Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment

by Anita Elberse

  Such efforts don’t come about in a vacuum, of course: superstars and the people who advise them are getting smarter about wielding their power. Recognizing their outsize value, talented actors, musicians, athletes, and other performers are pushing for ever-higher rewards. That, in turn, is putting pressure on the business models of studios, record labels, sports teams, and other content producers. Both sides have gotten ever more creative in their efforts to negotiate favorable agreements. And so it could come to be that, in 2006, even when his status as a star actor was first being challenged, the venerable studio MGM made a stunning move by offering Tom Cruise a part of a movie studio rather than a part in a movie—an ownership stake in MGM’s United Artists, to be precise. Or that Russian tennis player Maria Sharapova forged lucrative endorsement partnerships with an impressive set of brands, leading her to become the highest-paid female athlete in the world (and beating out a stellar cast of male athletes, too). And that, to the astonishment of many sports-industry insiders (even before his much-debated decision to “take his talents to South Beach,” as he described his move to the Miami Heat), basketball superstar LeBron James established his own firm to handle all aspects of his business ventures and marketing activities, taking a highly innovative approach to sports marketing.

  My research shows that there is a clear logic to these developments, one that can be grasped by closely studying the characteristics of the market for creative talent as well as the talent’s appetite for risk at different stages of their career. It is a logic that those who work in entertainment should be intimately aware of, as it yields lessons about how businesses can best recruit, manage, and reward talent—even if not every decision turns out as well as those involved might have hoped. It also offers important clues to any aspiring musician, actor, author, or athlete who wants to discover the best approach to his or her creative career. For superstars and lesser-known talent alike, knowing when to pursue which opportunities is critical, especially because the careers of most creative people are so short-lived.

  All of this now transpires in a media environment that, with the arrival of the YouTube, Twitter, and Facebook era, is of course vastly different from what it was when Alan Horn and Jeff Zucker first dreamed up their strategies, and when Lady Gaga and LeBron James first emerged on the scene. Undoubtedly, the biggest question currently facing entertainment companies is how the rapid rise of digital technology will affect their bets on blockbusters and superstars. Because advances in digital technology substantially lower the cost of doing business, there are good reasons to suspect that far-reaching changes are on the horizon. New technologies, after all, make it easier and cheaper for content producers to offer entertainment goods—just think of the savings that result from distributing a movie online rather than having to transport physical prints to theaters all over the world. At the same time, new technologies, such as sophisticated recommendation engines, make it less of a hassle for consumers to find and purchase the goods they want. These effects are especially apparent in the entertainment sector, where goods like films, television shows, books, and music can be fully digitized.

  Some industry insiders have suggested that digital technology will spell the end of blockbusters—and, with that, the effectiveness of blockbuster strategies. Is the rise of online distribution channels a sign that soon the “old” rules of the entertainment business will no longer apply? Looking at the popularity of sites such as YouTube that democratize content production and distribution, one might be tempted to conclude that a “yes” is the only right answer. But a closer look reveals that the reality isn’t quite so simple. In fact, in today’s markets where, thanks to the Internet, buyers have easy access to millions and millions of titles, the principles of the blockbuster strategy may be more applicable than ever before. As I will describe in the latter half of this book, there are fundamental laws of consumer behavior that explain the strategy’s enduring appeal—the kinds of laws everyone with an interest in the entertainment industry should be aware of, in other words. The blockbuster strategy’s continuing importance to the success of entertainment companies is made abundantly clear in the enormous amounts of data that online channels generate.

  Armed with an understanding of the ways in which digital technology is transforming the markets for entertainment goods, one can easily see why YouTube has struggled to turn its immense popularity into a lucrative and sustainable business, and one can begin to make sense of parent company Google’s push into Original Channels. It also becomes evident that NBC’s decision to co-fund Hulu, a site focused on offering premium, professionally produced online video, may have been one of the broadcaster’s smartest moves in recent years—Zucker deserves some credit for that. (Yes, it may come as a surprise, but this is not one of those black-and-white, heroes-and-villains books. Most entertainment executives have their fair share of successes and failures, and Zucker is no different.) These same underlying principles even help us see how the innovative foray into digital distribution of New York City’s Metropolitan Opera—specifically, its decision to simulcast live opera to movie theaters around the world—will affect the market for opera. One critical lesson here becomes clear: blockbusters will become more—not less—relevant to popular culture, and blockbuster strategies will thrive.

  A second question triggered by the emergence of online channels is whether these channels will ultimately undercut the role of established content producers and distributors. British band Radiohead made a splash a few years ago with an album they self-released, without the help of a record label or retailer, prompting many industry observers to suggest that other bands could and should release their work on their own, too. Previously unheralded musicians have on occasion developed vast fan bases on YouTube and through social networks, and some self-publishing authors have created huge demand for their writings online. As digital technologies become ever more sophisticated and ubiquitous, will creative talent increasingly seize the opportunity to market their creations directly to consumers? If so, the demise of many established entertainment companies may not be far off. According to my research, however, such an extreme scenario is unlikely: it’s virtually impossible for most creative people to thrive without the benefits that these enterprises provide. Still, the rise of do-it-yourself production and distribution raises critical issues for even the largest entertainment businesses.

