Blockbuster or Bust

Blockbuster or Bust
Why struggling publishers will keep placing outrageous bids on new books
By ANITA ELBERSE
http://online.wsj.com/article/SB123093737793850127.html

Dark days are upon the book industry. Last month alone, Random House announced a massive restructuring; Simon & Schuster laid off 35 staffers; the adult division of Houghton Mifflin Harcourt stopped acquiring manuscripts for the rest of the year; and HarperCollins sent comedian Sarah Silverman a contract worth $2.5 million to write her first book.

Yes, that's right -- amid the worst economic crisis to hit the United States in decades, publishing executives are still making what many see as outrageous gambles on new manuscripts.

The move by HarperCollins is only one of the latest in a string of big bets by companies employing a blockbuster strategy -- a common approach among movie studios, television-production companies and music labels. A spokeswoman for the publishing house says it doesn't disclose author advances. (HarperCollins Publishers is a unit of News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.)

Most large media firms make outsized investments to acquire and market a small number of titles with strong hit potential, and bank on their sales to make up for middling performance in the rest of their catalogs.

In the past, the strategy seemed to work wonders. For example, Grand Central Publishing, a division of Hachette Book Group USA, generated roughly 80% of its sales and an even larger share of its profits from just 20% of its titles in 2006. In 2007, Grand Central purportedly shelled out $1.25 million for the rights to Vicki Myron's "Dewey: The Small-Town Library Cat Who Touched The World," a nonfiction book about a fluffy orange kitten found abandoned in the returned-book slot of an Iowa public library.

The project, which was written with Bret Witter, did not scream instant success: Cat books are not particularly hot sellers, Ms. Myron was a first-time author and the book's main character passed away in 2006 -- making him unavailable for an appearance on Oprah Winfrey's couch. But the book has been a mainstay in the upper echelons of The New York Times bestseller chart ever since its September release. To the surprise of many, the book looks well on its way to earning its advance back -- and then some.

A prudent manager in any other industry might be left scratching his head: Why would Grand Central put itself in the position of having to outsell all cat books released in recent memory to earn back its seven-figure advance? Rather than putting all its eggs in one basket, wouldn't it be smarter for a publisher to place a larger number of smaller bets -- particularly in today's harsh economic climate?

Hardly. Despite its double-or-nothing daring, the blockbuster strategy remains the most sensible approach to lasting success.

Consider, first, how these bets come about. Given the variability in execution in books, and the constantly shifting tastes of consumers, it is extremely difficult to forecast demand for a new title. The one useful indicator of commercial potential is its resemblance to an existing bestseller, so a project can be tagged, say, "the next 'Tipping Point'" or "a hipper 'Harry Potter'." This similarity is an indicator that's evident to any editor or publisher who sees the proposal -- and thanks to busy agents, many do. As a consequence, there is heavy convergence of interest on certain properties, triggering competitive bidding situations.

Soon after "Dewey" started to make the rounds, industry insiders billed it as the feline answer to "Marley & Me: Life and Love with the World's Worst Dog," John Grogan's 2005 memoir, published by William Morrow, a HarperCollins imprint. "Marley" was a runaway hit and in its wake came related children's titles and a movie starring Jennifer Aniston and Owen Wilson. Publishers saw the essential similarities in "Dewey": It was a touching story about how an animal could bring out the humanity in people it encountered. While executives at Grand Central are careful about making comparisons between "Dewey" and "Marley" -- every title needs to be judged on its own merits, after all -- the resemblances undeniably spurred publishers' enthusiasm for the "Dewey" rights. Fearful that the price would reach astronomical heights at auction, Grand Central snapped up the book with a pre-emptive bid a day before several other publishers would have had their shot at it.

When a publisher spends an inordinate amount on an acquisition, it will do everything in its power to make that project a market success. Most importantly, this means supporting the book with higher-than-average marketing, advertising and distribution support -- which is exactly how Grand Central handled "Dewey'"s launch. To do otherwise would be foolish: If a product like "Dewey" fails to draw readers, Grand Central knows its profitability will be severely hurt. With such high stakes and money tied up in a few big projects in the pipeline, the need to score big with a next project becomes more pressing, and the process repeats itself. The result is a spiral of ever-increasing bets on the most promising concepts, creating a "blockbuster trap."

Examples are everywhere. Perhaps buoyed by Grand Central's success with Stephen Colbert's "I Am America (And So Can You!)" in 2007, Little, Brown & Co, another division of Hachette, reportedly bid more than $5 million for the rights to comedian Tina Fey's first book in October of last year, when the economy was already in deep trouble. A senior executive at Little, Brown declined comment on the advance.

