What's behind the phenomenal success of entertainment businesses such as Warner Bros., Marvel Entertainment, and the NFL—along with such stars as Jay-Z, Lady Gaga, and LeBron James? Which strategies give leaders in film, television, music, publishing, and sports an edge over their rivals?
Anita Elberse, Harvard Business School's expert on the entertainment industry, has done pioneering research on the worlds of media and sports for more than a decade. Now, in this groundbreaking book, she explains a powerful truth about the fiercely competitive world of entertainment: building a business around blockbuster products—the movies, television shows, songs, and books that are hugely expensive to produce and market—is the surest path to long-term success. Along the way, she reveals why entertainment executives often spend outrageous amounts of money in search of the next blockbuster, why superstars are paid unimaginable sums, and how digital technologies are transforming the entertainment landscape.
Full of inside stories emerging from Elberse's unprecedented access to some of the world's most successful entertainment brands, Blockbusters is destined to become required reading for anyone seeking to understand how the entertainment industry really works—and how to navigate today's high-stakes business world at large.
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About the Author
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Hit-making, Risk-taking, and the Big Business of Entertainment
By Anita Elberse
Henry Holt and Co.Copyright © 2013 Anita Elberse
All rights reserved.
Launching and Managing Blockbusters
Standing backstage at a sold-out concert in Boston’s TD Garden in March 2011 during Lady Gaga’s smash-hit solo tour, the Monster Ball, her manager, Troy Carter, took a moment to take it all in. “When Interscope celebrated its twentieth anniversary last year, Gaga was featured as one of its top acts in the past two decades. . . . It is amazing how far we have come in such a short time,” he told me. And he had a point: after emerging on the music scene in 2008—touring as a supporting act for New Kids On The Block, a former boy band beyond their glory years—Lady Gaga hit it big in the fall of 2009. Two short years later, she had become one of the biggest names in entertainment. Along the way, she collected multiple Grammy and MTV Video Music awards, garnering acclaim as both a singer and a songwriter. As Gaga’s musical star rose, so did her status in the fashion world, helped by her memorable appearance in a “meat dress” at the 2010 VMAs and, a year later, her red carpet arrival in an egg-shaped vessel held up high by latex-clad dancers. By 2011, Forbes ranked her first on its Celebrity 100 list, ahead of Oprah Winfrey.
Working behind the scenes, the thirty-eight-year old Carter had also seen his fortunes dramatically improve. He had been introduced to Gaga by top producer Vincent Herbert a few weeks after Herbert had signed her to his label Streamline Records, a subsidiary of major record company Universal Music Group (to which the flagship Interscope label also belonged). “I wanted someone who shared my vision for Lady Gaga, and Troy understands it. We have been close friends for fifteen years, and I knew he would appreciate this chance,” recalled Herbert, who described Carter as “a little kid from Philly with a big heart and a dream to prove himself.”
Although he looked much too young to have built a career in entertainment that spanned two decades, Carter had started out in the early 1990s carrying crates of records for Jeffrey Allen Townes and Will Smith, then better known as rap duo DJ Jazzy Jeff & The Fresh Prince. As the hub for all activities related to Lady Gaga (“I think of myself as the air traffic control center—just without the terminals,” Carter said about his job as manager), he himself had become a force to be reckoned with in the world of entertainment. Now, after a series of investments and new ventures in Silicon Valley, he was also a rising star in the world of new technology. “The reality of being a talent manager is that I risk my job every week,” Carter explained. “Lady Gaga trusts my decisions. We are about breaking boundaries, which means we do something different when we have a chance—we don’t just do what worked last time, or what was successful for someone else. But if something doesn’t work out, it is my responsibility.”
Gaga’s ascent to the top may have been swift, but her artistry had been a long time in the making. Born as Stefani Joanne Angelina Germanotta in New York City in 1986, Gaga began playing the piano at age four, composed her first piano ballad when she was thirteen, and played open mike nights at venues around New York one year later. As a student at Covenant of the Sacred Heart, an all-girls Catholic school in Manhattan, she excelled in lead roles in several of the school’s musicals. In 2003, she was one of twenty students given early admission to New York University (NYU)’s prestigious Tisch School of the Arts, which allowed her to further develop her singing, playing, and songwriting. A year and a half after arriving, she withdrew from NYU to focus on her music full-time—but not before striking a deal with her father to re-enroll if her music career fizzled: a smart safety net but, needless to say, one that ultimately proved unnecessary.
A day after hearing a recording of Gaga’s, Herbert flew her out to Los Angeles. “I knew she was a star,” Herbert said. “It was that simple.” To Carter, the woman who would go on to sell tens of millions of copies of songs such as Just Dance, Poker Face, and Bad Romance on her first two albums, The Fame and The Fame Monster, had “being a performer running through her veins.” Through a relentless touring schedule—for months on end, she put on seven to eight shows a week, sometimes performing three times per night, in different clubs around the United States and Canada—Gaga had built a fan base with a strong core. “This is not what pop artists usually do,” Carter remarked, “but we wanted to build her fan base from the ground up. . . . Once the audience feels they own something, they are going to run with it, and do the work for you.”
Gaga heavily relied on Facebook, Twitter, and YouTube to further spread word of mouth and strengthen her connection with her fans—or her ”little monsters,” as she liked to call them. She turned out to be extraordinarily skilled at doing so: by 2011, Gaga was the most popular living person on Facebook and the most followed person on Twitter. (In typical Gaga fashion, upon receiving the latter distinction, she posted a live video and tweeted, “May you always have soft cuticles while tweeting. May you never have carpal tunnel,” to thank her fans for the honor.)
