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

by Anita Elberse

  A sizable gap often exists between a content producer’s available budget for a product launch and the cost of adequately reaching that product’s potential audience. In today’s hypercompetitive media landscape, much of which is now dominated by global brands and global superstars, it is getting increasingly difficult to make product launches work. Because consumers are bombarded with marketing messages and have an abundance of media outlets to choose from, standing out from the crowd often requires big budgets.

  That’s why Random House approached Droga5—the publisher wanted to draw attention to the book with a relatively small budget. That’s also why the parties in turn reached out to Microsoft. Recalling the moment when the Droga5 team first presented the “Decode Jay-Z” campaign idea to Roc Nation, Meneilly said, “[Carter] got it immediately, and loved it.… But then I asked, ‘Now who is going to pay for it?’ Random House doesn’t have the budget, and we do not want to pay for this out of our own pockets. So I asked that question repeatedly—‘Who is going to pay for it?’” David Droga recognized what happened: “Jay-Z is a pragmatist, and he immediately recognized that we had a big and ambitious idea. ‘Big and ambitious’ often translates into ‘expensive.’”

  Campaigns like the one Droga5 developed for Random House and Roc Nation certainly are a vast undertaking. For the “Decode Jay-Z” project, the agency assembled a fifty-person team of content strategists, art directors and writers, game designers, media negotiators, community managers, graphic designers, mobile developers, programmers, print and digital producers, photographers, clue writers, interaction architects, and user experience designers. Droga5 also worked to identify the right technical product team within Microsoft and suitable team members within Roc Nation. (Even Jay-Z himself was part of the creative ensemble; he helped write many of the six hundred different clues.) And to ensure that the agency could quickly react to actions by participants in the campaign—a key feature of well-executed digital marketing efforts—Droga5 designed what it called a “nerve center” and set up a team to constantly monitor the campaign’s progress.

  Many content producers don’t yet have the expertise to imagine and execute the kinds of campaigns that push the boundaries of what digital technology can do, and they find it almost impossible to keep up with the rapidly evolving possibilities. But agencies like Droga5 specialize in such innovative campaigns. In fact, even though Droga5 has been in existence for only seven years, it has already proven its ability to break the mold. In a 2006 campaign for fashion company Marc Ecko Enterprises, for example, Droga5 created and leaked a grainy online video of what appeared to be hooded graffiti artists climbing barbed-wire fences and sneaking past guards with dogs to spray the words “still free” on Air Force One. The video became a viral phenomenon. And during Barack Obama’s 2008 presidential campaign, Droga5 launched “The Great Schlep,” an initiative aimed at generating votes for Obama from Jewish constituents. The agency created a web site and online video that featured comedian Sarah Silverman urging young Jewish voters to fly to Florida to talk their grandparents out of casting their ballots for Obama’s opponent, John McCain. Not your average marketing tactics, in other words.

  Couldn’t Carter have paid for Droga5’s campaign for Decoded himself? Yes and no. By 2010, Forbes estimated that the star had amassed a net worth of over $450 million, and his contract with Live Nation was worth $150 million alone, so a $2 million campaign would have been a drop in the bucket. But Carter is not only a highly successful musician—his 2009 record The Blueprint 3 became his eleventh album to reach number one on the Billboard charts, one more than the record previously held by Elvis Presley—he is also an extremely capable businessman. In 2007 Carter sold his Rocawear clothing line for over $200 million, and he remains active in several other businesses, including as an investor in the beauty brand Carol’s Daughter, as a co-owner of the 40/40 nightclubs in New York and Atlantic City, and even as a founder of a sports agency, Roc Nation Sports. When Carter was presented with Droga5’s idea, he did not consider paying for the campaign himself. As Droga put it, “like many smart entrepreneurs would in that situation, his impulse was to try to find a partner.”

