Meanwhile, Diener and his colleagues continued doing what they do best: helping a select roster of new artists find an audience. And thanks to their partnership with Universal, the A&M/Octone executives can be confident that they can ramp up quickly the moment they strike gold.
Chapter Three
INVESTING IN SUPERSTARS
In June 2009, Florentino Pérez, president of renowned Spanish soccer club Real Madrid, finally got his wish—and so did the object of his desire, the reigning world player of the year, Cristiano Ronaldo. Completing what Pérez described as a “dream move,” Real Madrid purchased the twenty-four-year-old Ronaldo for a record transfer fee of $125 million, to be paid to his previous club, Manchester United, and the promise of a rumored annual salary of more than $10 million. Earlier that month, the Madrid club had acquired Brazilian midfielder Kaká for a lower but still jaw-dropping amount—$92 million—from AC Milan. But Ronaldo, who had racked up an impressive tally of well over one hundred goals in nearly three hundred games for Manchester United, had long been Pérez’s top target.
The recruitment of Ronaldo was in many respects a return to what Pérez had termed his Galácticos strategy, a forceful effort to attract some of the world’s biggest stars to his club. Galacticism reached its peak when twenty-eight-year-old David Beckham, one of the sport’s towering names, was added to an already star-studded team that consisted of the Brazilians Roberto Carlos and Ronaldo Luís Nazário de Lima (commonly known simply as Ronaldo and not to be confused with Cristiano Ronaldo, the Portuguese soccer star), Frenchman Zinedine Zidane, Portuguese Luís Figo, and the Spanish forward Raúl and goalkeeper Iker Casillas. Over a thousand journalists attended the press conference during which Beckham was presented to the public as a new Madrid player. And the event was held at eleven a.m. local time to make the evening news broadcasts in Asia where Beckham was particularly popular. (The UK’s Sun newspaper, meanwhile, set up a help line for distraught British fans.) The star-focused strategy was so ingrained in the club’s thinking that in business presentations Real Madrid’s executives named individual seasons after the Galáctico the club had landed that year: Zidane in 2001, Ronaldo in 2002, and Beckham in 2003.
Pérez’s approach had brought Real Madrid a great windfall off the field, triggering strong growth each year and turning the soccer club into the world’s biggest as measured by revenues. Founded in 1902 and proclaimed royal (“real”) in 1920 by the king of Spain, the club attracted eighty thousand enthusiastic supporters to each of its home games in the Bernabéu Stadium, and had an estimated one hundred million fans around the globe. Real Madrid had risen to global prominence in the 1950s when it won the first five European Cup competitions. But the club’s fortunes declined in the 1970s, a slump that lasted two decades. In 2000, Pérez ran for club president on a campaign promise to woo superstar Figo from arch-rival FC Barcelona. (Real Madrid is owned by its members, and its president is elected by those members to a four-year term.) Once in office, Pérez not only made good on his promise, but also worked with his team of professional managers to turn around the club’s precarious financial situation and extend its brand around the world. In Pérez’s second season, Real Madrid captured a victory in the European Champions League—by then the most prominent international competition for club teams. Madrid’s on-field performance in subsequent seasons, however, largely failed to live up to the huge expectations.
Prompted by an unprecedented three seasons without any trophy, the Galácticos strategy was scaled back under Ramón Calderón, elected as president at the start of the 2006–2007 season. “We don’t necessarily need players who do well with the media—we need players who are good for the team,” Calderón told me at the time, in an obvious dig at the Galácticos strategy in general and Beckham in particular. “We put less emphasis on the stars, and more on the team as a whole.” Another club executive I spoke with agreed: “The model worked very well initially—we have become the standard in international football. But we suffered on the sports side.” The director of Calderón’s cabinet offered an especially acute analysis: “The true art of managing a football club is knowing how to strike the balance between business and sports. In the Florentino Pérez years, we were too focused on marketing, and not enough on sports. Pérez’s idea of bringing in the most talented players and emphasizing the ‘show business’ aspect of soccer was very innovative. It made it a true spectacle. However, it was extremely difficult to manage: the accumulation of stars produced excesses that we could not correct. It led to big egos, commitments we had to make to our stars, and jealousy among players who were not ready to share the spotlight. So we try to balance that more now.”
