30 Oct 2013

Make Big Bets: How Blockbuster Strategies Work

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What do Jay Z, Harry Potter and Grand Theft Auto have in common? They're hugely successful thanks to blockbuster strategies. HBS professor Anita Elberse is an entertainment industry expert and author of "Blockbusters: Hit Making, Risk Taking and the Big Business of Entertainment." In this episode of The Business she explains how putting a lot of eggs in one basket pays off in the entertainment industry.

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Transcript

Brian Kenny: Anita Elberse is an HBS professor and an expert in the entertainment industry. She’s also the author of a new book called: "Blockbusters: Hit Making, Risk Taking and the Big Business of Entertainment." She’s here today to talk about the high-risk strategy that some entertainment folks are taking by putting many of their eggs in one basket, and what the implications of that are. Anita, thanks for joining us.

Anita Elberse: Thanks for having me.

BK: So just a couple of weeks ago "Grand Theft Auto V" was introduced and in the first three days it sold a billion dollars. It made a billion dollars in sales. The company that produced it spent about $250 million making it. Does that fit the definition of a blockbuster?

AE: It's the perfect example of a blockbuster strategy. In fact, it's a perfect example of a company that is willing to go all in on its products; and that this is an extreme example of a company that says we're going to spend all our resources on just one product. This is essentially our portfolio.

BK: What drives you to write a book like "Blockbusters?"

AE: So the main goal is actually to get invited to as many parties and movie premieres as possible.

BK: You're hanging out with some cool people.

AE: Yes, and that was the main goal. In fact, that's why I joined the Harvard Business School. I thought that would give me the best shot.

No, so in all fairness, it occurred to me that there are major business challenges for these companies, companies in these sectors that academics really didn't understand.

We didn't really have good answers as to what was the best strategy for a film studio or for a record label, or for the Red Sox. And so I decided to devote my research to these areas, because it was great fun, but also because there were these, these big questions that need to be resolved. There’s really interesting data, for academics to analyze. The movie industry produces its sales data in the public domain every single week. So there is really interesting data to work with, and it’s been great fun.

BK: Can you predict what the successful characteristics of a blockbuster are going to be?

AE: Yes; and in fact it's all in the book. I can't give it away in this podcast. We really are hoping that people are buying the book so that they can make their own billion-dollar movie.

BK: Of course; right.

AE: Well no, and just kidding - it is extremely difficult to predict what the next blockbuster will be. We know some ingredients. We know that it takes high production value. It needs to look really good especially if you have a movie, for instance, that has, has a--that relies heavily on special effects. It tends to have A-list talent even though that is not always the case, but more often than not, yes when you're talking about blockbuster films. You tend to see that films that are based on existing properties whether it's a book or a videogame, or a previous movie that those do really well. And obviously it's not just about the product; it's also about the marketing. So you need to spend heavily to make sure that everyone knows about it. So those are, those tend to be the ingredients for a blockbuster. But even if you do all those things very well, it's not guaranteed that you'll have a blockbuster. If it really were that simple, if it really were all about throwing lots of money after ideas, then anyone could be a studio head, and I don't think that's the case.

BK: Talk about some of the people in the book that you cite as examples of people that have had, you know, the courage I guess to pursue the blockbuster approach.

AE: Yeah, one central figure in the book is Alan Horn who is currently the Chairman of Disney Pictures. And at the time that I interviewed him for the book, he was the Chief Operating Officer for Warner Brothers. He was really the first to make it a strategy--a strategy in Hollywood to make big bets. So he wasn't afraid every year to say out of the 25 films that Warner Brothers releases, we're going to be spending 2 to 3 hundred million dollars on maybe three to five of those films in the hopes that they reach a billion dollars. And that takes a lot of guts to do because if it fails, and sometimes it does fail, if one of your films fail, well there is a whole lot of negative publicity. And obviously there is--there is a negative impact on the bottom line, but what my research shows, and what he, he pioneered is that, in fact that is a strategy that works really well. It seems that it is more risky, but making a larger number of smaller bets [phonetic] would, in fact, be a lot riskier because the average return you would get for the smaller bets, if you were--if you were, for instance, to make 20 films that each cost $50 million instead of making three or four movies that cost 200 million dollars, the average return you would get for those smaller films is actually a lot lower.

BK: So if this is true, then why does anybody make small films anymore? Why don't all the major organizations just make all blockbusters?

AE: Yeah, that's a great question; and, in fact, that's a question I ask my students all the time when I've just explained to them why the blockbuster strategy works so well. And I think the answer is that you need, you need a full portfolio to make this work. As a film studio or a publisher, or a record label. You can't just make these really, really big bets. You need to think about having a pipeline of products that in a way are test cases for future hits. You need to think about satisfying your partners, your distribution partners or your retailers. They would love to see regular products coming out of your studio or your publisher. So there are a number of reasons why a blockbuster strategy isn't just making these big bets, but it's also thinking about having a portfolio of products that consist of some smaller products, some smaller bets as well.

BK: So it's not about the long the tail. Because I think one of the things that you're doing in this book is sort of debunking that notion that Chris Andersen put out there a few years ago that you could make small bets, and over time, incrementally you would make more than your investment back.

