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

by Anita Elberse

  Going for smaller-scale products can enable entertainment companies to build and maintain a favorable critical reputation as well, which in turn can help them attract sought-after A-list talent and their projects. If, say, a film studio wants to cast a superstar actor in an event film, it can be beneficial to have the option of offering that actor the lead in a smaller “passion project,” one with the potential to please critics and Academy Award voters. When Warner Bros. agreed to finance Clint Eastwood’s Million Dollar Baby despite the poor performance of boxing movies in the past—and especially of boxing movies that revolved around female fighters—no one at the studio had any idea it would become a box-office hit. If anyone other than Clint Eastwood had brought the movie to the studio, it likely never would have seen the light of day (or, rather, the darkness of a theater). Fittingly, when Warner threw Horn a good-bye party, George Clooney publicly thanked him for “supporting the things we want to do that studios never want to do.” Smart A-list actors remember these sorts of gestures and become allies.

  Finally, developing and releasing a number of smaller projects helps producers spread the fixed costs of their production and distribution infrastructures. For the major film studios that have expansive lots and dozens of offices around the world as part of their distribution apparatus, being able to allocate the costs of those resources across a larger number of projects—even if the smaller-scale projects barely break even—can be a huge benefit. For one, it helps them fund their blockbuster bets. “Very few entities in this world can afford to spend $200 million on a movie,” noted Horn. “That is our competitive advantage.”

  Despite the advantages of having a broad and varied portfolio, major studios and other large-scale content producers would probably further tilt their investments toward the bigger projects if they could. But two key constraints make that difficult: raising the funds required to produce blockbusters is a constant challenge, and finding the ideas that lend themselves to bigger-scale production and marketing support is never easy. “We were keen to make more event films, and steadily increased the number over the years,” Horn said about his time at Warner. “But there aren’t many ideas with global appeal.” What competing entertainment businesses do matters, too. As Horn pointed out: “There is a limit on good release dates in a given year.”

  And so, as a consequence of all these factors, many of today’s largest entertainment businesses end up with product portfolios consisting of a few blockbuster investments that require most of their attention as well as a number of smaller bets. That’s not to say that no other portfolio approach could possibly work. For example, animated movie house Pixar has an interesting approach: from the outset, it has focused on a very small number of films at any given time. Calling Pixar’s strategy a “rifle-shot approach,” Horn described its method this way: “They make one movie a year, and really handcraft each one. They are painstaking in their approach, highly self-critical, and work for years on one title before releasing it.” That focus has paid off: Pixar has churned out one box-office smash hit after another, from Toy Story to A Bug’s Life; Monsters, Inc.; Finding Nemo; The Incredibles; Cars; Ratatouille; WALL-E; Up; and Brave. But Pixar is not a stand-alone studio: it operates as a unit at Disney and is now Horn’s responsibility. Pixar thus can rely on the advantages that come with Disney’s wider scale and power—a big plus, for instance, when it comes to distribution—while continuing to lavish attention on each of its films.

  Another of Disney’s units—Marvel Entertainment—is also a provider of a steady stream of huge hits. In fact, even more so than cats and dogs, comic-book heroes seem to be the favorite targets of Hollywood studios in search of the next blockbuster hit. The people behind the huge splash that the first Spider-Man movie made at the box office in 2002—and much of the superhero craze that followed in its footsteps—know a thing or two about creating and monetizing hits. The evolution of their business reveals just how dominant blockbusters have become and underscores many of the lessons learned about effective blockbuster portfolio strategies.

  * * *

  In August 2009, Disney announced a $4 billion purchase of Marvel Entertainment, which owned and managed one of the oldest and most recognizable collections of characters in the entertainment industry. Its proprietary library of thousands of characters, collectively known as the Marvel Universe, includes superheroes such as Spider-Man, X-Men, The Hulk, Daredevil, The Punisher, The Fantastic Four, Captain America, and Thor, all of which were developed for an astonishingly rich trove of comic books dating back to the 1930s.

