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

by Anita Elberse

  Or consider a company in yet another sector: the one-and-a-half-century-old British retailer Burberry, among the world’s leading luxury brands, and famous for its blockbuster product, the trench coat. When I interviewed Burberry’s chief executive officer Angela Ahrendts in the fall of 2012, she described her firm not as a clothing company but as a “digital-media company.” It may be startling to hear her use that description—Burberry makes decidedly analog products, after all—but the statement actually makes perfect sense considering the way in which Ahrendts has reinvented the company since her arrival in 2006.

  In an effort to woo younger consumers and truly connect with them, Burberry has recently made a strong push in digital channels, effectively becoming a content producer. Media expertise is now essential to the company’s direction. “If you look at the composition of our board of directors, you’ll see it includes individuals who have served as the CMO of Time Inc. and the CEO of BBC Worldwide,” said Ahrendts. “Everything you see on Burberry.com, we shoot that in-house. We have a creative media team of a hundred people.” Burberry has live-streamed its runway shows since September 2010 (a first in fashion, apparently), allowing millions of viewers at home to view the shows online and post comments in real time. The brand continues to innovate, for example by simulcasting runway shows in 3D globally, and by offering online customers the opportunity to buy directly from the runway.

  Burberry has also focused heavily on populating its Facebook and Twitter accounts with useful content; it now has more fans and followers than any other luxury brand. And the company has launched several online destinations. At artofthetrench.com, for instance, consumers can submit photos of themselves in its iconic rainwear. “Nothing is for sale; it is just a site to connect people,” explained Ahrendts. At Burberry Acoustic, which falls under Burberry.com, people can find songs recorded exclusively for the brand by British artists who have been handpicked by Burberry’s chief creative officer. All these efforts stem from Ahrendts’s zeal for engaging customers and building communities of fans. Her strategy is working: in the seven years since she came to Burberry, the company’s annual sales have nearly tripled to more than $3 billion.

  * * *

  Perhaps it shouldn’t be all that surprising to see more and more companies, from a wide variety of sectors, adopt strategies that are successful in the business of entertainment, or even move into content production and distribution themselves. Every strong brand has a story to tell, after all, and entertainment businesses are masters at getting people to view, read, or listen to their stories. The best content producers have a keen understanding of how they can do so over and over again—how they can have lasting success in reaching and engaging audiences. So it’s only natural that those businesses would lead the way in a world that is increasingly connected and in which there is intense competition for people’s attention.

  Strategies that are effective in the entertainment business are also highly relevant to other sectors and, if current trends are anything to go by, best practices will increasingly pervade those industries. Many business leaders will find themselves competing in winner-take-all markets where being “average” is not good enough and scale is critical, where smart firms make blockbuster bets and put all their weight behind making those bets catch on with consumers, and where top-ranked individual performers—true superstars—are critical to success and may capture most of the rewards that are up for grabs. All in all, it is time to rewrite Irving Berlin’s 1954 blockbuster There’s No Business Like Show Business—the business world at large, it turns out, can learn quite a bit from the entertainment industry.

  NOTES

  In this book, I draw on hundreds of in-depth interviews I have conducted with entertainment executives, talent, and other personalities over the course of nearly a decade. Many of these interviews were a part of the case studies I developed in my role as a professor at the Harvard Business School; some interviews were conducted exclusively for the book. As is standard procedure with Harvard Business School cases, the interviewees have had a chance to review their quotes. The detailed notes below refer to the individual case studies.

  I also rely on my analyses of sales and other quantitative data on the entertainment industry. Some of my findings have been published in scholarly articles in academic journals. The notes below provide information on both the data sources and the corresponding journal articles, and often provide additional details on the analyses.

  Prologue: Show Business—a Business of Blockbusters

  as Horn put it, “really pursued it as a strategy”: Unless otherwise indicated, I obtained the quotes in this book from personal interviews.

  “He’s earned the respect of the industry for driving tremendous: Dawn C. Chmielewski, “Alan Horn Could Revive Walt Disney Studios’ Magic,” Los Angeles Times, June 1, 2012.