But when Gaga was ready to release her third album, Born This Way, Carter and his team decided to rely much less on a grassroots approach to propel sales. Rather, the idea was to support the launch with an intensive marketing effort—“much like opening this as a movie blockbuster in the summer months, like Avatar,” explained Interscope’s vice chairman, Steve Berman. Herbert added: “We can do that because of who she is—she is a part of culture now, and has an enormous platform.” But the strategy would be a significant drain on resources, Carter acknowledged: “With an artist of Gaga’s caliber, reaching full potential means doing things on an enormous scale.” He knew that the launch he had in mind would have to go beyond traditional music-distribution channels and would test the limits of what a record label, even one the size of Universal, could afford.
Now, as Carter made his way through TD Garden’s hallways to the stadium floor—“the best place to experience the concert,” as he put it—he wondered whether an expensive launch akin to that of a “tent-pole” movie was the right way to capitalize on Gaga’s popularity. Or was a more moderate approach—much like the one that Carter had employed so successfully for her first albums—the best way to proceed?
Not only do entertainment businesses make risky bets on the development of a select few products, they often further increase the stakes by investing a great deal of money in distributing and promoting those products as widely as possible, all with an eye toward opening as big as they can. And companies set those marketing budgets at high levels often well before they know how those products will be received in the marketplace. Why? Why would the team behind Lady Gaga want to move away from a word-of-mouth-driven launch that worked so well for them in the past? With Gaga’s new album likely to sell like hot cakes, would record label executives not prefer to save on any unnecessary marketing expenditures?
It is hard to argue with anyone who has been as successful as Gaga—when I spoke with Berman, he noted that “she could be a chief marketing officer for a big corporation, because she understands the brand, and how important it is to stand by that brand.” All evidence indeed points to team Gaga’s approach to releasing Born This Way being the wisest course of action. To understand why, it is necessary to take a closer look at the pros and cons of the different ways in which entertainment products are launched—and how, more specifically, media producers decide to allocate their marketing dollars over time.
Most albums, movies, television shows, video games, and books—and, in fact, the majority of goods not produced by entertainment businesses—are launched using what marketers call a “limited” or “grassroots” release strategy, as illustrated in the chart above. The basic idea behind such an approach is to gradually discover what level of marketing spending is most appropriate. It is all about being as efficient as possible with the available resources.
How does this work? When products are introduced using a limited release strategy, initial distribution and advertising levels are relatively low. For instance, in the context of the film industry, this could mean that a film debuts on only a few screens in major cities, and is supported with print and online advertisements in those regions. The primary goal of these efforts is to attract not the largest, but rather the right audience to the product, in the hopes that those early customers will in turn spread positive word of mouth and help draw in new audiences. Only if the product takes off—or shows some signs of being on the verge of taking off—will the producer gradually increase the distribution coverage or intensity and support the product with more advertising to further enhance growth. Getting a positive response from the market is critical: if the product fails to impress, the producer will cease to invest, and copies will be pulled from shelves (or, in the case of a movie, from theaters). The principle is to spend sizable amounts of money on the marketing of only those products that are worth it—those that truly have a chance of success in the marketplace.
Some of today’s biggest entertainment hits were launched using a limited release strategy. My Big Fat Greek Wedding is a classic example: a so-called sleeper movie that originally appeared on only a hundred screens in April 2002, it was initially promoted via a word-of-mouth campaign targeted at Greek communities in the United States. As the film caught on, the executives behind the film slowly expanded its distribution footprint and advertised the film to a wider audience. Not until August of that year was the film shown on a thousand screens—still a low number for a typical release in Hollywood, where films often play on three to four thousand screens at once—and made more than $10 million a week. The film remained in theaters until April 2003, nearly a year after its opening week, and ultimately grossed $240 million domestically. Not a bad haul, given its production costs of only $5 million.
Lady Gaga’s first recordings were also released in this fashion. Her first single, Just Dance, a glam-influenced pop song co-written with R&B artist Akon and producer RedOne that also featured up-and-coming artist Colby O’Donis, was released in April 2008. Gaining traction proved difficult: “We could not get it played on pop radio,” Carter recalled. “Mainstream radio stations told us it was too much of a dance song for them.” Bobby Campbell, chief marketing officer at Carter’s management firm Atom Factory, chimed in: “Dance music simply was not on the air in Top 40 Radio. Radio stations were saying no to such music.” To overcome the problem, Carter followed a release plan that, inspired by successful rap artists’ launches, relied on an intense schedule of live performances targeted at communities that seemed especially receptive to her music.
“The gay community seemed to stick to her, and that resonated with her personally. So gay clubs were a natural fit to start the work. We gave them full access to her,” explained Campbell. “It was about finding different groups: the gay community, the dance community, the club-going community, the fashion community, the art community, and developing those into a larger pool of Gaga fans. So when Interscope made some headway with radio later on, we had this really strong core of fans who had been following her for months, and who felt they were part of the reason why she was successful.”
Most content producers opting for a limited release do so because they lack the funds necessary for a wider rollout. Getting broad distribution for a product tends to be costly, partly because of the additional demands that many retailers make. In the film industry, for example, cinema exhibitors often insist that a film producer or distributor spend a certain amount on marketing before they agree to show a film; these stipulations are frequently a part of the contract between both parties. In the book business, the initial launch of E. L. James’s mega-seller Fifty Shades of Grey, which the British working mother of two wrote in her spare time, was remarkably modest: lacking the support of a publisher, James published the book’s first volume as an e-book and print-on-demand paperback in May 2011. She chose to release the book with a small Australian company called Writers’ Coffee Shop, and published two more novels by the same method over the next six months. Excitement about the books soon began to build on blogs and in social media, prompting an executive at major publisher Random House to sign James in early 2012 and give the trilogy a much stronger distribution and marketing push.
