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It is only logical, then, that superstars are in a position to capture ever-higher rewards and, spurred on by agents, have a tendency to push for those rewards. That is especially true for stars at more advanced stages in their careers who have accumulated some wealth and thus can afford to take more risks. Those who make investments in talent, be they casting directors, talent scouts, or marketers looking for brand endorsers, should be keenly aware of this dynamic and do their best to make deals that suit their own business objectives. This holds true in all kinds of sectors, but it is imperative in the world of entertainment. Precisely because the odds of success are so low, talent life cycles are so short, and the potential rewards for superstars are so high, those who invest in creative workers are under tremendous pressure to get it right.
Companies hiring creative talent should think deeply about both the value and risk involved in any transactions. Whereas usually the value of talent—and with it the fees that talent can command—first increases and then decreases, the risk involved in any talent transaction tends to move in the opposite way, as illustrated by the chart above. As a creative worker advances through his or her life cycle, the risk inherent in the bets on that worker are likely to first decrease and later increase. Consider the world of soccer: when a player is still young, it’s difficult to predict whether he will become a star, but as time goes on, more of his true potential is revealed, thus reducing the risk for a club seeking to acquire that player. When the player ages and the possibility of injury increases, the risk involved in buying the player goes up again.
The Talent Life Cycle
Whether entertainment businesses can gain the upper hand in negotiations with talent depends in part on the talent’s career stage. It was telling that after Saturday Night Live executives introduced stricter contracts with new cast members, all but one of the young comedians signed the agreement anyway. They could not resist the lure of the legendary show, despite talent agents and managers advising their clients against the deal. “You are waving their dream in their face,” one manager told Peter Bogdanovich. “Once you say to your client, ‘You’re testing for SNL,’ they go deaf after that.… I kept saying, ‘It’s a precedent—you cannot let them do this to you.’ But they’re nothing now. They’re not getting paid a dime now.”
Later in their careers, successful actors gain more control. The cast of the hit series Friends famously waited until the end of their seven-year contract in 2000 to negotiate a new deal, bringing the fees of each of the six lead actors from a low six-figure number to around $750,000 per episode. Their decision to bond together helped them push for what at the time was a tremendously high fee. “They said, ‘You have to pay all of us exactly the same and it is all of us or none of us,’” recalled Garth Ancier, who was intimately involved in this negotiation on behalf of NBC.
In the music industry, concert-promotion giant Live Nation tailors the kinds of deals it makes with artists to their career stage. Traditionally, “a promoter [pays] the artist to play in one or more venues, and the artist [enlists] a team that produces the tour—the artist effectively hires the trucks and the buses, the crew, the supporting musicians, and the dancers, and pays for the hotels and the travel,” Arthur Fogel, chief executive officer of global touring at Live Nation, once explained to me. This is still the norm: the typical contract places most of the risk with the artist. But for musicians who have proven that they can fill arenas around the world, Live Nation now often negotiates “net deals” in which artists earn a percentage of net income and promoters are responsible for all costs. This is a smart move by Live Nation, since it makes it possible for them to provide a valued service to established artists—who are inherently less risky bets—and simultaneously share in their high rewards. Even Lady Gaga had to demonstrate that the first two dozen stops on her Monster Ball tour could sell out before she qualified for a net deal. Because Lady Gaga made well over $200 million more in revenues while signed to that net deal, making her Monster Ball tour one of the most lucrative concert series of recent years, no one at Live Nation has any regrets about the agreement.
Anticipating what creative workers will demand and what they will settle for at any given point during their careers is a constant challenge for entertainment-industry executives. The best-laid plans can go awry when a product suddenly becomes a hit and the star involved gains leverage. “Hollywood is notorious for people trying to renegotiate deals in the middle of their contracts,” said Ancier. The adult cast members of ABC’s Modern Family did just that in 2012: they sued producer Twentieth Century Fox in an attempt to increase their fees, even though they all had multiyear contracts in place and had already been offered substantial salary increases that would pay each of them hundreds of thousands of dollars per episode. Sometimes even modestly successful performers will attempt to improve their fees while under contract. As Ancier told me, “A manager of one of the girls in [the 1990s hit television show] 7th Heaven once called me, saying, ‘By only paying her $70,000 an episode, you are breaking a young girl’s heart.’ It was a seven-year-old. I mean, who writes this stuff?”
Increasingly, superstars in every entertainment sector are fighting for ever more innovative deal structures. The agreements they are pursuing nowadays often include a share of the revenues or an equity stake in the companies they work with. One performer who has been notably creative about pushing the boundaries on these talent compensation models—and the conventions of talent representation in general—is an already legendary basketball star who goes by the nickname King James.