  We can learn a lot from content creators and owners who have used digital channels to deliver their content directly to the consumer. Hulu—co-owned by NBC Universal, News Corp.’s FOX, and Disney’s ABC—is an example here, too. But the world of sports has perhaps made even bigger waves. Major League Baseball’s digital arm stands out: MLB’s executives have embraced the opportunities that digital channels afford the league to interact directly with its fans, scoring with products for a host of different platforms and operating systems. The National Football League has taken a strikingly different approach to digital media, but its strategy has proven just as successful, and the resulting lessons for how markets for entertainment goods are evolving are remarkably consistent. All three cases—Hulu, MLB, and the NFL—show how content producers can use new digital distribution channels to their advantage. And all three again underline the benefits that blockbusters provide in that context.

  None of this is to deny how disruptive the advances in technology can be to the world of entertainment. Piracy, fueled by the same low costs of reproduction and distribution that explain digital technology’s other effects, is often seen as the main culprit. But other forces—such as consumers’ expectations that prices will inevitably come down in digital channels—may be more threatening. The so-called unbundling of goods in digital channels also causes headaches for entertainment businesses. For example, now that all the songs on an album are made available for individual purchase online, the album bundle is increasingly playing second fiddle to the individual song. This inversion was unthinkable in a fully analog world, if only because the costs of separately packag
ing and shipping songs were prohibitive. Meanwhile, the rise of massive online retailers and content aggregators with ultrathin margins has also put tremendous pressure on entertainment companies’ business models.

  As a result of all these tumultuous changes, blockbuster strategies will undoubtedly evolve—and what is fascinating is that some superstars seem to be leading the way. In 2010, in an award-winning campaign dreamed up by advertising agency Droga5, hip-hop mogul Jay-Z and his manager explored a partnership with Microsoft for the launch of his memoir, Decoded. A year later, Lady Gaga, never afraid to innovate, redefined the concept of a major launch with her Born This Way album. In the years to come, many more entertainers will surely follow in their footsteps. That’s not a blind guess—as we’ll see, it is a logical conclusion if one considers both the disruptive effects of digital technology and the factors that explain the effectiveness of blockbuster bets. Blockbuster strategies may become more difficult to execute in a digital world, but, as counterintuitive as it may sound, their relevance only increases. The future of blockbusters in the entertainment economy shines bright.

  And, in fact, blockbuster strategies may increasingly pervade other sectors of the economy, along with other marketing practices borrowed from the world of entertainment. So, to conclude the road map of what’s to come, I will end the book by pointing to particularly noteworthy examples I have come across in my research over the years. The nightlife business is a focus here: two of the sector’s most successful impresarios are leading a revolution, transforming the business from one that is all about selling bottles—high-priced alcohol delivered to “table customers” seated at hot spots in the club—to one that is just as much about selling tickets to heavily marketed events featuring superstar DJs. But I’ll also point to other examples, from Apple and its big bets in consumer electronics, to Victoria’s Secret with its angelic-superstar-studded fashion shows, and to Burberry’s success in taking the trench coat digital. As these will show, many of the lessons to be learned about blockbusters not only apply across the entertainment industry—they even extend to the business world at large.

  Chapter One

  BETTING ON BLOCKBUSTERS

  In June 2012, less than two weeks after the news of his appointment as chairman of Walt Disney Pictures had Hollywood insiders buzzing, Alan Horn walked onto the Disney studio lot. The well-liked sixty-nine-year-old executive (“I try to be a nice person almost all the time, but next to Alan Horn I look like a complete jerk,” actor Steve Carell had joked during Horn’s good-bye party at Warner Bros.) was excited about joining Disney, which he described as “one of the most iconic and beloved entertainment companies in the world.” But he also knew he had his work cut out for him, as Disney Pictures had posted disappointing box-office results in recent years. In his new role, Horn would oversee production, distribution, and marketing of live-action and animated films from Disney as well as its units Pixar Animation Studios and Marvel. Horn would have to decide whether the event-film strategy he had pioneered at Warner was the right approach for his new employer as well.

  After working for producer Norman Lear early in his career and spending a decade at the helm of Castle Rock Entertainment (a production firm he had co-founded that was known for creating the hit television show Seinfeld and films such as A Few Good Men, The Shawshank Redemption, and When Harry Met Sally), Horn had moved to Warner and fostered a different attitude toward risk. “Other studios made big movies, but no one was doing this on a consistent basis,” he told me. “In fact, they were afraid of it. Because the price for movie tickets was fixed, taking on higher costs seemed a bigger risk.”