Having some control over which audiences become early adopters is another important advantage of a limited release. It is no coincidence that highbrow films are usually released in more upscale neighborhoods in New York City and Los Angeles before they are rolled out to other parts of the country. Producers and distributors know that audiences there are most receptive to those kinds of films, and count on the positive word of mouth from these audiences to then spill over to other markets and help propel sales to greater heights. Jimmy Iovine, Interscope’s chairman, talks about capitalizing on “sparks”: the idea is that if an entertainment product resonates with audiences in a given market, that market can, with the right kind of support, become a launching pad for a wider rollout. In the case of Gaga’s debut album, for instance, Iovine and his colleagues thought initial conditions were most promising in Canada and Australia, which is why they rolled out the album there first—not in the United States.
By their very nature, social networks and video-sharing sites are uniquely suited to enhance any early buzz around a product or artist; indeed, such sites now play a critical role in many grassroots releases. That certainly was the case for Gaga. “Where other people see digital distribution as a source of cannibalization, we see it as an opportunity,” Carter said. “The Beatles, Michael Jackson, and Madonna didn’t have Facebook or Twitter. We wanted to use those new tools.” Gaga began using both sites in March 2008, right before Just Dance was released. Carter and his team arranged for fifty popular music bloggers to interview Gaga in the six months following the Just Dance launch; during that period, these interviews alone totaled over ten million impressions.
Using a more novel tactic, Gaga’s team also initiated a series of two-minute videos, dubbed Transmission: Gaga-Vision, on Gaga’s official YouTube channel. “There were fans that discovered her as early as April, and others that came on board months later,” recalled Campbell. “Because she is such a visual artist, we felt we had to keep the visual fresh even if we did not release another single. So we put out a series of ‘webisodes’ that followed her around and gave a peek behind the scenes. It wasn’t overly produced, and in fact mostly shot on a flip-cam—the idea was to create intimate moments that make you feel like you were there with her.” Atom Factory’s digital team worked to syndicate Gaga’s content, from her tweets to her music videos, as widely as possible and made sure it got covered by other media.
As is the case with most limited releases, success came gradually. Just Dance broke into major charts for dance airplay and club play two months after its release; another two months passed before it entered the Billboard Hot 100, the main singles chart in North America. The song then spent the next five months working its way to the number one spot, which it reached in January 2009. Just Dance’s nine-month-long journey up the charts was the second-longest climb to the top spot in Billboard’s history. By that time, Poker Face, a second single from the album that was marketed in much the same way, was moving up the charts right behind it.
Despite all the advantages that go along with a limited release strategy, however, most blockbuster bets in entertainment are released using what is known as a “wide” or “mainstream” release strategy. Wide releases, as suggested by the chart below, are not designed with efficiency in mind; instead, the goal is to “break through the clutter” and immediately capture the attention of as large an audience as possible.
For products launched in this manner, distribution levels start at a high level, while most promotional activities are concentrated at the time of release—or, to be more precise, in the short period leading up to the release. As a result, sales often peak immediately after launch and then taper off quickly. A successful opening is seen as critical: a failure to reach an acceptably high level of sales early on generally dooms a widely launched new movie, a new recording, or any other type of entertainment product.
Hollywood’s event films are perhaps the best example of products launched this way. Major studios have the scale needed to make high up-front investments in advertising and marketing at a time when no sales are being generated. They start promoting a film months—and, if we include teaser trailers, sometimes years—in advance of its opening weekend. Spending ramps up dramatically in the six to eight weeks before release: a studio will spend as much as two-thirds of its marketing budget on television commercials in the final two weeks before a film’s opening. And since some of Hollywood’s biggest films open on four thousand screens or more across the nation, their first week of release is often also their biggest week in terms of revenues. In 2011, for example, the top hundred films, from Harry Potter and the Deathly Hallows: Part 2 to The Iron Lady, collected 30 percent of their total of $9 billion in domestic theatrical revenues in their first week alone.
As soon as Carter and his team had the opportunity, they opted for a wide release for Lady Gaga’s music, too. Released in May 2011, Born This Way was shipped to an unprecedented twenty thousand locations across the United States—not just conventional music retailers but also coffee chains like Starbucks, electronics retailers such as RadioShack, and grocery stores and drugstores such as CVS and Walgreens. A long lead time made this possible: in 2010, knowing they would need months to pull off a launch of this scale, Carter and the Interscope executives convinced Gaga to push back the release date. “Normally there is a three- or four-month lead time, but we announced the album release seven months in advance,” Berman said. “We wanted to put a stake in the ground.” Gaga was initially less than thrilled about this plan, Carter recalled: “I still remember her crying her eyes out at the thought of having to wait this long.”
Why put Gaga through this misery? Why do Carter and almost every other executive and manager in the entertainment industry, when given the chance, prefer to push for big openings by spending heavily on advertising and distribution, rather than increasing marketing expenditures more gradually? The reason is simple: all else being equal, the odds of achieving success in the marketplace are higher with a wide release strategy than with a limited release approach. That, in turn, follows from the very nature of entertainment products—and, in fact, from several of the same characteristics that drive major media producers’ taste for blockbuster portfolio strategies.
First, because people like winners—because they prefer to consume entertainment products that are also chosen by others—a solid opening is often a huge factor in a rollout. For media products, initial success breeds further success, while a failure to achieve success early on frequently means having no chance to succeed at all. Alan Horn knows all too well how this dynamic works in the film industry. “We always found out how we did on opening weekend,” he explained. “For a film released on a Friday, I’d get a call that same night at eleven o’clock saying ‘Well, it is over.’ And I’d say, ‘When you say it is over . . .’ but before I could even finish they’d go, ‘No, no, it is over!’ For some of our event films, they’d tell me, ‘We are done. We have just lost $100 million.’ ” When Disney’s $250-million-budget John Carter generated a disappointing $30 million in revenues in its first weekend, trade magazines called it a “fiasco”—a full two days into its run—and audiences fled. Within a week, Disney had issued a report stating it would take a $200 million write-down.
