone has their own technique,” remarked Silva. “One top record-label executive likes to round up kids on the streets of New York and let them listen to new artists and new songs. Another executive prides himself on his ‘ears’ – unless it sounds like a hit to him, it is not, and he does not want to know what anybody else thinks. While a few companies rely completely on ‘gut instinct,’ most do some testing. Focus groups can cost record companies US$10,000 per song. A more popular technique is ‘call-out’ research. Enlisting the help of a market research company, potential respondents are contacted by phone at home. After screening for demographics, music listening behaviour, or other characteristics, respondents participate in a music ‘test.’ They are played 15 to 30 second fragments (sometimes called hooks) of songs and are then asked to rate them either by pushing a button on their phone or verbally giving a score to a staff member. Depending on the number of people surveyed and the method used, these studies cost between US$5,000 and US$7,000 per song. The Internet has reduced the cost of this research to US$3,000 per song.”
The vast majority of music released never became a hit. As one executive noted, “Releases in the music business traditionally are a big gamble. We can spend millions of dollars to put a product on the market and not be sure whether there will be any demand for it or whether it will get any airplay. Las Vegas gives you better odds than the music industry. We might as well just put a few million dollars on red and spin the wheel.” For each label, a few successes covered the losses made on many failed titles.
Silva argued, based on the results of initial beta tests, that he could give the industry much better success rates. “Song Maestro had an 80% success rate – it correctly predicted whether a single would reach the Singles Top 40 List eight out of ten times,” Silva boasted. “If a song scores a rating of 70 out of 100, I believe it has the potential to become a hit.”
Despite an extensive search, Silva was not aware of any comparable product or service on the market.
The Target Market Question Silva felt that there were four target markets who could use this technology:
Record label – helps the company decide whether to launch an album, which singles to release first, and which new artists to sign to a record deal;
Producers – can test songs or albums at some stage of the production process allowing for tweaks, additions or deletions before launch;
Unsigned artists – can test the hit potential of their songs, improve the quality of their demos, and improve their chances of being signed to a contract; and
Music retailers and e-tailers – allows customers to find new music that they will instantly like leading them to be more satisfied and, possibly, to buying more music.
Silva had done limited marketing research. “When we tell music executives about the concept, they typically look at us with glazed eyes, check their watch, and then think of an excuse why they need to leave as soon as possible. Many people simply cannot imagine that science could play a role in picking hit songs. Song Maestro is to the music industry what the x-ray machine was to medicine. The first time someone told a doctor that he could look inside a patient’s body without cutting it open, it probably sounded like science fiction. But in the end, the x-ray machine is a tool that helps the doctor see something that he could not see before, and he can use that information to make better decisions. That is exactly what Song Maestro does and that is what matters. I am just a millimeter away from this thing taking off.”
The manager of one artist disagreed, “What creates a hit is that people have an emotional reaction to a song, particularly the lyrics. I can’t believe that a machine could gauge that.” A musician noted, “I doubt pop music could get any worse. This is a meaningless tool.” A third expert argued, “There are always musicians who will do something different. They could be missed if the industry retires A&R people and relies too much on a data-crunching machine.”
However, not all executives were negative. One beta tester noted, “This business has always been run by instinct and gut, and even my own colleagues might have a hard time believing this, but my tests with Song Maestro have been fantastic. It was extremely accurate picking the tracks that we have taken to commercial radio.” Another beta tester noted, “When this service came along, I was skeptical. I put together a ‘crazy’ album with some really bad songs and some really good ones, just to see what would happen. The report generated by Song Maestro clearly showed the duds and the hits. Now that I have tested it, I realize that this is an amazing tool for producers.”
While Silva felt all four targets could benefit from Song Maestro, he needed to generate some quick sales. If he could convince a venture capitalist to invest US$100,000, he would be able to hire enough salespeople to target only one of these markets. It was important to choose the market that both had the greatest likelihood to buy and could generate significant revenues. For the first three markets, Silva had decided that he would only sell reports – he would not license the technology. He wondered what price point he could charge for the service? What benefit would most motivate customers to purchase? He expected some potential customers to ask for a “free” trial of the software. He worried that such an approach would “cheapen” the value the software could bring to a potential consumer. For the fourth market, only part of Song Maestro would be made available and that portion he was prepared to license. While he announced a free of US $250,000 per year, he had no idea how to price this value-added feature for record stores.