The new song of Broadway

The entertainment buzz this summer doesn't just center on how many million more boys will watch the "Transformers" sequel or how many million more songs Michael Jackson can sell posthumously. For certain showbiz cognoscenti, eyes are on another kind of potential blockbuster -- don't laugh -- the adaptation of the "Spider-Man" franchise as a Broadway musical. "Spider-Man: Turn Off the Dark" is due to open early next year, with easily the biggest production budget ever, a multimillion-dollar theater renovation to accommodate the pyrotechnics and with U2's Bono and The Edge writing the music. Sony Pictures Entertainment Inc. is a financial backer as is Marvel Comics.

"Spider-Man coming to Broadway reminds me of the 'Titanic' movie. Everyone said it would be the biggest disaster ever," says Ken Davenport, a theater producer who also blogs about Broadway. "We don't know what it's going to be, or how it's going to do at the box office. ... I think it's unprecedented. There's a possibility it could be bigger than anything we've ever seen."

Hollywood's business attracts widespread fascination and incessant interest. Broadway economics, by contrast, has the feel of inside baseball. Outside perhaps that piece of real estate that stretches for a dozen blocks or so on Manhattan's West Side, the theater business is as much subject to snickering about widows and pensions -- read, "The Producers" -- as to real analysis.

Adding to this kind of shady reputation these days is the case of Canadian impresario Garth Drabinsky. He is scheduled this month to be sentenced for up to 10 years in prison after being convicted of fraud in March. In the 1990s, Drabinsky bilked investors out of almost $500 million in his publicly traded theater production company, Livent Inc. The company claimed big profits when it actually incurred oversized losses.

Even among many in entertainment, Broadway has the feel of an analog cottage industry in an age of digital conglomerates. "Movies are just sexier," says New York entertainment lawyer Jason Baruch. "In that sense, theater is considered the ugly stepsister of the film industry."

Yet contemplate this: The single-most successful entertainment property in history isn't "Titanic," "Star Wars," "The Lord of the Rings" trilogy or even the entire "Harry Potter" movie franchise, at least to this date. Rather it's a live musical production that revolves around a disfigured musical prodigy who inhabits the catacombs of the Paris Opera House.

"The Phantom of the Opera" has grossed more than $5 billion since it opened in London in 1986, according to its producer, composer Andrew Lloyd Webber's Really Useful Group Ltd. "Phantom" is by far the longest-running show on Broadway, where, in more than 21 years, it has grossed upward of $800 million and displays little evidence of slowing down.

Take the Great White Way's other giant, the Walt Disney Co. The live version of "The Lion King" has grossed more than $3 billion, with eight productions now being staged around the world. While Disney doesn't break down revenue figures, Disney Theatrical Group executive vice president and managing director David Schrader says his operation garners "consumer spending" of about $1 billion annually. "It's a reasonably sized business," he says, and for Disney, he adds, "profitable."

Broadway, particularly the Broadway musical, shines a light on this peculiar corner of the entertainment economy. True, some of the financial mechanics remain little changed since the time when foot-tapping productions from Rodgers & Hammerstein, Cole Porter and Lerner and Lowe first burst on the stage. But media conglomerates, institutional investment and globalization are all attempting to work their alchemy. They are helping to reforge this niche business that is, in fact, a lot bigger and a lot more complex than meets the eye.

"The nature of the Broadway musical has evolved," says Gordon Firemark, a Los Angeles-based entertainment lawyer.

For the Broadway season ended May 24, ticket sales totaled a record $943 million, according to the Broadway League. "We have had the most extraordinary season," marvels veteran producer Susan Quint Gallin. "I'm amazed." Quint Gallin admits she purposely took a pass on the spring. "I was worried about the economy and afraid to go to investors."

Broadway touring companies felt the bite of the economic woes more intensely. They grossed $883 million, down from 2007-2008, which grossed a record $955 million.

Add to that perhaps an additional $1 billion in overseas sales of Broadway productions, which is proving to be a huge growth market. ("The Lion King" has so far played in 11 countries and been translated into 
five languages.

Three billion dollars represents a tiny fraction of film's global revenue, which last year eclipsed $80 billion, and just one-sixth of fast-declining recorded-music sales. But it's still an important entertainment component. "When it works, it really works," says Seth Gelblum, a veteran theater lawyer and New York-based partner with Loeb & Loeb LLP.

