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

by Anita Elberse

  Before an artist’s uplift, Octone received all revenues and paid the artist’s advances, all expenses related to recording the album, manufacturing costs necessary to physically produce the album, tour support, promotion and publicity, and other fees. But after the uplift, Sony BMG was responsible for all new costs, be they distribution, promotion, or sales efforts. From this moment on, Sony BMG and Octone equally split the profits, while Sony BMG covered all losses. Post uplift, Octone continued to provide creative and marketing direction to Sony BMG’s efforts, but its options for forcing Sony BMG to action were limited. “The risk in uplifting an album is that you lose total control,” said Boxenbaum. “It can be a challenge to manage a relationship with a partner label.”

  Crucial to the launch of Octone were Laurence Fink, the chief executive officer of investment management firm BlackRock, and Howard Lipson, then senior partner at prominent private equity firm The Blackstone Group. Diener had met Lipson and Fink in 1999 and asked them to fund the proposed new record label. Successful Wall Street financiers and avid music fans, they solicited a group of private equity investors and raised a total of $5 million in initial working capital. “We should have lost all of our money,” recalled Fink. “The business conditions in the music industry are very difficult and there are sea changes going on that are seismic. However, Octone shows that you can beat the trends.”

  “Many independent labels did not have sufficient funds to execute their ideas or were going to run out of money before they could make it,” added Lipson. “Therefore, they had to rely on an economic affiliation with a major label in which the major controls everything and the upside for the independent label is limited. Octone was well-capitalized, so we knew we had time to reach a certain level and fulfill our mandate. There was nothing we could do to guarantee success, but we set Octone up so that it could succeed.”

  For all its success in beating the steep odds of scoring a hit in the music industry—most record companies recovered their investments in only one out of every five or six new albums—Octone had not traveled a perfectly smooth road. Success had proven elusive for the third artist on its roster, Georgia-based singer-songwriter and guitarist Michael Tolcher. Although Octone spent over $750,000 marketing Tolcher’s first full album, I Am, it sold only one hundred thousand copies, not enough to recover the costs incurred. Now, as they contemplated their next move, Diener and his colleagues faced three options. They could “grind it out,” industry parlance for supporting the debut album over a prolonged period by leveraging the small beachhead of fans Tolcher had established on his last US tour in 2006; they could increase the stakes by backing a second album; or they could cut their losses and instead focus on other artists.

  * * *

  Is there a logic behind Octone’s efforts to pursue a hybrid model that combines a grassroots with a more mainstream release strategy? Is such a model the answer to the entertainment industry’s woes when it comes to consistently creating hits? Finding answers to these questions starts with the realization that, in most entertainment markets, a content producer’s scale and its product-release strategy are closely linked. The larger a media company, the more it can afford to put significant marketing efforts behind a product in an attempt to create a hit. But scale also comes with disadvantages. And both those advantages and those disadvantages explain what Octone executives are attempting to do, and whether their model may be here to stay.

  Smaller and larger content producers are different in their approaches. First, they vary in terms of the number of products they bring to the market. In the music business, major labels—the industry’s biggest powerhouses, such as Sony BMG (now called Sony Music)—tend to have hundreds of artists on their roster, including multiple bestsellers. Alicia Keys, Beyoncé, John Mayer, Britney Spears, and Justin Timberlake were some of the artists on Sony BMG’s roster at the time the executives at Octone were trying to determine their next step. Small “indie” labels, on the other hand, tend to have only a few artists. That, in turn, can mean that the success of one artist is essential to the small label’s overall fortunes. For all its success, Octone heavily depended on its number one act, Maroon 5: the superstar band brought in more than $10 million in annual profits in North America alone.

  Second, while larger players will often prune products quickly after a failed market launch (Sony, for instance, might terminate up to forty underperforming artists in a given year), smaller producers tend to support their products over a relatively long period of time. Larger labels typically do not invest a great deal of time in an album by a new, unproven artist; their strategy often comes down to giving an act one big push to see if the music catches on with fans. Because a major label has abundant resources and several blockbuster artists, it can afford to take a home-run swing and miss. Because of its high overhead costs, a major label also needs quick successes: it may not have the patience that is necessary to “break” an act through a series of small victories over a long time horizon. After all, the “next big act” in the label’s portfolio is always awaiting its turn.

  By contrast, smaller labels like Octone are more committed to developing artists longer. “We tend to stick with our artists,” is how Diener described it. Octone both can and has to do so because of its smaller roster. It can afford to spend more time on its artists. According to Boxenbaum, the label’s lower costs—in 2007, it counted only ten employees—and its freedom from the pressure of quarterly earnings reports allow the Octone team to take its time to nurture each project. But it also has to make things happen with each of its artists for its model to work: it has limited content to fall back on if one of its new releases were to fail. “We put ourselves in a position of having no choice but to push harder to make our releases work,” noted Boxenbaum.

