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

by Anita Elberse

  In the music business, record companies have also restructured contracts with artists so that the labels receive a higher return on their talent-development efforts. A “360” or “all-rights” deal gives the record company a share of all of an act’s revenue streams, including recorded music, concert-ticket sales, merchandising, commercial licensing, sponsorships, and endorsements. These deals mark quite a departure from a traditional record contract, which grants record labels a share of recorded-music sales only. Lady Gaga, for one, agreed to an all-rights deal with Interscope in 2007—an agreement the label will never regret, given her spectacular success. But Troy Carter also acknowledged the merits of the deal: “Would she be in a position to play in front of 20,000 people a night if the record company had not put up the marketing dollars?” he asked rhetorically. A&M/Octone’s executives are fans of the new contract, too, since it fits their artist-development strategy. Diener sees artists not just as sellers of recorded music but also as brands—and he believes labels should get rewarded for building those brands. Boxenbaum agreed: “The all-rights deal is, in reality, a better reflection of what the record industry’s business model should have been all along. If a label is doing its job well, it isn’t just selling a song or an album, but it’s marketing the artist and building the artist’s brand.”

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  Boca Juniors and other soccer teams reap the benefit of their talent-development efforts in a more direct fashion: they make money every time they sell a player to another team. Boca has been shrewd about protecting that vital income stream, too: for instance, the team requires youth players and their parents to sign a contract that gives Boca ownership of the player’s professional career. The club goes to great lengths to ensure that its contracts are enforced—not easy in a world in which European teams try to lure players away at an early age, and sometimes go so far as to offer their parents a job. Boca has also worked to reduce the influence agents have over the players. It introduced limits on potential earnings for agents by capping both agency commissions (at $1.5 million) and third-party ownership of players (at 20 percent of a player’s value).

  In the end, Boca Juniors did indeed sell Fernando Gago to Real Madrid in 2006 in a deal that brought $34 million to the club. Palacio, however, remained with the team. Boca’s decision not to sell Palacio helps explain the club’s push for majority ownership of players: Boca owned Palacio only in part (its share came to 17.5 percent), with the rest remaining in the hands of his former club and a number of private investors, meaning Boca would have missed out on the lion’s share of the transfer fee. The complexity of these decisions was perhaps best expressed by Boca’s former president, Mauricio Macri. He successfully ran for mayor of Buenos Aires, and when I asked him a few months into his term whether it was more challenging to run a soccer club or a city, he responded: “A soccer club. Without a doubt.”

  The broader point is that savvy managers will find ways to match their method of investing in talent to their company’s overall business model. Real Madrid and Boca Juniors represent two fairly extreme illustrations of the approaches companies can take to investing in talent; most entertainment businesses will fall somewhere between superstar-acquisition and talent-development models. Finding the best balance between developing and acquiring talent is paramount.

  A third example from the world of international soccer—FC Barcelona, or “Barça,” as its fans call it—provides a good illustration. The club currently occupies second place in the “football money league” revenue rankings, behind Real Madrid. Some soccer enthusiasts like to believe that FC Barcelona has found a way to beat many of the world’s best clubs—on and off the field—by virtue of its youth development. But the reality, as often is the case, is a bit more complicated.

  FC Barcelona’s reputation for developing talent is well-earned. When Barça beat Manchester United in the 2011 Champions League, Newsweek magazine—not normally a news outlet that pays much attention to soccer—devoted its cover to the victory, asking “Barça! The Best Football Team Ever?” in giant letters set against a picture of coach Josep “Pep” Guardiola being hoisted in the air by star players such as Lionel Messi, Andrés Iniesta, and Xavi. Inside, the news magazine raved:

  For lovers of the “beautiful game,” Barça’s onslaught … was soccer played at its best, with huge skill and minimum thuggery. The focus of Barcelona’s play was on possession of the ball (or on winning it back during the rare moments it was lost), then attacking with an intricate choreography of precise, short passes where players moved on and off the ball in constant, fluid movement.

  The performance owed much to FC Barcelona’s youth academy, known as La Masia, which produced seven of the eleven players who started in that final. For the first time ever in FIFA’s history, three of those players were included in FIFA’s list of the world’s five best players, with top honors—the coveted Golden Ball award—going to Messi. FC Barcelona’s president, Sandro Rosell, described the club’s academy as a place “where we work on creating our own players, with the right soccer skills and with our own values—players who put the team first, have respect for others, are humble even in success, and are resilient.” Its mission was to bring one or two players into the first team each year. By the summer of 2011, over 560 players had lived at the academy, of which 14 percent had made their FC Barcelona first-team debut, and another 30 percent had played professional soccer elsewhere. Even Guardiola—the most successful coach in the club’s history—had been a La Masia youth player.

