Saturday, June 4, 2016

Fresh Funds on Stage

Fresh Funds on Stage:
Bringing Private Equity Prowess to Bear on the Unruly Broadway Industry

Broadway is notoriously feast-or-famine – an industry relying on megahits every three or four years to carry on a disturbing slew of unoriginal, large-scale failures.  The fact that only 20 to 30% of Broadway shows are turning a profit  is driving away a lot of money from potential investors, combined with a negative, predatory image cultivated by shows such as The Producers.  This reality has unfortunate effects for fundraising and particularly for more original or cutting-edge fare to find its way to a Broadway theatre and its attendant marketing apparatus.
Every few years in recent time, a megahit has arrived of such grand scale as to pay for many other failures.  Shows such as The Book of Mormon,  Wicked,  and Jersey Boys  are among more recent examples of the power of a single show to achieve outsized revenues.  One individual who invested $35,000 in Wicked back before its initial run has achieved an investment return of approximately $1,000,000 .  However, the image from the outside remains focused on the potential for outsize losses.  The same season as Book of Mormon included massive losses for nearly all the other new musicals, including Wonderland, Scottsboro Boys, The People in the Picture, Sister Act, Priscilla Queen of the Desert, Catch Me If You Can, Bloody Bloody Andrew Jackson, and Baby It’s You.   Such a cavalcade of failures intimidates individuals who might otherwise invest, especially when minimum investments usual hover around $25,000 (or $10,000 for an exceptionally risky show).   The producers hope to make money off the investors’ profits, but many are also more driven by the ego-based incentives created by production credits and the potential for Tony nominations.  Each year, many new investors are approached across the country, and some are convinced by the potential for a smash hit, but they become quickly disillusioned and bitter when their attempts most likely result in a complete loss of capital.
The feast-or-famine dynamic is also partly a function of the nature of Broadway consumption.  With an average ticket price of $118.10  (page 39) per ticket in the 2013-2014 season, nearly half (42.8%)  of theatergoers only saw a single show in a year, and another third (35.5%) saw 2-4 shows.  While the rest of the market is comprised of dedicated theatergoers, who may be willing to try out the broadest assortment of shows, this audience base is generally only enough to pay the weekly running cost of a show, thereby failing to return any capitalization to the investors.   New York City in particular is a highly socially competitive place as well, and so whatever the “hot” show of the season happens to be, there will be a bottleneck to see it, ignoring the other offerings (a phenomenon Glenn Lowry certainly noted in his discussion of exhibits such as Marina Abramovic’s).  The stakes for these audience members may not be as high as for the average investor, but they are considerable nonetheless: as movie producers have attested to the class, people want to avoid paying much for entertainment, so when they do spend hundreds of dollars on two to three hours of it, “pretty good” is generally not good enough to prevent buyers’ remorse.
Other recent seasons of new musicals are perhaps not as skewed as Book of Mormon’s season, but do reflect more instances of wealth disparity.  The 2012-2013 season had four dire failures and three moderate hits (the largest of which, Kinky Boots, has likely returned a multiple of its capitalization to investors, judging by its revenues and weekly running cost).   The 2013-2014 season had nine flops and three successes, the largest success being from Disney (which, contrary to the rest, uses corporate cash rather than external investments from individuals) .  What is striking about all these seasons, and Book of Mormon’s season especially, is the persistent attempt among producers to find safety in familiarity, and the repeated audience response that they do not wish to see entertainment that they could access much more cheaply (and without shoving their way through Times Square) in the comfort of their respective homes.  Nearly all of the other offerings in that season tried to capitalize upon well-known properties with built-in fan bases: Wonderland on Alice in Wonderland, Scottsboro/Jackson/Picture on famous chapters in history, Baby It’s You on the Shirelles, and Catch Me/Sister Act/Priscilla on highly recognizable film franchises.  Yet as a number of the speakers in this class have opined, creativity cannot be so easily commoditized, forced, or easily replicated by envious imitators (Netflix’s data efforts notwithstanding).  While Book of Mormon references the holy text, it is a fully original story, and it even antagonizes the built-in audience (Mormons) who might be attracted by the title.  The Broadway League’s demographic data show that previous familiarity with a creative property does lead to significant amount of ticket sales (17.6% of theatergoers reported “saw the movie” as a motivating factor in their ticket purchasing decision).   However, far beyond any other motivating factor is a personal recommendation from a friend, family member, or other trusted individual: 48.4% of theatergoers listed this as a motivating factor.   When spending hundreds of dollars, consumers rely on word-of-mouth from those they trust – it is not familiarity with the subject matter they crave, but rather familiarity with people who have already seen the show.  It is noteworthy that among the movie-to-musical adaptations that have succeeded in this decade, both Once  and Kinky Boots  are based on movies that did not achieve major mainstream commercial success.  Many of the biggest hits in recent history have been shows that pushed the boundaries of what could be done on a Broadway stage, thereby broadening the demographics of ticket-buyers beyond those who historically have bought the tickets (cf. Avenue Q with its profane puppets, Rent with its in-your-face adult rock fantasy, and – in the process of becoming a megahit – Hamilton using rap music to tell a historical tale ).
