Nettwerk: Digital Marketing in the Music Industry

Cristina Beghian
Tamara Dabic
Aakash Dang
Danial Esseltine
Denise Kam
Matthew Spencer
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Table of Contents
Executive Summary...3
PEST Analysis4
4 Cs Analysis...4
SWOT Analysis..4
Positioning Statement5
Target Market and Segmentation5
4 Ps Analysis...6
Recommendation6
Implementation..7
Contingency Plan...8
Expected Results and Likelihood of Success...8



































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Executive Summary
Considering that Polyphonic is essentially a venture capital firm for bands, the primary
concern is generating a return that corresponds with a typical VC investment. Polyphonic needs
to generate lucrative cash flows from its bands in order to yield a positive net income, and attract
desirable acts in the future. Given that industry profits are under high pressure, this issue is of
high importance and high urgency. In addition, the $20 million seed capital limits how much
money Polyphonic can give to each artist and the number of artists it can invest in. While this
issue is of high importance, it is not urgent. There are ways to evaluate Polyphonics investment
strategy which will allow for adjustments. Lastly, once capital has been invested in an artist,
Polyphonic is limited to a ten year cash flow. This issue is of high importance but low urgency as
it will not affect the firm in the short term.
It is recommended that Polyphonic be launched, requiring artists to use the founders
resources (Nettwerk and ATC). The founders will be able to exploit a new business model but
will not be exposed to the same degree of financial risk as in the original Polyphonic model. This
alternative allows the revenues to be reinvested in funding additional artists or existing artists in
the future. A sensitivity analysis was performed taking into account a range of values for 2
independent variables (the usage of founder resources and the average gross revenue for band
activities). The expected average annual return over 10 years was 94% (see Exhibit I)
Polyphonic will set up negotiations with the companies of the three founders. This will
create a partnership between Polyphonic and the founders, such that artists will be required to
use their services unless proof is provided that external partners are superior in quality or value.
Artist selection will occur in three rounds of 20 artists over three years. 50% of recruited
artists will be those dropped from their record label, and the other 50% will be new artists. If
there is insufficient artist interest at the end of year one, Polyphonic should adjust its revenue
sharing model to a 30/70 split favoring the artist. Assuming the 25% of expended budget is
directed towards founders resources (a pessimistic assumption), Polyphonic should still yield an
average return of 61% over 10 years (See Exhibit H) It should also reevaluate its recruitment
strategy and expand the pool of potential artists to those with 60 000 120 000 unit sales.
After the first three years, a rolling selection of five artists per year will occur. At the end
of year one, the effectiveness of the program will be evaluated to determine whether enough
revenue is being generated to continue
A monetary reserve will be implemented for artists who have success rates of over
$200,000 in annual revenue for two or more consecutive years. These reserves will hold
$1,000,000 per artist for awareness bumps. If the artist requires an additional advance for
awareness bumps, a contract extension of five years is required.
If the 20 signed artists are unable to reach $1,000,000 by the end of 2010, no new artists
will be signed in 2011. Instead, artists that attained revenue of over $90,000 will have the option
of being extended additional advances based on their expansion strategy. Also, a laddered
approach will be implemented beginning in 2013 when bands will be offered advances of
$100,000 per year for three years given that artists maintain a certain level of success each year.