  As Disney’s purchase of the company came together, Isaac Perlmutter, Marvel’s chief executive officer and at the time its biggest shareholder, and his now former colleagues Avi Arad (who served as chief creative officer) and Peter Cuneo (who preceded Perlmutter as chief executive officer) had every reason to reminisce about a rescue they had staged that none of Marvel’s superheroes could have pulled off—that of the company itself. Perlmutter and Arad had made their fortunes as partners in a toy company. With business experience in sectors such as fiberglass, pharmaceuticals, power tools, and electric shavers, Cuneo was as unlikely an entertainment mogul as one can find. But he was an expert at managing turnarounds, and that was his brief at Marvel when he joined the company in July 1999. He succeeded beyond all expectations: exactly a decade after Perlmutter and Arad acquired Marvel out of bankruptcy and hired Cuneo, and nine years after it posted a loss of over $100 million and saw its stock price hover at around $1, the Disney offer valued Marvel at around $50 per share. It was a performance that made the feats of both Spider-Man, with his ability to scamper up the sides of tall buildings, and The Hulk, with his unparalleled power (and greenness), seem decidedly mundane.

  During that ten-year period, the executives rebuilt Marvel’s original comic-book publishing business into a profitable division, and revamped its toy and licensing operations. Marvel lent its characters to twenty movies, including Sony Pictures’ Spider-Man, Universal’s The Hulk, Twentieth Century Fox’s X-Men, and Lionsgate’s The Punisher. Many movies recouped their costs by the time they closed out their domestic runs and went on to post big numbers in markets across the globe. Fourteen movies made more than $100 million in US theaters alone, six made more than $200 million, and four made more than $300 million. Remarkably, Marvel’s sequels often outperformed its originals. As a result, worldwide grosses collected over a decade hovered close to the $7 billion mark.

  Marvel also made licensing deals for a wide range of other products, from video games to apparel and from party items to food. “We contribute our characters and our knowledge of the characters, we work hard to find the right partners, and we approve the products for quality, but we don’t contribute any capital,” one Marvel executive told me. “We just collect checks.” Perlmutter added: “It’s a gold mine. Cash just comes in every day.”

  Within a few years of Cuneo’s arrival, early doubts about the company’s business model started to disappear. So did fears that the company had milked the best gains from its most prominent characters and might not be capable of further developing lesser-known superheroes such as Ghost Rider, Iron Man, The Punisher, and The Fantastic Four to boost growth. “There is no end to our success—we have a great library of characters,” Arad told me in 2004. “I do feel frustrated by all the revenue that we are just giving away,” he admitted, pointing to Marvel’s relatively modest share of the revenues for its motion pictures. For instance, despite Spider-Man’s impressive theatrical box-office gross of over $820 million worldwide and sales of about 7 million $20 DVDs on the day of its release in the United States, Marvel received only about $25 million from Sony Pictures. “We have been focused on activities that require minimal capital investment on our part,” said Cuneo at the time. “There are bigger bets to be placed as we move more into the production and distribution of content—but there could be bigger rewards, too.”

  In 2005, Marvel made its first strides toward that goal by landing $525 million
worth of financing courtesy of Merrill Lynch that allowed it to produce its own film slate, and by giving Paramount Pictures the right to distribute those movies. Under the terms of the partnership, Marvel could produce up to ten movies over an eight-year period, with budgets ranging from $45 million to $180 million per film. Marvel received a fee for producing each film and would be able to keep all merchandising revenues, while Paramount collected a distribution fee of 8 percent of the box-office revenues for each film. (The deal also applied to any sequels to these films.) “Marvel has become a marquee entertainment brand,” Paramount’s chairman and chief executive officer, Brad Grey, said when the agreement was made public. “It speaks to Marvel’s strength in the marketplace and the great popularity of its brand and characters that Marvel can obtain such innovative financing for its film slate. We are thrilled to partner with them in this new venture.”