Expect Ms. Fey to get star treatment from the publisher. And if her new book falls short of the high expectations -- to earn back the advance, industry experts estimate that the book would need to sell over a million copies -- Little Brown will be all the more determined to make its next acquisition a hit.

But what would happen if a publisher like Grand Central decided to stop making large bids like the one it placed on "Dewey" and systematically walked away from the most sought-after -- and therefore expensive -- new properties?

First, agents would stop sending such a publisher their most promising book proposals. "If you are constantly backing out of big-ticket auctions, your list is going to hurt," is how one publishing executive explains it. "You are going to get a stigma that you don't play for the big ones, and you are going to get shunned out. Agents will no longer consider you for what they feel are their best projects." Publishers can't afford to cost-save themselves out of the market. Even if they could develop extraordinary competence in finding gold in the "slush pile" of hundreds of pieces of unsolicited material received each week, the dividends would be limited. After one success, the talent the publisher had nurtured would discover the value of an agent.

In addition, the most talented editors and other creative talent would leave to work for a publisher that would let them pursue the projects they thought had the highest chances of success. Careers are built on blockbusters. Jamie Raab, Grand Central's publisher, is known for discovering the bestselling novelist Nicholas Sparks. As a result, she continues to receive a steady stream of the best new love stories from literary agents.

Not bidding for sought-after projects also makes it harder to get best efforts from sales and marketing representatives and other internal constituents. After winning the hotly contested rights to a book like "Dewey," it is easier for the Grand Central executives to make the case that this book will beat its competitors. Firing up those that will be involved in the book's development and marketing process is important, because most media titles have only a short window in which to make money; the lion's share of marketing activity takes place before their launch -- when it's still largely unknown how audiences will respond.

Book retailers like Borders and Barnes & Noble want to see evidence that a book is worthy of their scarce resources. They like nothing better than to know that a book publisher has made a significant push for a title and is planning an extensive marketing campaign. In most media markets, support from the biggest retailers is decisive. A significant share of books is bought on impulse, so significant shelf space and room on display tables ("pile 'em high and watch 'em fly" tactics) are particularly important. A blockbuster strategy helps retailers to use their resources effectively, too.

In fact, the way in which retailers market their books 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 have ever walked into a Borders bookstore you may have noticed the "Like this? Try these!" signs with one arrow pointing to a bestseller such as "Marley & Me," and another arrow to a bunch of books that are similar to that hit book. For "Marley & Me," those included "The Art of Racing in the Rain," "A Three Dog Life," and "Merle's Door," all dog books. Expect to see "Dewey" on one of those shelves in your local store soon, if it's not there already, and an array of other cat books to follow in its footsteps.

Media companies' hit-focused marketing did not emerge in a vacuum. It reflects how consumers make choices. The truth is that consumers prefer blockbusters. Because they are inherently social, people find value in reading the same books and watching the same movies that others do. This is true even in today's markets where, thanks to the Internet, buyers have easy access to millions and millions of titles. Compounding this tendency is the fact that media products are what economists call "experience goods": that is, shoppers 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, and find it very useful to hear that "Dewey" is "a 'Marley & Me' for cat lovers." In much the same way that potential publishers do, readers value resemblances to past favorites.

Blockbuster strategies are certainly not free of risk, but, in the long run, they beat the alternative of more balanced investment strategies. That explains why, even when the book industry struggles with the effects of the economic downturn, publishing houses won't steer away from big bets. Publishers may be even more determined to land such projects in tough times. HarperCollins won the rights to Sarah Silverman's book only after an intense auction with several other houses. The highest-performing companies in the media and entertainment sector thrive by taking a chance on certain titles, and 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 media products is relatively low -- especially compared to their up-front production expenses -- the cost advantage of brisk sellers is huge.

Are there breakout hits that no one sees coming? Sure. And do media companies sometimes pick the wrong titles to focus their attention on? Absolutely -- no one in the industry has a perfect record, and the process of picking winners remains "an informed crapshoot," as one executive put it. But given their recent performance, it is hard to argue against the approaches taken by publishing houses like Grand Central and Little Brown. "Dewey" is quickly turning into one fat cat: In the latest sign of his ascent to superstardom, New Line Cinema landed the rights to a film adaptation, and Meryl Streep is believed to be in talks to play his owner, author Vicki Myron. Let's hope "Marley" loves a chase.

Anita Elberse is an associate professor at the Harvard Business School.