  One rival executive labeled Zucker “a case study in the most destructive: Maureen Dowd, “The Biggest Loser,” New York Times, January 12, 2010.

  to crow about “an electricity in the building” at the company’s headquarters: James B. Stewart, “NBC Finds a Winner in ‘The Voice,’” New York Times, March 2, 2012.

  Chapter One: Betting on Blockbusters

  In June 2012, less than two weeks after the news of: This section is partly based on: Gary Pisano and Alison Berkley Wagonfeld, “Warner Bros. Entertainment,” Harvard Business School Case 610-036. I identify each quote used from this case separately, but I think a wider acknowledgment of their work is appropriate. My own interviews with Alan Horn, which are the source for the large majority of his quotes in the book, were conducted before he commenced his new role at Disney Pictures.

  Disney Pictures had posted disappointing box-office results: Ryan Nakashima, “Disney Says ‘John Carter’ to Lose $200 million,” Associated Press, March 19, 2012.

  Described as “a consensus builder,” Horn went to great lengths: Patrick Goldstein, “Alan Horn: Can Disney’s New Boss Reinvent the Studio?,” Los Angeles Times, 24 Frames blog, June 1, 2012.

  The results proved the wisdom of his strategy: Warner Bros. press releases, boxofficemojo.com.

  “Making monster projects into profit centers is no slam-dunk: Merissa Marr, “Warner’s Event Movie Bet,” Wall Street Journal, June 1, 2004.

  Detractors of event-film strategies also loved to point to the western: Steven Bach, Final Cut: Dreams and Disaster in the Making of Heaven’s Gate (New York: William Morrow & Co., 1985); “Review of ‘Heaven’s Gate,’” Chicago Sun-Times, January 1, 1981.

  “In a good year, a major studio is happy to bat .500: Gary Pisano and Alison Berkley Wagonfeld, “Warner Bros. Entertainment,” Harvard Business School Case 610-036.

  “It is such a gut-level decision that it is impossible to define”: The last sentence of this quote comes from ibid.

  The studio released twenty-two films that year, spending about $1.5 billion: I estimated production budgets mentioned in this section using a variety of sources, including interviewees and other industry experts, boxofficemojo.com, the-numbers.com, imdb.com, annual reports, and trade magazines. Assessing production budgets is unavoidably an inexact science, though, so the numbers cited should be regarded as approximations. I obtained (proprietary) data on advertising spending from Kantar Media; I did not receive such data directly from Warner Bros. or any other studio.

  “We have made a conscious decision at Warner Bros.: Gary Pisano and Alison Berkley Wagonfeld, “Warner Bros. Entertainment,” Harvard Business School Case 610-036.

  Although the top three biggest bets only accounted for a third: I obtained domestic box-office data from Rentrak, and international box-office estimates from boxoffice mojo.com.

  At the other extreme, the four least expensive movies released in 2010: Several of these movies were only distributed by Warner Bros. and not produced by Warner Bros. And although a twenty-third film, Pure Country 2, was a part of its slate that year, too, I have excluded it here because it saw virtually no theatrical relea
se and was largely distributed in DVD format. Including the film would make the distribution of revenues and profits across films even more skewed.

  The figure plots each of the 119 films that Warner: To construct the sample, using data provided by Rentrak, I first compiled a listing of all Warner Bros. movies that were theatrically released in the five-year window from January 1, 2007, through December 31, 2011, and then excluded rereleases and IMAX movies. I used various sources to compile the necessary data: domestic box-office revenues from Rentrak; foreign box-office revenues from boxofficemojo.com; and production-budget estimates from interviewees and other industry experts, boxofficemojo.com, the numbers.com, imdb.com, annual reports, and trade magazines.

  The Blind Side, The Hangover, and Gran Torino: The Blind Side was distributed by Warner Bros. but produced by Alcon Entertainment.

  The figure shows how much the 119 movies, when grouped: To illustrate the basic relationship between costs and revenues, I define “surplus” as the difference between worldwide box-office revenues and production expenditures. The metric is not meant to be taken literally as the profits that flow to the studio; note, for instance, that the metric does not account for the studio’s advertising expenditures and the revenue share that the studio pays the theater.

  “The advertising expenditures for a movie that cost $150 million to make: The same is true for distribution costs, which in the film industry come in the form of prints (or copies of the film): a more expensive film may be distributed more widely, meaning more prints are needed, but, again, distributing a more expensive film will be more cost efficient. When films are fully digitally distributed, making extra copies will be very inexpensive. This further increases the relative advantage of bigger releases.