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Worth more than $90 million before he even graduated from high school thanks to a sponsorship deal with Nike, LeBron James is one of the biggest stars in the history of the National Basketball Association (NBA). An almost freakishly talented so-called small forward on the court, the Akron, Ohio, native was Rookie of the Year in 2004, won a gold medal with Team USA at the 2008 and 2012 Summer Olympics, and led both his previous team, the Cleveland Cavaliers, and his current team, the Miami Heat, to the NBA Finals, winning the NBA championship with the Heat in 2012 and 2013.
James’s contract with Nike—believed to be the richest initial shoe contract ever for an athlete—instantly turned him into one of the country’s highest-paid sportspeople, and gave him the freedom to pursue a different model for his business interests. He embraced that freedom as few athletes have. In 2005, toward the end of his second year in the NBA, the then twenty-year-old James fired his agent, Aaron Goodwin, who represented a number of professional basketball players. To the astonishment of many sports-industry insiders, James did not switch to another agent. Instead, he established his own firm to handle all aspects of his business ventures and marketing activities—and he put his childhood friend Maverick Carter, then twenty-three, in charge of the company, along with fellow friends Randy Mims and Richard Paul. They called their firm LRMR, “L” for LeBron, “R” for Randy, “M” for Maverick, and “R” for Richard.
Carter had first met James at his eighth birthday party. He had coached James’s summer league team and was working for Nike when James became a bona fide star—when “LeBron turned into LeBron,” as Carter put it to me. By 2005, James was keen to run his own business—or, in his words, “be his own business.” Carter agreed: “I always felt he should take more control.… And LeBron is a true entrepreneur. This is the right fit.” Carter saw enormous potential: “David Beckham is bigger than what he actually does on the field. Jay-Z is bigger than Rihanna because of what he does, even though Rihanna’s latest album sold many more copies. When Anna Wintour, the editor of [fashion magazine] Vogue, called to say that they wanted LeBron on the cover, I knew he had reached that stage, too. He is bigger than what he does.”
It took the four friends a year and a half to establish LRMR and assemble a team of experts around them: a publicist, an accountant, an agent for contract negotiations, a PR person, and a lawyer. Taking basketball legend Michael Jordan’s billio
n-dollar brand as inspiration, their vision for LRMR was to pursue a new model of sports marketing—a “new financial model for the 21st-century athlete,” as Fortune magazine wrote. Instead of pursuing standard endorsements, James sought a revenue or equity share in the companies he worked with. Comparing LRMR with an agency like IMG, Carter explained: “The old model is a salesman’s approach. They would sell LeBron like they would sell mattresses! They go like, ‘We have six slots for endorsement deals—hurry up before we run out.’ Consumers figure this out. They know it isn’t real. It should be about the person behind the brand. Selling something is just a transaction. We want partnerships.”
One such opportunity emerged in late 2008. By this point, James had signed several lucrative endorsement deals, but he had not made any agreements with a company in the video game market. LRMR received three unsolicited endorsement offers: from Electronic Arts (EA), a powerhouse in the world of video game development, publishing, and distribution; from 2K Games, a subsidiary of Take-Two Interactive; and from Microsoft, which marketed its Xbox 360 gaming consoles and Xbox Live gaming service.
EA hoped to sign James to be the cover athlete for the new installment of the company’s flagship basketball series, NBA Live. EA offered James a two-year contract, proposing to pay him $400,000 in year one and $300,000 in year two. In return, EA expected James to make himself available for two days to shoot commercials and collaborate in the production of other kinds of promotional materials, as well as participate in two media appearances to promote the game.
2K Games, meanwhile, wanted James to become its signature athlete for NBA 2K, the most highly acclaimed basketball video game. It offered a two-year contract that stipulated an up-front payment of $300,000 for year one and $350,000 for year two as well as bonuses tied to various sales targets. (For instance, if the game sold more than 2 million units in year one, James would receive a payment of $500,000; if it sold more than 2.5 million units he would get an additional $250,000; and if it sold more than 3 million units, he would gain an extra $750,000.) 2K Games asked James to participate in three days of production and advertising activities.
The third potential partner, Microsoft, was keen to develop a downloadable Xbox Live game revolving around James. The company offered him a $250,000 advance against a revenue-sharing deal in which James could earn up to a fifth of the game’s revenues. Specifically, at less than $1.5 million in revenues, James would earn 10 percent; at between $1.5 million and $3 million in revenues, he would get 12.5 percent, and at more than $3 million in revenues, James would collect 20 percent of sales. Microsoft told James’s team that they could be heavily involved in the game’s development and decide when it would be released and how it would be promoted.
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How should we evaluate James’s marketing approach and the opportunities that come his way? It is safe to say that James’s business ventures have been better received than his much-hyped decision in 2010 to leave the Cavaliers for the Heat, but his choice to fire his agent and establish his own marketing company has drawn its share of critics. Yet it has also set the tone for more such start-ups. Well before he was relegated to the New York Jets bench and then picked up by the New England Patriots, quarterback Tim Tebow, for instance, jumped on the bandwagon at the height of “Tebowmania” in 2010 by launching his own marketing firm, XV Enterprises, run by his older brother Robby Tebow and family friend Angel Gonzalez. These and other “do-it-yourself” ventures have led some sports-industry insiders to question the traditional agency model.