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PEST Analysis
Political: Though most downloaded music is pirated, the legal costs of pursuing piracy are high.
Economic: Album sales are declining and a greater proportion of revenues are generated from
live tours, merchandise sales, and licensing agreements.
Social: Consumer preferences and behaviors are changing. Consumers are less willing to buy
albums, instead opting to purchase artist singles or subscriptions to streaming services.
Geography is less of a barrier, making the world a niche for artists.
Technological Blogs and social media are inexpensive marketing tools for artists. They have also
eliminated geographic barriers to music promotion. The rise of online streamlining services has
increased the share of revenue generated from license sales. For all PEST impacts, see Exhibit A.
4Cs
Company: Polyphonic is a first mover business model in the music industry and takes advantage
of the turbulent market. The founders have success related to touring and the long-tail strategy.
Competitors: The illegal market for downloading music is putting downward pressure on profit.
Customers: Digital dissemination has caused a shift in the demand for music. Consumers require
content in formats that suits their individual needs. This includes live performances, record
singles, full albums, streamed libraries, and full discographies. In addition they require a variety
of sales channels from digital download services to product offerings in big box stores.
Collaborators: The three founders and the expertise they bring. No major labels, but included are
contractors for services ranging from distribution to promotion to merchandising.
SWOT Analysis
Polyphonic was established by industry experts including the founder of Nettwerk, a
large independent label. The company could leverage Nettweks legacy as an innovator capable
of responding to changing market conditions. Polyphonic could attract artists eager to retain
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control of their own marketing strategy, and reap the benefits of a more lucrative profit sharing
agreement. Polyphonic would capitalize on the use of social media and the internet to help artists
reach a broader audience.
The venture would limit Polyphonic to ten years of cash flows for each artist, and the
ROI is not high enough to attract most venture capitalists. Further, the seed capital invested in
Polyphonic limits how many artists can be signed and the amount that can be given to each artist.
Polyphonic sees the turbulence in the industry as an opportunity. If the artist is successful
through Polyphonic, there is potential to earn higher revenues. Further, Polyphonics unique
profit sharing agreement may attract artists that already generate large sales volumes.
This business model is untested, so there is the potential that artists may not generate
enough sales. For a full SWOT synopsis, see Exhibit B.
Positioning Statement
Polyphonic is a first mover venture capital firm that gives artists the capital and flexibility
to hire services at their discretion. Polyphonic could exploit copyrights for 10 years and share in
revenues in exchange for capital and more earnings for artists, cutting out the middle man.
Target Market and Segmentation
The target market is artists who have either been dropped by major labels or are new.
These artists would cater to music listeners aged 15 to 50 because these listeners spend time on
the internet downloading music and using social media. The age range of listeners is large since
different music artists cater to differing demographics. This would allow Polyphonic to identify
tastemakers for particular genres. This will also be a way to feed these tastemakers with inside
information about artists with pre-release songs and advance information of tours. These
tastemakers will use social media to promote the artists and encourage people to attend concerts.

