Broadway Musicals Economics

There are many factors that may come into play in the decision to keep a show running or to close it on Broadway, such as the possibility of a Tony Award, a Tony nomination, an infusion of additional investor money, excellent reviews, good word of mouth, reaching the point of merger of rights/vesting that ensures continuing rights, rotating well-known stars, or the success or failure of road or foreign productions. But the financial reality of incoming vs. outgoing weekly and/or monthly monies will eventually decide the issue.

Operating Expenses

The following represent many of the operating-cost expenses, some of which are a pre-determined amount while others are either an actual cost or on a percentage-royalty weekly basis. These may, depending on the show, be factored into the profit/loss and/or breakeven calculation.

For this example, we use a successful catalogue musical with gross weekly box office numbers of $1,015,000 and total weekly expenses of $602,000. Certain representative category dollar figures are also listed to provide perspective as to the types of actual costs that can be involved on an item-by-item basis.

• Physical Production ($51,000), which includes lighting, projection and sound rental ($35,000); props, automation rental, departmental costs for carpentry, electrics, wardrobe, hair/makeup, music, stage manager and sound, costume and for wig replacement.
• Recurring Fees ($10,000) that include sound and production design ($2,000), hair/makeup design, music coordinator ($1,400), music/photo licenses, casting ($2,000), technical supervisor, props coordinator, production electrician, production hair and stunt coordinator.
• Salaries ($130,000), including cast ($50,000), company and wardrobe crews ($35,000), hair/makeup crew, stage management ($8,000), vacation and sick pay accrual, general manager ($4,000), company manager, assistants, press agent ($2,000), music director ($4,000) and company musicians.
• Taxes and Benefits ($40,000), including covering multiple un-ion pension and welfare benefits.
• Rehearsal and Casting ($1,000); rehearsal studios and expenses as needed.
• Advertising and Promotion ($125,000), including artwork, flyers, brochures, photography, ticket promotions ($9,000), talent residuals, print media ($20,000), television media ($30,000), outdoor, sponsorship, other marketing ($3,000), marquee and signage, marketing consultants ($4,000), playbill ($2,000), special events, taxis, video, website and marketing fees.
• Theater Venue Expenses ($190,000), including fixed weekly charges ($24,000), theater share ($40,000), local crew, musicians and staff ($80,000).
• G&A Expenses ($20,000), including office charges for the producer and general manager, executive producer fee, legal fees, accounting and payroll expenses, local transportation, city rent tax and insurance.
• Royalty Fees ($35,000), including to the author ($12,000 which covers the book writer, composer and lyricist), director ($3,500), choreographer ($800), scenic, lighting and costume design ($3,000), orchestrator, musical supervisor ($500), producer ($3,800) and, if applicable, original venue royalty ($1,600 due the theatre or workshop where the production was originally developed and performed).

Depending on the show, operating costs could also include such items as aerial coordinator and designer, harnesses, high-speed flying rigs, puppets, animation, special effects, development expenses, theatre renovation, filming and videography, among other expenses. In the case of certain shows (e.g., Spider-Man: Turn Off the Dark), there may be theater renovations, rigs, production delays, etc.). These charges can prove substantial.

As seen from the above types of expenses that can be incurred in connection with a show, gross weekly box-office receipts are important in the grand scheme of things, but even million dollar grosses can be deceiving in categorizing a Broadway musical as a hit or a miss because so much depends on the behind-the-scenes actual costs of running the show. In the above example, the musical is in great shape with a $413,000 weekly operating profit. But if the weekly gross box office was $625,000 or $598,000 with weekly expenses of $602,000, financial considerations would definitely come into play as to the future of the musical.

It's also necessary many times to review net income on a weekly basis, rather than the overall monthly statement, because there may be extraordinary expenses during a particular week (e.g., the television advertising spend prior to the Tony Awards) and these amounts can be substantial, a factor that might give a false view of the profit and loss results for a specified week or weeks but not a true picture of the overall longer term financial situation.

As for investors who put up the money for a show, total capitalization of the show needs to be repaid prior to any dreams of receiving a continuing percentage of net profits. For most Broadway musicals, capitalization runs in the area of $10 million with many shows costing significantly more just to get to opening night. Rocky , with a $15 million investment and Spider-Man: Turn Off The Dark, with a reported $75 million investment, are two recent examples of shows closing with substantial losses.

Royalty Payments

Various formulas set forth the royalty payments to creative personnel, all which affect investor recoupment and post recoupment returns on investment. The three basic license arrangements that cover most Broadway musicals are the Dramatists Guild of America Approved Production Contract (APC), Royalty Pools and Fixed Dollar shows. Variations of these are found in practically all Broadway productions from original shows, to revivals to catalogue musicals.

Under the APC, the combined author share (book writer, composer and lyricist) is 4.5% of the gross weekly box-office receipts prior to recoupment and 6% once a show's investment has been recouped (normally a figure of 110% or more of the total). The APC also sets forth minimum annual and monthly option “to produce the show” payments that are paid to the book writer, composer and lyricist ($37,800 total over a three-year period) as well as a financial guarantee of $4,500 a week for the first 12 out-of-town performance weeks prior to the Broadway opening. Other creative personnel, the producer as well as other rights holders also receive weekly percentages based on the box office. All of these fees are taken off the top as they are part of the weekly operating costs of the musical with the remainder allocated to capitalization reduction.

