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

  When, in the mid-2000s, a brave producer named Rob Ahrens wanted to resurrect the 1980 Olivia Newton-John roller-disco film Xanadu—widely seen as one of Hollywood’s biggest debacles ever—as a Broadway musical, he encountered strong resistance. Described by influential film critics as “the epic failure to end all epic failures,” “the most dreadful, tasteless movie of the decade,” and “truly stupendously bad” (one critic simply warned audiences to “Xana-don’t!”), Xanadu is credited with inspiring the Golden Raspberry Awards, affectionately known as the “Razzies” and now an annual celebration of Hollywood’s worst moviemaking. Not the most likely candidate for a musical adaptation, to say the least.

  Although Broadway productions based on box-office hits are common—Spamalot, described by its makers as a musical “lovingly ripped off” from the successful motion picture Monty Python and the Holy Grail, is one example—shows based on Hollywood flops are rare. Not surprisingly, Ahrens faced numerous obstacles during his five-year quest for support. “As soon as you say Xanadu,” he remarked, “[people] either get it right away, or they look down on you and then they call the police.” When Ahrens approached Douglas Carter Beane, his choice for playwright, Beane’s first response—“No! Never!”—was not encouraging. “I passed several times, because it’s a really bad movie,” said Beane, who initially saw the opportunity as “theater suicide wrapped up in a nice box.” He added: “My partner said, ‘That sounds like a resume stopper.’ Another friend of mine said, ‘Do you want to keep working in this business we call show?’”

  Third, by extension, not bidding for sought-after projects makes it harder to get best efforts from sales and marketing representatives and other employees. After winning the hotly contested rights to a book like Dewey, Grand Central executives can forcefully make the case that this book will beat its competitors. (“It’s a sure bet to do as well as Marley & Me—why else would everyone be after it?”) The same principle holds true in the film industry. As Horn put it, “It’s really hard to convince marketing people to get behind a project when they have nothing to sell, whether it is a big star or a well-known literary property.” Firing up those who will be involved in the development and marketing process is crucial, especially because most media titles have only a short window in which to make money and the lion’s share of marketing activity takes place before their launch—when it is still largely unknown how audiences will respond.

  Finding and fostering internal champions of projects is an integral part of executing a blockbuster strategy. Raab described their national sales meeting, held twice a year and attended by all salespeople, as a “pep rally.” As she told me, “The idea is to have everyone walk out excited. Our job is to create the conditions to make a splash in the market—to get people to buy into our hopeful thinking.” Similarly, at Grand Central’s launch meetings, during which the company’s projects are formally introduced to internal constituents from the editorial, sales, marketing, and other departments, as well as several senior executives of Grand Central’s parent company Hachette, “a smart editor will make comparisons with other successful products [so] everyone understands this is going to be a big book,” as the director of marketing put it.

  Fourth, critically, if entertainment businesses forgo making big bets on likely blockbusters, they will find their channel power waning over time. Retailer support is decisive in most media markets. In the film industry, the number of screens a movie receives from exhibitors in its first few weeks remains the best predictor of its revenues. Exhibitors want to see evidence that a movie is worthy of their scarce resources; they like nothing better than to know that a studio is making a significant push for a film and planning an extensive marketing campaign. A blockbuster strategy helps them to use their resources effectively. “Exhibitors totally embrace the blockbuster philosophy,” said Horn. “They don’t bear any of the costs—whether the movie costs $20 million or $200 million makes no difference to them. But they do see the benefits of us spending more. What they want to do is sell popcorn. Blockbuster movies put a lot more people in seats, which means they sell more popcorn. That’s the beauty of it for them.”

  In the book business, a large share of products is bought on impulse—surveys show that just under three-quarters of the people entering a bookstore buy a book they did not intend to buy—so securing significant display space with book retailers such Barnes & Noble is particularly important. These “pile ’em high and watch ’em fly” tactics may seem old-fashioned, but they tend to be very effective at triggering sales. For television networks, getting buy-in from local television stations is crucial, and stations often strongly object to cost-cutting measures that may reduce the likely size of a popular show’s audience. NBC experienced this firsthand in 2009 when the network announced that it would move Jay Leno’s new show to the ten p.m. slot in place of more expensive dramatic content, which station managers believe is a better lead-in for local news programs.