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4Ps
Product: Polyphonic is offering a cash advance and net revenues would be split. Polyphonic
would receive a 10 year life cycle for artists. The success of an artist using the long tail effect
would mean that fans and tastemakers would need to be successful especially with social media.
Price: Digitized music and the Internet would combine to create new, low-cost ways to promote
music. Since music labels typically took a larger portion of profits, artists could now get a larger
profit per song even when setting a lower price for single songs as evidenced by Radiohead.
Promotion: Listening habits were changing. Fans are consuming music in the form of single-
songs and are downloading music for free. City-to-city marketing would matter less, the network
of like-minded individuals, globally, begins to matter more. For example, targeting the top 500
bloggers by giving them free music to write about will have a large effect on exposure.
Place: Polyphonic should focus on using social media (Facebook, MySpace) to keep fans up to
date with information on tours and releases. Also, artist websites will have sample clips of music.
Recommendation
Each alternative was evaluated by analyzing its advantages and disadvantages and using a
decision matrix, as seen in Exhibits D and E. Polyphonic will be launched with the requirement
that artists use the founders resources. The founders will be able to exploit a new model but will
not be exposed to the same degree of financial risk as in the original model. This alternative
allows the revenues to be reinvested in funding additional artists and existing artists have the
opportunity to obtain more funding in the future. If artists have a strong desire to use third party
resources, requests may be submitted and will be evaluated on a case-by-case basis. A
sensitivity analysis based on the percentage of budget directed to Nettwerk and ATC showed
that given annual revenue of 90K, artists using in-house resources only 25% (Pessimistic) of the
time generated an average annual return of 90%, while artists using 50% (Likely) generated a
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94% return, and artists using 75% (optimistic) earned a 97% return. See Exhibits G and I for
calculations.
Implementation Plan
A four-phase implementation plan will be executed from August 2009 and December 2021, and
will include periodic evaluations. Responsibilities and timelines are outlined in Exhibit F.
Preliminary set-up and negotiations: Polyphonic will set up negotiations with the companies of
the three founders. These negotiations will create a partnership between Polyphonic and the
founders, such that artists will be required to use their services unless proof is provided that
external partners are superior in quality or value. The partners will return 10% of the revenue
made from the artists in order to increase ROI to 94% under a realistic scenario (see Exhibit G).
Primary artist recruitment and selection: Artist selection will occur in three rounds of 20 artists
over three years. 50% of recruited artists will be those dropped from their record label, while the
other 50% will be new artists to have a balanced mix. Applicants will be sought by talent scouts
and online social media and webcasters. All artists are required to interview, propose a plan for
the $300,000 over 10 years and have an awareness bump strategy. The top 20 ranked artists that
can demonstrate that they can re-pay the $300,000 will be awarded the advance. If there is not
enough artist interest by the end of year one, contingency plan 1 will be implemented.
Rolling artist selection: After the first three years, a rolling selection of five artists per year will
occur to ensure polyphonic will have continued revenue beyond the 10 year mark of the original
20 artists, and reduce the risks associated with the long-tail to produce successful artists.
Evaluation: Yearly results will be used to measure the effectiveness of the program. At the end
of year one, the effectiveness of the program will be evaluated to determine whether enough
revenue is being generated to continue or be replaced by contingency plan 2. Success is indicated
by attainment of $1,000,000 in the first year; and $1,200,000 in the second year.
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Awareness bumps and contract extensions: A monetary reserve will be implemented for artists
who have success rates of over $200,000 in annual revenue for two or more consecutive years.
These reserves will hold $1,000,000 per artist for awareness bumps. If the artist requires an
additional advance for awareness bumps, a contract extension of five years is required. Exhibit C
outlines the maximum advance and expected return.
Contingency Plan
Contingency Plan 1: If polyphonic is unable to sign 20 suitable artists, a contingency plan will
be implemented evaluating the recruitment strategy to include a broader range of artists (between
60,000 and 120,000 unit sales) that were dropped from a major label and increasing flexibility
for artists to seek out services and have a lower revenue split of 30-70 in favor of the artist to
make Polyphonic more attractive to the artists. The impact on Average Annual Return is 61%
(see Exhibit H).
Contingency Plan 2: If the artist pool is unable to collectively earn $1,000,000 in revenue by the
end of 2010, no new artists will be signed in 2011. Instead, artists that attained revenue of over
$90,000 will have the option of being extended additional advances based on their expansion
strategy. Also, a laddered approach will be implemented beginning in 2013 when bands will be
offered advances of $100,000 per year for three years given that artists maintain a certain level of
success each year.
Expected Results and Likelihood of Success
The expected return is 94% based on Exhibit I. In the most pessimistic scenario, where
average annual revenue falls 25% to $67,500 and only 25% of founders resources are used, the
expected annual return is still 55%. In the most optimistic scenario, where revenues are 125% of
expected and 75% of budget is allocated to founders resources, the expected annual return is
132%.
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Exhibit A: PEST Analysis
Political Economic
Legal cost of pursuing music piracy is
not worthwhile
Obligations to pay royalties
Indies have simpler contracts than
major labels
More revenue generated from shows,
merchandise, and licensing rather than
album sales and royalties
Recession means less income to spend
on non-staple items
Social Technological
Consumer preferences and behaviors
are changing (e.g. buying single songs
versus buying entire albums)
Geography is less of a barrier meaning
the world is now a niche for an artist
Technologically savvy demographic
Audience: people with computers,
download access, ability to save music
on hard drives, ipods, phones, etc.
New revenue stream from availability
of different avenues to access music
(e.g. apps, Spotify, Slacker etc.)
Can enter into new revenue sharing
contracts with these new avenues
Album sales are less dependent on
traditional marketing techniques
Digital transformation of music files
(i.e. storage, sharing implications)