  These differences affect how content producers typically release their products. The larger label’s wider portfolio and focus on short-term success are suited to a more mainstream release approach built on distribution and marketing strengths. Major labels often stage elaborate marketing campaigns before and around the launch of albums, usually involving a strong push for radio and video airplay and other forms of advertising and securing shelf space in large music and mass-market stores—much like the campaign for Gaga’s Born This Way album. Meanwhile, smaller labels rely heavily on grassroots marketing techniques, such as using “street teams” of fans who have volunteered to promote the band (and are often recruited via the Internet and at concerts), social-networking techniques, distribution through small record stores (those that do “not just stock but actually sell records,” as Boxenbaum once put it), and extensive touring to refine an artist’s sound and gauge fan interest. These techniques go hand in hand with a gradual rollout of artists and their music, which fits Octone’s style of fostering deep connections with fans—much like Lady Gaga originally built a relationship with her fans.

  Diener understands the advantages of scale as well as anyone: “Major labels are essentially in the volume business. They have the resources to push artists via mainstream outlets, and they have the ability to achieve economies of scale once sales momentum has been created. There is a reason that the majority of records sold today is distributed by major labels. Most independent labels are not well funded, and most owners or operators of those independent labels do not have the expertise of major labels.”

  But he also knows that smaller labels can really nurture artists they feel hold artistic promise, even if it means forgoing early profits. “They excel in specialized artist development and marketing strategies, often employed over longer time horizons, that have launched many of today’s biggest selling artists,” remarked Diener, who pointed out that music that crosses established genres or otherwise does not fit the mainstream mold of the music industry usually comes from smaller labels. Smaller-scale producers may be better positioned to innovate—or, to put it in familiar terms, they may be less likely to fall into the blockbuster trap by spending big on acts that sound just like past
winners. It’s telling that Adele, who sounds and looks very different from any other artist that dominated the charts before she did, was nurtured by an indie label, XL Recordings. Any music company hoping to copy her phenomenal success will find it has to pay top dollar for artists that could be “the next Adele.”

  Clearly, then, a partnership between a larger and smaller content producer, when structured in the right way, can bring the best of both worlds together: the smaller producers’ ability to innovate, and the larger producers’ power to market those products to a mass audience. For a smaller player like Octone, being able to tap into the distribution and marketing strength of a behemoth like Sony BMG brings substantial advantages. As Diener put it: “When artists are on the verge of breaking through, there is nothing like the marketing power of a major label to bring that final push.” Boxenbaum agreed: “There are independent labels that have no relationship with major labels. They are just out there plodding along, they are surprised when an album starts to take off, and then they are stuck because they cannot take their campaign to the next level.”

  Octone’s joint venture solves that problem. It helps the label to secure shelf space in retail chains such as Walmart and Target that rarely take risks on new artists, and to get the artists’ songs played more on popular radio stations and video networks—the kinds of marketing actions that are commonplace for the major labels. Although borrowing Sony BMG’s marketing power comes at a significant cost—half the profits—Octone is banking on sales to be elevated to such an extent that they will make up for the lost share of profits.

  That is what seems to have happened with Maroon 5. Signed by Octone to a five-album deal in 2001, the category-blurring band entered the studio that same year. The resulting album, Songs About Jane, featured pop rhythms, classic soul melodies, searing guitars, a powerful rock undercurrent, and lead singer Adam Levine’s expressive voice. The record was completed in February 2002 and released in the summer of that year. But generating radio airplay and sales proved far from easy. To remedy the situation, later in the summer of 2002, Octone organized a so-called branch tour that enabled invited radio station programmers and regional managers of record retailers to see the band perform, identified a number of retailers that received discounts and marketing support, and set up a tour schedule that ultimately lasted an almost unheard-of three years and involved opening shows for more established bands—it fought a “ground war,” as one Octone executive put it. The strategy worked: in the spring of 2003, Maroon 5 fulfilled the uplift requirement.

  Sony BMG then stepped in to fund all of the band’s promotion, sales, and marketing activities and helped bring the band into more mainstream record stores, radio stations, and concert venues. From that moment forward, sales of the album took off. Helped by the marketing push, the record rapidly ascended the charts—domestically and internationally. At the height of its success, in December 2004, Songs About Jane sold well over 100,000 copies in a single week. It also yielded four hit singles, including This Love and She Will Be Loved, which together topped the charts for ten weeks in 2004. The album ultimately achieved quadruple platinum status in the United States, and reached gold or platinum status in over thirty-five countries.

  The partnership wasn’t just worthwhile to Octone; Sony BMG benefited, too. For them, the partnership reduced risk. “The dollars spent by Octone, prior to uplift, are the riskiest in the project,” Diener said. “Those spent by Sony BMG at the moment of the uplift are some of the surest dollars spent in the music business.” In the early stages of an act’s career, it’s difficult to know how the group’s music will be received in the marketplace. By the time Sony BMG enters the picture, the band has already shown its ability to sell records. This is market feedback a label executive can rely on, thus making any further investments in the band safer than those in any untested new act. The lowered risk comes not just from the level of sales achieved; it is also the result of having a base of dedicated fans, name recognition, and greater sophistication about how to handle the media. “By the time of the uplift, Sony BMG can be confident that our artists have done two hundred photo shoots and two hundred interviews, and know how to tell their story to the press. They also have improved a great deal as performers and know how to connect with an audience either in a large concert hall or in a more intimate venue such as a club,” Boxenbaum explained.