  Further evidence of Hollywood’s interest in Marvel’s hit characters and story lines arrived four years later when Disney purchased Marvel. Despite the high purchase price, the agreement required Disney to honor Marvel’s ongoing deals with other studios: Sony’s right to make movies based on Spider-Man—Marvel’s most sought-after character—lasts into perpetuity, and the deal with Paramount locked in several other characters. Yet Disney was undeterred. As Bob Iger, Disney’s chief executive officer, put it: “This treasure trove of over 5,000 characters offers Disney the ability to do what we do best.”

  * * *

  Marvel’s reversal of fortunes over the course of a decade—one of the greatest turnaround stories in the entertainment industry and indeed the business world in general—is a direct result of major movie studios’ search for the next blockbuster. Basing a new event film on a Marvel character is now one of the surest bets a Hollywood executive can make. Ironically, the only major studio not mining Marvel’s riches is Warner Bros.; its parent company, Time Warner, owns rival comic-book publisher DC Comics, which is known for Batman, Superman, and a host of other characters. Together, Marvel and DC have the market for comic books cornered.

  It is too easy to dismiss Marvel as a company that simply got lucky with its Spider-Man franchise and since then just banked on that initial success. But the truth is that every studio head knows that the first Spider-Man—the highest-grossing film of 2002, and at the time the tenth-highest-grossing movie ever worldwide—single-handedly turned Sony Pictures’ otherwise bleak year into a stellar one. In those early years, Marvel relied just as heavily on its biggest blockbuster. By my calculations, in fact, Spider-Man accounted for at least half of Marvel’s operating income—measured across toys, media licensing, and consumer-products licensing—in 2002 and 2004, and at least a third of the company’s operating income in 2003 (when no Spider-Man movie was released).

  “It’s toys, apparel, school products, games, promotions, pajamas, skateboards, vitamins, lollypops—with Spider-Man, there’s virtually no limit,” one of Marvel’s consumer-products licensing experts told me. Cuneo agreed: “There is nothing close to Spider-Man. He is our number one character, with the widest demographic appeal of any fantasy property. His appeal starts with two-year-old children who wear Spider-Man pajamas and goes up to consumers in their sixties—they all enjoy Spider-Man. I wish all our characters were that broad.”

  Early successes triggered a superhero craze. As other Marvel movies such as Daredevil, X2 (also known as X-Men II), and The Hulk performed well at the box office in the years following Spider-Man, and especially as the X-Men and Blade sequels outperformed their originals—a sign of a franchise having staying power or, as industry insiders say, “legs”—Hollywood executives began to compete ever more intensely for new Marvel characters that could be brought to the big screen. Marvel executives let the blockbuster trap work in their favor by pushing for better deal terms in negotiations with studios and other licensing partners. The original deals for Blade and X-Men stipulated that Marvel would receive a share of studio profits after all expenses had been incorporated. But studios had creative ways of calculating those profits that left only a negligible amount for Marvel—“Hollywood Economics,” as Cuneo put it. With a few early movie successes under its belt, however, Marvel was able to negotiate more favorable revenue participation deals that gave it a share, typically between 3 and 7 percent, of box-office grosses for its blockbuster movies. This was still only a fraction of what the partnering studios were able to keep, but a definite improvement.

  Meanwhile, Marvel executives created a business model that was specifically designed to minimize product-development and advertising costs—the major financial burdens involved in marketing blockbusters. Minimize those costs for Marvel, that is, and shift expenses to the studios that were licensing Marvel’s characters. Here is how it worked. Marvel operated as a mini-conglomerate with divisions focused on comic books, toys, media licensing, and consumer-products licensing. The company developed its characters and story lines in its comic-book division, which effectively served as its research-and-development center, or as its incubator for ideas. And a highly efficient incubator at that, since comic-book publishing is relatively cheap and flexible: a typical print run costs the company only $10,000 to $20,000.

