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

by Anita Elberse

  “They were recognizing something that no one else in Vegas was recognizing yet,” said Pasquale Rotella, who each year hosts the Electric Daisy Carnival, an international electronic dance music festival. After securing space in a new hotel development on the Vegas strip financed by Deutsche Bank—“the world’s largest bank took a gamble on a seven-year-old brand, Marquee, and we as operators gambled on a new model,” said Strauss—the impresarios decided to cater to customers who enjoyed dancing to music spun by high-profile DJs rather than, say, expect nightlife mainstays like Paris Hilton and Kim Kardashian to draw bottle customers and filler crowds.

  In the old days, Strauss and Tepperberg focused much of their time on building relationships with high-end clients. With their new content-centric model, the entrepreneurs have become major buyers in the market for DJs, so cultivating relationships with both established and up-and-coming DJs is now another major priority. The DJ market has a few winners and thousands of also-rans—much like those for movie and television actors, authors, athletes, and other creatives. The hottest DJs have seen their fortunes rise sharply in recent years: they now play stages and stadiums once reserved for only the most successful rock, pop, and hip-hop musicians. In 2012, Ryan Raddon, better known as Kaskade, sold out a concert at Los Angeles’s Staples Center—a feat that was previously unheard of for a DJ in North America. Strauss and Tepperberg shrewdly banked on the star power of top DJs to draw crowds to their new Vegas club. They even convinced Kaskade, described by industry magazine DJ Mag as being “among the vanguard of electronic musicians,” to sign on to a yearlong “residency” that required him to commit to a dozen performances in Marquee’s first twelve months.

  Relying on DJs has all the advantages that come with bets on superstars in media and sports. And because popular DJs often have a strong presence in social media, they are good at mobilizing their audiences. “DJs have a vested interest in people showing up, so they have incentives to market events,” said Lou Abin, along with Marc Parker and Richard Wolf a partner in Strauss and Tepperberg’s umbrella company, TAO Group. “If we book Tiësto for two hundred thousand dollars, thousands of customers will want to buy a ticket in advance,” said Tepperberg, adding, “Some DJs bring bottle-service customers, some bring in ticket buyers, and some do both.”

  But betting on superstar DJs also means having to deal with their power. Because they have such a strong hold on audiences, well-known DJs often earn rewards that are on par with the dazzling fees for top performers in other entertainment domains. Top spinners like Avicii, Deadmau5, David Guetta, and Tiësto can earn well over $1 million for a festival appearance and as much as $10 million for a high-profile Las Vegas nightclub residency. By some estimates, the world’s ten highest-paid DJs collectively earned $125 million annually in the 2011–2012 season—more than the Los Angeles Lakers’ payroll. Top DJs, keen to keep track of how they stack up, closely watch their rankings. “Every year there is a new guy who makes it onto the scene and onto the list,” Kaskade told me in late 2012, adding: “Last year it was Skrillex. And the year before that it was Deadmau5. This year Avicii will get a high spot.”

  DJs with clout often drive a hard bargain in their negotiations with nightlife impresarios. “For actresses and rappers, appearances in clubs are just a side thing. But for DJs, this is what they do—this is how they make their money,” explained Tepperberg. With agents and managers intent on getting the most lucrative deals for their clients, club owners face a difficult challenge, explained Rotella: “Everyone wants certain guys, and lots of people are now trying to jump into the business of hosting events. That is driving up the fees.” Strauss, based in Las Vegas, experiences those dynamics firsthand. “Stupid operators spend stupid money,” he said. “For some, it is just about market share. They ruin the market for us.”

  Under the old model, a club’s “promoters,” hired to attract a crowd that fit the image of the club, drove costs up. “If you run a nightclub, you know that the longer you are open, the higher your costs will be,” Tepperberg told me. “The rent goes up every year, and payroll and promotional fees are going up even faster.” Fees paid to promoters, who brought in around a third of the bottle customers and a fifth of the filler crowd for the old Marquee New York City, were the biggest drivers of cost increases for that club. “Promoters hold the crowd, create the energy, and give the place a certain look,” said Tepperberg. “They are the hosts.” At the old Marquee New York City, each promoter had his or her own approach to finding desirable patrons: some drew heavily on their own network of friends, whereas others relied on acquaintances from their day job. An average promoter made hundreds of dollars a night. (Knowing many fashion models and other good-looking people pays dividends in lots of ways, it seems.)

  A popular club’s costs can go up drastically when promoters realize how important they are to securing the right crowds and then begin to ask for higher fees. Tepperberg knows the problem all too well: “Here in New York City, promoters usually started at a low rate, but as their crowd developed, and as they started to bring in more and more people, other clubs offered them higher salaries, or higher commissions. They then came to us, saying, ‘Hey, you need to pay me more if you want me to stay.’ We make an effort to develop our own promoters, but as they get more successful, it ends up costing the club more money.” Laughing, he added, “We create monsters.”

  Ironically, with their move from a promoter-driven model to a DJ-driven model, Strauss and Tepperberg may find that DJs and their representatives have become even bigger monsters that need taming. That certainly would fit the experiences of many entertainment businesses that rely on superstars.

