After nearly tripping multiple times on assorted bags and feet, you squeeze yourself into your human olive press of a seat at a Broadway theater. You open up your Playbill to the main billing page, and above the title of the show, you see anywhere from one to 100 names of the people or companies that “present” the show. To pass the time as you wait for the lights to dim, perhaps you find yourself wondering who they are and how the production you are about to see was financed—and how you could get your name in a Broadway Playbill (assuming you, like this author, fall somewhat shy of being a world-class actor/singer/dancer).
For Broadway plays and musicals produced by independent producers, and even most produced by larger entertainment companies such as film studios, the producers raise much of the financing needed to mount their shows from individuals and family offices. At a time when the Broadway industry is still rebounding from the COVID-19 pandemic, established producers are looking to widen their investor base, and a crop of newer producers is pushing to expand the traditional Broadway audience by presenting stories from historically underrepresented communities, more and more individuals and family offices are being offered the opportunity to invest in Broadway shows. Anyone contemplating an investment in a Broadway show should consider several important issues and questions.
Before the COVID-19 pandemic shut down Broadway productions from March 2020 to September 2021, total gross box office revenues had increased in most recent Broadway seasons: from $1.367 billion in 2016–17 to $1.637 billion in 2017–18 and $1.8 billion in 2018–19. The 2018–19 season saw an all-time record in total Broadway attendance, reaching 14.77 million (see Broadway season statistics from The Broadway League here). In the 2022–23 season, the first full Broadway season following the shutdown, those numbers slipped to just under $1.6 billion and a total attendance of around 12.28 million, attributable in large part to changing theatergoing and work habits and continued health concerns as a result of the pandemic. For the most part, the shows that were strong box office performers before the pandemic have continued to do well, while newer shows have had a harder time building and sustaining box office momentum.
Even in the pre-pandemic “boom times,” only 20% to 30% of Broadway shows fully paid back their investors (see “No Business Like Show Business” here). This percentage varies somewhat depending on the category of show (all shows, just musicals, just plays, etc.). To understand why, it is necessary to have a general knowledge of Broadway economics.
Evaluating the economics of a Broadway investment means understanding the typical costs and revenue streams associated with a Broadway production. Although the following focuses on new Broadway musicals, the economics of nonmusical plays are similar, but simpler and smaller, and many of the same issues and considerations apply to investing in off-Broadway, touring and overseas live stage productions.
Production Costs. The production costs (or mounting costs) of a Broadway show are the expenses incurred until the start of performances. Most new major commercial Broadway musicals currently have production costs, including a reserve for unanticipated expenses, in the range of $17 million to $23 million. A musical with a smaller cast and simpler sets, or a revival (a new Broadway production of a musical that has been produced on Broadway at least once before), can be mounted for significantly less—under $10 million in some cases. Broadway plays are significantly cheaper than musicals, with production costs for new plays often ranging from $3.5 million to $5 million. Production costs include fees to creative and production personnel, including authors, directors, designers and general managers; expenses for workshops, out-of-town tryouts and other developmental steps; physical production costs like those for scenery, props and costumes; advertising and promotion; and administrative expenses such as legal, accounting and insurance. These costs and the operating costs described below have all increased since the pandemic due to COVID-19 testing protocols, supply chain issues, increased labor costs and other factors.
Weekly Operating Costs. The weekly operating costs (or running costs) of a Broadway show are the expenses incurred to run the show each week once performances start. The “fixed” weekly operating costs of a Broadway show include many of the same categories mentioned above, along with fixed theater costs such as the wages of theater and box office staff and musicians. On top of those costs, the theater will charge weekly rent calculated as a percentage (usually 6% or 7%) of the gross weekly box office receipts discussed below. For a major Broadway musical, fixed weekly operating costs excluding theater rent usually range from $650,000 to $800,000 a week.
Royalties. A show also will pay weekly royalties to the various royalty participants, such as authors (the book writer, composer and lyricist for a musical or the playwright for a play); the director and choreographer; the designers; the owner of any underlying novel, film or other work on which the musical is based; and the lead producer, as discussed below. These royalties can be a percentage of gross weekly box office receipts, but far more often for a Broadway musical they are a percentage of weekly operating profits, representing the gross weekly box office receipts less the weekly operating costs described above. They are usually around 40% of weekly operating profits before the show pays back its investors, increasing to approximately 45% after that point.
