A WEBF article: Risk and reward in theatre productions

Besties, when you buy your ticket for your next theatre trip, do you think about the challenges and risks that producers face in bringing the production to your theatre? It is a complex balancing act requiring upfront investment before a single seat is sold and collaborative effort from the creatives, cast, stage management and venue staff to create the magic of live performance. In this article, we look at the risks that the producers and their backers face over the next five years and why the recent permanent Theatre Tax Relief (TTR) announcement is so important to everyone involved. In the next, we will look at venue finances.

Sharing the Risks and Rewards of Production

Though gross box office income is growing in the sector, the risks of producing, operating venues, or investing in theatre are rising. The delicate balance of risk and reward between rights holders, creatives, cast and stage management, venue operators, audiences and financial backers ( “Angels”), which has evolved over many years, seems under threat. The tension and commercial arrangements that divide it up across all parties who work to bring the production to the stage are under pressure.

There appears to be a polarisation in outcomes between the star led productions in the West End and big touring musicals in regional cities which are performing well, and the rest of the productions which are finding it much tougher. Pre-Covid, a West End play might recoup around the 60% mark but now, this has risen to 75% before TTR, which reduces the required financial occupancy to around 70%. This makes the production much more risky for producers and their financial backers.

Producers face rising costs but the higher West End average ticket prices (ATP) and strong demand in the larger regional venues, programming the large touring musicals are grounds for optimism. Rights holders too seem to be increasing fees and royalties, adding to the producer risk. The power sits with rights holders and creatives, without whom there would be no show but the risk sits with producers, their funders and the venue operators with their overheads & maintenance costs who need the product . 

Higher ticket prices are being achieved on the shows that sell well but for newer work or shows without stars to sell, it may not be possible to achieve these higher prices due to discounting to fill auditoriums. Smaller venues (under 600 seats) struggle to attract the main touring productions unless they commit to large guarantees and higher net box office (NBO) shares which increases the risk for the regional venues . These venues are reliant on one nighters or smaller scale touring plays and their economics are getting very challenging especially where local authorities or ACE are cutting back funding. 

Every production will be a different mix of venue size, cast size and rights deals but as an illustration of the waterfall of funds from the total gross box office (GBO), we modelled a few illustrative smaller scale examples to examine this risk & reward balance. 

The West End Model

In the West End, venues are paid a rental and the contra (the cost of the venue staff working), where shows sit in the venue for longer runs and there is a willingness to pay higher prices, driven by the higher production values and star names. The risk of failure sits mainly with the producer and their financial backers.

A musical with a very modest £2.5m capitalisation (the preproduction costs funded by the producer and Angels) in the West End with weekly running costs of £300k in a venue holding 1500 might recoup the capitalised cost (after TTR) at around 70% capacity over 14 weeks. Of the gross box office income, two thirds might go on production cost, around 15% on venue hire, with perhaps 5% being shared by producers and rights holders. The Angels would get their investment back as it reaches 70% of the financial capacity. The rest of the GBO would be taken by the Government in VAT, Income Tax and National Insurance (between 26 and 30% of the GBO) with a return nearly double the cost of the TTR relief! 

A £1m capitalised play in West End with weekly running costs of £150k in a venue holding 900 might recoup the capitalised costs (after TTR) at around 60% of capacity over 12 weeks. Of the Gross Box Office income, half might go on production cost, around 30% on venue hire, with perhaps 5% being shared by producers and rights holders. The Angels would get their investment back at 60%. The rest would be taken by the Government in VAT, Income Tax and National Insurance, with a return nearly 1.5 times the cost of the TTR relief.

The Regional Tour model.

In regional venues, productions tour with usually one week stays (sometimes longer in bigger cities) and the venues retain a share of the net box office, plus there are the additional costs for the producer of accommodation for cast and crew and the costs of physically transporting and resetting the sets. As a result, production values may not be quite so grand as in West End, cast less glamorous (but equally talented) names and average ticket prices (ATP) lower.

A £0.5m capitalised regional touring play with weekly running costs of £75k in venues holding 900 might recoup the capitalised costs (after TTR) at around 70% of capacity over a 15-week tour . Of the gross box office income, half might go on production cost, around 25% on venue hire with perhaps 5% being shared by producers and rights holders. The Angels would get their investment back at 70% of financial capacity. The rest would be taken by the Government in VAT, Income Tax and National Insurance, with a return nearly 3 times the cost of the TTR relief! 

