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

by Anita Elberse

  Granted, the picture is a bit more complicated than any back-of-the-envelope calculation can capture. And several parties participate in these revenues: the networks share some of their revenues with the broadcast stations that help them reach viewers, and Hulu pays fees to content owners and distribution partners. But the message is clear: even if Hulu were to increase its advertising to 50 percent of the load carried by the broadcast networks—which Hulu’s executives have said they consider the upper limit—it is difficult to match the economics of broadcast networks. And these calculations do not even include subsequent revenue windows that could be cannibalized by online video distribution. For instance, syndication revenues that stem from selling series to other networks can run into the hundreds of millions of dollars for top-performing shows, and income from DVD sales can amount to tens of millions of dollars for hit series. The growth of Hulu and other online video sites may well undermine these revenue streams.

  Hulu’s advertising model is even less lucrative when compared to cable networks such as The Disney Channel, NBC Universal’s Bravo, and News Corp.’s FX. “On average,” Kilar explained, “about half of [their] revenues comes from advertising, while the other half comes from fees paid by cable operators” such as Comcast and Cablevision. Prime-time CPM rates for original dramatic content on cable networks may be lower than those for broadcast television, but with such a large share of revenues coming from license fees, an hour of cable television yields total revenues per thousand viewers per hour that are significantly higher. And the more popular the cable network, the higher the income from license fees. “In deciding whether to put their programs online, cable networks will consider the per-subscriber fee that they receive from cable operators,” noted Hulu’s Andy Forssell, who was senior vice president of content acquisition and distribution until he was appointed interim chief executive officer when Kilar departed in 2013.

  If the economics look so unfavorable, why did Hulu’s parents concoct the plan to launch Hulu in the first place? Well, because losing a customer to piracy and collecting no revenues whatsoever is clearly worse. Helping to prevent these scenarios from happening was the original idea behind Hulu. Kilar’s less-is-more approach must be viewed in that light: minimal advertising helps Hulu compete effectively with online rivals and with pirated content. Hulu is focused on creating a compelling offering for its users, explained Colaco: “We want a fair balance between the amount of advertising viewed and premium content consumed.”

  At the same time, even though Hulu is a hit, it is tough to blame television executives who tread carefully into the world of online video. As long as viewership on regular television is more lucrative than viewership on Hulu, and as long as the time spent viewing television still far outstrips that of watching online video, network and cable executives will have decidedly mixed feelings about fostering online video viewership—and in particular about tempting audiences to switch from watching, say, their favorite comedy series on NBC to watching that same program on Hulu. Powerful cable operators, which control about 70 percent of the paid-for television market in the United States, will feel much the same. Their cautious stance may seem shortsighted and lacking in an innovative spirit—indeed, such accusations are often hurled at television executives—but it is simply the result of economic realities. It is not surprising, therefore, that Jeff Gaspin, then president of the Universal Television Group and the man responsible for NBC Universal’s cable channels, was keen to find a model that, as he put it, “gets our content out there when and where people want it, but that also preserves [the] dual revenue stream and [the] relationship we have with our distributors.”

  The dilemma faced by television content producers is a classic one in the world of entertainment: should an established company risk cannibalizing its revenues in a traditional channel by pursuing a strong competitive position in a new channel? Managers in the television industry are hardly the first to struggle with this question. In the music industry, major record labels were initially hesitant to embrace online channels. In the face of growing piracy concerns, the labels focused instead on protecting traditional distribution methods. And with Amazon pioneering the online sale and now digital distribution of books, publishers have had to strike the right balance between exploiting new channels and working with existing bricks-and-mortar partners such as Barnes & Noble.

  Conclusive answers to questions about which approach is best for content producers in these situations are hard to come by. Is the smart move to go on offense and embrace the new digital channels? Or is it more sensible to play defense and protect the existing business? Good arguments can be made for each stance. And if market conditions or other circumstances change (a shift in corporate ownership, for instance, or a greater willingness of advertisers to spend money online), the optimal strategy may change.

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  What has not changed—regardless of the way in which media producers choose to approach digital channels—is the relevance of blockbuster content. With their bet on Hulu, and thus on premium film and television content, NBC, FOX, and ABC were better positioned for success online than YouTube, with its stronger focus on long-tail content. Before YouTube began to make forays into higher-end original programming, Hulu accounted for less than one in every twenty video streams, but it collected a whopping quarter of the total online-video advertising revenues. YouTube’s CPM rates were only a fifth of Hulu’s in 2009—even though YouTube only sold advertising for a small percentage of the videos in its vast long-tail assortment. Advertisers, like regular consumers, are drawn to popular programming. And thus far, even in online channels, premium video content appears to have the highest odds of becoming popular.