Gross Weekly Box Office Receipts (GWBOR). The primary source of revenue for a new Broadway show is the GWBOR, or the gross, which consists of ticket revenues less certain customary deductions like credit card fees and remote box office fees (such as those charged by Ticketmaster). A Broadway show with a GWBOR of at least $1 million is generally considered a solid success. The grosses for Broadway shows are publicly available information; for example, see here.
Merchandise. A Broadway show also will receive some income from merchandise and (possibly) cast album sales, but these revenues are usually quite small compared with GWBOR.
Licensing of Subsidiary Rights. Revenue also is generated from the licensing of subsidiary rights in the show. These are licenses that the author(s) of a show grant after the commercial producer’s rights to produce the show expire (generally once the producer stops presenting productions of the show), for example to schools, community theaters, and professional theaters in the U.S. and elsewhere. Subsidiary rights licensing generates income, and the company formed to finance the Broadway show, and thus its investors, will often receive a share of that revenue for a number of years (though it can take several years for that revenue to start coming in). Also, if a Broadway production spawns a U.S. tour or London production, those additional productions will often pay license fees to the Broadway financing entity.
“Follow the Money and See Where It Goes” (With Thanks to Hamilton)
The lead producer of a Broadway show raises financing from investors to pay for production costs and to establish a reserve. Once the show starts performances, box office and other revenues are first used to pay the show’s weekly operating costs and royalties. What’s left are the weekly profits, which are distributed 100% to the investors until the investors are fully paid back, a point known as “recoupment.” When a show achieves recoupment, a few things happen. First, the producer and investors metaphorically (and probably at least once literally) run out into the middle of Times Square for an extended kick line of jubilation. Second, there is a change in how the show’s profits are allocated. Upon recoupment, the show’s weekly profits are referred to as “net profits,” and after a share is paid to certain customary creative and production team members, the remaining net profits are referred to as “adjusted net profits” (ANP). ANP is split evenly—50% to the investors and 50% to the lead producer.
One can begin to see why the economics of Broadway can be so challenging. If a show’s weekly operating costs are on the high side, then even a show that is grossing $800,000 or $900,000 a week may be making little profit each week, especially after royalties have been paid. At that rate, it can take a long time to pay back the investors, and the longer a show runs, the more it becomes susceptible to competition from other, newer shows that may grab more of the public’s attention and dollars. For most shows, there is a natural decline in audience attendance over time. Shows face other challenges as well; for example, a show playing in a smaller theater has a lower maximum GWBOR potential, and a show with prominent stars who help attract attention may lose those stars if they are only available for a limited number of performance weeks.
Producers raise their financing for shows through private securities offerings under Regulation D of the Securities Act, which avoids the registration and reporting requirements of a public offering. For Broadway, a limited liability company (LLC) is by far the most common financing vehicle. The producer distributes offering documents to prospective investors, consisting of an LLC operating agreement and subscription agreement, typically including summary production and operating budgets and an estimated recoupment schedule that shows how long the producer estimates it will take the show to recoup its investment at different levels of box office performance. A long-standing rule of thumb for a Broadway musical is that the show should be able to repay its investors in roughly 52 weeks, running at an average of 80% of the maximum GWBOR potential at the theater where the show is performed. Post-COVID-19, however, that 52 weeks has crept up to 60 weeks or more for many new musicals. These offerings are almost always “min/max” offerings, with a stated minimum total financing that the producer must hit to proceed with the production and a stated maximum total financing so the investors know their investment will not be diluted beyond a certain point. Nearly all producers require that their investors be accredited investors under Securities Act regulations to avoid needing a private placement memorandum and to minimize the risk of claims under securities law.
Lead Producer vs. Co-Producer vs. Investor
Before proceeding, let’s discuss the terminology around the producers and investors in a Broadway show, which can be somewhat confusing.
Lead Producer. The lead producer, also often referred to as the Managing Member or General Partner, or simply “the producer,” is responsible for raising the financing for the show and has final authority over all producer decisions. This article mostly refers to “producer” in the singular, but it is not unusual for a show to have two to four lead producers. On the title page of a Broadway Playbill, the lead producers are listed on the top line of all the names above the title (just below the Broadway theater information).
Co-Producer. A co-producer is a large investor or someone who introduces a number of smaller investors to the show, or both. A co-producer receives certain special entitlements that “regular” investors do not, as discussed below. On the title page of the Playbill, the co-producers are all the names listed above the title but below the top producer line reserved for the lead producer. The lead producer may consult with the co-producers but has no obligation to do so, and the co-producers do not have approval over producer decisions.
Investor. An investor is anyone who directly invests in a show. The minimum investment for most Broadway shows is $25,000. Investors who are not also co-producers or lead producers do not receive billing or many of the other co-producer entitlements.