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  The more nightlife entrepreneurs focus on programming their nights, the more the practices of the best entertainment businesses will become useful in their world, too. So far, Strauss and Tepperberg seem to be making all the right moves. First, just as athletes want to play in stadiums and for teams that allow them to showcase their talents, the impresarios recognized the value of investing in excellent conditions for DJs. The design of the venue plays a key role here. Strauss and Tepperberg made sure DJs love to play at Marquee Las Vegas. “Right now it’s the premier club in North America. It’s the best thing we have in this country,” said Kaskade. “Their sound and lights are amazing. And the way the room is designed, with that tiered half-dome around the DJ booth, it’s really cool, because the most die-hard fans are right in front of me. That’s where the energy is, and that’s where it should be.”

  A high fee alone isn’t sufficient, Kaskade told me: “If the room isn’t conducive to my performances, I will not do the deal, regardless of the money involved.” Tepperberg is well aware of what DJs look for in a club and seeks to provide just that: “They want the right crowd, a great sound system, a good overall production, and great marketing around their shows—a story in the New York Times that helps build their brand.” With DJs knocking on the door seeking an opportunity to play the venue and fans knowing they’ll get the best possible experience, club managers face fewer challenges in attracting the most popular DJs and filling rooms to capacity. What initially seem risky investments to cater to DJs therefore become ways to help the club contain ongoing costs and maximize revenues.

  Second, just as with media production and distribution, scale brings advantages. It’s no coincidence that Marquee Las Vegas’s square footage is among the largest for clubs in Vegas, or that it operates not just a nightclub but also a dayclub on the premises—the scale allows Strauss and Tepperberg to make bigger bets on superstar DJs and other performers. For the same reason, the two men added capacity to the renovated Marquee New York City. Scale also manifests itself in the number of clubs under the TAO Group umbrella: the company’s expanding portfolio helps Strauss and Tepperberg to gain leverage over DJs and other partners, much as MLB and the NFL rely on the diversification of their distribution channels to gain power.

  Residencies such as the one Strauss and Tepperberg se
t up with Kaskade are also enabled by scale. When a nightclub owner secures a commitment from a high-profile DJ to play anywhere from eight to twelve nights, he or she is behaving much like a Hollywood producer signing up talent for sequels or a record label executive offering longer-term deals to musicians. Residencies help the nightclub impresarios better manage the risks inherent in investments in top talent. These deals up the size of the bet, of course—$10 million is hardly small change—but they also increase the likelihood of a solid payoff, just like Hollywood’s tent-pole movies featuring A-list stars.

  Third, borrowing a page from the best media and sports companies, Strauss and Tepperberg understand the importance of balancing superstar acquisition and talent development. “Jason and Noah are smart because they are not booking all the big DJs,” explained Rotella. “They have Kaskade and a few others star DJs. Some clubs are booking every big name but don’t see even close to the regular volume of customers when they do not have established DJs. Noah and Jason have up-and-coming DJs on those nights that are just as talented.” Rotella added: “You can’t ever be at the mercy of the acts. You have to own the experience.” Strauss and Tepperberg are careful to avoid getting caught up bidding higher and higher for superstar DJs. Recognizing that their venues can be a valuable platform to grow new stars, they are building relationships with newer, lesser-known performers who have genuine talent but need time to grow a fan base—not unlike, say, Saturday Night Live does with comedic talent. The more Marquee, TAO, LAVO, and Strauss and Tepperberg’s other clubs are recognized as brands in themselves—as places where great DJs play and where customers have a memorable experience—the more such talent development becomes possible.

  Of course, none of this means that the renovated Marquee New York City will be as big a success as Marquee Las Vegas; just as any Hollywood blockbuster can flop at the box office or any Broadway play can bomb, things could go wrong here. After all, there is inherent uncertainty about market outcomes in this sector, too, and the competition is fierce. Staying on top with Marquee Las Vegas will be no small feat, either. But it appears Strauss and Tepperberg’s strategy of making major events out of their blockbuster bets and being strategic about their investments in superstars is sound. With their shift to the content business—they have become, in a way, concert promoters as much as nightlife promoters—they live by the same rules that media companies do.

  “The market has changed,” observed Tepperberg. “People want more for their money, they want a show, a real production—they don’t just want to look at each other, or look at the pretty people. We saw what worked in Las Vegas, and now want to bring that to New York City.” There’s no reason their content has to be limited to electronic dance music and the DJs that create it, either. “In our new venues, we can do other things, too: a performance by a hip-hop star, a celebrity night, or a Cirque-du-Soleil-type show,” said Tepperberg. “DJs, live music, performance art—we can accommodate all those different types of content.”

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  When you look close enough, the principles and practices of “show business” can be found in a wide cross section of companies and sectors in our economy—and increasingly so. The hallmarks of blockbuster strategies and bets on superstars are visible throughout the hospitality industry, from the rise of celebrity chefs and cooking shows to the evolution of cruise lines and hotel concepts that seek to create unique customer experiences. (And in some ways, the Las Vegas Strip is nothing but an ongoing series of blockbuster bets on new hotel developments.) But the practices of entertainment businesses also apply outside the hospitality sector.