Striking out on their own allows stars to avoid paying hefty agency fees, thus enabling them to capture more of the value they feel they can create. Robby Tebow described the reason for his brother’s entrepreneurial venture as follows: “We interviewed the top 15 marketing agencies in the world and went through their dog and pony show.… They were big and smooth and wore three-piece suits and some of them are very good at what they do. But one thing we realized is that they were talking about the things for [Tebow] that we were already thinking about. And when it came to negotiating we could do the job as good as they could and we weren’t necessarily worrying about that 20 percent cut.” But proponents of the traditional representation model might counter that an agency like IMG helps increase the total pie by lining up opportunities that the star and his family and friends may not realize exist or otherwise cannot turn into reality. Good arguments can be made for both points of view.
Another reason stars may want to establish their own businesses—and arguably one that matters more to James—is the increased control it gives them. They gain the freedom and flexibility to pursue the opportunities they value most. Stars may also use that greater control to drive for innovations in compensation models, which agents and salespeople at traditional, larger-scale agencies may be less inclined to do. In some instances, stars may prefer opportunities that are not driven by profit at all. James, for instance, has spoken of his desire to give his friends a chance to create a professional legacy and give back to the community in which he grew up.
The issue of control brings to mind Tom Cruise’s deal with MGM. Cruise may have been motivated by the prospect of a big payday through his ownership stake in United Artists, but it is more probable that the freedom to choose projects was what he was really after when striking his deal. Most actors are essentially selling their talents to studios, and the idea of becoming a “buyer” for once can be very powerful. “Actors are always subject to the vagaries of the marketplace—who is better looking, who is the better actor, who is the hot new person,” Alan Horn told me. “Every actor, no matter how big they are, will have heard, ‘You know what, we know you are dying to do this, but we think so-and-so is more right for this than you are.’ Every movie star can point to the one picture they didn’t get.” Cruise must have been pleased to be in a position to make casting decisions rather than be subject to them, especially given the number of up-and-coming actors vying for his throne and the uncertainty about his star status at the time. That’s not to say, however, that when a star gains greater control over his or her business interests it necessarily leads to the best business outcomes. Although Cruise and Sloan showed admirable nerve when they chose to experiment with new models, they should have realized that major challenges lay ahead.
The same holds true for LeBron James: running a boutique agency like LRMR can create unique advantages, but it is far from easy. For one, LRMR lacks the scale, resources, and experience of an agency such as IMG, so it likely cannot provide the full suite of services that IMG offers its clients. A star like Sharapova, for instance, benefits not only from IMG’s team of agents and salespeople, but also from its activities in the world of fashion and modeling (two interests of hers), its representation of Wimbledon and other important sports properties, its influence in the world of broadcasting (which often provides a second career for athletes after their playing days are over), and its wealth management service. These kinds of offerings may not prove to be important to James, but they can make all the difference to other talented performers, limiting LRMR’s ability to attract a portfolio of athletes. And LRMR does not have the sales force to be as connected and constantly in tune with the business world as IMG is, so LRMR will probably have to settle for a more reactive and opportunistic role.
James has enormous star power, of course, and that can help limit some of his boutique agency’s shortcomings. Capitalizing on James’s popularity, Carter and his team have cleverly overcome some of the disadvantages inherent to LRMR’s small scale by amassing a strong network of partners. This network includes collaborators such as Nike (where around 150 people work on James’s product line on a daily basis), talent agency CAA, Fenway Sports Group (which gave James a tiny share in Liverpool FC, an English soccer club in Fenway’s investment portfolio), and even Warren Buffett, who on occasion provides advice. Each year, Carter and his colleagues organize a two-day summit for executives from the various companies that have aligned themselves with James,
to share information on their activities for James and discuss the latest trends in sports marketing. James and rapper Jay-Z also cohost an annual party, known as the Two Kings Dinner, during the NBA’s All-Star Weekend; numerous celebrity and corporate contacts line up to attend the event each year.
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To see what this all implies for how a superstar like James may approach specific partnership decisions, his choice between video game endorsements in 2008 is especially interesting. The deals offered to James reflect the three most common creative-talent compensation models in entertainment markets, illustrated in the chart below: first, a simple fixed-fee payment; second, a bonus or “step-function” fee structure that rewards talent for certain targets achieved; and third, a “share” model in which the talent receives a certain percentage of sales or profits. Whichever compensation model is selected depends on a large number of factors—including the power of the talent and that of the firms that employ them.
Three Talent Compensation Models
Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment Page 16