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  The way in which retailers market entertainment products to consumers is driven by the same forces that made Dewey such a pricey creature. This is noticeable even in the smallest details. If you had walked into a Borders bookstore around the time of the book’s launch, you might have noticed the “Like This? Try These” signs with one arrow pointing to the bestseller Marley & Me and another arrow to several books that were similar to that book: The Art of Racing in the Rain, A Three Dog Life, and Merle’s Door, all books about dogs. When Dewey hit the shelves, it, too, claimed a spot on that row—as much a “copycat” strategy as one will ever see. And so content producers, in turn, try to cater to the marketing strategies of retailers, sometimes going so far as to copy the look of products. For instance, publishers hoping to speak to the same audience that made Malcolm Gladwell’s The Tipping Point a huge hit sometimes mimic that book’s distinctive cover design. Gladwell himself has had no reason to change his winning formula: it’s no coincidence that his more recent books, Blink and Outliers, look like they belong right next to The Tipping Point on the shelf. Many of the biggest blockbusters spawn knockoffs and imitators: in 2012 the erotic novel Fifty Shades of Grey prompted the release of such titles as Fifty Shades of Pleasure and The Ninety Days of Genevieve. (Literary agent Jonny Geller joked that his agency is now seeing so many unsolicited erotica manuscripts, they have renamed the “slush pile” the “blush pile.”)

  New channels through which consumers buy books work in similar ways: Amazon automatically lists comparable books under the “Customers Who Bought This Item Also Bought” section, which undoubtedly helps drive sales for those titles. By the same token, new films and television programs are often described as being “from the producers that brought you…” to highlight similarities with past winners, and promotions and trailers are placed around current hits that resemble them in some important way, be it the story line, central property, or star actor.

  The blockbuster-focused marketing of many entertainment companies did not emerge in a vacuum—it mirrors the way consumers make choices among a wealth of competing entertainment offerings. Because people are inherently social, they generally find value in reading the same books and watching the same television shows and movies that others do. People have a taste for winners: if, say, a book is popular and has been widely discussed in the media, consumers have more reason to read it than they would an otherwise identical book that has not received such attention. Compounding this tendency is the fact that media products are what economists call “experience goods,” that is, audiences have trouble evaluating them before having consumed or experienced them. Unable to judge a book by its cover, readers look for cues as to its suitability for them. A prospective purchaser of Vicki Myron’s book will thus find it very useful to hear that Dewey is “a Marley & Me for cat lovers.” Just as publishers do, consumers value resemblances to past favorites.

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  No surprise, then, that the blockbuster strategy seemed to work wonders for Grand Central during the per
iod Dewey was published, just as it did for Warner Bros. under Alan Horn. In 2006, the year before the company acquired the book, Grand Central’s fall list consisted of sixty-one adult hardcover front-list titles. Just 20 percent of those titles accounted for roughly 80 percent of sales and an even larger share of profits. “The sins of the many are offset by the plentiful of the few,” said one of the company’s financial executives. As shown in the chart on the next page, the titles on its fall 2006 list with the highest acquisition costs were for the most part the titles that delivered the highest revenues—and the highest profits. Results are even more skewed than for Warner Bros.: the top 10 percent of Grand Central’s titles account for 64 percent of its costs, 72 percent of its net sales, and a staggering 126 percent of its profits.

  Remarkably, Grand Central made the lion’s share of its profits on just one book—and that title was by far its most expensive. The most popular title that fall cost $7.5 million to develop and market. The book generated net sales of just under $12 million, and gross profits of nearly $5 million—out of the nearly $6 million in total gross profits across the entire list. Meanwhile, as the chart on the following page also shows, many of the publisher’s small and medium-size bets lost money. For instance, the thirty titles that were cheapest to acquire actually lost an average of $12,000 each. Even the rare winners among Grand Central’s least expensive books contributed very little to the company’s profitability. And this particular list is no exception; it is illustrative of the publisher’s results in other years as well.

  Grand Central Publishing’s Bets in 2006

  The above figure plots each of the sixty-one hardcover books on Grand Central Publishing’s fall 2006 front list by its net sales and (development and marketing) costs. (The publisher asked for the titles not to be identified). The most expensive title on the list cost over $7.5 million and generated $11.6 million in net sales.

  As this example again makes clear, the idea of smaller bets being “safer” is a myth. Blockbuster strategies reliably beat the alternative of more risk-averse strategies: the highest-performing companies in the entertainment and media sector thrive by investing a relatively large proportion of their resources in just a few titles and then turning those choices into successes by giving them a higher level of development and marketing support. It may be partly a self-fulfilling prophecy, but it works. And because the marginal cost of reproducing and distributing entertainment products is relatively low—especially compared to their up-front production expenses—and because of the economies of scale involved in advertising campaigns, the advantage of a bestseller, a box-office champion, or a ratings monster is huge.

  How Grand Central’s Big Bets Stack Up Against Its Small Bets

  The figure shows how much the fall 2006 hardcover titles, when grouped by their costs, contribute to the publisher’s total costs, net sales, and gross profits. For instance, the top 5 percent, the most expensive titles, account for just over half of the development and marketing costs, 60 percent of net sales, and 118 percent of gross profits.

  This does not mean media companies can spend without limits, of course—especially given the turbulent markets for their products. Book publishers are experiencing uncertain times with the rise of e-books, broadcast networks see their market shrinking relative to premium cable channels, and film studios can no longer count on DVD sales to be the dependable cash cow they once were. But yielding to an excess of caution and shying away from any attempt to create the next blockbuster with mass appeal may be the surest way for an entertainment company to lose further ground.