Some in the industry are reporting that recoupment capacity levels are rising, and a musical tour might need in excess of 75% financial capacity over the tour at £40 ATP to recoup. Of course, longer runs (more time to recoup the capitalisation) or higher ATP’s will change the required financial capacity to recoup.

Regional Producing houses

Some regional venues are bold enough to produce for themselves. Many do an annual pantomime and others such as the Watermill Theatre in Newbury produce all their main shows. The economic pressures are the same but at least the commercial tension between producer and venue operator is eliminated and the shows can be selected to target the audience they know well. It is surprising that more of these smaller regional production houses don’t collaborate to create their own mini tours, thereby spreading the costs of pre-production across a longer run. There is a fear of loss of control, of competing for audiences who travel and the conflicting ethos’ and ego’s of Artistic Directors.But this surely has to be a model to develop more.

Smaller regional Venues are finding the risks of producing much higher post covid and are cutting back the number of productions they undertake each year, leaving more weeks to be filled with one nighters or left dark and hindering audience development. They need philanthropic supporters, or to access trusts and foundations to underwrite the costs and risk of new productions.The lack of funds will hinder young creative development and the nurture of new audiences.

Regional Pantomime

The business of pantomime is critical to many regional venues and subject to the same cost pressures during its 40-60 performance run. Though many pantomimes perform to 80% to 90% capacity audiences, these short runs depend on the amortisation of the set costs across multiple years. The surpluses generated for the venues can represent a third to a half of the annual surplus for the venue and are crucial to its sustainability. They also provide first opportunities for many young performers, not just in the ensemble or supporting roles but often in principal boy and girl roles. Equity pressure to increase pay in these roles with some producers is understandable but if it threatens the generation of surpluses that will support workforce opportunities all year round by the closure or curtailment of the venue from these financial pressures, it may be self-defeating. Once again, the delicate balance between the producers, venue, cast and audiences - who need each other to succeed - can be threatened by unsustainable rises in costs.

Reward to Producers’ Financial Backers

The West End market does, however, remain much cheaper than Broadway where budgets can be 4 to 5 times higher than the UK, requiring higher occupancy over longer runs but making US investors see the UK market as more attractive to invest in.

The traditional split of surpluses after recoupment and royalties on a production is 60/40 between the funders and the producers. This must be sustained and not drift down to 50/50 as on Broadway or else the risk: reward for investors will become even more unattractive and make fundraising for all but the star driven shows even harder.

The Angels return from success with capacity sold over 80% in many models are attractive but we estimate that around one third to a half of productions don’t recoup, some with complete write-offs, so this does balance out against the returns from hit shows. Of those that do not recoup, some lose more than 50% of the original investment emphasising the importance of the higher TTR in mitigating this risk. Of course, post recoupment, the returns to cast and creatives, producers, Angels, and the Government can be exceptional, especially if the show runs longer. There are many tempting examples of the amazing returns from shows such as The Mousetrap, Cats, Witness for the Prosecution but these are the exceptions.

If the illustrative shows played to 90% capacity, then the rights holder, producers and Angels might share the profits, taking their shares of the box office towards 10% each. For an investor at this level of success, that might represent a 30% plus return on their contribution to the capitalisation, much more in longer running shows.

Rising costs of production 

The cast and creatives costs are rising, fuelled by competition from TV and film productions who generally pay significantly higher fees and talent agents seeking larger fees for their clients. The new Equity deal with SOLT for the West End added a 9% rise in April 2023 and another 5% in 2024. The subsided sector deal added 5% and 4% respectively, while the commercial sector deal added 4.4% in 2022 and 5% in 2023 with a larger rise in the touring allowances, although many argue that they are still below the actual costs to an artiste of accommodation and travel on a tour. The higher national wage adds too but this has much more impact on the venue operations. The Covid layoffs meant that many found that they could earn more in other sectors without the work-life balance issues of live theatre and especially touring adding to the competitive pressure to recruit casts and crews. The shortage of technical staff to manage the production is becoming a real challenge for the safe and efficient running of the show. Those who have trained in the last five years have much more limited experience than the pre-Covid graduates and this has added to the shortage of technical staff. There is a real need for the industry to address this gap for these critical roles.