In April, the value of the Broadway musical went on public display. The Netherlands-based Imagem Music Group CV acquired Rodgers & Hammerstein's extensive music catalog, along with the company administering performance rights. Imagem acted on behalf of a Dutch pension fund. No price tag was given, although those in the industry put the transaction at around $200 million.

Bankrolled to the tune of €525 million ($734.68 million) by Stichting Pensioenfonds ABP, Imagem has been aggressively buying up music catalogs since it was formed in early 2008. At the time of the Rodgers & Hammerstein acquisition, Imagem CEO André de Raaf raved about being able to hold copyrights to a major chunk of the American songbook, which throws off a perennial revenue stream most copyright holders can only dream of. But in a more recent interview, de Raaf marveled as well about the intrinsic value of performance rights to Rodgers & Hammerstein's amazing stable of musicals, which include "The Sound of Music," "Oklahoma" and "South Pacific."

"Theater rights are extremely important, nearly 50% of our revenue," de Raaf says. While Broadway revivals grab attention, much more critical to income generation is the licensing to community theater and school productions. "We're finding out all the various ways of exploiting the theatrical business. It's only made us more excited."

The Rodgers & Hammerstein Organization also administers North American performance rights to the Lloyd Webber catalog. De Raaf says he's met with Lloyd Webber "several times" and is hopeful for "greater cooperation," not specifying what that might entail.

Lloyd Webber's empire rivals any in the theater today. It also illustrates the somewhat singular nature of the musical-oriented company. Privately held by his Really Useful Group, this treasure trove includes the underlying rights to music from previous Lloyd Webber hits -- including "Cats," "Evita," "Jesus Christ Superstar" -- as well as the revenue thrown off by "Phantom" and whatever other productions are mounted around the world. Earlier this year, Lloyd Webber announced he will stage a sequel to "Phantom."

Lloyd Webber has a history of selling stakes in his own company only to buy them back. In 1986, the company went public. Lloyd Webber, spooked when media baron Robert Maxwell and Australian financier Robert Homes à Court started buying up shares, took the company private in 1990. A year later, Lloyd Webber sold a 30% stake to Polygram UK, a unit of Royal Philips Electronics NV, but acquired it back seven years later when Seagram Co. bought out Polygram.

In 2000, his group established a 50-50 joint venture with what was then known as NatWest Equity Partners. (It became Bridgepoint Capital Ltd.) The venture paid £87.5 million ($142 million) for 10 theaters and a ticketing agency. In 2002, Really Useful Group shelled out a further £13 million for another 
ticketing agency.

Then, in 2005, Lloyd Webber put the Really Useful Group on the block. At the time, financial adviser Ingenious Media plc -- its chief executive, Patrick McKenna, spent most of the 1990s as Really Useful Group's chairman and CEO -- put the asking price at around £500 million. What happened next is the stuff of continued speculation and theater lore. Michael Grade, chairman of the British Broadcasting Corp., headed one consortium of bidders. Another was never identified. In a long profile in the Sunday Times in late 2005, Lloyd Webber questioned the asking price, saying it was "wildly overvalued." This wasn't exactly the wisest of sales strategies and most likely a case of seller's remorse before the sale.

In the end, Lloyd Webber not only held on, but he bought out Bridgepoint for an undisclosed amount.

Talk of a possible sale or an equity offering periodically crops up, although Lloyd Webber's unpredictability, along with his previous track record, stands in the way. Also, some industry insiders now believe the composer-impresario may have been right in his 2005 assessment and that the group isn't worth a billion dollars. So saying, the Sunday Times Rich List estimated Lloyd Webber's worth at £750 million. He actually placed ahead of that other British tunesmith, Paul McCartney.

Imagem's move once again raises the question of whether institutional money will become more common on Broadway. Fund managers "now talk about it. I get a lot of calls, but it's difficult," says Baruch, whose father is one of Broadway's most prominent producers. "I've seen a few funds, although not in the way the movie industry has tapped into them. Broadway hasn't found a way to tap into them."