In the film industry, with its tradition of publishing sales figures weekly, each weekend’s winner is ensured a great deal of free publicity. Opening-weekend revenues are a quality signal for subsequent moviegoers, and most customers (and indeed most reporters) pay little attention to the fine print, such as how many theaters were necessary to achieve the total grosses, or how much was spent on advertising. By contrast, the movies that, for whatever reason, fail to open well in their first week are immediately considered “losers.” They are quickly whisked away to smaller screens at the theaters or disappear from view altogether, only to make room for a new set of movies hoping to capture people’s attention from the very start.
But even in sectors where sales figures are harder to come by, we see similar patterns. In book publishing, if new titles fail to catch on, they are often pulled from the shelves in a matter of weeks. Extensive marketing campaigns and the star power of established authors can help place books in prime spots in bookstores across the country, but they suffer the same fate if they do not open well. On Broadway, underperforming plays, no matter if they cost millions of dollars to produce, are regularly replaced after only a few weeks of disappointing ticket sales. Even Lady Gaga, for all her success, scrambled to release a third song in advance of her album Born This Way when the second, Judas, underperformed in the market.
Social influence is a powerful force in markets for popular culture. Because we are social beings, people tend to want to listen to the same music that others listen to, read the same books, and see the same movies. Simply put, we repeatedly show a preference for popular products. That tendency, economists have shown, can tip the scales in favor of those products that perform well at the outset—even if the difference between the top performers and the next level down is slight. If one product edges out a rival for the number one position in its first week, that success may become a topic of conversation at the water cooler and ultimately make a huge difference across a product’s entire run.
Even products that have no discernible quality differences can, as a result of these forces, experience very different outcomes in the marketplace—luck alone might lead to an early break. The sociologist Duncan Watts has proved this point convincingly. By conducting a set of experiments involving an artificial market for songs, he and his colleagues found that social influence played as large a role in determining the market share of successful songs as actual differences in quality. The experiment was designed to measure varying degrees of social influence: for instance, some respondents could see how many previous participants had downloaded a particular song while others could not, and some respondents saw a list ranked by song popularity while others saw a random listing. In one study, Watts and his colleagues presented respondents with false information—they showed a ranking that was completely inverted from what the download pattern of previous listeners actually looked like. What the study revealed was that while the “best” songs never did very badly and the “worst” songs never did terribly well (even when the rankings began inverted, the very best songs eventually made their way back to the top), any other scenario was possible.
The ultimate success of an entertainment product, Watts and his colleagues revealed, is extremely sensitive to the decisions of a few early-arriving individuals: if consumers making decisions about a product later in its life cycle can see whether that product is popular, they amplify the choices of those early consumers. The result is what Watts calls a “cumulative-advantage process,” which helps explain the high unpredictability of the demand for popular-culture goods. Successful songs, movies, books, and artists are not necessarily “better,” Watts argues; rather, what people like depends on what they think other people like, and what the market “wants” at any point in time depends on its own history.
Faced with this dynamic, executives will do everything they can to gain the upper hand in a battle with their rivals right from the time of launch—which means opting for a wide release strategy. Achieving scale from the moment of introduction is critical. In the case of Born This Way, for instance, it would be very risky to rely primarily on word of mouth: any loss of traction with initial audiences could seriously hinder the album’s launch. Especially with a high-profile artist like Lady Gaga, attempting to raise a high level of awareness among the largest possible audience in advance of a new product’s release is in fact the safest approach. “We chose a big launch because we could,” is how Interscope’s Berman put it. “Leave no stone unturned” was Carter’s motto ahead of the Born This Way campaign: in other words, use every opportunity to make the launch as big as it could be. Similarly, no film-studio executive in his right mind will launch a $200 million movie on a few screens in the hope that word of mouth carries the picture to a wider audience. Smart executives will do what is in their power to create buzz and open big, so as to avoid their products losing the battle for early adopters.
The preference for a so-called push strategy involving wide distribution and high advertising intensity has everything to do with a second characteristic of entertainment products: their experiential nature. This is not to say that consumers will mindlessly choose whatever is put in front of them just because they cannot reliably assess product quality before the moment of consumption, but wide distribution and marketing can make a substantial difference. “In the business, we say ‘you can buy an opening weekend,’ ” Horn said. “You can spend so much that audiences will show up. It will be disappointing for you and for them, but you can get them in those seats.”
In the movie industry, study after study has shown that the best predictor of a movie’s revenues is the number of screens on which it plays. Sophisticated statistical models (some of which I developed in my own research) that are designed to tease out the tangled effects of factors such as genre, star power, seasonality, competition, and advertising invariably demonstrate that, all else being equal, an increase in the level of distribution is the most effective way to increase sales. Higher advertising expenditures help, too: advertising not only directly increases sales by triggering audiences to buy tickets, it also indirectly drives sales by reassuring theater owners that dedicating screens to a movie will be worth their while. In the music industry, radio airplay—the main way through which new music is promoted—continues to be a critical predictor of recorded-music sales. And in book publishing, distributing a large number of physical books remains a classic tactic.
The fact that entertainment products are experience goods also explains the important role critics can play. Potential customers typically value the opinions of others who have already read, listened to, watched, or otherwise interacted with a product. Because judgments about the quality of these products are inevitably subjective, people tend to trust experts to tell them what to like. But the tastes of regular consumers matter as well, which is why Facebook, Twitter, and other online sharing tools, although mostly associated with grassroots releases, are just as relevant to wide releases. Because social networks make it possible to spread information and opinions about new products across the globe instantaneously, and because entertainment executives are often keen to benefit from that buzz, online sharing mechanisms can fuel ever bigger releases.