But Calderón could not see his “Beyond the Galácticos” strategy through; he was forced to resign in 2009 following allegations of rigging votes for a budget proposal. Within months, Pérez was back in the saddle. And with the acquisition of Cristiano Ronaldo, one of Pérez’s first major moves, it appeared that Galacticism was back with a vengeance. Now that the returning president had his second chance, friends and foes alike wondered whether Pérez’s investments in global superstar players would continue to pay off—both on and off the field—even as the competition for talent was getting more intense.
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The key question here—does betting on A-list talent make sense?—goes to the core of how a wide range of entertainment companies operate, and is crucial to their blockbuster strategies. Granted, professional soccer clubs are far from regular businesses, especially those that, like Real Madrid, are member-owned and led by an elected president. But that does not mean that the challenges confronting soccer clubs when recruiting and managing talent are different from those experienced by other entertainment businesses. In fact, we can learn a lot about effective talent strategies from soccer clubs, especially from European teams that have relatively few regulations to interfere with free market principles. (Their American counterparts in soccer, football, basketball, and baseball are all characterized by a redistribution of wealth and talent that rewards underperforming teams in the hopes of fostering a healthy dose of competition on the field.) European soccer clubs live and die by the same kinds of market economies that affect businesses in many other sectors of the entertainment industry: even within the premier European leagues, clubs can differ greatly in their wealth and prestige, and therefore in their ability to afford superstar talent.
Real Madrid, now one of the world’s largest franchises in all of sports, has put a huge bet down on its strategy of signing superstars. Its approach is akin to—and in fact was inspired by—film studios, television networks, and other media businesses that invest enormous sums in A-list talent. “We began to think of ourselves as content providers,” said one executive as he reflected on Pérez’s first term. Another executive, making a direct comparison to the film business, added: “The players and the games—that is the content. The ‘movie’ we are selling is worth more if, say, Tom Cruise is in the lead.” To understand successful models of content exploitation, club executives looked closely at how Disney’s movie studio commercialized its biggest hits. “To transform Real Madrid we went partly against what experts were used to,” explained one of Pérez’s close confidants. “Soccer is over 100 years old, and it takes a while to change the rules of the game.”
Evaluating the wisdom of Pérez’s approach—and assessing the superstar strategy more generally—requires that we understand a couple of important features of the market for creative talent in which content producers like Real Madrid compete. First, the few performers and other creative workers who have risen to the highest level in their field (professional athletes, A-list movie stars, best-selling authors, and Grammy-winning pop singers) often earn extremely high fees while a much larger group of also-rans in these sectors barely earn a living. The differences between the “haves” and the “have nots” can be staggering. Cristiano Ronaldo’s eight-figure annual salary is one case in point. Paychecks in Hollywood also illustrate the dispar
ity vividly. In 1995, Jim Carrey famously became the first star to command $20 million for his role in The Cable Guy as the dementedly overeager cable repairman. Tom Cruise reportedly earned more than $70 million—a 22 percent share of total box-office receipts—for Mission: Impossible, and another $92 million for its sequel. Most members of the Screen Actors Guild, the union to which virtually all working film actors belong, are less fortunate: two-thirds make less than $1,000 a year (yes, a year).
Even within teams of entertainers, athletes, and other creative workers, the differences can be stark. When David Beckham joined the Los Angeles Galaxy after leaving Real Madrid in 2007, he signed on for a guaranteed salary of over $100,000 per week (not counting any bonuses), while some of his new teammates earned less than $20,000 per year. Additional sources of income tilt the balance even more in favor of a select few stars. In sports such as soccer, basketball, and tennis, for instance, the lion’s share of the industry’s endorsement revenues goes to the small group of players at the very top.
