Broadway's Financial Gamble: Do Plays Turn A Profit?

Investing in plays is a risky business, with around 80% of Broadway producers and investors struggling to make their money back. This figure has remained consistent since at least the 1960s. However, it's important to note that investing is a long-term game, and returns can vary widely depending on the type of investment, level of risk, and time horizon.

When it comes to plays, there are a few factors that can determine whether an investment pays off. The success of a play often depends on strong word-of-mouth and critical acclaim, which can be unpredictable. Additionally, the high costs of running a theatre production, including royalties, venue hire, and actor salaries, can eat into profits.

Despite the risks, some plays have successfully recouped their initial investment. For example, The Book of Mormon recouped its $9 million investment in just eight months. Harry Potter and the Cursed Child and SIX the Musical have also turned a profit.

So, while investing in plays can be a gamble, with careful consideration and a bit of luck, it is possible to make a successful investment in this field.

Broadway plays: 80% of Broadway producers and investors struggle to make their money back

Broadway plays are notoriously difficult to profit from, with around 80% of producers and investors failing to recoup their initial investments. This trend has remained consistent since the 1960s, indicating the enduring challenge of turning a profit in this industry.

Factors Affecting Profitability

The success of a Broadway play depends on various factors, including the show's production budget, talent involved, marketing, and overall critical and audience reception. Additionally, the complex nature of Broadway financing, where producers sell percentages of the show's profits to investors, can impact the likelihood of recouping investments.

Examples of Successful Recoupments

Despite the high rate of financial losses, some Broadway shows have managed to turn a profit. Notable examples include "Harry Potter and the Cursed Child," "SIX the Musical," and "The Book of Mormon." "The Book of Mormon," in particular, stands out for coming in under budget and recouping its investment in just eight months of standing-room-only performances.

Strategies for Success

To increase the chances of financial success, producers should aim for lower production costs and longer runs, as extended runs with strong box office numbers can lead to profitability over time. Additionally, choosing shows with minimal sets, costumes, and shorter runtimes can help reduce expenses and maximize profits.

The Impact of the Pandemic

The COVID-19 pandemic significantly impacted Broadway, with many shows struggling to recoup their investments due to shutdowns and reduced audience capacities. However, some shows, like "Six," were on the path to recouping their initial investments through presales alone before the pandemic hit.

The Role of Touring and Licensing

While Broadway shows themselves might struggle to turn a profit, the real financial gains often come from national touring and international productions, as well as licensing the rights to schools and community theaters. This additional revenue stream can make a significant difference in the overall profitability of a show.

Trading companies: It can take years to recoup investments

On Broadway, it is notoriously difficult to make money, except for the landlords who own the theatre houses. Approximately 80% of Broadway producers and investors struggle to recoup their investments, and this number has remained consistent since at least the 1960s. This means that out of every five shows, only one manages to turn a profit.

There are a few reasons why it is so challenging for Broadway shows to recoup their initial investments. One factor is the high cost of putting on a production, which can include expenses such as creative costs, insurance, theatre fees, and the cost of keeping the show running. Another reason is the complex nature of Broadway financing, where producers sell percentages of the profits to investors, further reducing the potential returns.

Additionally, the impact of the COVID-19 pandemic has made it even more challenging for Broadway shows to turn a profit. Many shows had to shut down temporarily due to public health restrictions, and even after reopening, they faced reduced audience capacities and increased expenses for safety measures.

Despite the challenges, there are some strategies that can help Broadway shows recoup their investments. For example, licensing the rights to popular shows to schools and community theatres can bring in significant revenue. Touring productions and international productions can also generate substantial profits.

Risk and return: Investments with higher potential returns are riskier

When it comes to the world of investments, risk and return are two sides of the same coin. The concept of risk versus reward is a fundamental challenge in investing, and understanding this dynamic is crucial for making informed decisions. Here's a detailed exploration of the relationship between risk and return:

Understanding the Risk-Return Tradeoff

The risk-return tradeoff is a well-established investment principle. It states that there is a direct link between risk and potential return, where higher risk is associated with higher potential rewards. In simple terms, the greater the risk an investor is willing to take, the higher the potential profits. This tradeoff applies to various investment options, including stocks, bonds, and mutual funds.

Assessing Risk and Return

When assessing the risk-return tradeoff, investors need to consider multiple factors. These include an investor's risk tolerance, their years to retirement, and the potential to replace lost funds. Additionally, time plays a crucial role. For example, investing in equities over the long term provides an opportunity to recover from bear markets and benefit from bull markets. On the other hand, short-term investments in the same equities carry a higher risk proposition.

Calculating Risk and Return

To make informed decisions, investors use various ratios to calculate and assess risk and return. The alpha ratio measures excess returns on an investment compared to a benchmark. The beta ratio reflects the correlation between a stock's performance and the overall market, such as the Standard & Poor's 500 Index (S&P 500). Meanwhile, the Sharpe ratio helps determine if the risk taken is worth the potential reward.

