What Value Does Hss Create? to What Extent Does It Increase Expected Revenues and Profitability of Albums and Songs by New and Established Artists?

1. What value does HSS create? To what extent does it increase expected revenues and profitability of albums and songs by new and established artists?

Founded in 2002, Polyphonic HMI was established as a subsidiary of Grupo AIA to market the Company's expertise in the area of artificial-intelligence and the natural sciences (such as mathematics and physics) to the music industry via new technology referred to as Hit Song Science (HSS). The technology (HSS) analyzed the mathematical characteristics of music (by isolating aspects such as melody, tempo, pitch, rhythm and chord progression) and compared them with characteristics of past music hits making it possible to determine a song's hit potential. Recent analyses performed for music released in the U.S. suggest that Hit Song Science could achieve a success rate of 80% in predicting which songs will become hits, compared to the current industry success rate of 10% using traditional market testing techniques. Studies tend to support HSS's ability to improve record labels' ability to predict which songs will become hits, determine whether to market an album and choose which songs should be released first as singles. Additionally, HSS could help determine whether it would be worthwhile to make a record for new artists and offers the opportunity to test songs and albums during the production process. This would enable producers to make tweaks throughout the process, increasing the efficiency of testing and maximizing hit potential. Ultimately, HSS creates value by offering an alternative method to existing market testing methods with higher accuracy at a lower cost.

Table A gives the low, medium and high expected revenues for singles and albums with and without a Singles Top 40 hit. Taking a conservative approach, the estimated value of a single reaching the Singles Top 40 and the estimated value of a single not reaching the Singles Top 40 are $200,000 and $10,000 respectively. Given the success rate of a single becoming a hit without HSS is 10%, the expected value of a single without the use of HSS is $29,000. Given the success rate of a single becoming a hit with the use of HSS is 80%, the expected value of a single with the use of HSS is $162,000. This results in a total value-added of $133,000 per single. The conservative total value-added from the use of HSS in predicting the success of an album with and without a Top 40 Single is $1,337,000. (See Exhibit 1 for a Full Sensitivity Analysis)

In 2002, there were approximately 10,000 artists with a record contract in the U.S. and Europe, but only several hundred with some name recognition and commercial success. Tens of thousands—if not hundreds of thousands—of artists were hoping to secure such a contract. In an effort to land a record deal, unsigned artists often use "demo" recordings to attract music publishers' attention. Labels typically receive three to four hundred