  The figure shows, for Warner’s 2010 movie slate: I obtained data on advertising expenditures from Kantar Media. The data cover advertising expenditures across a range of media, including newspapers, magazines, network and cable television, radio, and outdoor.

  “We intend to relax risk aversion policies: “Paramount Sees Its Future in the Stars,” New York Times, March 31, 2004.

  The latter was one of the biggest box-office disasters of all time: As estimated by boxofficemojo.com.

  One of the most daring bids in the world of book publishing: I have earlier discussed some of these arguments in an article on blockbuster bets in book publishing: Anita Elberse, “Blockbuster or Bust,” Wall Street Journal, January 3, 2009.

  His charming, unassuming personality easily made up for it: This section is based on: Anita Elberse, “Grand Central Publishing,” Harvard Business School Case 508-036.

  Author advances in the tens of thousands: For more information on the structure of such contracts and the publishing industry more generally, see: Albert N. Greco, The Book Publishing Industry, 2nd ed. (Hillsdale, NJ: Lawrence Erlbaum, 2005); The Book Industry Study Group, “Book Industry Trends 2006”; The Bowker Annual Library and Book Trade Almanac, 51st ed., edited by Dave Bogart (Medford, NJ: Information Today, Inc., 2006); and Standard & Poor’s “Industry Surveys: Publishing,” March 8, 2007.

  Marley & Me had garnered critical and commercial success: “Competitors Bark at Heels of ‘Marley’s’ Success,” USA Today, April 29, 2007.

  William Morrow, a HarperCollins imprint, had paid: Ibid.

  “It’s stunning, the advances being paid: Motoko Rich, “Iowa Library’s Cat Has a Rich Second Life as a Biography,” New York Times, April 4, 2007.

  According to Kosztolnyik’s records, Peter Gethers’ The Cat Who Went to Paris: These data are from Nielsen BookScan, the most comprehensive source of information on industry sales. BookScan does not cover all retailers, though; Walmart is an example of a retailer that is excluded.

  A publisher’s front list is its catalog of new books: Standard & Poor’s, “Industry Surveys: Publishing,” March 8, 2007.

  Grand Central chose to compete this way in a sector where: The Association of American Publishers (AAP) collects monthly and annual data on book returns.

  The sixth-highest-selling book (fiction or nonfiction) of 2006: I am indebted to Al Greco for his help in securing these Nielsen BookScan data.

  and when a no-name filmmaker with a minuscule budget: The Blair Witch Project cost

  only $60,000 to produce and generated close to $250 million in worldwide box-office revenues. Paranormal Activity cost only $15,000 to produce and generated nearly $200 million at the box office worldwide. Even Paranormal Activity 4, made for $5 million, generated five times its production budget in its opening weekend alone.

  Many movie lovers lament the offerings: These nine films were Harry Potter and the Deathly Hallows: Part 2, Transformers: Dark of the Moon, The Twilight Saga: Breaking Dawn—Part 1, The Hangover Part II, Pirates of the Caribbean: On Stranger Tides, Fast Five, Mission: Impossible—Ghost Protocol, Cars 2, and Sherlock Holmes: A Game of Shadows.

  “Sometimes this industry is like the mafia: Gary Pisano and Alison Berkley Wagonfeld, “Warner Bros. Entertainment,” Harvard Business School Case 610-036.

  When, in the mid-2000s, a brave producer: This paragraph is based on: Anita Elberse, “Xanadu on Broadway,” Harvard Business School Case 508-062.

  Described by influential film critics as “the epic failure: Roger Ebert, “Xanadu” Review, Chicago Sun-Times, September 1, 1980; Clark Collis, “Why People Love ‘Xanadu,’” Entertainment Weekly, July 6, 2007.

  “As soon as you say Xanadu,” he remarked: Clark Collis, “Why People Love ‘Xanadu,’” Entertainment Weekly, July 6, 2007.

  When Ahrens approached Douglas Carter Beane: John Berman and Ted Gerstein, “Can Broadway Fix ‘Xanadu’?,” ABC News, July 9, 2007.