Co-producers are entitled to receive some or most of the following special entitlements, which are set forth in a side letter to the offering documents between the lead producer and the co-producer:
Kicker. A share of the lead producer’s 50% of ANP is known as the co-producer’s “kicker.” The kicker is usually based on the percentage of the capitalization that the co-producer invests and/or introduces (by way of smaller investors) to the show. For example, let’s take a co-producer who invests and/or introduces $1 million to a musical that is capitalized at $10 million, representing 10% of the capitalization. The investors who actually provide the $1 million will collectively receive 10% of the show’s profit distributions until recoupment and then 10% of the investors’ 50% (or 5% of 100%) of ANP thereafter. Under a typical deal for a co-producer at that level, the co-producer might receive an additional share of ANP payable out of the lead producer’s ANP equal to 2.5% of ANP (which is half of the 5% of ANP on the investors’ side attributable to the $1 million investment, also known as a “one for two” deal) or, if the producer is driving a harder bargain, 1.67% of ANP (which is one-third of the 5% of ANP on the investors’ side, also known as a “one for three” deal).
Billing. Billing as a producer above the title, as well as eligibility to receive a Tony Award if the show wins the Tony Award for Best Play or Best Musical.
Opening Night Tickets. Tickets to the official press opening or opening night performance and the opening night party, plus preferred access to the producer’s pool of house seats for post-opening performances.
Future Investment Rights. The right to invest in future productions of the show.
Meeting Participation. The right to attend marketing meetings and certain other producer meetings.
Financial Information. Enhanced financial reports about the show.
Similar Treatment. The right to be treated no less favorably than any other investor or co-producer who invests and/or introduces an equal or lesser amount of total financing (subject to a customary list of exceptions).
For many stage investors, such nonfinancial benefits, together with the satisfaction of supporting a project that they consider artistically and culturally important and laudable, outweigh (or at least balance out) the financial risks inherent in investing in the theater. One entitlement that a co-producer never receives (absent some truly extraordinary circumstance), however, is any approval or vote over the lead producer’s decisions or any ability to remove or change the lead producer.
Key Questions to Ask, or “Why Oh Why Oh Why Oh?....” (With Thanks to Wonderful Town)
There are several important questions to ask before investing in a Broadway show. Below is a representative list; it is not meant to be comprehensive.
- What is the minimum and maximum amount for the offering? Is the spread between them unusual?
- What do the production and operating budgets and recoupment schedule reveal? How long will it take the show to recoup at different levels of gross capacity? How big is the reserve?
- What are the lead producers paying themselves?
- Do the producers have a commitment for a Broadway theater yet? (The answer is often no.)
- For co-producers, which of the entitlements above is the lead producer offering?
Rather than invest in individual shows, some investors prefer to invest in theatrical investment funds that invest in multiple live stage projects. These funds are often established by experienced Broadway insiders (often producers in their own right) who have developed relationships with various producers, theaters and artists over years of working in the Broadway industry. Investing in a fund provides an investor with a more diversified portfolio of stage investments than if the investor invested the same amount of money in only one or two shows. The fund investor also gets the benefit of the fund manager’s expertise in selecting the shows for investment and access to potentially “hot” upcoming shows. The fund’s ability to aggregate smaller investments into one larger investment can offer better kicker terms from a show than any of the smaller investments would receive on their own.
There are potential downsides to investing in a fund, however. The fund manager typically will take a management fee and a share of fund profits, and the investors typically have no say in the selection of shows their money is used to support. Since the fund may invest its money over multiple Broadway seasons, the timeline for the return of capital to the fund’s investors also may extend well into the future. In addition, fund investors may not receive the same nonfinancial benefits (such as Tony Award eligibility) they would receive by direct investment in a show.
There is no question that investing on Broadway is a high-risk proposition, but it also offers nonfinancial benefits that, for many investors, are more important than the potential financial benefits or risk of losses. One producer client, acknowledging this dynamic, has observed, “You should not invest in a Broadway show unless you love it.” Another producer client, discussing his own initial forays into Broadway investing, noted that “it is hard to make money on Broadway, but if you are smart about it and surround yourself with smart people, it is possible.” An attorney with expertise in the live stage industry can advise potential investors not only on the offering documents, side letters and other legal aspects of a potential investment in a show, but also on the financial and business aspects of the investment. We might return to that seat in the theater as a good metaphor for investing on Broadway: It’s difficult to feel comfortable, but if you get yourself a seat, you might end up being part of an amazing show.