The MGM deal came at a time when Cruise’s superstardom was first being questioned, amid heightened media attention for a series of incidents involving the actor that had caught both fans and industry insiders off guard. In the preceding eighteen months, Cruise had jumped on Oprah’s couch during a television interview while he effused about his love for then fiancée Katie Holmes, boasted about his plans to eat the placenta of his unborn child, verbally attacked actress Brooke Shields for her use of medicine to help cope with postpartum depression, and lashed out at a German reporter who suggested that Scientology was a pseudoscience. In fact, just two months before Sloan made his unprecedented offer, Viacom’s chairman Sumner Redstone, in an unusually abrupt and public way, had ended Cruise and Wagner’s fourteen-year relationship with Viacom’s studio, Paramount Pictures. The partnership had initially been extremely successful, generating such blockbuster hits as The Firm, Days of Thunder, and Mission: Impossible, and Cruise had long been seen as Hollywood’s most reliable and bankable actor. However, Redstone had increasingly come to view the star’s controversial behavior as embarrassing and costly.
In a newspaper interview, Redstone directly attributed the disappointing ticket sales for the third installment of Mission: Impossible to Cruise’s antics. Wagner was quick to counter: “Tom Cruise, in 10 months, for Paramount Pictures, generated just under $1 billion,” she said, pointing to the box-office grosses of his last two films with Paramount, Mission: Impossible III and War of the Worlds. Yet Redstone refused to renew their $10-million-a-year production deal and asked Cruise and Wagner to vacate their offices on the Paramount lot. “It’s nothing to do with his acting ability, he’s a terrific actor,” Redstone told the Wall Street Journal. “But we don’t think that someone who effectuates creative suicide and costs the company revenue should be on the lot.”
Sloan’s proposed partnership gave Cruise a chance to strike back and prove his doubters wrong. But the “experiment,” as Sloan called it, was notable for other reasons, too. Cruise and Wagner were given a relatively free hand in determining a direction for United Artists—for instance, they could greenlight movie projects costing less than $60 million without MGM’s approval—and for a term of at least five years they could develop up to six films a year. All films would be distributed and, at least initially, financed by MGM, for which the studio would receive a distribution fee of between 7 percent and 15 percent of revenues. In exchange, MGM granted the pair a one-third equity stake in United Artists without asking them to invest a penny of their own money. Wagner, an accomplished producer but new to the role of executive, assumed the role of chief executive officer and was given responsibility for overseeing day-to-day operations. And although he was not given a formal title, Cruise was expected to be actively involved in picking films and working with the talent. Perhaps most remarkably, Cruise was not obligated to appear in any United Artists movies himself, and he remained free to star in and produce movies at other studios.
* * *
What could Harry Sloan—a smart, seasoned executive with a strong track record of running global media businesses before he took on the challenge of salvaging the legendary but long-underperforming MGM studio—possibly have been thinking? Did his new partnership with Cruise and Wagner represent a viable approach to playing the high-stakes game for A-list actors and generating blockbuster products for them to star in, or had Sloan lost his mind?
At the time the United Artists deal was made public, many industry observers were as puzzled about Sloan’s moves as they were about Cruise’s couch jumping. But a closer look at the intense competition for talent in Hollywood, and the evolving role of stars in other entertainment sectors, reveals that Sloan may not have been so crazy after all. Rather, the experiment can be seen as an attempt to solve a fundamental problem—the growing ability of powerful stars to undermine the profits of the studios and other businesses that employ them—that plagues not just the film industry but also a host of other sectors in entertainment. Although the experiment ultimately did not work out as those involved had hoped and in retrospect perhaps should have been set up differently—and although, as we know now, Cruise’s troubles were far from over—there is a lot to be learned from studying this unusual arrangement.
