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

by Anita Elberse

  A Wide Release Strategy

  As soon as Carter and his team had the opportunity, they opted for a wide release for Lady Gaga’s music, too. Released in May 2011, Born This Way was shipped to an unprecedented twenty thousand locations across the United States—not just conventional music retailers but also coffee chains like Starbucks, electronics retailers such as RadioShack, and grocery stores and drugstores such as CVS and Walgreens. A long lead time made this possible: in 2010, knowing they would need months to pull off a launch of this scale, Carter and the Interscope executives convinced Gaga to push back the release date. “Normally there is a three- or four-month lead time, but we announced the album release seven months in advance,” Berman said. “We wanted to put a stake in the ground.” Gaga was initially less than thrilled about this plan, Carter recalled: “I still remember her crying her eyes out at the thought of having to wait this long.”

  Why put Gaga through this misery? Why do Carter and almost every other executive and manager in the entertainment industry, when given the chance, prefer to push for big openings by spending heavily on advertising and distribution, rather than increasing marketing expenditures more gradually? The reason is simple: all else being equal, the odds of achieving success in the marketplace are higher with a wide release strategy than with a limited release approach. That, in turn, follows from the very nature of entertainment products—and, in fact, from several of the same characteristics that drive major media producers’ taste for blockbuster portfolio strategies.

  First, because people like winners—because they prefer to consume entertainment products that are also chosen by others—a solid opening is often a huge factor in a rollout. For media products, initial success breeds further success, while a failure to achieve success early on frequently means having no chance to succeed at all. Alan Horn knows all too well how this dynamic works in the film industry. “We always found out how we did on opening weekend,” he explained. “For a film released on a Friday, I’d get a call that same night at eleven o’clock saying ‘Well, it is over.’ And I’d say, ‘When you say it is over…’ but before I could even finish they’d go, ‘No, no, it is over!’ For some of our event films, they’d tell me, ‘We are done. We have just lost $100 million.’” When Disney’s $250-million-budget John Carter generated a disappointing $30 million in revenues in its first weekend, trade magazines called it a “fiasco”—a full two days into its run—and audiences fled. Within a week, Disney had issued a report stating it would take a $200 million write-down.

  In the film industry, with its tradition of publishing sales figures weekly, each weekend’s winner is ensured a great deal of free publicity. Opening-weekend revenues are a quality signal for subsequent moviegoers, and most customers (and indeed most reporters) pay little attention to the fine print, such as how many theaters were necessary to achieve the total grosses, or how much was spent on advertising. By contrast, the movies that, for whatever reason, fail to open well in their first week are immediately considered “losers.” They are quickly whisked away to smaller screens at the theaters or disappear from view altogether, only to make room for a new set of movies hoping to capture people’s attention from the very start.

  But even in sectors where sales figures are harder to come by, we see similar patterns. In book publishing, if new titles fail to catch on, they are often pulled from the shelves in a matter of weeks. Extensive marketing campaigns and the star power of established authors can help place books in prime spots in bookstores across the country, but they suffer the same fate if they do not open well. On Broadway, underperforming plays, no matter if they cost millions of dollars to produce, are regularly replaced after only a few weeks of disappointing ticket sales. Even Lady Gaga, for all her success, scrambled to release a third song in advance of her album Born This Way when the second, Judas, underperformed in the market.

  Social influence is a powerful force in markets for popular culture. Because we are social beings, people tend to want to listen to the same music that others listen to, read the same books, and see the same movies. Simply put, we repeatedly show a preference for popular products. That tendency, economists have shown, can tip the scales in favor of those products that perform well at the outset—even if the difference between the top performers and the next level down is slight. If one product edges out a rival for the number one position in its first week, that success may become a topic of conversation at the water cooler and ultimately make a huge difference across a product’s entire run.

  Even products that have no discernible quality differences can, as a result of these forces, experience very different outcomes in the marketplace—luck alone might lead to an early break. The sociologist Duncan Watts has proved this point convincingly. By conducting a set of experiments involving an artificial market for songs, he and his colleagues found that social influence played as large a role in determining the market share of successful songs as actual differences in quality. The experiment was designed to measure varying degrees of social influence: for instance, some respondents could see how many previous participants had downloaded a particular song while others could not, and some respondents saw a list ranked by song popularity while others saw a random listing. In one study, Watts and his colleagues presented respondents with false information—they showed a ranking that was completely inverted from what the download pattern of previous listeners actually looked like. What the study revealed was that while the “best” songs never did very badly and the “worst” songs never did terribly well (even when the rankings began inverted, the very best songs eventually made their way back to the top), any other scenario was possible.

