Theater 101: The Risky Business of Broadway

The question on many people’s minds these days is how do you finance a Broadway show? Considering the lavish sum now required to produce an offering on the Great White Way — which is now typically between two to three million dollars for plays, seven to ten million for a mid-size musical, and in excess of 12 million for a large-scale musical — the answer is that it takes a select (and sometimes very large) group of people to get a show on the New York stage.

WHO ARE THE PRODUCERS?
Those who put money into Broadway shows run the gamut from theater owners like the Shuberts or Nederlanders who want a production mounted in one of their houses; presenters who want the right to take the show on the road; movie companies who want to promote their properties; investors who simply love the theater; people of all walks of life who want to hobnob in circles rife with glitz and glamour; and philanthropic individuals who want to contribute to the arts.

As veteran producer Liz McCann, whose past projects include such shows as Edward Albee’s The Goat, or Who Is Sylvia?, explains: “There are now more people involved than ever before. “The theater was initially founded around one main person — a David Merrick or a Hal Prince — as the producer. You rarely saw more than one or two names billed above the title. Now you look above the title and you see hordes of names. That is due in large part to the Tony Award rule that if you’re billed above the title, then you are a producer, and therefore, you are personally eligible for a Tony nomination.”

Still, there are industry leaders such as Daryl Roth, who produced this year’s Tony Award-winning revival of The Normal Heart. She is one of Broadway’s most prolific lead producers, which means she often originates a project and both invests money of her own, and/or asks others to join her in investing in a show. Roth also often chooses her projects based on her belief in the material and its artistic or cultural merit, rather than the sole hope of making a profit.

For each show, a partnership is formed, with some producers becoming general partners, which means they participate in making decisions, and are also personally responsible for their share of the show’s losses. The financial contributions of the general partners are split equally. For instance, if four general partners produce a musical with a capitalization of ten million dollars, each of the four will contribute 2.5 million.

These general partners will often ask other producers — who will also receive above-the-title billing — to help them achieve their share of the capitalization. These producers’ financial contributions, in the instance of the aforementioned $10 million musical, would typically range from $500,000 to $1 million each.

Producers also typically turn to individuals who only want to invest around $25,000 to $50,000 each to help meet their costs. These investors, also known in the industry as backers, become limited partners in the production. They do not receive any billing, have no decision-making power, nor do they carry any liabilities. The benefit to them is not just the prestige that investing in a Broadway show brings them, but the potential of making a profit. Moreover, these investors are traditionally the first people to get their money back once a show recoups its initial investment.

However, there are numerous variations on how general partners can share their percentage of their profits. For example, if a show stars a box-office draw such as Nathan Lane, the general partner will probably stick to the traditional arrangement of a 50-50 split, but in the case of a hard-to-sell play with no stars, a producer may have to give away a larger share of his or her profit as an incentive to investors, says producer Tom Kirdahy, whose credits include the recent Broadway revival of Master Class.

The amount of the investment can also be factor. “An investor who is investing $10,000 or $25,000, for example, is still looking at a traditional 50-50 split,” says Kirdahy. “However, someone who is giving me $250,000 to be above the title is going to get more money from me, because that person gave me more in order to help me meet my obligation.”

If a production runs into financial difficulties and needs additional capital while running, and those involved still believe they can still make a profit, general partners can decide to infuse more money into the show. Those who make these additional contributions (known as “priority loans”) are the first to get paid back if any profit is ever made.

WHY DOES IT COST SO MUCH TO PUT ON A SHOW?

One major expense of mounting a Broadway show is the cost of renting a theater. Rather than paying an outright sum per week, this is usually calculated as a percentage of a show’s weekly gross revenue, often in the six to seven percent range, says Liz McCann. (Broadway grosses, which are based on both ticket price and the size of the theater, can range dramatically, from $200,000 to $2 million.)

Typically, theater owners will also negotiate a minimum monthly rent, which must be paid even if that sum exceeds the required percentage of the show’s ticket sales. And there is some rent that must be paid even before the show goes into previews when the theater is being used only minimally, primarily for technical rehearsals.

