Anita Elberse is a Harvard Business School Professor whose first book, Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment, will be released on October 15.
Much has been written about Hollywood’s biggest blockbuster bets stumbling at the box office this summer. The business model that major film studios live by is “tanking” or “imploding,” some of the most vocal critics argued, with others chiming in that throwing so much money at the summer lineup is wasteful and that studio executives wildly overestimate the appeal of their riskiest bets.
The season sure had its share of flops, with expensive films such as After Earth, Lone Ranger, Turbo, and White House Down performing well below expectations. But while it’s easy to blame the studio heads for those failures, I would argue that’s also largely unfair. Yes, Hollywood is investing more and more every year in A-list-star-driven films, superhero movies, and other expensive concepts — a phenomenon I have dubbed the “blockbuster trap.” And yes, every year some of those big bets fail miserably at the box office. But the truth of the matter is that there’s generally a clear reason why studio heads do what they do — they are, in fact, very focused on reducing risk — and their blockbuster-focused strategy is sound. As tempting as it is to overreact to this summer’s megaflops, a closer look at what is really going on suggests that Hollywood would be in much bigger trouble if its executives consistently walked away from making such large bets. And that would be bad news not just for those of us who can’t get enough of Channing Tatum and Ryan Reynolds, but for everyone who loves film.
Hollywood’s Love Affair With Past Hits
Let’s start with a simple assertion: Many of the decisions made in the movie industry ultimately are the result of the high uncertainty in the market for films. It is extremely difficult to reliably forecast the success of a new title at the green-lighting stage for many reasons — the constantly shifting tastes of consumers, the challenges inherent in shepherding an idea from page to screen (especially for live-action movies, where even something as crucial as the chemistry between lead actors is hard to gauge beforehand), and the sheer time involved in making a movie.
The one useful indicator that Hollywood executives can rely on to reduce that uncertainty is a new project’s resemblance along some dimension to an existing hit. That’s why so many executives try to borrow from past successes in their efforts to create new hits, and why they can’t seem to stop adding installments to successful film franchises.
You can see this phenomenon play out in the market. With Nicholas Krasney, an MBA student at the Harvard Business School (where I teach), I compiled a list of all movies released in the U.S. since 2002 — some 6,000 films. We categorized each film by their origin, assessing whether it was based on a prior movie, stemmed from another property such as a book, comic book, or video game, or (if none of the above applied) was a truly original idea. And we examined how much each film grossed at the U.S. box office.
You can sift through our data here with this interactive graphic. For us, several conclusions jump out. First, studio executives indeed have a habit of betting on proven concepts. Of the 6,000 films released in the past decade, nearly a quarter were based on another film or media property, and the share of such “non-original” films has gone up over that period.
Second, despite all the doomsaying, the strategy appears to be working: Films based on existing properties bring in most of the money. In 2011, non-original films collected $6.6 billion at the box office, significantly more than the $3.5 billion grossed by original films. In 2012, non-original films captured over $7 billion of the total of $11 billion in grosses. There are no signs that the gap is closing anytime soon. Tellingly, of the 343 films that made more than $100 million at the box office in that decade, 150 — close to 45 percent — were based on an existing property. The large majority of these were released in the last five years.
Third, and most striking, books and comic books in particular remain fertile ground for Hollywood bets. In 2012, roughly two thirds of box-office sales for non-original movies came from those two categories. Lately, nothing comes close to the firepower of films based on comic books by the likes of Marvel and DC Comics: As few as three films — Marvel’s The Avengers, The Dark Knight Rises, and The Amazing Spider-Man — out of the total of close to 670 films theatrically released in 2012 accounted for a staggering one eighth of total box-office receipts.
Film aficionados may dislike studio executives not mixing it up more, but the market speaks loudly. And the results this summer will only increase the focus on comic-book superheroes, young-adult fare, and other known properties, as blockbuster bets such as White House Down that were not tied to existing franchises (and those like The Lone Ranger, tied to long-forgotten franchises) struggled the most.