The best response to this large problem in the Broadway musical space is for a few top producers (or individuals with a track record of Broadway investing) to participate in the creation of pooled investment funds across many shows.  Each Broadway show is a separate LLC, and it is highly unrealistic to think that the industry would suddenly shift to a studio system; however, robust investment funds to support the LLCs can make a meaningful step to address the problematic dynamic at work now.  The model for this endeavor would be private equity “growth equity” funds, which lock investors in for a period of five to seven years and spread the accumulated investment capital across an array of companies within a given sector.  Broadway producers often come from strong creative backgrounds, but, as the class speakers have indicated about most other subsectors of the entertainment industry, formalized business knowledge such as may be gained from an MBA is much less common currency in show business, and so part of the reason for an absence of this investment structure is simple lack of familiarity.  By locking theater investors in for a similar length of time, producers would be liberated to focus on more audacious and original projects, no longer needing to justify each show separately.  This movement would shift the attention from ultra-high-risk investments in individual musicals to more moderate-risk investments focused more on the producers behind the shows and their respective track records.  Attracting more capital to the strongest producers would enable them to do both a greater number of projects and a stronger slate of provocative works.  Jeffrey Seller, for example, has a stunning record of hits, including Rent, Avenue Q, In the Heights, and the new smash Hamilton;  he also has produced a number of total commercial failures, including [title of show], High Fidelity, and most recently The Last Ship.  Recognizing the likely chance of a steep loss of many thousands of dollars, skittish investors shy away from all these projects.  A structured fund embracing the full range of shows here provides an enormous reduction of the investment beta, with a truly enviable net return across the different shows.  Similarly, David Stone, producer of Wicked, Spelling Bee, and Next to Normal,  would benefit from an increased project capacity and the option to embark upon riskier projects, knowing that across a variety of shows he would continue his superior track record.  Even for Mr. Stone, after Wicked established him as one of the most successful producers of his generation (a show which still, 12 years later, spews profits at an astounding rate) , faced a difficult task  approaching investors for Next to Normal, an intense and often abrasive rock musical depicting the ravages of bipolar depression and electro-shock therapy.   Next to Normal was released in April of 2009, and so the process of capitalizing a totally original, feel-bad musical with no obvious audience in the depths of the worst recession since the Depression, in the financial capital of the country, was a considerable task, to say the least.   The show went on to make an excellent profit, contrary to expectations, as word-of-mouth spread widely that the quality of the content was exceptionally high.  A structured investment fund would enable Stone and others to launch such projects more easily and more frequently.
Investors would benefit from a lower-beta investment and would be more likely to provide capital in the first place, free from the prohibitive psychology that drives them away after a single massive loss.  Rather than chasing the illusory safety of movie adaptations and the like, investors would have the option for legitimate (relative) safety in numbers.  By shifting the burden for each investment choice from the end investors to the producer, potentially many anxiety-inducing choices are reduced to an easier choice appraising an individual and his or her track record.
This is not to say Broadway would suddenly be transformed from a land of stale retreads to a garden of all new ideas simply by redistributing risk.  As Mark Harris detailed poignantly in his article “The Birdcage: How Hollywood’s Toxic (and Worsening) Addiction to Franchises Changed Movies Forever in 2014,”  studios pooling their money across different projects can still be immensely wedded to rehashing the same tired characters and plots lines.  There is certainly the risk that a fund’s even more focused attention to making money may squash some of the humbler, less commercial projects that are so artistically valuable.  However, beacons of success such as HBO and Pixar show how a single entity can shepherd a large number of genuinely original and cutting-edge projects to final form, and to a large, appreciative audience.  By wedding some of the culture of intelligent risk-taking that has succeeded so fantastically in Silicon Valley VC firms and growth equity outfits across the country, drawing an increased share of capital and likely more capital in total to the most talented and visionary producers, this framework can, in a meaningful way, broaden the musical theatre landscape.  This would comprise a culture shift within Broadway producing as well, and plenty of the course speakers have indicated how delicate a matter changing and controlling culture can be.  However, with a well-executed cultural and structural shift, they can inspire new audiences and new business people to engage with an art form that is currently restricted to a deplorably small demographic – ethnically, age-wise, gender-wise, in terms of education, and in too many other regards.   By pooling the risk and using the lessons learned from the private equity and venture capital world, producers can better harness the creativity of fresh artists and present these stories to a broader audience.

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