Guru: Harry Potter & The Wolf from McKinsey

CM: Have audiences changed their tastes since 9-11, or we going to want to see Die Hard 5 this February?

Wolf: Audiences are very fickle. What's exciting and attracts an audience today isn't necessarily what people are going to want in the future. After the success of the Celine Dion song, "My Heart Will Go On," everybody in the music business thought that the new thing would be sound tracks. After the success of Jurassic Park, everyone in the movie business thought it was going to have to be big budget, action/adventure films.

One thing is for sure in the entertainment business — and that is that nothing's for sure, that there is no formula.

Entertainment companies need to continually refresh their view of what consumers will want. Nothing can stay old. As soon as anything gets stale, then consumers will walk away from it. It's part of the reason why it's not so bad when television shows, even the best shows that are working very well, go off the air. There have been magazines that have been around for 100 years, and yet they keep reinventing themselves. I think that entertainment companies don't need to change just because of what's going on right now. They need to continually change.

CM: Is it more difficult for media and entertainment companies to cut their costs than it is in other sectors?

Wolf: It's probably one of the most difficult industries for companies that want to reduce their costs.  Reducing their expenditures on programs and on people has a long-term effect. And the effect is hard to recover from. There is only a very small number of people who can edit great magazines,  write great television shows, produce great albums, and be really great at developing movies. Yes, they're highly paid and yet you can't lose them. The real upside in the entertainment business is on the revenue side. Ultimately, what will distinguish companies that win or lose in this business is their ability to have great content that either gets people to watch or buy or attracts a great audience, the ability to create new formats and new products, especially leveraging technology. Next is their ability to grow into new markets and bring those great brands that they're creating in one place into another.

CM: How is the talent model in Hollywood changing? Is the model changing, as far as how a studio works with actors goes?

Wolf: I think it's too limiting to just talk about it from Hollywood's perspective, because every major business in the media and entertainment world deals with talent. Talent, whether it's creative or management talent, is the most precious commodity in these businesses. Yes, there are important brands. But in many cases, every one of these companies starts either their year or their month anew. The public judges a newspaper on yesterday's issue, a magazine on the current issue on the stands, a movie studio on the films that anybody can go see in a theater today. And all of those have to be created by talent. That talent has skills that are required but that are very elusive and hard to train. A lot of it comes from a feeling or an ability for them to have what I call an educated gut. Then follows an ability to bring together people that have similar talents and get them to create.

CM: Last fall, the President met with the heads of several entertainment companies to discuss "the new world we all live in." Do entertainment companies have a greater responsibility than other companies from the standpoint of products' impact on the population?

Wolf: The entertainment industry actually has a greater responsibility. This is because it  has the ability not only to communicate to an audience but also to help shape their mood — to provide them with a sense of excitement or hope.

The media industry also has a responsibility for reporting the news and telling them what's going on. And it's not just telling them what happened, but telling them the why, the story behind the story. When you look at some of the events organized by the entertainment industry, the Tribute to Heroes and Concert for New York, yes, they were ostensibly about raising money, but they were really about giving people a strong sense of bonding with each other. In the sense that they could find solace in song. The same can be true for the news media getting together, and whether it's sharing images in reports or deciding policy on how they report the news, I think they do have a strong sense of responsibility.

CM: As media companies continue to grow globally, what new insights do we have on globalization and its impact on the sector?

Wolf: We have a couple of currents going on in the media business, and I think that they reflect on globalization. Ultimately, media companies need to be true to their brand. Their brands need to stand for something to their particular constituents. The same people who are watching MTV are not the same people watching CNBC or watching CNN. Each of those audiences expects something. The MTV audience expects that it will be a unifying force among young people everywhere; viewers of CNN expect to see the news as it happens. I think that it's hard for certain brands like those to become something else.

We're seeing that there are brands that are becoming global brands. The best of those brands aren't seen as American brands going abroad — they have become in themselves global brands. One example is Cosmopolitan magazine — it means something to women everywhere around the world, but it's not as if it means something American. It's about their lifestyle, their goals, their own world..

Another brand is MTV. It means something, it means music, it means excitement. It's the ultimate party host. But if you're watching it in Shanghai, you don't feel like it's an American channel, you feel it's something that's Chinese that ties you to the rest of the world.

I think we're seeing a lot of markets of strong antiglobal sentiment. The breakout American movies and TV shows are traveling everywhere. ER is shown in every major television market in the world. On the other hand, we're seeing a lot more antiglobalization. Some of the most revered brands in the world are finding themselves at the wrong end of the spray can or a computer hacker, an anticorporate campaign. For these companies, they are going to have to learn to work with both global and local cultures. If you live in Munich, you want to see stories about people who live in Germany.

A couple of years ago it would have been unimaginable to think that a Chinese film would hit mainstream audiences around the world, which we saw last year. We're going to see products traveling both ways. The time is over for American media companies to just view themselves as exports. They're going to have to become part of the local fabric of all cultures.

CM: Is it true that certain strategies commonly used by entertainment companies could be more broadly adopted?

Wolf: In the same way that many companies outside of the entertainment world have already begun to incorporate the principles of entertainment into their businesses, a lot of media businesses are going to start adopting new tactics and strategies — for example, in financial services or healthcare. Media companies are looking to other areas as a way of growing their share of consumer spending. I don't expect that media companies are going to be in the pharmaceutical business, but they'll have more to do with our spending on our health and our well-being. I don't expect that I'll have a checking account with a media company, obviously.

CM: If we were to look at the sector's revenue pie, where would we see the hot areas for growth in the sector?

Wolf: It depends on every company. Everyone is different. Digital technology will only expand the pie. It's an expanded pie both from the consumer side as well as the advertising side. There are a lot of advertisers that have given up the idea that they'll become their own media company. On the consumer side, people are going to find more and more occasions to use media entertainment and information in their lives. You could go to China and find families that make a couple of thousand dollars a year, and yet they own a video player and are buying videos or they're buying music. There are 100 million television sets in the U.S., 350 million in China.

CM: It seems that you remain rather bullish regarding the consulting opportunities within this sector …

Wolf: This industry, like so many others, is undergoing fundamental structural changes. Companies are going to turn to consultants to help them think about how to improve their profitability, and how they take the business they have today and make it more profitable, and how they position themselves to compete in an increasingly uncertain future.