A second characteristic of markets for creative talent is that the level of earnings for superstars is mostly determined by their relative performance—in other words, how they stack up against their peers—as opposed to some absolute yardstick. This feature is perhaps most noticeable in the world of sports. Consider Rafael Nadal, by all accounts an excellent tennis player. If it were not for Roger Federer, who for years stood in the way of Nadal being the top-ranked tennis player in the world, Nadal could have earned millions more in prize money and endorsements. What mattered was not the quality of Nadal’s tennis per se, but the quality of his performance relative to that of Federer (and, in more recent years, to that of Novak Djokovic).
The position of quarterback for the New England Patriots provides another example. When Tom Brady, the team’s star, tore his knee ligaments in 2008, Matt Cassel, Brady’s backup, saw his earnings increase sharply. Although Cassel should be commended for making the most of the opportunity—in 2009, he landed a six-year, $63 million contract with the Kansas City Chiefs—there is little reason to believe he would have escaped obscurity if it weren’t for Brady’s temporary absence. Brady himself is well acquainted with the difference between the “haves” and the “have nots”: without an injury in the 2001 season to Drew Bledsoe, who was the Patriots’ quarterback when Brady was drafted with the 199th pick, Brady may never have gotten his chance to establish himself as the franchise quarterback and reap all the rewards that go along with being on top.
Markets with these characteristics are “winner-take-all markets,” a term popularized by the economists Robert Frank and Philip Cook. But as they explain in their book on the topic, a more fitting term might be “those-near-the-top-get-a-disproportionate-share markets.” In these markets, the efforts of only a small number of people at the very top—the superstars—largely drive the value of what is produced. Executives like Pérez are intimately aware of the winner-take-all structure—they know they have to pay handsomely to attract stars like Cristiano Ronaldo. But, the question remains, why? Why do these winner-take-all markets for creative talent emerge and persist, despite the seemingly endless supply of people willing to work for next to nothing, hoping for their big break in sports or show business? It is one thing when a single individual is primarily responsible for the product—a solo recording artist, a book author, or a painter—but when entire teams of creative workers come together to produce an entertainment product such as a soccer game or a movie, why would anyone consider paying tens of millions of dollars for an athlete like Ronaldo or an actor like Tom Cruise?
A first (and admittedly obvious) observation is that, even when goods are produced in teams, one creative person can have a profound impact on the success of those goods. Ronaldo can do things with a soccer ball that most amateur—and indeed most professional—players can only dream of. He is faster and more skilled, and he has a greater knack for scoring from impossible positions than all but a handful of people on the planet. His assists and goals make him tremendously valuable to Real Madrid, since his actions often translate into victories that, especially in the European Champions League, can yield substantial prize money. But pure talent is not the only reason why Ronaldo is worth so much. A single creative worker’s impact on success is seldom easy to establish, especially outside sports: it is much less clear, for instance, that there are no actors who can match Tom Cruise’s, Mark Wahlberg’s, or Channing Tatum’s acting chops.
This point leads to the second reason why a select few at the top earn such high rewards: they have become what marketers call “product attributes.” Many of today’s biggest stars are brands in their own right, and they can often be a deciding factor in a consumer’s decision-making process. The mere involvement of a certain actor, musician, or sports figure can affect a consumer’s choice to buy or pay attention. Ronaldo’s actions make people want to watch him—when he is sprinting down the field with the ball, something is bound to happen—which converts to ticket sales for the club or eyeballs for advertisers. Likewise, at the height of Cruise’s popularity, hordes of fans would take a gamble on his movies because they had come to expect that the films he starred in would be entertaining. Superstars can also turn a consumer into a fan of the overarching brand. When the LA Galaxy offered David Beckham a very lucrative contract to play for their franchise, the club’s executives were hoping that Beckham would not only lift interest in their team, draw new fans, and increase the sale of jerseys and other branded merchandise, but also raise the profile of Major League Soccer as a whole. Creative talent not only makes the product—in many ways, they are the product.
