Broadway Today: Investor Development Over Theater Development

Two Sundays ago the New York Times ran an article on the theatre industry. Entitled “I Want to Be a Producer (Me, Too),” the article told the story of how the lead producer of the Tony Award winning Best Musical “A Gentleman’s Guide To Love And Murder” found its investors. It was not a pretty story. I’ll spare you the details and just insert a link. I Want to Be a Producer (Me, Too!)Combined with the recent discussion about limiting Tony Award statues to those producers who develop theatrical properties, and excluding investing producers who finance those productions (see A Tony for the Mantel? Maybe Not), the article pointed its finger at a distressing trend in the industry: Today, commercial theater is more about investor development than it is about developing pieces of theater.Simply put, due to rising costs such as theater rents and union minimums, it is impossible to produce a Broadway show today without a large number of investors. And those investors frequently choose properties based on everything and anything but financial data. Investors are swayed by stars attached to the production as writers or performers, or maybe the movie the show is based on and, of course, the opportunity to be billed as a producer and attend the opening night performance and celebration. Since this is what investors value, this is where producers put their focus.What is being lost is attention to some fundamentals. Like these.1. Who Is The Competition? Far too often, investors pick shows without stopping to think about what other shows will be opening around the same time. For example, it has become common for shows to try to schedule their openings in March and April, very close to the Tony nomination deadline. The hope is that Tony nominations will drive ticket sales. However, what ends up happening is that more shows open at the same time than the public will support. So unless you’re show is the lucky show that has the right star or the right title, your show could very well end up on life support.2. Can The Show Recoup? Investors are typically given proposed recoupment projections along with their investment papers, to help them decide whether or not the investment is a good one. Usually, these recoupment charts will show that at 100% gross revenue capacity, the show will recoup its investment easily and quickly; at 80% gross revenue capacity the show will eventually recoup and at 60% gross revenue capacity there is little chance that the show will recoup. The recoupment charts include the appropriate disclaimers indicating that most shows don’t recoup. What the charts don’t say is that, for most shows, even when 100% of the seats are filled, the show is only taking in 80% of its gross revenue capacity at best, because a lot of tickets get sold at a discount. A show playing in a house 80% full is maybe taking in 60% of its gross revenue capacity. And while a show playing in an 80% house and taking in 60% of its gross revenue capacity may eventually recoup, it likely won’t get the chance because the theater will throw the show out, hoping to replace wit with a more successful show.If investors started paying attention to these fundamentals, they would realize that any show in which they invest will have to be a blockbuster in order for them to have a reasonable chance at getting their money back. The financial structure of our industry today makes a modest hit an unlikely phenomenon.So, what does all of this mean? Theater producers are developing properties they think they can get financed, and hoping that their production is the one to break through to blockbuster status. And since most productions do not reach blockbuster status, most investors are losing their money. Once an investor loses their money, they are much less likely to invest again.And so the only way that the theater industry can survive in its current form is to find an endless supply of investors who will put money into shows without bothering to really check whether or not the show has a chance in hell of recouping its investment. With the coming change in SEC regulations which will allow theater producers to find investors over the internet, the day of reckoning may be pushed off a bit further, but eventually an industry with a ridiculously low rate of return on investment cannot survive. For while it may be easier to find investors on the internet, once those investors start posting reviews on Yelp about theater producers the writing will be on the virtual wall.Is there a solution? Some producers are trying to innovate. This season will bring several limited run productions with big name stars, a model which in the past has yielded some profits for investors. Perhaps this is the wave of the future. However, this model is not particularly well suited to musicals.I believe the best option is to return the industry to its roots – developing artists, not investors. Perhaps it is time for the return of a Broadway musical that costs $8 million dollars to produce, instead of $15 million dollars. A show of that size would have a chanceBut make no mistake, change is coming to Broadway.