  What Carter ultimately got from working with Droga5 and Microsoft was worth much more than $2 million. Although Droga5 sent Microsoft a bill for that amount, the labor, the media, and the production of materials were all billed at cost. “Normally we would expect a profit margin of at least twenty percent,” Droga5’s chief financial officer said. “And on a short-term, labor-intensive project like this, additional fees of $1 million to $1.5 million for our services would have been common practice.” Moreover, the partnership enabled Carter to gain access to Microsoft’s team of engineers, its technological expertise, and the tools the $63 billion tech giant had developed over the years, including its search and maps technology. These enormously valuable tools—worth billions of dollars—would have been virtually impossible to enlist on a short-term basis otherwise. And Carter did not pay a dime for them.

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  The same challenges that drove Jay-Z and Random House to find a partner for the Decoded launch also plague many other content producers. It is therefore only logical to predict that the search for partners will become more commonplace in the world of entertainment. Grau’s observation that the book publishing industry is “under fire” is important here—and publishing is far from the only sector of the entertainment industry to be in that fateful position. The advent of new technologies does not just bring opportunities—it often brings decidedly bad news, too. New distribution methods and other advances in digital technology tend to put considerable pressure on the revenues that media producers can generate. One painful effect is piracy; another is the erosion of what consumers believe to be a fair price for an entertainment product.

  A third disruptive force is what economists call “unbundling.” Although this phenomenon has not received nearly as much attention as the threat of piracy, unbundling may in fact be a far bigger menace. Take the music industry as an example: thanks to digital technology, consumers can purchase recorded music in three ways. They can buy a physical copy of an album, they can download that album in a digital format from a store such as iTunes, or they can select whatever subset of downloadable songs on the album they like most. That’s a significant shift from the old analog days when (with the exception of one or two singles that were deemed to have the highest hit potential) it wasn’t economically feasible for record labels to sell songs individually. Or think of the television industry: without significantly adding to the costs of production and distribution, each of the episodes that make up a season-long television series can now be sold individually through digital channels. In both examples, producers are moving from a strategy of “pure bundling” in which they sell just the bundle (only the music album or the series’ season) to one of “mixed bundling” in which they sell both the bundle and all or most of its components (the songs or the episodes) separately.

  The impact of unbundling on revenues can be positive or negative. In the music industry, for instance, record companies could lose revenue if some consumers switch from buying albums to buying only the individual tracks that they like most on those albums. But the labels could also gain revenue if the losses in album revenues are offset by a higher total amount received from the sale of individual tracks. Because unbundled tracks are available at a low price, it is not inconceivable that the total demand for an artist’s music may be larger than when only more expensive, bundled products can be purchased. Which outcome is more likely depends on how groups of consumers differ in their willingness to pay for the products.

  A hypothetical situation can perhaps best illustrate this point. Imagine that a group of Jay-Z fans heavily favors the hit track Otis on his 2011 album Watch the Throne (a collaboration with fellow rapper Kanye West), and that they are willing to pay up to $6 to buy that track but do not want to shell out more than $0.50 for each of the eleven other songs. At sale prices of, say, $1
for a song and $10 for an album, selling albums exclusively—a pure bundling strategy—leads to higher revenues than selling both albums and songs. (Here is the math: when unbundled songs are available, the fans will only buy Otis, yielding revenues of $1 from each fan, whereas when only albums are sold, consumers will “add up” their willingness to pay for each song and easily clear the hurdle of the $10 album price—they are willing to pay $6 for the Otis track plus $0.50 for each of the eleven other tracks, or $11.50 in total—and thus buy the bundle.) However, if there is a second group of fans that is willing to pay up to $1.50 per song for three songs—say, Otis, Made in America, and Welcome to the Jungle—and $0.50 for each of the other nine songs, a mixed-bundling strategy will yield more revenues from this group. This hypothetical group of fans will purchase the three songs for a total of $3 but will not want to purchase a full album. When both groups exist in the marketplace, the relative size of each will determine whether a pure or mixed-bundling strategy yields higher sales.