Examples of Risk and Return in Action

Stocks, bonds, and mutual funds are common investment products that illustrate the risk-return dynamic. Stocks are considered one of the riskiest investments due to their volatility and the potential for loss if a company underperforms. However, historically, stocks have provided the highest average rate of return over the long term. Bonds, on the other hand, generally offer higher returns than savings accounts but lower returns than stocks. They are considered less risky than stocks because bondholders have a better understanding of the expected payouts unless the issuer goes bankrupt. Mutual funds carry the risk associated with the underlying investments they hold, and their returns are not guaranteed.

A Case Study: Broadway Investments

As an illustrative example, let's consider the world of Broadway productions. Investing in Broadway shows is known for being a high-risk endeavour, with approximately 80% of producers and investors struggling to recoup their initial investments. However, in rare cases, some shows, such as "The Book of Mormon," have not only recouped their investment but also turned a significant profit. This example highlights the risk-return tradeoff, where investors accept a high level of uncertainty for the chance of substantial financial gains.

Diversified portfolios: Reduce risk by spreading investments across different asset classes

Diversified portfolios are an important tool for reducing risk and increasing the probability of satisfactory returns. Diversification is about spreading investments across different asset classes, sectors, and geographies, and using different investment styles. The main goal is to limit the impact of volatility on a portfolio.

The first step in creating a diversified portfolio is deciding on an asset allocation. This involves determining what portion of your total portfolio you will invest in different asset classes, such as stocks, bonds, cash or cash equivalents, options, futures and commodities, and real estate. Your asset allocation will depend on factors such as your risk tolerance, investment horizon, and financial goals. For example, a common guideline is a 60/40 split between stocks and bonds, but other allocations can be more aggressive or conservative depending on your risk appetite.

Within each asset class, diversification can be achieved by investing in different sized companies (small, medium, and large), different sectors (technology, healthcare, energy, financials, etc.), and different geographic regions (domestic and international). For example, when investing in stocks, diversification increases by owning multiple stocks across different industries and countries. Similarly, when investing in bonds, you can choose bonds with different terms, credit ratings, and issuers (federal, state, or local governments, or corporations).

Mutual funds and exchange-traded funds (ETFs) are popular tools for achieving diversification. These pooled investments typically include a larger number and variety of underlying assets than individual investors can assemble on their own, providing instant diversification. However, it is important to ensure that the funds you invest in are themselves diversified and do not overlap significantly with your other holdings.

Regular portfolio rebalancing is crucial to maintaining a diversified portfolio. Over time, market movements can cause your asset allocation to drift from your target. Therefore, it is important to periodically adjust your holdings to realign with your original allocation. This can be done by redirecting money to lagging asset classes, adding new investments to those classes, or selling a portion of holdings in outperforming classes and reinvesting the profits in the lagging classes. While there is no official timeline for rebalancing, it is often considered as part of an annual review of investments.

In conclusion, diversification is a powerful strategy for reducing investment risk and increasing the resilience of your portfolio. By spreading your investments across different asset classes and within those classes, you can lower the volatility of your portfolio and increase the likelihood of satisfactory returns over time.

Calculating ROI: Subtract the initial investment from the final value, divide by the cost, and multiply by 100

Calculating the return on investment (ROI) is a straightforward process that can be applied to stocks, businesses, and real estate. ROI is expressed as a percentage and is calculated by dividing the net profit (or gain) of an investment by its initial cost.

The formula for calculating ROI is:

ROI = (Final value of investment - Initial value of investment) / Initial value of investment x 100%

Here's a step-by-step guide to calculating ROI:

Step 1: Identify the initial value of the investment. This is the cost of the investment at the time of purchase.

Step 2: Determine the final value of the investment. This includes the sale price of the investment, less any commissions, taxes, or fees paid during the sale.

Step 3: Calculate the net return on investment by subtracting the initial value from the final value. This represents the gain or loss on the investment.

Step 4: Divide the net return on investment by the initial value of the investment. This will give you a decimal number.

Step 5: Multiply the result from Step 4 by 100 to get the ROI as a percentage.

For example, let's say you bought a house for $300,000 and sold it one year later for $360,000 due to high demand. You paid a 5% commission to agents ($18,000), 3% in escrow fees ($10,800), and 25% capital gains tax on the increase in property value ($15,000).

Using the formula:

ROI = [($360,000 - $300,000) - $18,000 - $10,800 - $15,000] / $300,000 x 100%

ROI = $16,200 / $300,000 x 100% = 0.27 x 100% = 27%

So, the ROI on this investment is 27%.

It's important to note that ROI has some limitations. It doesn't take into account the holding period of an investment, which can be a factor when comparing investment alternatives. Additionally, ROI doesn't adjust for risk, and it may not include all relevant costs, which can impact the accuracy of the calculation.

Frequently asked questions