  As for Dewey, how did our fat-cat friend fare? Published in September 2008, the book became one of those blockbuster bets that paid off—and then some. Released at a list price of $19.99, Grand Central’s big gamble performed beyond any of the executives’ wildest dreams. It captured the number one spot on the New York Times hardcover bestseller list and sold 759,000 copies in just over three months, making it the sixth-highest-selling adult nonfiction title that year. It sold another 130,000 hardcover copies in 2009, bringing the total close to 900,000 copies. Having tasted success with cat books, that same year another Hachette imprint published a children’s book by Vicki Myron, Bret Witter, and illustrator Steve James. Called Dewey: There’s a Cat in the Library, it sold 106,000 copies. The next year, Myron and Witter launched another follow-up, Dewey’s Nine Lives: The Legacy of the Small-Town Library Cat Who Inspired Millions, which offered “nine funny, inspiring, and heartwarming stories about cats.” At one point, there was even talk of a movie adaptation starring Meryl Streep as Dewey’s caretaker.

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  Perhaps the key question is not why entertainment executives make blockbuster bets—the real puzzle, it seems, is why they continue to turn out products that are the result of much smaller bets. After all, the financial payoff from these modest investments looks decidedly shaky. If tent-pole films consistently generate the highest returns for Warner Bros., why does the studio also invest in the smaller films that make up the large majority of its annual output? And if Grand Central’s expensive “focus” and “make” books consistently outperform the large majority of other titles on its list, why even bother with those smaller investments?

  A close look at the way successful entertainment companies operate reveals that both kinds of investments play an important role in their portfolios. Bigger bets tend to generate the highest revenues and profits, bring excitement to the company, help build the brand, and foster future hits. But for a book publisher, a film or television studio, or another type of media producer to carry out a blockbuster strategy, smaller bets are needed, too—for a variety of reasons.

  First, smaller investments can serve as test cases. Placing a reasonable number of less expensive bets can help a media producer discover the next big-hit franchise. In the film industry, sequels are seen as one the safest blockbuster bets one can make, and smaller investments may help turn up another film that is ripe for a sequel, much like The Hangover and Sex and the City. This principle also applies to actors, directors, and other creative workers. Even if studio executives are convinced that a little-known actor is the next Tom Cruise, asking him to star in a $200 million film in his very first assignment seems ill advised. Instead, it is more sensible to commence a collaboration with a promising young actor by giving him a role in a smaller film, one that will allow the studio to learn whether he is truly capable of “carrying a film” and accomplishing all that comes with that responsibility, from performing at a high level on the set every day to fulfilling publicity obligations. Being able to test the appeal of new product formats, from vampire movies to talent shows, is another advantage. Some product types or genres may prove profitable as smaller-scope investments in their own right, as seems to be the case, for instance, with certain ultra-low-budget horror films.

  Smaller bets can also help a media producer “fill the pipeline,” thereby keeping companies that help sell the producer’s output satisfied. For example, a book publisher that delivers a steady stream of new titles to the market will find it easier to build and maintain relationships with retailers. That, in turn, may put the publisher in a position to negotiate steeper discounts, favorable in-store placements, or other marketing advantages. In the film industry, Warner’s commitment to producing two dozen movies each year—roughly one Warner Bros. film opens in theaters every other week—helps it to obtain better agreements with theater owners. “Our head of domestic distribution would go out and speak with exhibitors and say, ‘I need your best theater on Wilshire Boulevard and I need it for four weeks,’” Horn told me. “The exhibitor might counter that Paramount wants it, too. But then we could say, ‘We are Warner Bros., here is our lineup for the year, and this is what we need for this particular movie.’ It will always be a back-and-forth in these negotiations, but having the largest number of films gave us weight in the marketplace, which got us better screens, for a longer time, and at a better revenue-sharing rate.” Additionally, a larger
number of products often leads to volume discounts in media buys: the more products they advertise, the more favorable the advertising rates studios and publishers can secure.

  Pursuing a wide range of smaller projects allows studios, publishers, and other entertainment businesses to form closer links with agents, who are involved in the lion’s share of deals for new products and therefore critical gatekeepers in virtually any entertainment sector. Further, a broad portfolio of properties can attract needed financing. For a studio like Warner Bros., which under Horn’s leadership relied on co-financing for nearly all of its projects but the surest bets like Harry Potter, a broad portfolio can be a useful way to attract outside investors willing to share risk. The studio takes a distribution fee off the top, and then splits revenues with those investors. “Some investors may push back on this model, but they usually don’t have the power and the relationships to be an effective distributor, so we have the upper hand in these talks,” said Horn. “Again, our scale worked in our favor.”

  That smaller bets may allow for more flexibility in dealing with these industry partners is an added advantage. For example, it is often easier to move release dates and shift advertising budgets for smaller-scale projects. Large media producers may buy advertising time on television months in advance; having smaller projects to move around can help optimize the use of those resources.