  Although Hulu has assembled a solid lineup of partners who bring their hit content to the site, signing up broadcast and cable television series (as well as A-list Hollywood movies) is an ongoing challenge. In 2009, FX asked Hulu to pull three seasons of It’s Always Sunny in Philadelphia over fears that offering the show online would undercut its ratings and DVD sales. Turner Broadcasting System has refused to license Hulu popular shows such as The Closer that air on its cable network TNT. And in March 2010, Viacom’s Comedy Central pulled The Daily Show with Jon Stewart and The Colbert Report, both of which consistently ranked among the most popular shows on Hulu, only to reverse its decision several months later. Even popular broadcast shows from equity partners are not always available on Hulu: FOX’s juggernaut American Idol, for example, has been noticeably absent from Hulu’s free service. “There can be friction between serving content owners and users,” remarked Kilar.

  Having demonstrated that the economics for premium content are more favorable than those for long-tail assortments, Hulu—much like YouTube, with the launch of its Original Channels—began to think about ways of tightening its hold on the head of the demand curve. A subscription service fits this goal: it provides a steady source of revenues and establishes an economic model that suits cable television, thus allowing Hulu to better compete for hit broadcast and cable shows. And so, after Kilar and his team investigated various options, the company wasted little time: in June 2010, Hulu Plus saw the light. For $9.99 a month, consumers could gain access to more shows and view them on more platforms, from Apple’s iPhone and iPad to video game consoles. By late 2012, Hulu had amassed more than three million paying Hulu Plus subscribers, more than double the total for the year before. Hulu’s estimated revenues rose to nearly $700 million in 2012. These amounts still pale in comparison to the rewards up for grabs in the traditional television industry, and it remains to be seen whether Hulu’s parent companies will continue to support the young company and its business model. But Hulu’s good results have already proved a critical point: a significant number of consumers are willing to pay for popular content online.

  Developments in online video show us that digital technology is unquestionably a disruptive force that poses significant challenges for established content producers. That is not the whole
story, however. Some existing entertainment businesses have switched to digitally distributing their products without being pressured into it by pirates or competitors and are reaping the benefits. A prime example can be found in the world of opera—not necessarily the first sector one thinks of when searching for clues about the evolving media landscape beyond, well, the nineteenth century, but actually an intriguing context for anyone hoping to understand the enduring relevance of bets on blockbusters and superstars.

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  In the 2006–2007 season, the Metropolitan Opera (“the Met”) went where no opera house had gone before: to the movies. Or, to be more precise, general manager Peter Gelb started broadcasting (or “simulcasting”) the Met’s performances live in high-definition (HD) to movie theaters across the United States and Canada. The Live in HD program was a revolutionary move for a performing arts organization: never before had live productions been instantly accessible to mass audiences beyond the confines of auditoriums.

  Concerned about its future, the Met conceived of the program as a way to attract new audiences to the opera. This was a critical goal for the Met, which had seen the average age of its audience base increase from sixty to sixty-five within just five years. (You know you have a problem when your audience is literally dying off.) Although opera attendance had risen in the 1980s and 1990s, it had waned since then. By 2007, Gelb’s third year at the helm of the 124-year-old opera house, less than 5 percent of adults in the United States attended opera at least once a year, about a third of the number of Americans attending a Broadway show or symphony orchestra performance. “My aim is to strip away the veil of elitism,” Gelb declared about the Live in HD program. “This is opera for the widest possible audience.”

  The largest independent performing arts company in the world and one of the oldest in the United States, the Met in 2007 had an annual attendance of 780,000 and an operating budget of over $220 million. As a nonprofit institution, it defined its purpose as “sustaining, encouraging, and promoting musical art, and educating the general public about music, particularly opera.” As Gelb explained, the Met combined “every aspect of the performing arts into one,” with a 120-member symphonic orchestra, a full-time chorus, a full-time dance company, and hundreds of stagehands. The Met staged twenty-five to twenty-eight different productions per season, and up to 240 performances annually, in its thirty-eight-hundred-seat opera house. Around two-fifths of its budget came from ticket sales, another two-fifths from private donors, and the remainder from government grants. Gelb—who had worked as an agent for Columbia Artists Management and served as a president of Sony Classical Music prior to his appointment at the Met—was determined to broaden the organization’s revenue base by pursuing a multimedia strategy for the Met akin to the windowing strategy of Hollywood movies.

  The inaugural season of the Live in HD program involved six Saturday matinee performances. Mimicking the release of a new movie, the shows were transmitted live and simultaneously across the country to nearly 250 movie theaters equipped with high-definition projectors. From the start, Gelb said, he wanted to “conceive of it as an event.” But that didn’t come cheap: the simulcasts required substantial investments in technology. They also involved a production team of about sixty people and some fifteen cameras to film the action onstage and backstage. The cost for each simulcast was about $1.1 million, or a total of $6.6 million for the season. To enable distribution of the performances, Gelb partnered with National CineMedia (NCM), the leading supplier of alternative programming to large movie theater chains such as Regal Cinemas, AMC Theatres, and National Amusements Theatres. As part of their agreement with the Met, the theaters agreed to share equally the revenues from ticket sales, with each ticket selling for around $22.

  The first opera to feature in the Live in HD program was The Magic Flute, on December 30, 2006. Audiences across the United States experienced the opera at the same time as their counterparts in the Met itself, but at a much lower price—and with popcorn within reach. They saw a richly detailed performance that revealed performers’ facial expressions and other subtleties normally not visible from even the best seats in the opera house. And if the opera they were watching had breaks, audiences followed the camera backstage and saw interviews with performers and exclusive footage about such things as costumes and set design. In total, three hundred thousand people turned out for the Met’s first season of simulcast performances, yielding $3.3 million in revenues for the company.