  Are these gains worth the trouble for Sony BMG? Could a major label not establish one or more separate divisions that function much like Octone does, each being responsible for a small roster of artists, so as to avoid having to share half of the upside of an uplifted artist? That surely is a possibility. But fully merging the cultures of a major label and a smaller one can prove challenging, and managing the costs of such “R&D divisions” can be tricky—Sony BMG would have to have a high rate of success in developing and nurturing artists in order for this strategy to be effective. A partnership like the one with Octone encourages Sony BMG to be more disciplined in making development and marketing investments: Octone’s efforts allow Sony BMG to pick its battles.

  The worth of Octone’s model to major labels became apparent in early 2007, when Universal Music Group’s Jimmy Iovine proposed to buy out Sony BMG’s share in the joint venture and so bring Octone over to Universal. The offer established Octone’s valuation at approximately $70 million. Diener’s team accepted the proposal and soon relaunched their label as A&M/Octone under the Universal banner.

  * * *

  Lacking the necessary resources to support a product on the verge of taking off is a key problem for many smaller content producers. But there’s an issue they struggle with far more often that could ultimately prove more costly—that of not knowing when it is wise to stop investing in a product that is not quite catching on. Octone was experiencing that problem firsthand with its third act, Michael Tolcher.

  An artist who hailed from Lovejoy, Georgia, Tolcher was in the midst of a string of cross-country gigs in clubs, bars, coffeehouses, and parties when Octone’s executives discovered him in July 2002. They liked what they heard of a subsequent demo recording but still found him to be a little unpolished. “Some bands are very slick from the get-go and they have a lot of experience with production equipment and studio boards, but Michael was different,” Boxenbaum recalled. “We didn’t want to rush out a commercial recording before he was ready.” Octone sought to strengthen Tolcher’s fan base by arranging opening shows for such established artists as Crosby, Stills and Nash, Sister Hazel, and Everclear, and by creating opportunities to play in small clubs and bars.

  Tolcher’s time on the road inspired many of the songs on his first full album, I Am, which was released in May 2004. By 2006, Tolcher was back on the road, touring extensively and accompanying Michelle Branch, Maroon 5, Gavin DeGraw, and numerous other acts. He also made television appearances on Jimmy Kimmel, Last Call with Carson Daly, and several network morning shows. Tolcher’s single, Mission Responsible, received some airplay on the radio but the attention proved short-lived. By early 2007, I Am had sold a total of a little less than one hundred thousand copies, a lackluster performance given that he had been uplifted after the album achieved seventy-five thousand in cumulative sales. Worse, Octone’s losses on the artist now totaled around $800,000—and they were increasing every day.

  Octone’s predicament with Tolcher illustrates the difficulty in knowing when to stop investing in a product or artist launched using grassroots techniques. That’s the critical issue with such limited releases: success could be just around the corner, in which case investing more seems the right thing to do, as it was with Maroon 5. But it is also possible that success may never come, in which case each additional dollar spent is a waste. Because the signals coming back from the market are noisy at best, it is virtually impossible to determine the right course of action. Boxenbaum, with all his experience in the music industry, realizes this all too well: “The great artists and the bad artists are easy—it is the good artists that can ki
ll you. With the great artists you just keep putting fuel in their tank. With the bad artists, you realize your mistake quickly and cut your losses. It is the good artists that bankrupt you because they are good enough to make you think they are about to turn the corner and therefore keep you spending.”

  Octone—by then A&M/Octone—ultimately decided to give the artist one last push. The label released a new single, supported by heavy online and video promotions. However, the efforts did not generate the market response the executives hoped for, and in 2008 Tolcher was released from his contract. Knowing when to pull the plug on an investment, Diener and Boxenbaum have found out, can sometimes be the most critical decision of all. This is especially important in the entertainment business, where the odds of success for any given product are so low.

  Fortunately, the label’s blockbuster act Maroon 5 fared much better. Relying on Universal’s distribution and marketing resources, A&M/Octone released the group’s second album, It Won’t Be Soon Before Long, in the spring of 2007. Featuring a duet with pop star Rihanna, the album debuted at number one on the Billboard album chart and went on to sell over four million units worldwide, earning the band two more Grammy Awards. The band’s third album, Hands All Over, got off to a more modest start, but received a huge boost from the success of its fourth single, Moves Like Jagger, which became the ninth best-selling digital single of 2011 with worldwide sales of seven million copies. Lead singer Adam Levine’s turn as a star judge on NBC’s The Voice further propelled the band—and its appropriately named fourth album, Overexposed, released in 2012—into the mainstream market.