Under a Royalty Pool arrangement, a percentage of the weekly operating profits (box office receipts minus operating costs) would be placed in a pool to be shared by all participating creative personnel and rights owners with the remainder of the operating profits allocated to paying back the investment. For example, with a weekly royalty pool of 35% of operating profits to be shared by all royalty participants, the remaining 65% of weekly operating profit would be used to repay investors. Thus, if the weekly operating profit was $250,000 for a show with a gross box-office figure of $1,000,000 and weekly expenses of $750,000, a 35% royalty pool would be $87,500 with a 65% investor recoupment figure of $162,500. Minimum payments are also negotiated for the royalty participants in a royalty pool so as to guarantee some payments even when the show has little or no weekly operating profits.

Under a Fixed Dollar Amount production, the producer will often negotiate a specific weekly dollar amount for pre-existing songs being used in a show ( e.g. , $600 per song, per week). In the case of catalogue/jukebox musicals, many times two formulas will be used where prominent songs are paid as part of a royalty pool arrangement whereas less important compositions receive fixed weekly amounts. As to the “fixed dollar” songs, they will make the same amount of money each week the show is running regardless of whether the show is a massive hit or a theatrical failure.

Once capitalization is totally repaid including a reserve fund for the future (among other items), net profits are then distributed to investors and the producers.

Conclusion

Broadway is a very special world, one that sometimes defies reality in any discussion of whether something is a good or risky investment. Because of this, knowledge of how things work behind the scenes is many times much more important than what happens on stage.

Jeff Brabec, Esq., is Vice President of Business Affairs for Chrysalis BMG. Todd Brabec, Esq., is former ASCAP Executive Vice President. The Brabecs are Deems Taylor Award-winning authors of Music, Money and Success: The Insider's Guide to Making Money in the Music Business (Seventh Edition/Schirmer Books) (available from Amazon.com at http://amzn.to/1sCjJjW).

Being an investor, producer or creator involved in a Broadway musical ' whether a new show with original music and lyrics, a “catalogue/jukebox” musical using pre-existing songs or a revival ' may yield enormous amounts of money, both short term and long term, if the show is a hit, but can result in enormous financial losses if it fails to attract an audience.

The difference in why a show makes it or doesn't often isn't always about the quality of the material, reviews or the cast (although they have to be there), but the costs of operating the musical on a weekly basis. Even with significant weekly box-office ticket receipts ( e.g. , $500,000 to over $1 million), a sustainable hit depends on the difference between the box office income and the costs of the musical. If the costs are greater than the income or if the income barely exceeds the costs, the musical is on its way to closure.

This is true not only for new musicals but also for successful musicals that have been on Broadway for years.

There are many factors that may come into play in the decision to keep a show running or to close it on Broadway, such as the possibility of a Tony Award, a Tony nomination, an infusion of additional investor money, excellent reviews, good word of mouth, reaching the point of merger of rights/vesting that ensures continuing rights, rotating well-known stars, or the success or failure of road or foreign productions. But the financial reality of incoming vs. outgoing weekly and/or monthly monies will eventually decide the issue.

Operating Expenses

The following represent many of the operating-cost expenses, some of which are a pre-determined amount while others are either an actual cost or on a percentage-royalty weekly basis. These may, depending on the show, be factored into the profit/loss and/or breakeven calculation.

For this example, we use a successful catalogue musical with gross weekly box office numbers of $1,015,000 and total weekly expenses of $602,000. Certain representative category dollar figures are also listed to provide perspective as to the types of actual costs that can be involved on an item-by-item basis.

• Physical Production ($51,000), which includes lighting, projection and sound rental ($35,000); props, automation rental, departmental costs for carpentry, electrics, wardrobe, hair/makeup, music, stage manager and sound, costume and for wig replacement.
• Recurring Fees ($10,000) that include sound and production design ($2,000), hair/makeup design, music coordinator ($1,400), music/photo licenses, casting ($2,000), technical supervisor, props coordinator, production electrician, production hair and stunt coordinator.
• Salaries ($130,000), including cast ($50,000), company and wardrobe crews ($35,000), hair/makeup crew, stage management ($8,000), vacation and sick pay accrual, general manager ($4,000), company manager, assistants, press agent ($2,000), music director ($4,000) and company musicians.
• Taxes and Benefits ($40,000), including covering multiple un-ion pension and welfare benefits.
• Rehearsal and Casting ($1,000); rehearsal studios and expenses as needed.
• Advertising and Promotion ($125,000), including artwork, flyers, brochures, photography, ticket promotions ($9,000), talent residuals, print media ($20,000), television media ($30,000), outdoor, sponsorship, other marketing ($3,000), marquee and signage, marketing consultants ($4,000), playbill ($2,000), special events, taxis, video, website and marketing fees.
• Theater Venue Expenses ($190,000), including fixed weekly charges ($24,000), theater share ($40,000), local crew, musicians and staff ($80,000).
• G&A Expenses ($20,000), including office charges for the producer and general manager, executive producer fee, legal fees, accounting and payroll expenses, local transportation, city rent tax and insurance.
• Royalty Fees ($35,000), including to the author ($12,000 which covers the book writer, composer and lyricist), director ($3,500), choreographer ($800), scenic, lighting and costume design ($3,000), orchestrator, musical supervisor ($500), producer ($3,800) and, if applicable, original venue royalty ($1,600 due the theatre or workshop where the production was originally developed and performed).