  In consumer electronics, for example, Apple has long used what looks an awful lot like a blockbuster strategy to compete with its rivals. And I don’t mean in its media business (where Apple makes 30 cents on every dollar’s worth of music, video, or other software sold through its iTunes and App stores—a multibillion-dollar business in itself), but rather in its approach to selling desktop and laptop computers, displays, smartphones, and other hardware. Consider this: Apple releases fewer products and product variations than virtually all of its competitors in computer hardware. The MacBook Pro, for instance, only comes in two or three different screen sizes and allows for far less customizing than laptops made by manufacturers such as Sony and Lenovo (which also carry a much wider assortment of machines—Lenovo, for instance, offers seven series of its ThinkPad alone, each consisting of a number of different models). Apple makes only a few bets each year: it focuses its production efforts on a small number of the most likely blockbusters.

  The same is true for the company’s marketing efforts. Apple puts all its weight behind each product launch, carefully planning the release date and the rollout of product information, all in an attempt to drum up as much free publicity as possible and create broad awareness of the launch. The approach works beautifully: each product announcement is discussed—and indeed dissected—by established news media and blogs alike. (By contrast, it’s hard to recall the last time the news media came out in full force to report on the launch of a new laptop by, say, Dell, Hewlett-Packard, or Sony.) And when a new Apple product hits the stores, the company often appears to deliberately create a sense of scarcity, fostering a “must buy” or “can’t miss” feeling and prompting people to form the kinds of lines in front of Apple Stores that are also often seen for big movie premieres and other entertainment events. Perhaps Apple’s former leader Steve Jobs learned a thing or two during his time at Pixar and his tenure on the Walt Disney Company’s board of directors.

  Although it may seem to have little in common with the world of computing, the market for underwear has seen its fair share of blockbuster-like marketing tactics, too. Victoria’s Secret, for instance, purposefully turns its annual fashion show into a media spectacle, so as to attract maximum attention and awareness for its collection of bras, panties, and other women’s clothing and accessories. Broadcast in more than 180 countries, the $12 million show serves as the main form of advertising for the lingerie brand.

  In 2012, the event saw dozens of beautiful women showcase Victoria’s Secret product lines by walking the runway, just as one would expect with any fashion show. But the show also highlighted live performances by A-list pop stars such as Rihanna, Bruno Mars, and Justin Bieber (who, dancing among the models, presumably invited the envy of millions of other eighteen-year-old males). And it prominently featured a group of superstar models who have signed on with the brand to become Victoria’s Secret “Angels,” including Alessandra Ambrosio, Doutzen Kroes, and Candice Swanepoel, even following them behind the scenes. (The footage mostly suggested the models engage in a lot of pacing around, and are stalked by at least three dressers at all times, but that’s beside the point.) In the United States, where CBS licenses the show for more than $1 million, over nine million viewers tuned in. The one-hour show aired in a prime-time slot on December 4—timed perfectly to coincide with the start of the Christmas holiday shopping season—and was designed to send viewers to Victoria’s Secret retail outlets or its e-commerce operations. The blockbuster bet, which absorbs a significant chunk of the brand’s advertising budget, is tremendously effective in creating buzz around the company’s brand in the mass market every year.

  Beyond the fashion show, Victoria’s Secret—which generates over $5 billion in net sales annually for its parent company, Limited Brands—appears to get a lot of mileage out of its superstars. The models who sign on as Angels serve as brand ambassadors throughout the year, making appearances, participating in interviews, or attending publicity events on behalf of Victoria’s Secret. And these elite models benefit, too. Not only does being an Angel pay handsomely—reportedly up to $5 million a year—but the association with Victoria’s Secret also helps these superstars further enhance their reputations, much more so than any regular endorsement deal. Just being selected is a huge career boost: it’s perhaps roughly equivalent to the benefits that befall a soccer player being recruited by Real Madrid or Manchester
United. Becoming an Angel gives the models tremendous exposure. “It puts millions of dollars of advertising behind you,” according to a senior vice president of IMG Models, which represents many Victoria’s Secret Angels. These mutual benefits help explain why the brand’s strategy works so well.

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  The advent of digital technology is helping to bring a wide range of companies a huge step closer to media businesses and the rules they play by. Think back to Starbucks: in addition to procuring recorded music for sale in stores, it is investing in its Starbucks Digital Network—and both initiatives help the coffee company provide its consumers with content that speaks to the brand. Or take Red Bull, which seems to be transforming itself into a media company. The energy-beverage brand is well-known for unusual stunts, such as its air show and cliff-diving competition. But it took things to new heights with Red Bull Stratos, which involved skydiver Felix Baumgartner jumping out of a capsule twenty-four miles above the earth’s surface. That widely promoted event allowed Red Bull to reach a worldwide audience of tens of millions of viewers—including eight million with its own live stream on YouTube. The company seems committed to becoming a real player in entertainment, whether by selling content to consumers, licensing the rights to sports events, or building an advertising business around its YouTube channel. None of these tactics are guaranteed to help sell more cans of its energy drink, but they all cleverly speak to the brand’s “Red Bull gives you wings” slogan.