A third feature of entertainment goods is that in general they are relatively expensive to produce but cheap to reproduce. The first copy of an album (the “negative”) often costs hundreds of thousands, if not millions, of dollars to produce. But once a record label has the first copy in hand, the company has to spend only a fraction of that amount to create more copies and distribute them—each physical record sent to retailers costs a few dollars at most, and even less if the album is distributed online. Not only does this make blockbuster products disproportionately profitable (the more copies sold, the lower the production and distribution costs per copy sold), it also makes media producers eager to earn back their investments sooner rather than later. With so much money tied up in their projects, time is of the essence.
In some entertainment sectors, a wide release also makes it easier for media producers to plan multiple revenue windows, allowing companies to reap further rewards from hit products that carry low marginal costs. In the movie industry contracts between studios and theater owners are often specifically designed with wide releases in mind. Revenues can be shared on a sliding-scale basis, whereby studios receive a higher (and exhibitors a lower) percentage of revenues in the early weeks of a film’s release—giving studios yet another reason to aim for big openings. And such launches help protect executives from changes in audiences’ tastes in genres, stars, or other product features. The hunger for popular culture items can fade quickly—most are essentially “fads” or “fashions.” But some entertainment products are especially perishable or timely—think of a book about a politician running for election, or a new song by an artist who has just won a Grammy Award. For such products, if the necessary resources are available, experienced entertainment executives will favor a big launch over a limited campaign that plays out over many months.
All in all, just as blockbuster bets at first glance seem risky but upon closer examination may in fact be the safer choice, releasing those bets in a manner that emphasizes big openings may seem to only heighten the risk but is often the smartest approach. Such launches are not for the faint of heart because they require huge up-front investments. With a wide release, entertainment executives are effectively doubling down on their investment. But they also increase the probability of achieving mainstream market success—which, of course, is critical to the profitability of blockbuster bets.
For Lady Gaga, the meticulous preparation for a massive launch paid off in spades. Carter and his team used the long buildup to the Born This Way launch to take advantage of a series of high-profile, attention-grabbing events to which the superstar had been invited in early 2011, including the Grammy Awards, a taping of American Idol, and the season finale of the television mainstay Saturday Night Live. And team Gaga worked closely with retailers, super fans, the media, and a variety of other partners in a concerted effort to help grow awareness for the album and make sure that it would be readily available for prospective customers.
Released on a wider scale than any other album in 2011, Born This Way sold 1.1 million units in its first week, making it just the seventeenth album to reach the one-million-copies-a-week benchmark since Nielsen SoundScan began tracking such data in 1991. Some say the sales total paints an unfair picture of the album’s “true” popularity, as online retailer Amazon sold an estimated 440,000 units for just 99 cents to promote its new cloud-based music service. But those critics overlook the fact that Amazon paid the same wholesale price that other retailers did and fully absorbed the resulting loss—as good an indication as any of Lady Gaga’s star power and the level of anticipation for the album. Within a year of its release, the album sold well over two million copies; during the same period, eighteen million copies of the album’s songs were sold. Whether Lady Gaga would have sold fewer copies had her team opted for a more gradual release is impossible to say, but her team did not want to risk finding out—and rightly so.
Most creative goods, of course, are released on a much smaller scale than Lady Gaga’s album, yet many of these products have made a significant difference in the world of popular culture. The work of a small New York–based label is a case in point: Octone Records is among a select group of music companies that has perfected the art of creating hits with limited resources—and along the way demonstrated the value of a novel “hybrid” model that marries the strengths of both wide and limited releases.
Although he had the deep passion for music required for the job, James Diener never was your typical record-label executive. He mingled with top players in the private-equity sector, read Harvard Business Review articles just to keep up with the latest management thinking, and wasn’t afraid to try a different model of creating hits in a collaboration with music-industry legend Clive Davis. Diener, who began his career at Columbia Records and rose to the position of vice president of A&R Marketing at the label, had started Octone in 2000 to put a new philosophy on how to launch music to the test. By 2007, after Octone had hit home runs with the first two bands signed—the pop-rock quintet Maroon 5 and the alternative rock band Flyleaf—music-business insiders were following the small label’s every move. Initially rejected by the major labels, Maroon 5 had garnered both commercial and critical success, selling ten million copies worldwide of its 2002 debut album Songs About Jane and winning the prestigious Grammy Award for “Best New Artist.” Flyleaf’s first album, meanwhile, had reached gold status with more than five hundred thousand albums sold, and was heading toward the million-units platinum mark.
With Diener in the role of chief executive officer and president, David Boxenbaum—fresh off a career as a strategy consultant at PricewaterhouseCoopers and sporting an Ivy League MBA—as general manager, and Ben Berkman as executive vice president and head of promotion, Octone was based on the belief that once a decision was made to sign an artist, it was the label’s job to do everything possible to realize the artist’s full potential. The team believed that most major labels were impatient, dropping acts too soon and failing to dedicate sufficient resources and efforts to building their audience. “When I worked at Columbia we signed a lot of acts that didn’t get a decent shot,” Diener told me. “I wanted to change that.”
