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

by Anita Elberse

  It was fitting that Apple had selected BAM to showcase the only sports-related app for the iPad. BAM was known for having the best league web site in professional sports—and, in fact, was widely regarded as one of the most remarkable success stories in the emerging digital media industry as a whole. Started in 2000 with what amounted to a $2.6 million investment from each of the thirty Major League Baseball (MLB) teams, the idea behind BAM was to establish a separate company for MLB’s digital operations, in an attempt to improve the league’s competitive balance. MLB’s thirty team owners had unanimously voted to give BAM the responsibility for all digital activities, including the teams’ own web sites, and had agreed that all revenues would be divided equally across the teams. MLB found office space for BAM above Manhattan’s trendy Chelsea Market in a building filled with dot-com start-ups, a short cab ride but seemingly a world away from MLB’s headquarters at 245 Park Avenue.

  The first year was far from easy. MLB had virtually no digital media expertise—tellingly, just months before Bowman was hired, the URL MLB.com directed visitors to a Philadelphia law firm. “It was tough,” Bowman said.”We encountered many technological and editorial glitches. We made our way through 2001 as best as we could, fixing problems as they came up, and rebuilt the site in the off-season.” Initially, skeptics doubted that MLB.com would serve as anything more than a marketing vehicle and a venue for selling licensed merchandise. And not every new idea worked. For example, BAM supplied Japanese-language play-by-play calls for every game played by superstar outfielder Ichiro Suzuki in his debut year with the Seattle Mariners. The project cost $50,000 but drew fewer than one thousand Japanese fans. (Ever since, whenever someone at BAM made what was deemed an idiotic suggestion, co-workers would respond with “Japanese audio!”) Before long, however, many of BAM’s products and features began clicking with users, and traffic and revenue numbers improved dramatically.

  By early 2010, its tenth year, BAM had grown considerably. Now operating with a staff of 475 employees, the company expected to generate $475 million in revenues that year from ticketing, paid content, advertising, and merchandising. Paid content, which brought in nearly a third of the revenues, comprised two distinct streams: income generated from licensing content to partners, and income derived from selling content directly to end consumers. With respect to licensing content, for example, BAM had a five-year digital-rights deal with ESPN that ran through 2013 and was thought to be worth close to $20 million a year. This agreement gave ESPN the right to live stream all Sunday, Monday, and Wednesday night baseball telecasts on its online television network (ESPN360.com, later renamed WatchESPN.com) and ESPN Mobile TV, as well as show some video highlights.

  But BAM became best known for its direct-to-consumer products. Bowman advocated the idea of developing products for an array of different platforms. “Heaven is the ability for people to touch baseball every day in the most convenient way possible,” he told me. One of his colleagues confirmed that Bowman’s strategy was working: “Business-to-consumer content is the fastest-growing source of revenue.” While most content producers had failed to find viable business models for their digital operations, in 2009 BAM had amassed well over fifty million unique visitors per month on the MLB.com web site and 1.5 million paying subscribers for multimedia content delivered via the web. That included half a million customers who subscribed to BAM’s flagship video product MLB.TV; priced at $100 or more a season, it allowed subscribers to watch live baseball games via their personal computers. In 2009, the company’s At Bat Apple iPhone application was the nation’s second-highest-selling app. Named “Best Multimedia App” by Macworld, two million downloads and sixty million videos had been streamed since its July 2008 debut. Summarizing the prevailing sentiment, Newsweek called BAM “the grand-slam online leader among major sports.”

  Now, BAM’s iPad app would have to live up to the high standards Bowman and his team had established. In late December 2009, after months of intense speculation from technology enthusiasts about Apple’s intention to launch a tablet device (but no news from Apple itself), the company approached Bowman and asked him whether he would be willing to send two employees to Cupertino to work with Apple on an unspecified assignment. “When Steve Jobs calls with such a request, you say ‘yes,’ even if he gives no other details,” Bowman recalled a few weeks before the iPad’s launch. The BAM employees jumped at the chance: “I’m always excited by top-secret opportunities I know nothing about,” quipped one, a director of product development. “We have a philosophy here that we want to be the first on any new device. We like to be leaders.” Bowman agreed: “You just don’t know in this technology world what is going to take hold.”

  During the meeting in January 2010, Bowman talked with his team about the unusually short development time for the new app—only sixty days remained until baseball season’s opening day—and the decisions that still needed to be made. How should they price the app? And should BAM offer free live games, as it did with the iPhone app? One team member pointed to a major challenge: “Video is going to look a lot better on the iPad than on the iPhone, which ironically creates some issues for us.” Bowman knew how high the stakes were. “The iPhone has been a great success, which led to strong sales for our At Bat app, and the iPad could become equally important,” he told his team. “We have got to get this right.”