  Lionel Messi is undeniably the academy’s biggest star. He left Argentina at age thirteen, hoping to find a soccer club that could pay for the drugs he needed to treat a growth deformity. (Today he is five feet, seven inches, significantly shorter than most of his peers.) Now a three-time winner of FIFA’s Golden Ball, in 2012 he broke a four-decades-old record for the most goals scored in a calendar year. Messi has star power, too: when he joined Facebook in April 2011 (“I am so excited! From now on we will be more closely connected through Facebook,” Messi wrote), he landed close to seven million fans within seven hours, instantly overtaking tennis star Roger Federer. Many soccer lovers see Messi as the world’s most valuable player—not that FC Barcelona is planning to sell him anytime soon.

  At first glance, FC Barcelona’s focus on talent development indeed seems akin to that of Boca Juniors. The club invests heavily in its youth program: in 2011 the academy moved to a new $12 million facility at the team’s training grounds, and it now operates on an annual budget of roughly $25 million and has room for over eighty residents. When I visited the new youth academy shortly after its opening, I found the similarities between La Masia and La Cantera striking. Like Boca, FC Barcelona insists that its most promising youngsters reside in the academy, where they study together, have meals together, play video games and engage in other leisure activities together—and practice their soccer. Each week, youth players play one ninety-minute game and practice close to eight hours. The club teaches players its distinctive style of play, characterized by many short, quick passes and an uncanny sense of positioning. “We want them to really understand our style of play, so all our teams—from the eight-year-olds to the eighteen-year-olds—play the same system,” said director Carles Folguera. A network of scouts searches for young talent in Catalonia, in other provinces in Spain, and abroad. In its selection of players, the academy emphasizes both physical and mental strength, based on a belief that “resilience is the best predictor of success,” as Folguera put it. And, like Boca, FC Barcelona is very focused on education. “We know that over half of our boys will not become professional soccer players,” said Folguera. “That is why giving them an education is so essential.”

  Make no mistake, however: while FC Barcelona’s success is most closely associated with its focus on youth development, the club spends huge sums on superstar acquisitions as well. Executives may like to claim otherwise—“in the choice between buying talent or growing it in-house, we have chosen the latte
r,” the club’s chief financial officer said recently—the numbers tell a different story. In the five seasons before the summer of 2011, FC Barcelona made roughly $230 million selling players but spent $540 million acquiring them, an average loss on player transactions of $60 million per season. That number places the club behind Real Madrid and Manchester City—both of which had a deficit that exceeded $700 million during the same period and are among soccer’s biggest spenders on superstars—but ahead of Manchester United and Chelsea FC. To those who follow soccer, this may come as a surprise: Chelsea, owned by the billionaire Roman Abramovich and often seen as a poster child for irresponsibly high transfer expenditures, actually showed a lower deficit on its player transactions than FC Barcelona over this five-year period. When it chooses to be, Barça is as aggressive about acquiring talent as any club in the world: among the club’s biggest splurges were nearly $100 million for Zlatan Ibrahimović and $50 million each for David Villa and Dani Alves. “Even with a good team,” explained one of Barça’s executives, “we have to feed success by investing in new faces all the time.”

  The club also rewards its superstars royally. In fact, Barça is estimated to be the world’s best-paying sports team: according to ESPN, in 2011 the club paid each of its players an average of nearly $8 million per year (or just over $150,000 per week), closely followed by Real Madrid with an average of $7.4 million per player per year, the New York Yankees ($6.8 million), and the Los Angeles Lakers ($6.5 million). Several other European soccer teams also appeared on this exclusive list: Chelsea ranked sixth with $6 million, Manchester City tenth with $5.8 million, and Manchester United sixteenth with $5.1 million. With such high talent acquisition and salary costs, no wonder FC Barcelona’s chief financial officer worries about repaying the club’s debt, which he called “too high for the club to be able to dictate its future.”

  Because of the economics of the soccer industry and the complex regulations that govern it, Barça may have a harder time locking its young talent into long-term contracts and lower salary brackets than, say, a television network or studio. But that does not change the key takeaway here: for all its success in creating superstars, the club cannot escape the realities of competing for talent in a winner-take-all market. Like so many leading entertainment businesses, it is playing the high-risk, high-reward superstar game. “We won’t always win, so our challenge is to make our model sustainable in the ups and downs,” remarked the club’s chief financial officer.

  Barça may be closer to finding the right balance between developing and acquiring talent than most other sports businesses, but the need for investments on both fronts also means that it’s tricky for the club to manage its costs. It remains to be seen whether Barça’s model can stand up against inevitable downswings in on-field performance. Executives have recently said that they now strive to limit fees spent on player acquisitions, which seems a sensible step. But more than that, the club needs to ramp up its marketing operations so it can compete off the field with clubs like Real Madrid, which rely less on their on-the-field performance to boost revenues and have a head start in exploiting global markets.