  The ultimate success of an entertainment product, Watts and his colleagues revealed, is extremely sensitive to the decisions of a few early-arriving individuals: if consumers making decisions about a product later in its life cycle can see whether that product is popular, they amplify the choices of those early consumers. The result is what Watts calls a “cumulative-advantage process,” which helps explain the high unpredictability of the demand for popular-culture goods. Successful songs, movies, books, and artists are not necessarily “better,” Watts argues; rather, what people like depends on what they think other people like, and what the market “wants” at any point in time depends on its own history.

  Faced with this dynamic, executives will do everything they can to gain the upper hand in a battle with their rivals right from the time of launch—which means opting for a wide release strategy. Achieving scale from the moment of introduction is critical. In the case of Born This Way, for instance, it would be very risky to rely primarily on word of mouth: any loss of traction with initial audiences could seriously hinder the album’s launch. Especially with a high-profile artist like Lady Gaga, attempting to raise a high level of awareness among the largest possible audience in advance of a new product’s release is in fact the safest approach. “We chose a big launch because we could,” is how Interscope’s Berman put it. “Leave no stone unturned” was Carter’s motto ahead of the Born This Way campaign: in other words, use every opportunity to make the launch as big as it could be. Similarly, no film-studio executive in his right mind will launch a $200 million movie on a few screens in the hope that word of mouth carries the picture to a wider audience. Smart executives will do what is in their power to create buzz and open big, so as to avoid their products losing the battle for early adopters.

  The preference for a so-called push strategy involving wide distribution and high advertising intensity has everything to do with a second characteristic of entertainment products: their experiential nature. This is not to say that consumers will mindlessly choose whatever is put in front of them just because they cannot reliably assess product quality before the moment of consumption, but wide distribution and marketing can make a substantial difference. “In the business, we say ‘you can buy an opening weekend,’” Horn said. “You can spend so much that audiences will show up. It will be disappointing f
or you and for them, but you can get them in those seats.”

  In the movie industry, study after study has shown that the best predictor of a movie’s revenues is the number of screens on which it plays. Sophisticated statistical models (some of which I developed in my own research) that are designed to tease out the tangled effects of factors such as genre, star power, seasonality, competition, and advertising invariably demonstrate that, all else being equal, an increase in the level of distribution is the most effective way to increase sales. Higher advertising expenditures help, too: advertising not only directly increases sales by triggering audiences to buy tickets, it also indirectly drives sales by reassuring theater owners that dedicating screens to a movie will be worth their while. In the music industry, radio airplay—the main way through which new music is promoted—continues to be a critical predictor of recorded-music sales. And in book publishing, distributing a large number of physical books remains a classic tactic.

  The fact that entertainment products are experience goods also explains the important role critics can play. Potential customers typically value the opinions of others who have already read, listened to, watched, or otherwise interacted with a product. Because judgments about the quality of these products are inevitably subjective, people tend to trust experts to tell them what to like. But the tastes of regular consumers matter as well, which is why Facebook, Twitter, and other online sharing tools, although mostly associated with grassroots releases, are just as relevant to wide releases. Because social networks make it possible to spread information and opinions about new products across the globe instantaneously, and because entertainment executives are often keen to benefit from that buzz, online sharing mechanisms can fuel ever bigger releases.

  A third feature of entertainment goods is that in general they are relatively expensive to produce but cheap to reproduce. The first copy of an album (the “negative”) often costs hundreds of thousands, if not millions, of dollars to produce. But once a record label has the first copy in hand, the company has to spend only a fraction of that amount to create more copies and distribute them—each physical record sent to retailers costs a few dollars at most, and even less if the album is distributed online. Not only does this make blockbuster products disproportionately profitable (the more copies sold, the lower the production and distribution costs per copy sold), it also makes media producers eager to earn back their investments sooner rather than later. With so much money tied up in their projects, time is of the essence.

  In some entertainment sectors, a wide release also makes it easier for media producers to plan multiple revenue windows, allowing companies to reap further rewards from hit products that carry low marginal costs. In the movie industry contracts between studios and theater owners are often specifically designed with wide releases in mind. Revenues can be shared on a sliding-scale basis, whereby studios receive a higher (and exhibitors a lower) percentage of revenues in the early weeks of a film’s release—giving studios yet another reason to aim for big openings. And such launches help protect executives from changes in audiences’ tastes in genres, stars, or other product features. The hunger for popular culture items can fade quickly—most are essentially “fads” or “fashions.” But some entertainment products are especially perishable or timely—think of a book about a politician running for election, or a new song by an artist who has just won a Grammy Award. For such products, if the necessary resources are available, experienced entertainment executives will favor a big launch over a limited campaign that plays out over many months.

  All in all, just as blockbuster bets at first glance seem risky but upon closer examination may in fact be the safer choice, releasing those bets in a manner that emphasizes big openings may seem to only heighten the risk but is often the smartest approach. Such launches are not for the faint of heart because they require huge up-front investments. With a wide release, entertainment executives are effectively doubling down on their investment. But they also increase the probability of achieving mainstream market success—which, of course, is critical to the profitability of blockbuster bets.