Part of it is scale. The average Broadway musical these days is capitalized at somewhere around $15 million. That's not the kind of money to get many institutional juices going. It's not even in the same ballpark as the typical studio movie projects. "For a filmmaker, 15, 20 million dollars is nothing. They won't do a meeting for that kind of money," quips Schrader.

Part of it is structure. Unlike their attitude toward film financing, banks won't lend against a stage production. Unlike film, a Broadway production requires significant operational costs, maybe $500,000 to $750,000 a week. That means a play could spend almost two years on Broadway, gross upward of $1 million a week, which would put it in the top 10 draws, and still not recoup its capital. It must rely on tours and licensed productions to make a profit.

Some see Broadway as a necessary stop or expense, more a marketing tool than a profit center. "Not exactly a loss leader," says Jean Ward, an entertainment partner with Frankfurt Kurnit Klein & Selz PC. "You don't expect to make as much money on Broadway as on the road."

Also, some high-profile institutional investments haven't exactly been box-office boffo. Transamerica Capital Inc., for example, began bankrolling some musicals in 2003. Three years later, it put up half the money for a musical called "Hot Feet." The marquee read: "Transamerica Presents Hot Feet." The show closed after three months. The entire $8 million investment was wiped out. While a Transamerica executive attempted at the time to justify the experience to The New York Times as a "branding opportunity," the company hasn't been heard of since.

There is some institutional movement. "It's starting," says Davenport, who says he has two unnamed hedge funds on tap. Each invested $500,000 into a basket of projects.

He claims of the eight shows he's produced on and off Broadway in the past four years, seven have recouped their investment and returned investors 30% to 40%. "One of my missions is to get more aggressive with funds," he says, likening the process to venture capital. "I'm selling the notion of theater as an alternate investment class."

The traditional economic model for Broadway is essentially a limited partnership. It has remained remarkably durable over several decades. A lead producer attempts to finance a show. Since credit markets are tight, the producer taps investors, almost all of whom are high-net-worth individuals, for cash. After expenses are covered, investors are repaid. If the show lasts long enough, and after investors are fully made good on their investment, producers and investors split the profit.

Broadway's financial community can be ingrown. "Individual investors are still the same old people, the same cast of characters," says Ward. "Now they have their kids doing it," adds Mark Merriman, Ward's associate at Frankfurt Kurnit.

There's some evolution. Baruch's father, Steven, was a master of assembling hundreds of investors who would throw in $10,000 each. Those days are largely -- although not totally -- over. Now it's more typical for a producer to chase investors willing to put in at least $250,000. That has resulted in a proliferation of producers, who are actually just bigger investors. "Nowadays, producer credit is traded like candy," says Jason Baruch. Investments of 5% to 10% of the total budget can mean an "above-the-title credit." That's why producer scrums are common on awards night.

"That cast of 14 people running up to collect their Tonys? They've invested money," says Merriman.

Depending on whom you talk to, the success rate on Broadway is 10% to 20%, which means of the 30 to 40 new shows produced each season, maybe a handful will end up profitable. Even moderate hits don't necessarily recoup investment on the Great White Way. So, producers say, it's necessary to place bets on a number of shows. "If you were to invest in several different shows with reputable producers, there's a good chance a few will do well, a couple won't and you'll do OK," says Quint Gallin.

Disney upended the limited partnership model, both producing and self-financing musicals as part of a public company. That means the only investor Schrader's group has to satisfy is the head office.

For some purists, Disney's Broadway assault is like allowing barbarians to picnic inside the gate. The Broadway establishment, including some critics, first scoffed when Disney mounted a live musical out of the animated film "Beauty and the Beast" in the early 1990s. Then they huffed at the unprecedented success.

But there's little question that "Beauty and the Beast" and its progeny are huge draws for families and tourists, which now form the bulk of Broadway ticket sales and fill most seats. "I'm grateful," says film and theater producer Michael Alden. "It puts the 10-year-old in a live theater. It creates the audiences of tomorrow."

On a recent Wednesday afternoon, a raucous din envelopes the entrance to the storied New Amsterdam Theatre on 42nd Street. Both parents and ushers attempt to herd groups of kids inside. Another matinee performance of "Mary Poppins" is about to begin.