  That’s the theory, anyway. In practice, unbundling is usually detrimental to the business models of traditional media producers. My own research shows that unbundling has had a strong negative impact on music revenues. After closely examining trends in sales for more than two hundred artists for a period of nearly two and a half years in the mid-2000s, I found that music revenues decreased significantly when digital downloading gained ground, even after controlling for a rise in illegal downloading. The dollar amounts gained through new song sales were far below the level needed to offset the losses resulting from lower album sales. Although albums by the biggest stars with the strongest track records were hurt less—yet another indicator of their power—even they felt the effects.

  During this period, revenues declined substantially across the board: according to my estimations, weekly sales dropped by one-third as a direct result of consumers switching to digital channels where they could forgo buying music in bundles. As my study suggests, rather than buying albums, music consumers have increasingly turned to cherry-picking one or only a few tracks from those albums, without buying enough songs from other albums to make up for the difference. Not at the current price levels, that is, where the price of an individual track is often less than 10 percent of that of an album. (The record labels accepted such low prices for individual songs when they signed on to Apple’s iTunes Store a few years after Napster first appeared on the scene—without rampant piracy, the labels likely would have never agreed to unbundle in the first place.)

  Fearing a similar effect on revenues, established players in television are fighting to hang on to their bundling models. Existing television networks have little to gain from opening the door to a world in which consumers no longer have to buy a package of cable channels if they are only interested in, say, AMC or ESPN. Likewise, those networks will resist the idea that the “TV Everywhere” bundle that connects television and online consumption should be broken up. This point was powerfully illustrated in 2012, when tens of thousands of fans begged premium cable network HBO to make its HBO GO service available for purchase. United under the Twitter hashtag #takemymoneyHBO, fans demanded that HBO change its policy of limiting access to those who receive HBO programs as part of their cable subscription. The highly vocal fans hoped that “cord-cutters”—television viewers without a subscription—could be in on the action, too. Asked to explain why HBO had so far refused to stray from its current model, HBO president Richard Plepler used just one word: “math.” Plepler will know that its strong online service puts HBO in the driver’s seat if changes in the media landscape were to demand a shift in strategy, but for now the reality is that unbundling provides no clear economic benefit.

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  A final factor causing pressure on content producers’ existing revenue models, and again one that perhaps has not received the consideration it deserves, is the rise of massive online retailers and other content aggregators with sometimes razor-thin margins on entertainment goods. Because companies like Amazon, Apple, and Google dominate the sectors in which they operate, they have amassed the power to influence—and sometimes dictate—how and at what price entertainment goods are sold. This, in turn, is putting tremendous pressure on the business models of established producers.

  Here, too, the music industry led the way. After launching its iTunes Store in 2003, Apple has quickly become the leading online music retailer in the United States. By mid-2012, it was responsible for well over 60 percent of legal digital music downloading, and nearly 30 percent of all music sold at retail. And because Apple makes the large majority of its profits from its computers, phones, and other hardware, it can afford to slash prices on the entertainment content it sells in the iTunes Store, now used by some 425 million people. The company insisted on its $1-a-song price upon the store’s launch and, indicative of Apple’s power, it took the record labels years to convince Apple to agree to a price increase. (The iTunes Store now has a three-tier pricing structure in which songs sell for $0.69, $0.99, or $1.29, but record labels price virtually all of the top-selling songs at the highest level.)

  Book publishing is another sector that has experienced increased retailer concentration. The shift to online channels may help publishers better manage the return of unsold books—traditionally a significant problem, since often at least a third (and sometimes much more) of all books that publishers ship to stores are sent back after spending some time on the shelf. The emergence of e-books eliminates the costly problem altogether. But the rise of online channels has made Amazon an undeniable force in book retailing, and the company is now responsible for nearly 30 percent of total book sales and about 60 percent of e-book sales in the United States (with the e-book category as a whole now accounting for more than a fifth of book sales). The company’s vast range of products generated $48 billion in revenues in 2011, and although its net income of $630 million was sizable, that figure is a paltry 1 percent of revenues. Chief executive officer Jeff Bezos’s strategy appears to be to sacrifice short-term earnings in order to reap higher profits at some unknown point in the future.