AE: Yeah, so his argument, I think, is that it's in the best interest of publishers or other content producers to make a larger number of small bets. He was saying the future of business is less of more in a way--selling less of more. And that, I think, is an incorrect notion. You definitely need the head of the distribution. You definitely need to make these big bets. And yeah you can have success with some smaller products, but to solely focus on really small product and expect that demand, consumer demand will shift to those products now that they are available through online channels. It was a very appealing notion for many people. It gave lots of people hope that the industry might change significantly and barriers to entry would be lower; but if you look at the data, there is very little to suggest that demand is, in fact, moving to the tail.

BK: A lot about the blockbuster strategy is counterintuitive in some ways. And you would think that digital and the sort of democratization of creativity online would have leveled the playing field in some respects. But you point to the fact that it has actually fueled the blockbuster strategy in some ways.

AE: Yeah, what we, what we see is that the rise of online channels or more generally the rise of digital technology and everything that it brings with it is actually fueling bigger blockbuster brands, bigger superstars. And yeah, that is counterintuitive, I think, for most people and it certainly wasn't a very popular notion in the past few years with many observers of these markets coming out and saying the exact opposite. Saying, in fact, what you said that the adoption of these new technologies will make it easier for everyone to create products, will make it cheaper for everyone to offer these products, will make it cheaper and easier for consumers to search for whatever it is that they like. So there is a, there is feeling that we are no longer at the mercy of these artificial hits of the past that we could now, as consumer figure out what it is the we would really like, and that would not be the same for all of us. But, in fact, it turns out if you open up the floodgates in a way. If you let everyone consume what it is that they really want, tastes tend to converge on similar products. So even though we might not like to admit it, we all want to listen to Britney Spears, and we all want to see that really racy movie that everyone is talking about. So what you, in fact, get because access has increased is that we are--we're consuming more of those water cooler type products that everyone loves to talk about.

BK: So can you talk a little bit about the importance of talent, generally speaking, and the blockbuster approach?

AE: Yeah, absolutely. So I think the role of talent is incredibly important, and that's why I devote a large share of the book to successful talent management strategies and actually looking at this challenge both from the perspective of the entertainment business and the entertainer, whether it's an athlete or a musician, or an actor - from that perspective as well. And what we see is that it's incredibly difficult to think about building a sustainable business in the entertainment industry without making investments in A-list talent. Whether it's in the sports sector or in the more media and entertainment sectors, we see that most businesses that have sustained success are willing to make bets on A-list talent. And they also need to think about where they come out in terms of investing in superstars or developing superstars themselves, and none of those are easy challenges; and, in fact there are different strategies. Different companies have solved those challenges in different ways.

BK: I was surprised to see that the Mickey Mouse Club and Saturday Night Live have something in common. You wouldn't necessarily think they do, but you talk in the book about the talent development model. Can you describe that for us?

AE: Yeah, absolutely. So when we think about blockbusters, we tend to think about companies that acquire superstars; but, in fact, there are also companies that have been very, very skilled at developing stars; and picking young talent, for instance, and actually making sure that they, at some point, are the stars of the, of the future. And I think what good companies, smart managers of those companies have in common is that they think not just about how can we be as good as possible at developing talent, but also how can we capitalize on those efforts. And I think that's where the Disney Channel and Saturday Night Live are excellent examples. If you look closely at how they structure their contracts, and if you look closely at what they do with talent once it reaches star status, they're just incredibly smart about how they go about their business. Lorne Michaels I think is a genius in that respect; and the way in which Disney shepherds its talent through different stages. They grow up from being stars on the Disney Channel to being mega stars like Justin Timberlake and others it's, I think, a fascinating space.

BK: So some it is the talent itself, but some of it really is that they're being shepherded through this process, and that Lorne Michaels has control in some respects over their careers even after they have left "Saturday Night Live." Does that make them kind of indentured servants in some way?

AE: No, I mean I think the idea is that if you go through all that effort of developing talent, which is an incredibly difficult thing to do, and very resource intensive; and also an activity with low odds of success - most people will not become the next Justin Timberlake. So if a company goes through that effort, I think it's only natural that at some point you expect to see a return for that effort. So I think what they're trying to do is simply to protect their side of the business and ensure that they can keep doing this. If they would consistently lose money on the development of talent, and they would see that talent go elsewhere without getting a reward for it, they wouldn't be in that business for very long.

BK: So if you were sitting in a room with executives, which you do often, is there something that, an insight that would share with them where they could somehow apply the blockbuster strategy to what they're doing?

AE: One of my favorite examples is just this idea that it's fine to take big risks, and I think that applies to many sectors that it's, that it's okay and, in fact, probably very beneficial to you to reduce your product line and to go all in on what you think are the most likely winners. And that is, in fact, what you see that the leading companies are doing across a number of different domains. One example is Apple, which for a long time if you look at other consumer electronics manufacturers has had a much, much smaller product line and has really been making big bets on the products that it thought were going to be the most successful. So that is an incredibly useful strategy to have. And then if you think about how films are marketed or how music is marketed, the same idea can also be applied to the consumer electronic space. So Apple has long lines in front of its stores. Everyone knows the release dates of its products. There is lot of advertising before the release. They create the same type of atmosphere, the same type of hype around its releases that Hollywood studios have been doing for years and years.

BK: She is Professor Anita Elberse, author of "Blockbuster, Hit Making, Risk Taking, and the Big Business of Entertainment." Thanks for joining us today.

AE: Thank you for having me. It was a pleasure.

BK: Thanks for listening to The Business. I’m Brian Kenny, your host. You can find other editions of The Business at hbs.edu/news or on iTunes or SoundCloud.

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