  For Lady Gaga, the meticulous preparation for a massive launch paid off in spades. Carter and his team used the long buildup to the Born This Way launch to take advantage of a series of high-profile, attention-grabbing events to which the superstar had been invited in early 2011, including the Grammy Awards, a taping of American Idol, and the season finale of the television mainstay Saturday Night Live. And team Gaga worked closely with retailers, super fans, the media, and a variety of other partners in a concerted effort to help grow awareness for the album and make sure that it would be readily available for prospective customers.

  Released on a wider scale than any other album in 2011, Born This Way sold 1.1 million units in its first week, making it just the seventeenth album to reach the one-million-copies-a-week benchmark since Nielsen SoundScan began tracking such data in 1991. Some say the sales total paints an unfair picture of the album’s “true” popularity, as online retailer Amazon sold an estimated 440,000 units for just 99 cents to promote its new cloud-based music service. But those critics overlook the fact that Amazon paid the same wholesale price that other retailers did and fully absorbed the resulting loss—as good an indication as any of Lady Gaga’s star power and the level of anticipation for the album. Within a year of its release, the album sold well over two million copies; during the same period, eighteen million copies of the album’s songs were sold. Whether Lady Gaga would have sold fewer copies had her team opted for a more gradual release is impossible to say, but her team did not want to risk finding out—and rightly so.

  Most creative goods, of course, are released on a much smaller scale than Lady Gaga’s album, yet many of these products have made a significant difference in the world of popular culture. The work of a small New York–based label is a case in point: Octone Records is among a select group of music companies that has perfected the art of creating hits with limited resources—and along the way demonstrated the value of a novel “hybrid” model that marries the strengths of both wide and limited releases.

  * * *

  Although he had the deep passion for music required for the job, James Diener never was your typical record-label executive. He mingled with top players in the private-equity sector, read Harvard Business Review articles just to keep up with the latest management thinking, and wasn’t afraid to try a different model of creating hits in a collaboration with music-industry legend Clive Davis. Diener, who began his career at Columbia Records and rose to the position of vice president of A&R Marketing at the label, had started Octone in 2000 to put a new philosophy on how to launch music to the test. By 2007, after Octone had hit home runs with the first two bands signed—the pop-rock quintet Maroon 5 and the alternative rock band Flyleaf—music-business insiders were following the small label’s every move. Initially rejected by the major labels, Maroon 5 had garnered both commercial and critical success, selling ten million copies worldwide of its 2002 debut album Songs About Jane and winning the prestigious Grammy Award for “Best New Artist.” Flyleaf’s first album, meanwhile, had reached gold status with more than five hundred thousand albums sold, and was heading toward the million-units platinum mark.

  With Diener in the role of chief executive officer and president, David Boxenbaum—fresh off a career as a strategy consultant at PricewaterhouseCoopers and sporting an Ivy League MBA—as general manager, and Ben Berkman as executive vice president and head of promotion, Octone was based on the belief that once a decision was made to sign an artist, it was the label’s job to do everything possible to realize the artist’s full potential. The team believed that most major labels were impatient, dropping acts too soon and failing to dedicate sufficient resources and efforts to building their audience. “When I worked at Columbia we signed a lot of acts that didn’t get a decent shot,” Diener told me. “I wanted to change that.”

  Octone introduced an innovative model that borrowed the be
st practices from both independent and major labels. The idea was simple. Octone would focus its efforts on just a few artists each year. Initially, like most independent labels, the company would rely heavily on grassroots marketing campaigns to gradually build its artists’ fan bases. But once artists succeeded to the point that they were on the verge of breaking through, the company’s distribution and marketing efforts would enter a second, more aggressive phase. To make this phase possible, Octone structured a unique joint-venture model with Sony BMG Music Entertainment, a major label that at the time had revenues of $1.75 billion and the second-highest share of the recorded-music industry (behind Universal Music Group). Diener had successfully pitched the idea of the partnership to Clive Davis and his colleagues at Sony BMG after the famed music executive, responsible for guiding the careers of superstar artists such as Whitney Houston and Bruce Springsteen, courted Diener to leave Columbia Records. Diener took on two roles: he became a full-time senior vice president of A&R and marketing at Sony BMG’s J Records while also running Octone.

  Under the terms of the partnership, Octone shouldered the initial costs of discovering and promoting its artists. Octone’s acts remained exclusively on Octone’s profit-and-loss statement until a so-called uplift into the joint venture took place. Artists could get uplifted in three ways, Diener explained. “First, if an artist reaches 75,000 records sold, Octone can elect to uplift the artist into the joint venture, and Sony BMG is required to accommodate this decision. Second, if an artist reaches 125,000 records sold, Sony BMG can compel us to uplift the artist. Third, both parties can mutually agree on a natural time in a project where it becomes appropriate to step in.”