To grasp Sloan’s motives and understand why his offer would appeal to Cruise—and to discern what the agreement says about how other executives may try to structure their dealings with superstars in the future—it helps to know a bit about the movie industry’s history. When MGM was established in 1924, its head, Louis B. Mayer, and his fellow studio executives held all the power in Hollywood. At that time, in what was known as the “studio system,” seven studios, including MGM, owned the movie houses where their pictures were screened and monopolized movie production, working with actors, directors, writers, set designers, film editors, and others as salaried employees.
It may be hard to imagine now, but stars such as Bing Crosby, Bette Davis, Olivia de Havilland, Bob Hope, and John Wayne were required to sign strict and expansive contracts that essentially made them the property of the studios. These contracts typically lasted seven years, and they required the actors to participate in every movie and all publicity the studio desired. The studios created public personas for their stars by typecasting them in familiar roles and generating publicity for their on-screen personalities. The terms of the contract often enabled the studios to control details of the stars’ public image, so as to boost their popularity and therefore box-office receipts. The studios scripted stars’ interviews, and “morals clauses” dictated their public statements, their photographic poses—and even their significant others. Under orders from a studio, stars sometimes altered their facial appearance, hair color, names, and biographical details.
They did all this in return for salaries that do not come close to those lavished on top actors nowadays: in 1947, for example, the most popular stars were paid less than $100,000 per movie, or approximately $900,000 adjusted for inflation—a hefty sum, but nowhere near the multimillion-dollar fees that today’s biggest stars can command. An actor’s salary could not be increased until his or her contract expired, so even the biggest stars were locked into a salary bracket for several years. And if actors failed to work, regardless of the reason, studios could invoke a so-called extension clause and automatically extend their contracts.
The studio system was brought to a standstill by legal challenges. In 1944, a California court ruled against Warner Bros. in a dispute over an extension clause, essentially comparing such contracts to slavery. The decision marked a turning point, and soon power began shifting from the studios to the stars. In the 1950s, studios began to employ actors on a project-by-project basis, and agents and managers helped stars to exploit their newfound power. Over the decades that followed, salaries and perks for the industry’s biggest stars skyrocketed. In some cases, studio heads signed “first-look” contracts with production companies founded by stars—Reese Witherspoon’s Pacific Standard, Brad Pitt’s Plan B Entertainment, and Will Smith’s Overbrook Entertainment are just three examples—giving them additional fees and access to office space on the studio lot in exchange for the first option to produce or distribute the movies the stars pursued.
By the mid-2000s, it had become increasingly clear that the tug-of-war between stars and studios was not helping the profitability of movie studios. My own research, most notably a study that examined more than twelve hundred casting decisions made between 2001 and 2005, suggests that whereas movies that starred A-list actors typically had higher box-office revenues, the fees for those actors were so high that they wiped out the extra revenues the stars brought in—leaving studios with the same profits they would have made if they had relied on lesser-known creative talent. In other words, the stars themselves must have captured most of the surplus that resulted from their involvement. If a studio casts, say, Johnny Depp in a movie and so brings in an additional $20 million at the box office, that will do little for the studio’s bott
om line if Depp demands that same amount in salary. My study is just one in a large stream of research; other academics studying the film industry have also documented evidence for what might be called the “curse of the superstar.”
When Harry Sloan took over MGM in 2005, he found himself in this challenging context—a Hollywood in which a handful of stars had become so powerful that studios had to pay ruinous fees to enlist their services. Making matters worse, by the time of Sloan’s arrival, the once-mighty MGM—known for Gone with the Wind, The Wizard of Oz, and many other successful and prestigious films—no longer had the resources to compete with bigger studios such as Warner Bros. that had surged ahead. Tellingly, not one of the top movies released by MGM in the years before Sloan reached out to Cruise—Barbershop 2 in 2004, The Amityville Horror in 2005, and The Pink Panther in 2006—had exceeded the $100 million domestic-box-office-revenues barrier, and none of the studio’s movies had broken into the top 10 during that three-year period. Cruise, by contrast, had been involved in a $100-million-plus movie in each of those years.