Next, there are the many people involved in the production, both on the stage and behind the scenes. Actors Equity guarantees performers a minimum salary of $1,653 per week and major stars like Hugh Jackman and Harry Connick, Jr. can reportedly earn up to $100,000 per week.

The Equity minimum for stage managers of musicals is $2,700 per week, and theater’s many other unions mandate minimum staffing requirements and fees for directors, designers, and musicians, all of which must be added in to the mix.

In many cases, the artists’ royalties, which are usually subtracted from the weekly gross, can also add significantly to the cost of certain shows. In addition to producers, authors, underlying rights holders (the people who hold the rights to the story you’re dramatizing), directors, designers and choreographers can all receive royalties.

Advertising and marketing expenses have also risen dramatically in recent years, and can easily add $1 million or more to the budget. For instance, a full-page ad in The New York Times can cost nearly $110,000, and other print publications charge large fees for advertising.

Television has once again become a popular form of advertising for Broadway shows. According to advertising agency Serino Coyne, Inc., television advertising budgets for a mid-size Broadway musical range from $40,000 to as much as $90,000 per week, which is primarily used to fund 15- and 30-second television commercials on broadcast and cable television in the New York market.

Even hit shows use television advertising. For example, while The Book of Mormon is currently playing to completely full houses, the producers are still airing commercials on a regular basis. “This is the genius of promoting a show and keeping it in the public consciousness,” says Kirdahy.

In addition, all Broadway shows now incorporate their own web sites, social media, and Internet advertising into their strategies, as well as grassroots marketing techniques such as street teams and various forms of outdoor advertising.

Additional promotional costs, not included in the advertising budget, arise from the use of public relations firms, which typically charge around $2,000 per week, beginning at least four weeks prior to the show’s opening. (In the case of the long-delayed Spider-Man: Turn Off the Dark, the show’s press agents were on the production’s payroll much sooner than that.)

Finally, theater owners routinely pass on the expenses for personnel such as ushers, ticket takers, and stagehands to the show’s producer, adding yet another item to the budget.

IS THEATER A GOOD INVESTMENT?

So, knowing all of the above, should one actually put their money into a Broadway show? Experts agree that the Great White Way is a very particular sort of investment.

“I think that most sophisticated investors do this for many reasons,” says Jed Bernstein, the former executive director of the Broadway League and a producer of such shows as Driving Miss Daisy. “But there is not a strict expectation of profit the way there is in the venture capital world, where you’re looking for five times your initial investment in a certain period.”

The general rule is that there’s only a 20 percent chance of getting a return at all on one’s investment, as producer Ken Davenport, who is bringing a revival of Godspell to Circle in the Square this fall, has written on his blog, The Producer’s Perspective. Those odds, as Davenport has pointed out, are not that different from many other businesses, such as investing in a new restaurant.

Moreover, some investors rightly see the Great White Way as a place where the prospect for big payouts is alluring. For example, many long-running hit shows, such as Wicked, which has grossed over $570 million on Broadway and $2.1 billion worldwide, and Jersey Boys with Broadway grosses of over $325 million (both as of this writing), are among the hit shows that have returned their investment many times over.

And even if you don’t make a fortune on every show, you can get a decent yield on many investments, says Tom Viertel, who has produced such hit shows as The Producers. “We like to think that for most projects, other than very large or complicated ones, that at reasonable grosses, most people ought to be able to get their money back in more or less a year. If you create a project where the only way to get your money back in a year is to gross 1.5 million dollars a week for 52 weeks, you can look and see that there are only about three projects doing that. On the other hand, if you can turn a profit while grossing $650,000 per week, that is a relatively typical situation, and something that you can promulgate to investors with some kind of confidence.”

Finally, as Roth remarked in the book, The Commercial Theater Institute Guide to Producing Plays and Musicals, investors really shouldn’t consider getting their money back to be their prime motive when it comes to Broadway. “You would never get angry if you gave money to a museum, and you wouldn’t expect to get it back. I say to investors to think about theater in that way, because you are making something wonderful happen.”