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  MLB is a powerful content producer—it effectively has a monopoly on professional baseball content in the United States, which means it can count on a loyal audience of sports enthusiasts. Often called “America’s national pastime,” baseball is one of the country’s most popular sports: in the 2009 season, seventy-three million tickets to live games were sold. (The NBA was a distant second that year with twenty-two million.) And MLB’s efforts to develop direct-to-consumer paid content have, by many measures, been extraordinarily successful. In fact, BAM was one of the first companies to demonstrate that consumers are willing to pay for content online.

  But BAM’s success also raises some key questions. Do the company’s bold initiatives predict a future in which major media producers sell their content directly to consumers using a plethora of new channels, thus bypassing traditional partners such as the broadcasters that now televise baseball games? It is tempting to jump to such a conclusion, but that would be premature, and most likely flat-out wrong.

  Admittedly, online channels create enormous opportunities for media producers to connect with audiences. The sport of baseball seems especially well positioned to take advantage of digital media: major-league teams play almost twenty-five hundred games each year, roughly twice that of the NBA and ten times that of the NFL. “We play every day,” is how one executive put it. No television network can broadcast all those games. Online media allow MLB to tap into “displaced” demand—enabling, say, Boston Red Sox fans to watch a Sox game they cannot watch on television because they live outside New England, or because they are at work when the game airs and only have access to a computer. Online sports media thrive because of such demand. Baseball also has a strong community of avid fans addicted to baseball news, rumors, and statistics. Digital media are ideally suited to provide such die-hard fans with a barrage of information before, during, and after games—to “super-serve” the biggest fans. And, like all sports content, baseball is best consumed live. That makes consumers more willing to pay for live content, and makes illegal downloading of content much less of a problem than in other entertainment sectors such as music and film.

  When the Internet, smartphones, and other new channels emerged, content producers faced a simple choice: let others develop products for those channels and hope they ask for your content, or take a hands-on approach to building those channels yourself. BAM chose the latter. Bowman openly speaks about his desire to be “a technology leader.” When BAM launched, no industry player had the capability to do what baseball executives wanted to do—ESPN, for instance, was lagging in developing streaming technology. If BAM
wanted to exploit new distribution platforms and ensure that products met their high quality standards, Bowman and his team needed to take responsibility for developing those platforms and products themselves.

  And so BAM developed—from scratch—video-editing software that enabled employees to produce highlights in a matter of minutes. It also built a full-fledged studio filled with dozens of computers on which editors watched games in real time; as soon as something significant happened, editors could rewind the game, mark the highlight, save it, and then pass it on to another editor who could send the highlight out over the Internet. During the season, BAM would routinely send out hundreds of highlights a day.

  “We bet big on broadband in 2002 and were willing to stream games when that was nothing more than showing a series of photographs, like in the old-fashioned flipbook,” Bowman said. “We bet on wireless in 2005 when only Sprint was capable of handling multimedia content. We got lucky because the iPhone came along and triggered exponential growth.” In the long run it may make little sense for one content producer to be pioneering new technologies, but in the short run doing so helps a producer grow a new business in a manner that suits its fans, its content, and its market position. Or, as Bowman put it, “if we are not willing to take risks and make mistakes, then we are never going to figure out what tomorrow looks like.”

  In the pursuit of that tomorrow, MLB seemingly jeopardizes what makes it so strong today. For professional baseball, as for all other major sports leagues, lucrative contracts for television rights remain critical to the bottom line. In 2010, MLB had ongoing television rights deals with the broadcast networks ESPN, FOX, and TBS. The contract with ESPN, owned by Disney, was worth $2.4 billion over eight years, or $300 million per year. The agreement allowed ESPN to televise up to eighty games per season, to feature a single team on its exclusive Sunday night games up to five times per season, and to start a series of Monday night baseball broadcasts. MLB also had a seven-year deal with FOX worth around $250 million per year (giving the network the rights to selected Saturday afternoon games and making it the exclusive home for the World Series and the All-Star Game), as well as a seven-year contract with TBS for around $150 million per year, bringing the total to roughly $700 million a year.

  Those numbers dwarf the approximately $70 million in revenues that BAM made in 2009 from its online paid-content products, including MLB.TV and its iPhone At Bat app. When the company was pondering how to respond to the iPad launch, selling content directly to consumers accounted for only one-tenth of the revenues generated by its television rights deals—despite BAM’s leading position in the paid-content market. Bowman and his team knew that digital revenues were likely to grow rapidly, but the league was (and is) a long way away from making as much money from paid content as it does from traditional media. Moreover, even online, licensing content to media partners is just as important as selling content directly to consumers: in 2009, for instance, $70 million of BAM’s revenues came from licensing deals with ESPN and other media companies—many of the same partners the league works with in negotiating television-rights contracts.