Sloan’s experiment was essentially an attempt to, as he put it, “align the incentives of the studio and the star.” Sloan sought to make it attractive for a star actor of Cruise’s caliber to work with a smaller studio such as MGM. But because Sloan could not afford the kinds of budgets that bigger companies spent on films, and by extension on actors’ salaries, he had to offer the star something else. Instead of up-front money, Sloan offered Cruise the freedom to pursue the kinds of projects that he and his partner, Paula Wagner, were most excited about, and the promise of a bigger payday in the future, through an ownership stake in the studio.
Sloan’s choice of the dormant United Artists as the vehicle for his experiment was appropriate. Founded in 1919 by Charlie Chaplin, Douglas Fairbanks, Mary Pickford, and D. W. Griffith, four of the biggest stars in Hollywood at the time, United Artists was known as “the company built by the stars.” The studio was unique in that it gave filmmakers and actors creative freedom and control over their own pictures, while also giving them a share of the film’s profits—an arrangement that led one film-industry insider to joke that “the inmates have taken over the asylum.”
In the end, Sloan’s experiment was widely regarded as a disappointment. Cruise and Wagner produced only two movies under the United Artists banner—Valkyrie, which grossed $200 million worldwide, likely yielding not more than a small profit, and Lions for Lambs, which failed to make any splash at the box office. Some industry observers suggested that the terms of the contract were to blame: Why didn’t Sloan insist on having a say with regard to what films were produced, especially since Cruise hadn’t proven his mettle as a studio executive? Others thought the choice of Cruise was wrong, given his troubled public profile at the time. Both are valid points. But Sloan must have sensed that a star of Cruise’s stature would be less likely to sign on if the agreement had been more restrictive. Sloan probably hoped that the incentive of owning a stake in the company and the autonomy to greenlight projects would motivate Cruise to focus his attention on United Artists; Sloan had little other means to attract A-list stars and promising projects to his studio. He likely thought Cruise’s troubles worked in MGM’s favor: the actor might well have been interested in United Artists only because he was now lacking a major studio deal. And Sloan might have felt he had to try something bold to revive his ailing studio’s fortunes. Even so, he could have pushed for different terms; for instance, he could have given Cruise better reasons to pursue more mainstream movies—it’s no secret that Sloan had hoped Cruise would select the next installment of the popular Terminator franchise as his first project.
The experiment was successful in one respect. One of Sloan’s primary goals was to attract funds from outside investors and develop better relationships with partners who trusted the value of Cruise’s star status. Sloan sought to exploit the actor’s power to his studio’s advantage, and he did just that: with Cruise’s help, he was able to secure $500 million in financing for United Artists, at a time when Sloan was having considerable trouble raising funds for parent company MGM. So although the experiment ultimately yielded no significant upside for MGM, it also exposed Sloan and his studio to very little downside. With a bit more luck, the experiment might have ushered in a new model of collaboration in Hollywood.
For this kind of partnership between entertainment businesses and the talent they depend on to become commonplace, such collaborations will have to help superstars achieve their goals as well. They will have to truly “align incentives,” in Sloan’s words. So in order to understand what the future will look like, it is necessary to consider what an A-list star could get out of engaging in a longer-term partnership with an uncertain payoff—and how such an arrangement could fit his or her efforts to build and profit from a personal brand. In other words, exactly why did Cruise say “yes” to Sloan? And why would A-listers across different sectors of entertainment sign on to other collaborations? Some outsiders may feel there is no rhyme or reason to these decisions, but there is, in fact, a clear logic to how smart stars and their advisers manage their personal brands, and especially to their weighing what opportunities to pursue when. And the truth is that the preferences of the shrewdest stars create a real problem for entertainment businesses: the more they rely on A-list stars, the more their profitability may be hurt.