Octone introduced an innovative model that borrowed the best practices from both independent and major labels. The idea was simple. Octone would focus its efforts on just a few artists each year. Initially, like most independent labels, the company would rely heavily on grassroots marketing campaigns to gradually build its artists’ fan bases. But once artists succeeded to the point that they were on the verge of breaking through, the company’s distribution and marketing efforts would enter a second, more aggressive phase. To make this phase possible, Octone structured a unique joint-venture model with Sony BMG Music Entertainment, a major label that at the time had revenues of $1.75 billion and the second-highest share of the recorded-music industry (behind Universal Music Group). Diener had successfully pitched the idea of the partnership to Clive Davis and his colleagues at Sony BMG after the famed music executive, responsible for guiding the careers of superstar artists such as Whitney Houston and Bruce Springsteen, courted Diener to leave Columbia Records. Diener took on two roles: he became a full-time senior vice president of A&R and marketing at Sony BMG’s J Records while also running Octone.
Under the terms of the partnership, Octone shouldered the initial costs of discovering and promoting its artists. Octone’s acts remained exclusively on Octone’s profit-and-loss statement until a so-called uplift into the joint venture took place. Artists could get uplifted in three ways, Diener explained. “First, if an artist reaches 75,000 records sold, Octone can elect to uplift the artist into the joint venture, and Sony BMG is required to accommodate this decision. Second, if an artist reaches 125,000 records sold, Sony BMG can compel us to uplift the artist. Third, both parties can mutually agree on a natural time in a project where it becomes appropriate to step in.”
Before an artist’s uplift, Octone received all revenues and paid the artist’s advances, all expenses related to recording the album, manufacturing costs necessary to physically produce the album, tour support, promotion and publicity, and other fees. But after the uplift, Sony BMG was responsible for all new costs, be they distribution, promotion, or sales efforts. From this moment on, Sony BMG and Octone equally split the profits, while Sony BMG covered all losses. Post uplift, Octone continued to provide creative and marketing direction to Sony BMG’s efforts, but its options for forcing Sony BMG to action were limited. “The risk in uplifting an album is that you lose total control,” said Boxenbaum. “It can be a challenge to manage a relationship with a partner label.”
Crucial to the launch of Octone were Laurence Fink, the chief executive officer of investment management firm BlackRock, and Howard Lipson, then senior partner at prominent private equity firm The Blackstone Group. Diener had met Lipson and Fink in 1999 and asked them to fund the proposed new record label. Successful Wall Street financiers and avid music fans, they solicited a group of private equity investors and raised a total of $5 million in initial working capital. “We should have lost all of our money,” recalled Fink. “The business conditions in the music industry are very difficult and there are sea changes going on that are seismic. However, Octone shows that you can beat the trends.”
“Many independent labels did not have sufficient funds to execute their ideas or were going to run out of money before they could make it,” added Lipson. “Therefore, they had to rely on an economic affiliation with a major label in which the major controls everything and the upside for the independent label is limited. Octone was well-capitalized, so we knew we had time to reach a certain level and fulfill our mandate. There was nothing we could do to guarantee success, but we set Octone up so that it could succeed.”
For all its success in beating the steep odds of scoring a hit in the music industry—most record companies recovered their investments in only one out of every five or six new albums—Octone had not traveled a perfectly smooth road. Success had proven elusive for the third artist on its roster, Georgia-based singer-songwriter and guitarist Michael Tolcher. Although Octone spent over $750,000 marketing Tolcher’s first full album, I Am, it sold only one hundred thousand copies, not enough to recover the costs incurred. Now, as they contemplated their next move, Diener and his colleagues faced three options. They could “grind it out,” industry parlance for supporting the debut album over a prolonged period by leveraging the small beachhead of fans Tolcher had established on his last US tour in 2006; they could increase the stakes by backing a second album; or they could cut their losses and instead focus on other artists.
Is there a logic behind Octone’s efforts to pursue a hybrid model that combines a grassroots with a more mainstream release strategy? Is such a model the answer to the entertainment industry’s woes when it comes to consistently creating hits? Finding answers to these questions starts with the realization that, in most entertainment markets, a content producer’s scale and its product-release strategy are closely linked. The larger a media company, the more it can afford to put significant marketing efforts behind a product in an attempt to create a hit. But scale also comes with disadvantages. And both those advantages and those disadvantages explain what Octone executives are attempting to do, and whether their model may be here to stay.
Smaller and larger content producers are different in their approaches. First, they vary in terms of the number of products they bring to the market. In the music business, major labels—the industry’s biggest powerhouses, such as Sony BMG (now called Sony Music)—tend to have hundreds of artists on their roster, including multiple bestsellers. Alicia Keys, Beyoncé, John Mayer, Britney Spears, and Justin Timberlake were some of the artists on Sony BMG’s roster at the time the executives at Octone were trying to determine their next step. Small “indie” labels, on the other hand, tend to have only a few artists. That, in turn, can mean that the success of one artist is essential to the small label’s overall fortunes. For all its success, Octone heavily depended on its number one act, Maroon 5: the superstar band brought in more than $10 million in annual profits in North America alone.
Second, while larger players will often prune products quickly after a failed market launch (Sony, for instance, might terminate up to forty underperforming artists in a given year), smaller producers tend to support their products over a relatively long period of time. Larger labels typically do not invest a great deal of time in an album by a new, unproven artist; their strategy often comes down to giving an act one big push to see if the music catches on with fans. Because a major label has abundant resources and several blockbuster artists, it can afford to take a home-run swing and miss. Because of its high overhead costs, a major label also needs quick successes: it may not have the patience that is necessary to “break” an act through a series of small victories over a long time horizon. After all, the “next big act” in the label’s portfolio is always awaiting its turn.
By contrast, smaller labels like Octone are more committed to developing artists longer. “We tend to stick with our artists,” is how Diener described it. Octone both can and has to do so because of its smaller roster. It can afford to spend more time on its artists. According to Boxenbaum, the label’s lower costs—in 2007, it counted only ten employees—and its freedom from the pressure of quarterly earnings reports allow the Octone team to take its time to nurture each project. But it also has to make things happen with each of its artists for its model to work: it has limited content to fall back on if one of its new releases were to fail. “We put ourselves in a position of having no choice but to push harder to make our releases work,” noted Boxenbaum.