Many consumers are perfectly happy to know only a few professional athletes, musicians, movie stars, and other performers by name, just as consumers will typically not care to remember more than a small set of brands of other consumer goods, be they detergents, beverages, or toothpaste. Die-hard fans of a particular form of entertainment may find it difficult to believe, but most consumers simply do not have the energy or time to focus on any but the top performers. And since people are drawn to winners, the best (or even just the most visible) performers enjoy a substantial advantage over their teammates and rivals.
The winner-take-all effect is especially strong in entertainment markets because performances of the most sought-after creative talent can be reproduced at low additional costs. Through media such as books, film, video, television, and recorded music, consumers have easy access to the world’s most talented creative workers. The best performers can literally be everywhere at once, especially in the digital age. And since it costs no more to print or stream, say, a record by a superstar like Jay-Z than a record by an unknown rap artist that most people will value less, A-list talent almost inevitably dominates the market. No wonder, then, that the biggest stars in entertainment usually wield a great deal of power at the negotiation table.
To some extent, the pain for entertainment businesses is self-inflicted. Those responsible for casting actors, signing musicians, selecting athletes for endorsements, and recruiting talent for other activities are often tempted to play it safe by hiring an A-list performer even if they do not believe that person is necessary for the task at hand. They hire “a name” for fear of making a mistake. It is difficult to blame them: can we really fault the manager of a world-renowned soccer club for recruiting a proven star player rather than a talented up-and-comer, or a casting director who is staffing a $100 million movie for relying on an A-list actor with a strong track record rather than someone less established? Even if hiring the more obscure actor would involve a much lower fee, the fear of disappointment looms large: after all, if the film stumbles at the box office, it is easy to point fingers at the person who “failed to hire the best.” And after a losing season it takes a brave soccer-club president to say, “We’ll try again next year with the exact same team,” even if losing came down to a last-minute fluke goal. Most executives will feel they need to act—and their reflex often is to bet on established sta
rs and proven winners.
A reliance on popularity also characterizes the industry players involved in marketing a product; they, too, are swayed by the presence of stars. Studios will find it easier, for instance, to sell movie exhibitors on dedicating a large number of screens to the opening of a film that stars Will Smith or Leonardo DiCaprio as opposed to one that has a no-name actor in the lead. And because screen intensity is in turn such a critical driver of revenues, the response from exhibitors helps reinforce the idea that Smith and DiCaprio are bankable actors. Similarly, the attention that advertisers lavish on David Beckham—fashion retailer H&M’s 2012 Super Bowl spot featured him in nothing more than his underwear and tattoos—keeps the soccer star in the spotlight, solidifies his brand, and drives up his endorsement fee. Even a performer’s personal life can come into play. Beckham’s much-buzzed-about relationship with a former Spice Girl first made him a household name among non-soccer fans in Britain, and what initially may have been a subtle advantage for Beckham compared to other top-notch professional soccer players ultimately translated into a highly lucrative career built around the Beckham brand. Often, the more performers are in the public eye, the more they become stars.
In most instances, winner-take-all markets emerge because a large number of buyers, be they music aficionados or book consumers, are willing to pay a little more for (or pay more attention to) the services of one performer over another. In some cases, however, the concentration of rewards among top performers is fueled by a small number of wealthy buyers who are intensely interested in a particular winner. Their money can instantly propel talent to the top level of compensation in their profession. Presidents of rich European soccer clubs fit this description: a promise to their fans to sign a certain star player can lead to excessively high transfer sums. When Pérez vowed to bring Figo to Real Madrid if he were elected, he gave Figo’s then club, FC Barcelona, every reason to start salivating over the money that would come its way.
Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment Page 10