  Marvel relied on partnering movie studios to advertise its brands. The company’s licensing contracts with studios stipulated that Marvel did not contribute to movie production and marketing expenses. “Usually we get anywhere between thirty million and eighty million dollars in advertising devoted to our movies,” Arad told me in 2004. “As a result, the word spreads like wildfire—it leads to worldwide exposure for the Marvel brand and for the specific character.” Cuneo explained the resulting positive effect on its brands: “If you have seen our movies, you might get into our comic books, you might get into our video games, you might buy a T-shirt with a Marvel character, or you might buy some of the other consumer products.”

  How did Marvel make money? Although the partnering studios would undoubtedly have preferred otherwise, Marvel retained full control over merchandising rights, which it used to drive sales in toys and consumer products, the company’s main sources of revenues. Consumer-products licensing in particular was—and is—a highly lucrative activity. Costs are incredibly low: at the time Disney made its move, Marvel’s consumer media group (which coordinates activities for all consumer products) consisted of just a few salespeople and assistants, supported by a dozen or so legal and product-approval specialists. Contracts specified a minimum guarantee, to be paid to the rights owner regardless of the sales of the licensee’s product, and additional royalties if sales exceeded the guarantee. Not surprisingly, the more the character was associated with blockbuster content, the higher both the minimum guarantee and the royalty rate that Marvel could negotiate. No wonder Perlmutter called it “a gold mine.”

  Marvel’s approach to the management of its portfolio of brands was equally clever. Hollywood studio executives—and producers in many other sectors of entertainment—know that strong brands are not created overnight. For every Finding Nemo, which introduced a character that immediately resonated with audiences everywhere, there are hundreds of properties such as Shark Tale and Delgo that disappoint. Marvel’s good fortune was that it had an extensive library of tried and tested characters and story lines to exploit, and Perlmutter, Arad, and Cuneo recognized this value. “We don’t want to be a regular studio and come up with new ideas for movies,” said Arad at the time. “Then we’ll be like everybody else in this hit-and-miss business. That’s a shot in the dark—we might as well play blackjack. Somehow the characters have permeated into our culture—that’s our marketing advantage.”

  Blockbusters drove growth for other, lesser-known characters, building Marvel’s portfolio over time. Helped by the fictitious Marvel Universe, which provided a common historical and contextual background for the company’s characters, the executives emphasized the linkages that existed between its hit characters so as to grow smaller brands. (Elektra, for instance, made an appearance in the Dare
devil movie and later starred in a movie of her own.) Cuneo explained the nature of the content library this way: “You’ve got to think of the forty-seven hundred characters not as individuals but as families. We have forty years of Spider-Man stories. There might be fifty bad guys associated with Spider-Man and fifty friends. So the Spider-Man family consists of one hundred, maybe two hundred, properties. The Hulk accounts for another hundred, while X-Men has about four hundred characters.”

  The essential natures of Marvel’s franchise characters, built up over decades of appearances in comic books, are remarkably similar. As one Marvel executive put it: “They have some kind of vulnerability attached to them. Spider-Man is just a kid with glasses. Although they have superpowers, our characters are presented as normal people, with problems that anybody else would have.” Because its brands are linked and in many respects similar, Marvel was in an ideal position to capitalize on Hollywood’s search for the “next big thing” after the Spider-Man movie became a hit. Rather than fight against a blockbuster trap that was gaining momentum, the major studios helped to further strengthen Marvel’s overall brand by pursuing the film rights to many of the company’s other characters. Some marketing executives even asked for a Marvel-themed trailer to play just prior to their own films.

  Realizing that bigger risks go along with bigger rewards, Marvel executives used their newfound powers to put together the groundbreaking deal with Paramount and Merrill Lynch—a move that fit Marvel’s desire to capture more of the upside of its movies, but one that pitted the company directly against some of its other studio partners. By 2005, just a few short years after the first two Spider-Man movies had together grossed more than $1.5 billion in worldwide ticket sales, Marvel’s characters had become so sought-after that it could negotiate innovative financing: the contracts with Merrill Lynch reportedly stated that an insurer would cover interest payments in case Marvel would not be able to—in return for the movie rights to the central character. Have characters serve as collateral? It is hard to think of a more fitting illustration of the power of the company’s blockbuster brands.