Exhibit B: SWOT Analysis
Strengths Weaknesses
Successful founders
Artists would be in control of finances
Adapts to changes in market demands
Collapsed copyright
Founders are industry experts
Would allow for strong use of social
media (e.g. MySpace, Facebook)
Artists can increase revenues
ROI is not high enough for traditional
returns for venture capitalists
Polyphonic is limited to a ten year cash
flow once an artist is signed
Opportunities Threats
Turbulence in the industry
Potential for higher than expected sales
Could attract higher volume selling
bands/artists
Untested business model
Potential of not generating enough sales

Exhibit C: Awareness-Bump Funding
Time in contract
Expected return based on 1 year
(^) return* (thousand dollars)
Provided Funding based on 1 year
(^) return (thousand dollars)
Pre-
extension
Post-
extension 200 ^ 500 ^ 800 ^ 200 ^ 500 ^ 800 ^
5 10 1000 2500 4000 500 1250 2000
4 9 900 2250 3600 450 1125 1800
3 8 800 2000 3200 400 1000 1600
2 7 700 1750 2800 350 875 1400
1 6 600 1500 2400 300 750 1200
*Excluding the impact of awareness bump
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Exhibit D: Advantages and Disadvantages of Alternatives
Do not launch Polyphonic venture
Advantages Disadvantages
$20M seed capital not foregone
No financial risk for founders
Potential to lose out on profitable business
model
Move forward with Polyphonic as is
Advantages Disadvantages
Highly flexible for artists
Innovative, new business model
Low ROI
Risk of unsuccessful artists
Low budget
Limited cash flows
Artists must use founders resources
Advantages Disadvantages
Higher ROI
Mitigates risk with use of experienced industry
professionals
Successful artists can obtain more funding in
the future
Rolling artists funding provides increased
profits
Less flexibility for artists
No suitable artists
Unsuccessful artists

Exhibit E: Decision Matrix
Weight No
Polyphonic
Polyphonic as
described
Collaboration
ROI 0.5 2 1 3
10-year cash flows 0.3 2 1 2
Limited start-up
capital
0.2 1 1 2
Total 1.0 1.8 1.0 2.5
If the alternative has a risk of low ROI, it is rated 1. The Collaboration is rated 3 as it mitigates
this risk. If there is potential for cash-flows past the 10-year period, the alternative receives a
high rating. If the alternative increases the allocation of capital, it is rated higher.

Exhibit F: Implementation Timeline
Action Phase Timeline Responsible Parties
Preliminary set-up and negotiations Aug 2009 Dec 2009 Three founders and
finance department.
Primary artist recruitment & selection Jan 2010 Dec 2013 Talent scouts, social
network media experts
Rolling artist selection Ongoing from Jan 2014 Talent scouts, social
network media experts
Evaluation Ongoing from Jan 2011 Three founders
Awareness bumps and contract extension Ongoing from Jan 2012 Finance department
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Exhibit G Alternative: Partnership Realistic Scenario (50/50 rev split & 50% usage of founders
resources)








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Assumptions

Assumption: 10% of the revenue brought in to Nettwerk is returned to Polyphonic
% of Nettwerk resources used by artists: 50%
Investment in Artists $300,000
Total Investment in Artist $18,000,000
Average Annual Revenue per Artist $90,000
Average Annual Revenue per Artist for Polyphonic $45,000
Initial capital available to Polyphonic $20,000,000







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Exhibit H Alternative: Partnership Pessimistic Scenario (70/30 rev split & 25% usage of founders
resources)





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Assumptions

Assumption: 10% of the revenue brought in to Nettwerk is returned to Polyphonic
% of Nettwerk resources used by artists: 25%
Number of Artists Signed 60
Total Investment in Artist $18,000,000
Revenue per Artist $90,000
Revenue per Artist for Polyphonic (assuming 30-70 split) $27,000
Initial capital available to Polyphonic $20,000,000




Exhibit I: Sensitivity Analysis on ROI (Based on 50/50 profit sharing)



Based on weightings of 25% for optimistic scenarios, 50% for realistic scenarios, and 25% for pessimistic
scenarios, our expected return on investment is 94%.