These differences affect how content producers typically release their products. The larger label’s wider portfolio and focus on short-term success are suited to a more mainstream release approach built on distribution and marketing strengths. Major labels often stage elaborate marketing campaigns before and around the launch of albums, usually involving a strong push for radio and video airplay and other forms of advertising and securing shelf space in large music and mass-market stores—much like the campaign for Gaga’s Born This Way album. Meanwhile, smaller labels rely heavily on grassroots marketing techniques, such as using “street teams” of fans who have volunteered to promote the band (and are often recruited via the Internet and at concerts), social-networking techniques, distribution through small record stores (those that do “not just stock but actually sell records,” as Boxenbaum once put it), and extensive touring to refine an artist’s sound and gauge fan interest. These techniques go hand in hand with a gradual rollout of artists and their music, which fits Octone’s style of fostering deep connections with fans—much like Lady Gaga originally built a relationship with her fans.
Diener understands the advantages of scale as well as anyone: “Major labels are essentially in the volume business. They have the resources to push artists via mainstream outlets, and they have the ability to achieve economies of scale once sales momentum has been created. There is a reason that the majority of records sold today is distributed by major labels. Most independent labels are not well funded, and most owners or operators of those independent labels do not have the expertise of major labels.”
But he also knows that smaller labels can really nurture artists they feel hold artistic promise, even if it means forgoing early profits. “They excel in specialized artist development and marketing strategies, often employed over longer time horizons, that have launched many of today’s biggest selling artists,” remarked Diener, who pointed out that music that crosses established genres or otherwise does not fit the mainstream mold of the music industry usually comes from smaller labels. Smaller-scale producers may be better positioned to innovate—or, to put it in familiar terms, they may be less likely to fall into the blockbuster trap by spending big on acts that sound just like past winners. It’s telling that Adele, who sounds and looks very different from any other artist that dominated the charts before she did, was nurtured by an indie label, XL Recordings. Any music company hoping to copy her phenomenal success will find it has to pay top dollar for artists that could be “the next Adele.”
Clearly, then, a partnership between a larger and smaller content producer, when structured in the right way, can bring the best of both worlds together: the smaller producers’ ability to innovate, and the larger producers’ power to market those products to a mass audience. For a smaller player like Octone, being able to tap into the distribution and marketing strength of a behemoth like Sony BMG brings substantial advantages. As Diener put it: “When artists are on the verge of breaking through, there is nothing like the marketing power of a major label to bring that final push.” Boxenbaum agreed: “There are independent labels that have no relationship with major labels. They are just out there plodding along, they are surprised when an album starts to take off, and then they are stuck because they cannot take their campaign to the next level.”
Octone’s joint venture solves that problem. It helps the label to secure shelf space in retail chains such as Walmart and Target that rarely take risks on new artists, and to get the artists’ songs played more on popular radio stations and video networks—the kinds of marketing actions that are commonplace for the major labels. Although borrowing Sony BMG’s marketing power comes at a significant cost—half the profits—Octone is banking on sales to be elevated to such an extent that they will make up for the lost share of profits.
That is what seems to have happened with Maroon 5. Signed by Octone to a five-album deal in 2001, the category-blurring band entered the studio that same year. The resulting album, Songs About Jane, featured pop rhythms, classic soul melodies, searing guitars, a powerful rock undercurrent, and lead singer Adam Levine’s expressive voice. The record was completed in February 2002 and released in the summer of that year. But generating radio airplay and sales proved far from easy. To remedy the situation, later in the summer of 2002, Octone organized a so-called branch tour that enabled invited radio station programmers and regional managers of record retailers to see the band perform, identified a number of retailers that received discounts and marketing support, and set up a tour schedule that ultimately lasted an almost unheard-of three years and involved opening shows for more established bands—it fought a “ground war,” as one Octone executive put it. The strategy worked: in the spring of 2003, Maroon 5 fulfilled the uplift requirement.
Sony BMG then stepped in to fund all of the band’s promotion, sales, and marketing activities and helped bring the band into more mainstream record stores, radio stations, and concert venues. From that moment forward, sales of the album took off. Helped by the marketing push, the record rapidly ascended the charts—domestically and internationally. At the height of its success, in December 2004, Songs About Jane sold well over 100,000 copies in a single week. It also yielded four hit singles, including This Love and She Will Be Loved, which together topped the charts for ten weeks in 2004. The album ultimately achieved quadruple platinum status in the United States, and reached gold or platinum status in over thirty-five countries.
The partnership wasn’t just worthwhile to Octone; Sony BMG benefited, too. For them, the partnership reduced risk. “The dollars spent by Octone, prior to uplift, are the riskiest in the project,” Diener said. “Those spent by Sony BMG at the moment of the uplift are some of the surest dollars spent in the music business.” In the early stages of an act’s career, it’s difficult to know how the group’s music will be received in the marketplace. By the time Sony BMG enters the picture, the band has already shown its ability to sell records. This is market feedback a label executive can rely on, thus making any further investments in the band safer than those in any untested new act. The lowered risk comes not just from the level of sales achieved; it is also the result of having a base of dedicated fans, name recognition, and greater sophistication about how to handle the media. “By the time of the uplift, Sony BMG can be confident that our artists have done two hundred photo shoots and two hundred interviews, and know how to tell their story to the press. They also have improved a great deal as performers and know how to connect with an audience either in a large concert hall or in a more intimate venue such as a club,” Boxenbaum explained.