  While BAM’s moves are great news for fans—“the fan is much better served now than in the past,” Bowman said—MLB risks upsetting its television partners if it moves too aggressively into distributing digital content directly to consumers. As fans are given more options to watch live games and other baseball-related content online, broadcasters will inevitably worry that their viewership may decline. Even if other factors drive ratings down—the lack of a compelling matchup in the divisional play-offs or the World Series games, for example—those broadcasters may be quick to blame BAM and threaten to lower their bids for MLB television deals upon the next negotiation. And in a television landscape where sports leagues compete intensely for a share of the rich contracts offered by a small group of networks, getting on the wrong side of a broadcaster may be the last thing a sports-content producer wants to risk.

  Why, then, would MLB allow Bowman’s BAM to make such a forceful push into the digital age? As counterintuitive as it may sound, BAM’s pursuit of direct-to-consumer, paid-content products actually strengthens MLB’s existing revenue model. BAM increases the league’s leverage over its existing distribution partners. MLB’s aim is to gain the upper hand in negotiations with television networks—not to eventually displace those networks as channel partners. This is a common theme in markets for entertainment: when content producers pursue new channels, they typically do so not to disintermediate their current distribution partners, but rather to increase competition and drive up fees for their content. In MLB’s case, the more it has a significant online presence and a direct route to the consumer, the more the league can credibly threaten to walk away from a deal it deems insufficiently lucrative. After all, when trying to profit from its content, MLB is no longer completely at the mercy of its distribution partners.

  The same strategy of gaining leverage over distributors also goes a long way toward explaining why MLB launched its own television network, MLB Network. Introduced in 2009 to fifty million homes that subscribed to a digital cable subscription package, MLB Network airs live games as well as original programming (including MLB Tonight, a live, nightly studio show), highlights, classic games, and coverage of baseball-related events. The league’s network may seem like an attempt to bypass existing broadcast partners. But here, too, MLB has little interest in jeopardizing its relationships with, say, ESPN and FOX by locking them out of many more live games. One reason is that MLB’s high television-rights fees, paid up front each year, provide a solid financial foundation for its operations, so the league has a powerful incentive to keep the likes of ESPN satisfied. Another reason is that broadcast networks, by virtue of their mainstream programming, make it easy for MLB to reach more casual baseball fans and attract those new to the sport—and thus expand their customer base. Just as with BAM, MLB Network offers a way for MLB to strengthen its existing licensing model. The league’s challenge is finding the right balance between going it alone and relying on the rights fees that its partners pay.

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  The television networks themselves are on the opposite side of a similar tug-of-war between media producers and retailers. Consider the role that Hulu plays: television production companies and networks use Hulu to offer their programs directly to consumers—without cable operators such as Comcast and Cablevision that stand between them and the consumer. As Hulu’s Andy Forssell put it, “Hulu is about the content owners taking matters into their own hands—about participating in the value created through the distribution of their content.” Especially for cable networks which rely strongly on fees from cable operators, distributing programs directly is a bold step. That is why powerful cable operators, fearful that Hulu may undermine their position as the exclusive source of certain programming, are fighting back. They have taken a hard line against cable networks whose shows were streamed on Hulu, with some cable companies going so far as to stipulate that the networks limit the number of episodes they make available online, or even imposing an outright ban.

  The tensions are also prompting new alliances between content producers and aggregators. In a more comprehensive effort to protect its business model and role in the marketing channel, leading cable operator Comcast teamed up with media conglomerate Time Warner in June 2009 to pioneer an industry initiative called “TV Everywhere,” which gives consumers who pay for cable channels access to the same content online. A month later, major broadcaster CBS—at the time the only top-four broadcaster that was not a Hulu owner—joined a TV Everywhere trial to test the authentication system necessary to distinguish paying from non-paying customers.

  As the online video market continues to evolve, television networks have shown a greater inclination to play by the rules of the existing industry structures, which includes a strong role for the cable operators. The networks have good reason to do so, since they continue to depend heavily on the considerable income stream those cab
le operators provide. And although critics may dismiss initiatives such as TV Everywhere as futile attempts by the old guard to hang on to a dying business model, the truth is that none of the major players in the television industry have a strong economic incentive to cause upheaval. They benefit from protecting current revenue models and safeguarding their place in the marketing channel. True threats to existing structures are much more likely to come from outside the industry.

  As these examples from the worlds of baseball and television suggest, it makes little sense to believe that advances in digital technology will cause powerful content producers to simply push out existing distributors. What is actually happening is both more complicated and more interesting. Even as digitization is creating a multitude of ways through which consumers can get media content, some of the biggest media producers are actively contributing to this trend by launching their own channels to gain leverage over existing distributors.

  Taking this clever approach to the use of new distribution technologies to an even higher level is another sports league, the NFL. Much can be learned from the way in which the nation’s most-watched sport—and arguably one of the most successful entertainment properties in the world—has managed its content strategy, for it says a great deal about how markets for entertainment goods are evolving.