  Offline retailers of books—Borders went out of business in 2011, leaving Barnes & Noble as the only major bricks-and-mortar chain—and smaller online retailers find it difficult to compete with Amazon. Meanwhile, Apple is under investigation for alleged cartel-like behavior in its dealings with several of the biggest publishers in the e-book market. These trends are of great concern to many publishers, who worry about their loss of bargaining power over Amazon when it comes to setting prices and terms. It is hardly surprising, then, that Grau and other publishers are fretting over the limited number of major national accounts in today’s retail environment.

  In the film industry, online retailer Netflix comes closest to playing the role of a disruptor. The company undoubtedly helped topple offline retailers such as Blockbuster, thereby putting pressure on the windowing strategy of Hollywood studios, which formerly could count on DVD sales and rentals being more lucrative sources of income. Netflix has seen its power wane more recently, but the low-cost subscription service continues to rely on its large customer base to gain leverage over content producers when bidding for the rental and streaming rights to films and television programs.

  The result of all these forces—each driven by advances in digital technology—is that the blockbuster strategy is becoming more necessary than ever, but also harder to pull off. The threat of piracy, the lower perceptions among consumers of what price is reasonable, the unbundling of content packages, and the increased concentration in retailing put tremendous pressures on existing revenue models. The bets made by content producers are becoming riskier—only those titles in greatest demand have a shot at earning back their production and marketing costs, with the remaining products more likely to fall by the wayside. What we end up with is a world still dominated by blockbusters, but one that is possibly even more lopsided.

  One way content producers can react to this new reality is by doubling down on
blockbuster investments and focusing even less on smaller bets. Such a trend is already under way in several markets. The film industry, for instance, has cut back on the quantity of films it produces—but it has not reduced the number of tent-pole bets. “Because technology is shrinking the pie, at least in the foreseeable future, we’ll have to make fewer smaller movies, or make those smaller movies for less money,” Disney’s Alan Horn commented.

  Another way to react is by seeking help in making blockbuster investments and their wide launches possible—that is where brand partnerships are so critical. Little wonder, then, that entertainment producers and personalities increasingly rely on alliances with firms of some scale. Shawn “Jay-Z” Carter is far from the only superstar to do so. A familiar pop star managed by another Carter also reaps rich rewards from her ties with corporations.

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  How many brand partners does it take to launch one hit album? In March 2011, Lady Gaga’s manager hoped the answer was one less than the number he had tried to line up. That’s because Troy Carter, still on the road with the Monster Ball tour, knew that a planned deal with mass retailer Target to benefit the launch of his client’s third album, Born This Way—an agreement that would have given Target exclusive retail rights to a special version of Lady Gaga’s album in return for distribution and marketing support—had just fallen through.

  Reflecting her influence on popular culture, Lady Gaga had already established partnerships with several leading consumer-goods companies. One of these was with Beats by Dr. Dre, a line of high-end music headphones. Itself a partnership between Interscope chairman Jimmy Iovine and legendary hip-hop producer Dr. Dre, Beats was introduced in 2008. A year later the brand launched an extension, Heartbeats, that was co-designed by Lady Gaga. The headphones were well received: an influential technology web site described the $100 in-ear headphones as “undeniably unique” and likely to “attract fashionistas far and wide.” Virgin Mobile was another marketing partner. The same day that Lady Gaga’s second album, The Fame Monster, hit the shelves, the mobile telephone network operator announced its sponsorship of the US dates of the Monster Ball tour, promising to reward fans with free tickets if they agreed to help homeless-youth organizations.