A Blockbuster Trap?
One problem with relying on existing concepts is that it could stifle innovation, weakening the film sector over time. This is a valid concern, but not a new one. Because making movies is such an expensive endeavor, other media such as books and comics have long been a more feasible way to experiment with truly new ideas. Plus, without the profits brought in by long-running franchises, over time there would likely be even less money available for films that really push the envelope: this weekend’s Gravity, for instance, the $100-million Warner Bros. space drama that won wide critical acclaim for its cinematography, visual effects, and use of 3-D — and had a record-setting opening weekend.
A second problem with relying on proven concepts is that every industry player is going after the same targets. Anyone can see that, say, superheroes and vampires perform well at the box office. That in turn can trigger competitive bidding situations and soaring fees for people who can bring these properties to the screen. The result can be a dramatic increase in the costs of production.
With so much money invested in their most promising projects, Hollywood executives will understandably do everything in their power to make their products a success in the marketplace. Therefore, the most expensive films often also get the highest marketing budgets,and are slotted into the most favorable opening weekends. The effect is to escalate the studio’s commitment and increase the size of its bet. Now the need to score big with a next project becomes more pressing, and the need to find another foolproof idea becomes essential. The result is the “blockbuster trap”: a spiral of ever-increasing bets on the most promising concepts.
For those on the receiving end, the rewards can be extremely lucrative. For instance, in the years before Disney acquired the company, Marvel Entertainment saw studios go to great lengths to secure the rights to its characters, offering the comic-book giant more favorable deal terms in search of a piece of its unparalleled run at the box office. But for the studio executives who have to pay those high fees, the blockbuster trap can lead them to risk the very future of their studio on just a few big bets.
The Blockbuster Strategy Works
Luckily for studios, the occasional major flop notwithstanding, all the empirical evidence I’ve collected points to Hollywood studios thriving by investing a relatively large proportion of their resources in the few titles with the highest potential and turning those choices into successes by going all-in when marketing them. It may be partly a self-fulfilling prophecy, but it is working.
In my forthcoming book, Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment, I present evidence of the payoff of such a blockbuster strategy for film studios and other entertainment companies. Anyone who analyzes the business results of Warner Bros. during the decade that Alan Horn (now the chairman at Walt Disney Studios) was in charge, for instance, will see that the studio’s blockbuster bets had by far the highest average return. Sure, they can fail, and any executive knows that major flops will lead to a flood of negative publicity. But in parsing the data, I found that smaller films fail at a much higher rate. Bigger bets may seem riskier, but they are in fact more consistent moneymakers. That’s why, even when its flops garnered more than their share of bad press, the movie industry as a whole notched its best summer ever this year, collecting $4.75 billion in ticket sales.
Winning the battle for attention is critical in Hollywood, and that is precisely what the blockbuster strategy is designed to do. “Even the most diehard fans will not see more than a movie a week,” Horn told me. “You have to make sure it is your movie they see.”
With the recent high-profile failures in mind, studio executives will undoubtedly be more cautious. But that won’t do anything to make them less reliant on blockbusters bets — it will only lead them to raise the stakes when they pursue more established properties. In today’s marketplace, having the movie that everyone wants to see means making big bets on superheroes, vampires, and other properties and talent connected to past hits.
We can criticize Hollywood for becoming more formulaic, but its executives aren’t foolishly spending money and taking unnecessary risks. In fact, it is their intent to reduce risk that drives the reliance on blockbuster bets. If anyone is to blame, it’s us moviegoers — we simply get more of what we have been shown to want in the past. And so the future will bring more familiar names to our theaters: The summer of 2015, for instance, promises to be a battle between The Avengers sequel, Ben Affleck’s Batman Versus Superman, Independence Day 2, Jurassic Park 4, Star Wars VII, and Terminator 5.
“I’ll be back” was never a more fitting description of Hollywood.
This article was developed with Nicholas Krasney, an MBA candidate at Harvard Business School and co-founder of Tivli.