Schrader sits in a glass office on the top floor, eight stories up, in a part of the theater that once staged Ziegfeld's Midnight Frolics. (The glass catwalk is now frosted.) Disney's theatrical group started modestly, Schrader explains, but began to ramp up when the long-term success of "Beauty and the Beast" 
became apparent.

"We backed into the notion that if we owned the copyright, we should look at what are the different ways to exploit it," says Schrader, dressed in blue jeans with elaborate stitching and an open shirt.

"Traditionally, show rights revert back to the author. We are the author."

That exploitation has meant touring companies and licensed offerings, everything from glittering spectaculars in Tokyo or Seoul to modest high school productions. ("Beauty and the Beast" and "High School Musical" rank as two of the top titles for high school productions.)

Then there are ancillary products. Merchandising adds a further 10% to the revenue mix, Schrader says.

Only 10% to 15% of total theater revenue comes from Broadway itself. In the case of "High School Musical," Disney avoided Broadway completely. The first production was mounted in a summer camp in the Catskills, then a theater in Atlanta, then a touring company. "Disney figured out a model of how to turn a huge amount of income without ever coming to New York," says Baruch. "'High School Musical' is a template for the stock and amateur world."

Disney's successful transformation of movies into musical theater hasn't been lost on other studios. Universal Studios invested in "Wicked" after it opened and became this decade's runaway hit. In an act of Disney wannabe, Dreamworks conceived and bankrolled the current production of "Shrek the Musical."

If there's one dominant trend these days, it's the musical theater adaptation of film or television. Witness this year's Tony Award winner "Billy Elliot," which began in London and was co-produced by Working Title Films Ltd. and Universal Pictures Stage Productions. But also look at some upcoming offerings: "Little House on the Prairie, the Musical," "The Addams Family, the Musical," "The Nutty Professor, the Musical."

The list seems almost endless and at times very silly.

If anything, expect even more. "They're known brands," says Firemark, who works in both movies and theater. "Film-based properties seem to be the trend. Big blockbusters are based on these underlying properties."

"Studios to a greater or less degree are now in stage productions," adds Gelblum. Studios "see them as extremely valuable, like a sequel to a film or a TV series."

It helps in valuing their properties as well. In early 2002, Metro-Goldwyn-Mayer Inc. announced its MGM on Broadway division. Since then, the studio has licensed Broadway productions of "Dirty Rotten Scoundrels," "Chitty Chitty Bang Bang" and "Legally Blonde" and has said publicly it's looking to license a whole lot more. Some cynics believe this tactic helped give the studio cover for a bigger valuation when it put itself up for sale a few years back. "Their investment bankers were looking for some incremental income," says one skeptical entertainment executive.

MGM was sold to Sony Corp., Comcast Corp. and some A-list private equity players for $4.85 billion in cash in September 2004.

The film-to-musical model doesn't guarantee a winner, however. For every "Lion King," there's a stinker like "Carrie: The Musical." This 1988 offering closed after five performances and earned the instant sobriquet of the biggest Broadway flop of all time. (At the time, its $8 million budget was considered astronomical.)

Neither does studio participation ensure success. Take "Lestat," the first -- and so far only -- offering from Warner Bros. Theatre Ventures. Based on Anne Rice's "Vampire Chronicles," "Lestat" barely lasted a month. Warner Bros. Theater Ventures disappeared with it, although its head, Gregg Maday, told a college class last year in a seminar captured on YouTube that he will produce a stage version of "A Star Is Born." (Nothing has happened since. Lloyd Webber at one time owned those rights as well.)

Even Disney isn't bulletproof. "The Little Mermaid" will close on Broadway Aug. 30, 20 months after opening. It should eventually turn a profit, but Broadway hasn't carried the play the way it has "Beauty" or "Lion King."

"Spider-Man" will test the limits as to how much a huge movie blockbuster can translate into Broadway ticket sales. While the producers are mum on the topic, the play's budget has blown past $40 million, or more than twice what previous Broadway blockbusters have run up, according to a number of industry sources. The cavernous Hilton Theater is undergoing a $7 million renovation, according to industry scuttlebutt, and running costs will be upward of $1 million a week. Only Bono knows how much the music will cost.

"If they deliver, all bets are off," says Schrader. "By normal Broadway standards, it's insane."