The world of celebrity endorsements provides a good backdrop to examine why this might be the case and how it works out in practice. By some estimates, 10 percent to 20 percent of the advertisements that aired in the United States in recent years featured celebrities endorsing products and brands; the percentage is twice as high in some Asian countries. The most sought-after endorsers are richly compensated: in fact, endorsements are a major source of income for many star entertainers.
* * *
In July 2004, at the tender age of seventeen, Maria Sharapova became one of the youngest women in history to win Wimbledon, the most prestigious tennis tournament in the world. To say her victory was unexpected is an understatement: when Sharapova went to Wimbledon that year she was ranked number 15 in the world and at best was considered a long-shot contender for the title. But what happened next may be even more remarkable: just two years later, Sharapova was the highest-paid female athlete in the world, making an estimated $25 million a year. The secret behind her off-court success? Her agent, Max Eisenbud, a man perhaps not with the looks of Tom Cruise’s character in Jerry Maguire, but certainly with his smarts, passion, and hustle—and a wealth of knowledge about what it takes to build a superstar brand.
“That day, Maria’s life changed forever, and so did mine,” Eisenbud said, reflecting on the tremendous impact of her Wimbledon victory. “I have to admit I cried my eyes out after her win.” Only thirty-two at the time, Eisenbud had guided Sharapova’s career since she had signed with leading sports agency IMG—Eisenbud’s employer—at age eleven. “Max is half family, half agent,” Sharapova told me. In the early stages of Sharapova’s career, Eisenbud had been focused on helping her achieve success on the court as well as building relationships with corporate sponsors and advising her on business decisions. But even he did not think a Grand Slam win was within reach in July 2004.
“She faced Lindsay Davenport, one of the favorites, in the semifinal,” Eisenbud recalled, “and initially Davenport was killing Sharapova. She won the first set 6–2 and was up a break in the second when it started to rain.… I thought it was all over, and Davenport’s agent actually consoled me. Then, after a two-hour rain delay, she comes back, and—boom! She wins 7–6 in the second set and then beats her 6–1 in the third. Two days later, she played the final against Serena Williams—a skinny little girl against a great champion with enormous physical strength. She won the first set 6–1, and I did not think she could keep it up, but she did. It was just an amazing win.”
Sharapova claimed her second Grand Slam, the US Open, in 2006. (“This time I was ready to win,” she recalled.) By then,
she was not only the world’s highest-paid female athlete, she was also the tenth-highest-paid overall, ahead of the men’s top-ranked tennis player Roger Federer. Estimates put her income from endorsing such brands as Nike, Motorola, Canon, Tag Heuer, Pepsi, and Land Rover at well over $18 million—despite the fact that she was available for sponsorship commitments for only two and a half weeks per year. “She wants to win titles, so that is all we can afford,” Eisenbud told me.
Sharapova brought in these huge sums of money without creating a sense that she was selling out, unlike fellow blond-haired Russian tennis player Anna Kournikova, who had become known more for photographs of her scantily clad body appearing in various men’s magazines and an “only the ball should bounce” billboard campaign for a bra brand than for her on-court performance. That is not to say that Sharapova did not bank on her model looks. “Let’s not kid ourselves—she is six foot two, blond, and a very attractive woman, and that is one of the reasons why she generates attention,” said Eisenbud. But ever since her first Grand Slam win, the members of “team Sharapova” (which included not only the tennis player and Eisenbud but several other IMG representatives) had done an impressive job of both building her brand and reaping the rewards from those efforts through a broad portfolio of endorsements.
* * *
One way to think about the careers of creative talent is through the lens of a “talent life cycle,” which reflects how a creative worker’s brand value changes over time. Marketers in other sectors of the economy often rely on the “product life cycle” to help guide strategic decisions; the underlying idea is that products go through a fairly predictable set of stages, from launch and growth to maturity and decline. Marketers know they will experience a different set of strategic challenges in each of those stages. Because talent goes through its own series of stages, and because in the entertainment industries those who make the product often become the product (or at least an integral part of it), studying the life cycles of talent is quite useful.
Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment Page 14