  In April 2007, as audiences settled into their seats for the last performance of the season, a new production of Il Trittico, Gelb watched from behind the stage where singers and musicians were getting ready for yet another performance. He faced an important decision. The Live in HD program had received mostly positive reviews in arts communities. But it had lost over $3 million—a significant sum that could make it impossible for the Met to break even, which in turn could upset donors. There were other lingering concerns. Some opera lovers feared that the simulcasts would cause a deterioration of the artistic quality of opera. Others speculated that the broadcasts would adversely affect ticket sales for live performances, including those staged by rival opera companies. As the Opéra de Paris, the Royal Opera House at Covent Garden, and other opera companies around the world announced plans to produce their own simulcasts, some feared that the intensified competition would hurt the long-term viability of the Met’s costly initiative. After considering all these issues, Gelb had to answer a straightforward question: would the benefits of the simulcasts outweigh the necessary investments?

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  I’ll cut to the chase: thus far, the answer for the Met is a resounding “yes.” Gelb decided to continue to fund his Live in HD program, and it has had a major positive impact on the Met’s bottom line. Accomplishing a rare feat for any new venture, the program was profitable in only its second year, when eight operas were broadcast to six hundred cinemas in twenty-three countries, selling 920,000 tickets. By the 2010–2011 season, a total of twelve operas were simulcast to fifteen hundred theaters in forty-six countries, selling nearly 3 million tickets and generating $11 million in profits. Within a few short years, the Met’s Live in HD program became a powerful illustration of how digital technology can make a positive difference, even in a rather sleepy sector like opera. But that’s not the only insight emerging from the Met’s initiative. In fact, a close analysis of the Live in HD program’s impact on the market for opera reveals other important lessons that apply to the entertainment industry more generally.

  A first observation is that when thinking through the effect of new distribution channels, it helps to consider the “bundle of benefits” delivered to the customer in each context. The benefits of going to the Metropolitan Opera House are evident: a live opera at the Met is a special event taking place at a world-class venue with superior acoustics, where patrons are a part of an exclusive experience, dress up for the occasion, and mix with others of their ilk. But the simulcasts also have advantages: the $22 ticket prices are a far cry from the $400 that live operagoers have to shell out for orchestra-level seating; going to a local movie theater tends to be more convenient; there are fewer restrictions on what audiences can and cannot do (walking out in the middle of a performance, for instance, or munching on popcorn); simulcast-goers can see elements of the performance that are visible only on the screen; and they are able to view interviews and other bonus content. One form of consuming opera isn’t necessarily better than the other—they are simply different. And the more these bundles of benefits are different, the more likely it is that new and existing channels are complements rather than substitutes. Gelb rightly compared the simulcasts to the popular Monday Night Football broadcasts that have significantly increased the popularity of the NFL: “Just as sports teams have discovered that fans still want to come in and experience the live thing, this will only enhance our live performances in New York City.”

  Customer benefits often change when products are distributed t
hrough different channels, even if the only apparent change is the “pipe” through which offerings reach the customer. Consuming television programs through Hulu, for instance, is different from consuming those same programs via regular television. Traditional television is linear: it takes place at a scheduled time, is limited by “what is on,” contains mass-media advertising, and is more of a collective, “lean back” experience. Viewing videos through Hulu, by contrast, can take place whenever users want, gives viewers access to a vast assortment, shows them tailored advertisements, and is more of an individual, interactive, “lean forward” experience. Delivering these different benefits places new demands on content producers and their creative talent. The more the Met relies on simulcasts, for example, the more it may want to recruit opera singers who are trained in on-camera work, who have voices that translate well to the movie theater—and who look great up close. In this way and others, Gelb’s Live in HD program is bound to change the market for opera.

  The new technology is also likely to create bigger blockbusters. Opera has seen remarkably little innovation: at the time Gelb was mulling over his decision about whether to continue the Live in HD program, most major opera companies focused on nineteenth-century repertoire—works by composers such as Verdi, Puccini, and Mozart. Over the past twenty years, only twenty-six different operas had appeared in Opera America’s list of the top ten productions, including just one American opera, Porgy and Bess; no modern operas appeared in the list at all. With the simulcasts attracting a different and (as Gelb hopes) younger audience, the opera house may be tempted to offer new content. So far, however, the same operas that are popular with live audiences—the few blockbusters that have stood the test of time, such as Carmen, La Bohème, and La Traviata—seem to appeal to simulcast-goers. Early evidence emerging from surveys offers an explanation: many of those who watch the productions in a movie theater tend to be relatively light opera consumers who are looking for a convenient way to supplement their occasional trips to see live opera. McPhee’s natural monopoly concept teaches us that light consumers usually converge on the most popular products. Over time, therefore, the Met’s already very popular interpretation of the love story of Carmen and Don José will probably become an even bigger hit around the world.