  Literary agent Jonny Geller joked that his agency: Sex Story: Fifty Shades of Grey, Documentary, Channel 4, United Kingdom.

  The above figure plots each of the sixty-one hardcover books: These data came directly from Grand Central Publishing; the sample covers all books on the publisher’s fall 2006 front list.

  because of the economies of scale involved in advertising campaigns: In video games, Activision Blizzard is an interesting example. Its three key franchise titles—Call of Duty, World of Warcraft, and Skylanders—accounted for approximately 73 percent of its net revenues and, according to the game publisher, “a significantly higher percentage” of its operating income in 2011. (Source: Activision’s 2011 Annual Report.)

  The figure shows how much the fall 2006 hardcover titles: Here, “costs” include the author’s advance and royalty payments, printing and binding, freight and shipping, and marketing. “Net sales” are the net copies sold multiplied by the cover price, and taking into account any retailer discounts. “Gross profits” are the net revenues (which cover net sales and any subsidiary rights) minus paper, printing and binding, freight and shipping, marketing, and total author earnings.

  Called Dewey: There’s a Cat in the Library, it sold 106,000 copies: Again, I am indebted to Al Greco for his help in securing these Nielsen BookScan data.

  At one point, there was even talk of a movie adaptation: Michael Fleming, “Meryl Streep to Star in ‘Library Cat’: Actress Purrs for New Line’s ‘Dewey,’” Variety, November 12, 2008.

  Additionally, a larger number of products often leads to volume discounts: Savings on advertising are especially likely if studios can buy television advertising time on the so-called up-front advertising market (as opposed to the “scatter market”). A larger scale facilitates such media buys.

  Large media producers may buy advertising time on television months in advance: Most television advertising is sold on the up-front market, which takes place in May each year, when the networks present their program lineups for the upcoming season.

  In August 2009, Disney announced a $4 billion purchase: This section is based on: Anita Elberse, “Marvel Enterprises, Inc.,” Harvard Business School Case 505-001.

  As Disney’s purchase of the company came together: “Marvel May Need Heroic Help,” Wall Street Journal,
June 29, 2004; “Shareholder Scoreboard: Leaders and Laggards in the Rankings,” Wall Street Journal, March 8, 2004.

  In 2005, Marvel made its first strides toward that goal: Marvel Enterprises, “Marvel Launches Independently Financed Film Slate with Closing of $525 Million Non-Recourse Credit Facility,” press release, September 6, 2005.

  “This treasure trove of over 5,000 characters offers Disney: David Goldman, “Disney to Buy Marvel for $4 Billion,” CNN Money, August 31, 2009.

  the first films to come out of the company’s deal with Paramount: Marvel Enterprises, “Marvel Launches Independently Financed Film Slate with Closing of $525 Million Non-Recourse Credit Facility,” press release, September 6, 2005.

  Disney gained further control of the Marvel portfolio by buying Paramount: Pamela McClintock, “Move for Marvel Rights,” Variety, October 18, 2010.

  Chapter Two: Launching and Managing Blockbusters

  Standing backstage at a sold-out concert in Boston’s TD Garden: This section is based on: Anita Elberse and Michael Christensen, “Lady Gaga (A),” Harvard Business School Case 512-016; Anita Elberse and Michael Christensen, “Lady Gaga (B),” Harvard Business School Case 512-017.

  Born as Stefani Joanne Angelina Germanotta in New York City: “Bio,” www.ladygaga.com; “Lady Gaga: Biography,” Rolling Stone. Both accessed May 31, 2011.

  In 2003, she was one of twenty students given early admission: Vanessa Grigoriadis, “Growing Up Gaga,” New York Magazine, March 28, 2010.

  “May you always have soft cuticles while tweeting: Mawuse Ziegbe, “Lady Gaga Thanks Fans for Twitter Crown,” MTV.com, August 22, 2011.

  My Big Fat Greek Wedding is a classic example: For more information on this and other limited releases, see: Anita Elberse, John A. Quelch, and Anna Harrington, “The Passion of the Christ (A),” Harvard Business School Case 505-025; Anita Elberse, John A. Quelch, and Anna Harrington, “The Passion of the Christ (B),” Harvard Business School Case 505-026.