The rising cost base of production includes 100% plus rise in insurance premiums for public liability, property, and cancellation and that does not even cover Covid exclusions. There is a suspicion too that upfront rights and royalties pool demands are rising, perhaps fuelled by the knowledge that both qualify for TTR or reflecting the rights holders view of the higher risk to participating in post recoupment profits. 

The physical cost of a production has risen sharply too, driven by a variety of factors including Brexit, loss of  production capacity during Covid and the impact of rising materials and utilities costs. Some report a rise of up to 50% in costs of material or worst still, the unavailability of materials when needed.

These rising costs add pressure to the fundraising and discourages risk taking on new works when the chance of success on a first outing is much higher. These pressures can only be addressed by the producer by pushing up prices in the West End or seeking more favourable deals on tour, passing some of the increased risk on to the regional venues.

The Theatre Eco System

The challenge is to sustain all of the organisations in the economy. Regional venues have to cover their running and maintenance costs from their share and when producers demand higher guarantees or larger box office shares to tour to a venue, this puts those venues in a difficult margin squeeze which threatens their sustainability. If the venue can’t be confident of hitting 70% capacity, then the guarantees are risky but without them, the producer may not include the venue in the tour.

In the West End, if a production is not selling then the venue may be asked for a rental waiver to keep the show on and the venue is faced with the limited options of either covering its actual costs only or going dark. 

His Majesty’s Treasury

The only sure-fire winner is the treasury so the case for more support for the theatres is very strong, just on the basis of the cash inflows it generates, let alone the wider benefits to the communities’ economies. 

TTR has risen from just £74m in 2020/21 to an estimated £250m p.a. now with higher rates and increased volume of production. This was a simple economic decision for the treasury as the theatre industry drives £2.4billion p.a. of gross value add to the economy (SOLT data), which will drive strong inflows to the treasury of VAT on tickets and hospitality, and Income tax and National Insurance from the workforce. Not only that but those inflows to the treasury occur monthly as the production is mounted, whereas the TTR flows out in the year following the incursion of the costs. This leaves the producers and their financiers to cash flow the expenditure but at least now they have certainty of recoupment for a larger percentage of the capitalisation.

The Digital market

Digital has become a vital means of selling shows with social media platforms and targeted advertising being a very cost-effective means of selling tickets, making the Electronic Press Kit (EPK) a vital tool in attracting audiences. Covid also introduced a wider population to digital streams of theatre. It may not be the same experience as being part of a live audience but for those who can’t afford ticket prices or find the travel too onerous, they give them a similar experience. The cinema broadcasts add to this with the shared experience and enhanced sound systems but the costs of capture including rights and additional payments to cast and creatives seems to be a barrier to more captures. There is no evidence that these broadcasts harm theatre box offices but at present, the costs of capture add to the risk rather than generate additional income to mitigate it.

Impact on Producers’ Financial backers

Producers will be encouraged to undertake work with the permanent enhanced TTR especially with their ability to generate fee and royalty income pre and post recoupment, and ability to lay off funding commitment to supportive Angels while retaining 40% of the post recoupment profit shares. While for those investors supporting them, the risk of non-recoupment has reduced, they retain the exposure to rising weekly operating costs and creative and rights holder royalties based on net box office revenue (NBOR) or weekly operating profits pre-recoupment, which increase the required financial capacity required to recoup.

With each investment by an individual being treated separately for tax purposes and no offset of losses of one production against the profits of another, the investment in productions as a financial investor remains risky, requires a philanthropic attitude to losses and creates the challenge of picking winners based on a short prospectus.

The best solution for Angels is a portfolio approach to investment in productions with a producer with a strong track record. As with any investment strategy, the portfolio diversifies the risk and increases the chances of backing a winner which will offset the less successful shows. Fiery Dragon recently announced a new opportunity to invest in a portfolio of future productions though Fiery Dragon II. This will build on the success of the original Fiery Dragon raise in 2011, around the staging of the hit show The Ladykillers, which has been very successful.

The next articles will look at venue operations, audience development and green issues, which will also materially impact on the success of shows from producers and their financial backers.

Nick Wayne

Nick has been involved in Producer and Venue Organisations for twenty-five years, seen over 1200 productions, visited over 160 of the UK Venues and directly invested in over 30 West End Productions.