Are these gains worth the trouble for Sony BMG? Could a major label not establish one or more separate divisions that function much like Octone does, each being responsible for a small roster of artists, so as to avoid having to share half of the upside of an uplifted artist? That surely is a possibility. But fully merging the cultures of a major label and a smaller one can prove challenging, and managing the costs of such “R&D divisions” can be tricky—Sony BMG would have to have a high rate of success in developing and nurturing artists in order for this strategy to be effective. A partnership like the one with Octone encourages Sony BMG to be more disciplined in making development and marketing investments: Octone’s efforts allow Sony BMG to pick its battles.
The worth of Octone’s model to major labels became apparent in early 2007, when Universal Music Group’s Jimmy Iovine proposed to buy out Sony BMG’s share in the joint venture and so bring Octone over to Universal. The offer established Octone’s valuation at approximately $70 million. Diener’s team accepted the proposal and soon relaunched their label as A&M/Octone under the Universal banner.
Lacking the necessary resources to support a product on the verge of taking off is a key problem for many smaller content producers. But there’s an issue they struggle with far more often that could ultimately prove more costly—that of not knowing when it is wise to stop investing in a product that is not quite catching on. Octone was experiencing that problem firsthand with its third act, Michael Tolcher.
An artist who hailed from Lovejoy, Georgia, Tolcher was in the midst of a string of cross-country gigs in clubs, bars, coffeehouses, and parties when Octone’s executives discovered him in July 2002. They liked what they heard of a subsequent demo recording but still found him to be a little unpolished. “Some bands are very slick from the get-go and they have a lot of experience with production equipment and studio boards, but Michael was different,” Boxenbaum recalled. “We didn’t want to rush out a commercial recording before he was ready.” Octone sought to strengthen Tolcher’s fan base by arranging opening shows for such established artists as Crosby, Stills and Nash, Sister Hazel, and Everclear, and by creating opportunities to play in small clubs and bars.
Tolcher’s time on the road inspired many of the songs on his first full album, I Am, which was released in May 2004. By 2006, Tolcher was back on the road, touring extensively and accompanying Michelle Branch, Maroon 5, Gavin DeGraw, and numerous other acts. He also made television appearances on Jimmy Kimmel, Last Call with Carson Daly, and several network morning shows. Tolcher’s single, Mission Responsible, received some airplay on the radio but the attention proved short-lived. By early 2007, I Am had sold a total of a little less than one hundred thousand copies, a lackluster performance given that he had been uplifted after the album achieved seventy-five thousand in cumulative sales. Worse, Octone’s losses on the artist now totaled around $800,000—and they were increasing every day.
Octone’s predicament with Tolcher illustrates the difficulty in knowing when to stop investing in a product or artist launched using grassroots techniques. That’s the critical issue with such limited releases: success could be just around the corner, in which case investing more seems the right thing to do, as it was with Maroon 5. But it is also possible that success may never come, in which case each additional dollar spent is a waste. Because the signals coming back from the market are noisy at best, it is virtually impossible to determine the right course of action. Boxenbaum, with all his experience in the music industry, realizes this all too well: “The great artists and the bad artists are easy—it is the good artists that can kill you. With the great artists you just keep putting fuel in their tank. With the bad artists, you realize your mistake quickly and cut your losses. It is the good artists that bankrupt you because they are good enough to make you think they are about to turn the corner and therefore keep you spending.”
Octone—by then A&M/Octone—ultimately decided to give the artist one last push. The label released a new single, supported by heavy online and video promotions. However, the efforts did not generate the market response the executives hoped for, and in 2008 Tolcher was released from his contract. Knowing when to pull the plug on an investment, Diener and Boxenbaum have found out, can sometimes be the most critical decision of all. This is especially important in the entertainment business, where the odds of success for any given product are so low.
Fortunately, the label’s blockbuster act Maroon 5 fared much better. Relying on Universal’s distribution and marketing resources, A&M/Octone released the group’s second album, It Won’t Be Soon Before Long, in the spring of 2007. Featuring a duet with pop star Rihanna, the album debuted at number one on the Billboard album chart and went on to sell over four million units worldwide, earning the band two more Grammy Awards. The band’s third album, Hands All Over, got off to a more modest start, but received a huge boost from the success of its fourth single, Moves Like Jagger, which became the ninth best-selling digital single of 2011 with worldwide sales of seven million copies. Lead singer Adam Levine’s turn as a star judge on NBC’s The Voice further propelled the band—and its appropriately named fourth album, Overexposed, released in 2012—into the mainstream market.
Meanwhile, Diener and his colleagues continued doing what they do best: helping a select roster of new artists find an audience. And thanks to their partnership with Universal, the A&M/Octone executives can be confident that they can ramp up quickly the moment they strike gold.
Copyright © 2013 by Anita Elberse
Excerpted from Blockbusters by Anita Elberse. Copyright © 2013 Anita Elberse. Excerpted by permission of Henry Holt and Co..
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Table of ContentsCONTENTS
Prologue: Show Business—a Business of Blockbusters
One: Betting on Blockbusters
Warner Bros. Entertainment, Grand Central Publishing, Marvel Entertainment
Two: Launching and Managing Blockbusters
Lady Gaga, Octone Records
Three: Investing in Superstars
Real Madrid, Boca Juniors
Four: How Superstars Use Their Powers
MGM and Tom Cruise, Maria Sharapova, LeBron James
Five: Will Digital Technology End the Dominance of Blockbusters?
YouTube, Hulu, the Metropolitan Opera
Six: Will Digital Technology Threaten Powerful Producers?
Radiohead, Major League Baseball, the National Football League
Seven: The Future of Blockbuster Strategies
Jay-Z, Lady Gaga
Epilogue: No Business Like Show Business?
Marquee New York City