  Described as “a consensus builder,” Horn went to great lengths to ensure that his Warner colleagues embraced the event-film strategy. His first event-film pick was The Perfect Storm, released in 2000. “George Clooney was not a big star at the time, and neither was Mark Wahlberg, but I really liked the story,” Horn recalled. “We wanted to create the best visual experience for audiences, and we spent a lot to showcase those in our marketing campaign. I remember I saw an early cut of the trailer and asked, ‘Where is the storm?’ I wanted a shot of the boat in the storm, with the high seas. It took half a million dollars, but they made it happen in a week. We wanted everyone to know this was going to be big. So we had to have that shot.”

  Within a few years, the event-film strategy had taken hold, and Warner was releasing four or five such movies annually. Horn focused on what he called “four-quadrant movies”: films appealing to young and old as well as male and female moviegoers. In 2008, the studio’s picks included The Dark Knight, Get Smart, Speed Racer, and, before its release date was moved to 2009, Harry Potter and the Half-Blood Prince. In 2010, Horn’s last full year in charge, Inception, Clash of the Titans, and Harry Potter and the Deathly Hallows: Part 1 were among the event films. Each event movie received a higher-than-average production and marketing budget and generally had its release date planned years in advance. “The potential upside for our event films is so enormous that we believed it was worth the risk,” declared Horn.

  The results proved the wisdom of his strategy: under Horn’s twelve-year leadership, Warner Bros. Pictures, the largest of the six major Hollywood studios, became the first studio in history to collect more than $1 billion in theatrical revenues for ten years in a row. In 2010, the studio was the market leader in films with worldwide box-office revenues of $4.8 billion—its biggest haul ever. The eight Harry Potter films, the most successful motion picture franchise in history, collected $7.7 billion at the worldwide box office. Warner Bros.’ output during this period also included several other lucrative films, including 300, The Dark Knight, The Departed, Gran Torino, The Hangover and its sequel, I Am Legend, Million Dollar Baby, Ocean’s 11, 12, and 13, and Sherlock Holmes.

  But Horn’s strategy remained controversial precisely because it seemed so risky. “Making monster projects into profit centers is no slam-dunk,” wrote one Wall Street Journal reporter, expressing a sentiment that was widely shared. “Someday soon, one of these big bets will crash so hard that a studio will be left with a staggering write-off.” Disney’s own John Carter was a recent case in point: it had cost an estimated $250 million to produce and likely lost almost as much, easily making it 2012’s biggest flop. Detractors of event-film strategies also loved to point to the western Heaven’s Gate, otherwise known as “the film that sank a studio.” Delayed for months and beset by cost overruns, the 1980 movie cost a then-unprecedented $40 million, only to be roundly rejected by both the press and the public (one influential critic called it “an unqualified disaster”). United Artists sold only $3 million’s worth of tickets; as a direct result of the massive box-office flop, the studio collapsed and was sold off to MGM.

  Horn acknowledged the downside of his approach. “The problem with event movies is that when we fail, it is a colossal failure.” And for all of his successes, Horn also had his share of misses during his long tenure at Warner Bros. “In a good year, a major studio is happy to bat .500,” he said. “The real goal is overall profitability.” The countless variables involved in the moviemaking process plagued every live-action project he decided on. “When Jo Rowling was selling Harry Potter, she was turned down by a number of publishing companies. And they were reading it in the medium in which it would be released! Making a movie is—it’s just ridiculous. We are reading a screenplay, and have to imagine what it will look like with a certain director, a certain cinematography, and a certain cast. You say, ‘With Channing Tatum it will look this way, but if we go with Matt Damon it will look a different way.’ It is such a gut-level decision that it is impossible to define criteria that can make a studio successful year in, year out.”

  Now, with his arrival at Disney, all eyes were on Horn to do just that: achieve success year in, year out. It didn’t help that Disney’s appetite for big risks was low after the John Carter debacle; making matters worse, Horn knew he would have to compete head-on with Warner and the very strategy he
had invented. “Other Hollywood studios have embraced the event-film strategy, too,” he said. “So the competition from other major studios for the best ideas, creative talent, and release dates has only increased in recent years. We will have to go up against other big movies in our release weekends.” Could Horn bring the magic back to the Mouse House?

  * * *

  Is the event-film strategy—or, as I called it earlier, the “blockbuster strategy”—really the best approach to making and marketing entertainment? For major studios like Warner Bros. and for other large-scale content producers across the different sectors of the entertainment industry, the answer is an unequivocal “yes.” In fact, the strategy that Warner Bros. followed is now a common approach among not just movie studios, but also publishers, television production companies, music labels, video game publishers, and producers in other sectors of the media and entertainment industry. But before we delve into the explanation for why such a seemingly risky approach makes sense even in today’s competitive marketplace, let’s take a closer look at the approach taken by Horn at Warner Bros. and understand the returns that are associated with it.