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  Long the undisputed leader in building its business globally is Manchester United, among the biggest franchises not just in soccer, but sports as a whole, with an estimated brand value of well over $2 billion. FC Barcelona may have gotten the better of them in the 2011 Champions League final, but over the past two and a half decades Manchester United has had a far more consistent record on and off the field. The English club’s marketing operation is widely admired; in fact, Real Madrid’s executives have explicitly said that they modeled their approach after United’s. But much of the credit for the club’s achievements goes to one man: Sir Alex Ferguson, the most successful coach in British soccer history, who stepped down at the end of the 2012–2013 season. (As the club’s former chief executive officer, David Gill, told me before Ferguson’s retirement: “Steve Jobs was Apple. Sir Alex Ferguson is Manchester United.”) Covering every aspect of Ferguson’s approach to talent management would require another book, but what is perhaps most relevant here is that Ferguson had an especially clever, well-balanced portfolio approach to the club’s investments in talent.

  First, maybe even more so than FC Barcelona, Manchester United owes its success to its focus on youth development. Upon his arrival in 1986, Ferguson immediately set about revolutionizing United’s youth program. He established two new “centers of excellence” and recruited a number of new scouts, urging them to bring him the best young talent. One of the first young players identified and recruited was a willowy thirteen-year-old named Ryan Giggs, who would go on to become one of the greatest British soccer players of all time, playing his entire club career under Ferguson’s management. David Beckham is also a product of United’s youth program. “The first thought for ninety-nine percent of newly appointed managers is to make sure they win—to survive,” Ferguson told me when I visited the team’s training facilities. “They bring experienced players in, often from their previous clubs. But I think it is important to build a structure for a football club—not just a football team. You need a foundation,” he said, adding, “There is nothing better than seeing a young player make it to the first team.”

  Second, Ferguson kept a tight focus on the long term. At a moment when other managers might be tempted to reap short-term gains from players who are aging, Ferguson never hesitated to begin the hard work of rebuilding his team. His decisions were driven by a keen sense of players’ value over time, and he distinguished three layers of players: “The players from thirty and above, the players from roughly twenty-three to thirty, and the younger ones coming in. The idea is that the younger players are developing and meeting the standards that the older ones have set before.” Managing the talent-development process inevitably involves cutting players. “The hardest thing is to let go of a player who has been a great guy,” Ferguson said. “But all the evidence is on the football field. If you see the change, the deterioration, you have to start asking yourself what it is going to be like two years ahead.”

  Third, Ferguson was equally shrewd about how to work the transfer market to his advantage. In the past decade, one in which Manchester United has won the English league five times, he spent less on incoming transfers than the club’s main rivals—Chelsea, Manchester City, and Liverpool. He accomplished this by focusing on buying players younger than twenty-five years of age who he believed would become stars; that age group constituted a far higher share of United’s total number of transfers than those for its competitors. In addition, partly because of the club’s focus on young players, United made more from outgoing transfers than most of its rivals—and put that money to good use. For instance, money from the high-profile sales of Beckham and defender Jaap Stam was invested in two promising but at the time mostly unproven youngsters: Cristiano Ronaldo (the future apple of Florentino Pérez’s eye) and England’s own Wayne Rooney. It took a few years for their talents to blossom, but the duo ultimately became a dominant force in the English Premier League. And on occasion, Ferguson would shell out top money for a highly regarded superstar—in 2012, for instance, United purchased twenty-eight-year-old Dutch striker Robin van Persie for $35 million.

  As Ferguson’s strategy suggests, a portfolio approach to investments in talent can help an entertainment business survive and thrive, even in a fiercely competitive marketplace. Thanks in part to Ferguson’s relentless focus on finding the right balance between developing and acquiring superstars, he outperformed the typical short life cycle of a coach—and then some. The 2012–2013 season was his twenty-sixth as Manchester United’s leader, which made Ferguson the longest tenured coach among all active coaches in professional soccer in Europe. (It wasn’t even a close race: the second-longest tenured coach was a decade behind.) Most executives in other entertainment businesses would be thrilled if they held a high-level job for half that long—and no matter what their sector, they would do well to
follow Ferguson’s example in their own efforts to compete in winner-take-all markets for talent.

  Chapter Four

  HOW SUPERSTARS USE THEIR POWERS

  In November 2006, movie star Tom Cruise and his longtime business partner, veteran producer Paula Wagner, walked into the offices of Harry Sloan, then the chairman and chief executive officer of film studio Metro-Goldwyn-Mayer (MGM), in Century City, Los Angeles. They were there to finalize a partnership that would catch most Hollywood insiders by surprise: Cruise and Wagner signed an agreement to run United Artists, a dormant studio that was part of MGM’s portfolio. Cruise, Wagner, and Sloan made for a unique, powerful trio. Cruise had been one of Hollywood’s biggest stars for a quarter of a century, dating back to 1983’s Risky Business. Veteran producer Wagner had joined Creative Artists Agency, a leading talent agency, in 1980, as one of its first female agents, and she had been carefully guiding Cruise’s career ever since. And Sloan was best known for founding a media company in Europe in the 1990s, building it into the second-largest broadcaster on the continent, and selling it for $2.6 billion fifteen years later.