This is especially tricky because Spider-Man movies are aimed directly at the hearts of teenaged boys, not exactly known for their collective love of the Broadway musical. The hope? This comic-book blog posting: "I hate musicals. But I know if I could, I'd go see it."

David Shor has acquired companies. He has advised businesses. He's produced a DVD movie with Dave Barry. Now the Santa Barbara, Calif.-based financier is trying to turn "Sleepless in Seattle" into a musical.

Shor partnered with Jeff Arch, who wrote the original script of the movie. They spent three years attempting to obtain the rights. Arch wrote the original script. "Sony at first said no way, Shor says. "Then they changed their mind." According to Shor, Sony not only agreed to the rights deal, but agreed to put in 50% of the production costs. Shor says the musical will cost about $15 million.

"We're learning the business of Broadway these past six months. It's been an eye opener," says Shor. "Things are done differently. The titles may be similar to the movie business. The formulation is different."

Shor says he's raised $750,000 in front money and is now ready to approach co-producers. He wants to open on the road on Valentine's Day, 2010. "From a financing standpoint, it's similar to, but a different model from, film: The first dollars are the hardest ones to raise. The first dollars were our dollars. I supported a legal team for three years. I wasn't going to take anyone's money until I had a deal. Now I'm able to take a breath. I'm comfortable going to outsiders."

Shor has already suffered a creative setback, however. He hired veteran Broadway composer Leslie Bricusse, best known for "Stop the World: I Want to Get Off." Bricusse penned and recorded 19 songs only to be dumped by the fledgling producer. "We decided on a different direction, a much more contemporary composer-lyricist," Shor says. At the same time, he's looking at populating his shows with songs already recorded.

That musical uncertainty -- and the fact that Bono's name figures prominently in the Spider-Man credits -- underscores two interwoven long-term production trends. Rock and pop are overtaking classic show tunes. So-called catalog or jukebox musicals are proving big draws. "Mamma Mia!," which features the songs of Swedish bubblegum artists Abba, remains immensely popular a decade after opening. (It was reverse-engineered into a successful movie last year.) "Jersey Boys," built around the 1960s pop group The Four Seasons, looks to be an equally powerful moneymaker three years after its debut. With its shameless appeal to baby boomers and anyone else with a Jersey attitude, Jersey Boys is a huge draw on both Broadway and in Las Vegas, which has emerged as a hugely profitable outpost for popular musicals. (Disney invested in both "Mamma Mia!" and "Jersey Boys.")

As costs rise, producers understandably grab at tried and tested formulas. However, those in the business swear musical theater has a long way to go before Broadway compares to Hollywood, with its create-by-committee ethos. And for each predictable hit, there's a surprise success, the anti-blockbuster blockbuster. It seems each season produces a new, unexpected wrinkle on the old musical. One year it's "Avenue Q," with its potty-mouthed puppets. Another year, it's "In the Heights," with its Latin, hip-hop fusion.

Composer Neil Bartram and writer Brian Hill plop down at a table in a Starbucks on Park Avenue, just up from their apartment. Nine years ago, they had an idea for a musical, an unassuming show about two friends. Last March, they realized the impossible dream. "The Story of My Life" opened on Broadway, a modest $5 million production.

Just as quickly, the dream shattered. "The Story of My Life" closed after five performances.

"We were shocked. We really thought we were onto something. But the day after opening, the New York reviews came in, and they were not good. The producers immediately announced they were closing," says Bartram, who tries to understand the decision. "February felt like a different economic time than now. There was panic. Everyone felt like the trap door would open. All conspired to make it a desperate decision."

However, that isn't the end of the story. "A cast recording was released in June and is selling like crazy," says Hill. "Maybe it has mystique.

"We're the new Cabbage Patch doll," quips Bartram.

Now, with the recording as a marketing tool, the two are looking for touring productions and believe they stand a good chance of success. "We want to be aggressive with an existing property and make money," says Bartram. "The truth is, there's some sense of vindication.”

The two reflect on their journey. "We may not have gone down the road we wanted. It would have been nice to run for six months," says Hill.

"Or a week," interjects Bartram.

However, the composer concludes, "there's life beyond Broadway." Sounds like a song.