Depending on the show, operating costs could also include such items as aerial coordinator and designer, harnesses, high-speed flying rigs, puppets, animation, special effects, development expenses, theatre renovation, filming and videography, among other expenses. In the case of certain shows (e.g., Spider-Man: Turn Off the Dark), there may be theater renovations, rigs, production delays, etc.). These charges can prove substantial.

As seen from the above types of expenses that can be incurred in connection with a show, gross weekly box-office receipts are important in the grand scheme of things, but even million dollar grosses can be deceiving in categorizing a Broadway musical as a hit or a miss because so much depends on the behind-the-scenes actual costs of running the show. In the above example, the musical is in great shape with a $413,000 weekly operating profit. But if the weekly gross box office was $625,000 or $598,000 with weekly expenses of $602,000, financial considerations would definitely come into play as to the future of the musical.

It's also necessary many times to review net income on a weekly basis, rather than the overall monthly statement, because there may be extraordinary expenses during a particular week (e.g., the television advertising spend prior to the Tony Awards) and these amounts can be substantial, a factor that might give a false view of the profit and loss results for a specified week or weeks but not a true picture of the overall longer term financial situation.

As for investors who put up the money for a show, total capitalization of the show needs to be repaid prior to any dreams of receiving a continuing percentage of net profits. For most Broadway musicals, capitalization runs in the area of $10 million with many shows costing significantly more just to get to opening night. Rocky , with a $15 million investment and Spider-Man: Turn Off The Dark, with a reported $75 million investment, are two recent examples of shows closing with substantial losses.

Royalty Payments

Various formulas set forth the royalty payments to creative personnel, all which affect investor recoupment and post recoupment returns on investment. The three basic license arrangements that cover most Broadway musicals are the Dramatists Guild of America Approved Production Contract (APC), Royalty Pools and Fixed Dollar shows. Variations of these are found in practically all Broadway productions from original shows, to revivals to catalogue musicals.

Under the APC, the combined author share (book writer, composer and lyricist) is 4.5% of the gross weekly box-office receipts prior to recoupment and 6% once a show's investment has been recouped (normally a figure of 110% or more of the total). The APC also sets forth minimum annual and monthly option “to produce the show” payments that are paid to the book writer, composer and lyricist ($37,800 total over a three-year period) as well as a financial guarantee of $4,500 a week for the first 12 out-of-town performance weeks prior to the Broadway opening. Other creative personnel, the producer as well as other rights holders also receive weekly percentages based on the box office. All of these fees are taken off the top as they are part of the weekly operating costs of the musical with the remainder allocated to capitalization reduction.

Under a Royalty Pool arrangement, a percentage of the weekly operating profits (box office receipts minus operating costs) would be placed in a pool to be shared by all participating creative personnel and rights owners with the remainder of the operating profits allocated to paying back the investment. For example, with a weekly royalty pool of 35% of operating profits to be shared by all royalty participants, the remaining 65% of weekly operating profit would be used to repay investors. Thus, if the weekly operating profit was $250,000 for a show with a gross box-office figure of $1,000,000 and weekly expenses of $750,000, a 35% royalty pool would be $87,500 with a 65% investor recoupment figure of $162,500. Minimum payments are also negotiated for the royalty participants in a royalty pool so as to guarantee some payments even when the show has little or no weekly operating profits.

Under a Fixed Dollar Amount production, the producer will often negotiate a specific weekly dollar amount for pre-existing songs being used in a show ( e.g. , $600 per song, per week). In the case of catalogue/jukebox musicals, many times two formulas will be used where prominent songs are paid as part of a royalty pool arrangement whereas less important compositions receive fixed weekly amounts. As to the “fixed dollar” songs, they will make the same amount of money each week the show is running regardless of whether the show is a massive hit or a theatrical failure.

Once capitalization is totally repaid including a reserve fund for the future (among other items), net profits are then distributed to investors and the producers.

Conclusion

Broadway is a very special world, one that sometimes defies reality in any discussion of whether something is a good or risky investment. Because of this, knowledge of how things work behind the scenes is many times much more important than what happens on stage.

Jeff Brabec, Esq., is Vice President of Business Affairs for Chrysalis BMG. Todd Brabec, Esq., is former ASCAP Executive Vice President. The Brabecs are Deems Taylor Award-winning authors of Music, Money and Success: The Insider's Guide to Making Money in the Music Business (Seventh Edition/Schirmer Books) (available from Amazon.com at http://amzn.to/1sCjJjW).