Theater Economics

There are two basic financial statements with which writers and their representatives need to be familiar with to understand how playwrights are paid for their work in the theater: “production statements” and “weekly operating statements.”

The production statement describes how the money raised for a show – the “capitalization” – has been spent prior to opening night. The permissible “production expenses” are defined in the Guild’s Approved Production Contract, originally negotiated with the League of American Theaters and Producers – the agreement known as the “APC.” The APC, and its definitions, have become the industry standard. [See APC Section 4.04(b) following this article.] 

The weekly expenses a show incurs after it opens are called operating expenses, or running costs, and these are also defined in the APC [See Sidebar of APC, Section 5.01(a) on page N7], and are provided to the writer in a document called a weekly operating statement. Often, these weekly operating statements are prepared on a monthly basis, so that each such statement will usually report on a four-week performance period.

These two documents formed the basis of our seminar on theater economics, as we walked through sample forms of these documents, line by line, and described our many and varied experiences about how producers and their general managers represent their revenues and expenses to investors and royalty holders. We also discussed the interrelationship between the two documents, as well as the current developments in these reports, and the differences that exist for touring productions.

Once upon a time, all a writer cared about is gross weekly box office receipts – the total dollar amount coming into the box office. That’s because writers used to be paid a royalty based on gross – and gross only. Today, especially with Broadway musicals, it is not at all uncommon for all the “creatives” – writers as well as directors, designers, choreographers, and producers, too – to be paid a flat weekly guarantee as an advance against “weekly net operating profits,” instead of gross royalties. The rise of the “profit pool” [See the Newsletter article “An Analysis of Profit Pools” in the April 1994 issue.] means writers now get paid on “the net” instead of “the gross” and, so, has necessitated a greater level of awareness of what producers claim as expenses and a greater sophistication in negotiating such deductions.

However, the issue of “weekly profits” aside, even an author being paid a gross royalty must be aware of production expenses, to understand when a production has recouped those expenses and, accordingly, the author becomes owed a greater royalty rate. Under the APC, for example, when the producer recoups its production expenses, the author’s royalty for a play increases from 5% to 10%, so knowing at what point “recoupment” occurs is essential information.

Should writers concern themselves with these issues? Mostly, I think not. Writers need to concern themselves with writing. Frankly, most of the information discussed at this seminar was technical and of interest primarily to agents, lawyers, general managers, and accountants. Therefore, it would be best, for the most part, for writers to raise their specific questions about these financial statements with those best qualified to advise them. Still, there are specific issues of such universal import for the industry that writers would be foolish not to pay attention to them, and the principal economic issue facing writers today can be summarized in one word: “amortization.” It is a Hydra with many heads, and it insinuates itself throughout the financial documents in many guises.

First, a little background. It used to be that a writer wrote a work, spending years of his/her creative life facing an empty page or stave to create a new play or musical. A producer came along and, inspired by the writer’s vision, raised the capital and hired the personnel to make that vision a reality. The writer risked years of his life, without any promise that anybody would even want to read what had been written, much less pay for the privilege of presenting it. The producer risked money usually from other people – hence the phrase “other people’s money.”

Now, along comes amortization. It is a device, adapted from other types of entrepreneurial ventures, by which the producers shift some of the economic risk of producing back onto the artists, who’ve already taken the risk in creating the work. They do this by taking back for the investors certain moneys before paying royalties, to ensure a quicker return on investment.

For example: let’s say a production statement shows that a musical cost $8 million. The producers may try to get that amount back by taking, say, the first $100,000 in profits for eighty weeks, before anybody gets a share of the remaining weekly net operating profits – if there is any left. For all practical purposes, those in the profit pool will be making only their minimum guarantees, as the investors are paid back first. Here, the author has been transformed into a guarantor of the show’s investors.

Amortization was first presented on touring shows, where the length of the tour was known ahead of time – unlike open-ended Broadway productions – and the price of mounting the tour was minimal in comparison to a major “sit down” (i.e., non-touring) production. Even with these known quantities, there can be major abuses on tours with outcomes not contemplated by authors until it is too late.

For example: a tour producer will sometimes try to get an author to agree to amortization and yet offer the author nothing for agreeing to it – in the form of either substantial advances, over-scale weekly minimums, net profit shares, or all the above. The producer may also try to employ a profit pool on the tour, where the pool is not applicable against the total box office but merely from that portion of it paid to the touring company. “A pool on company share,” then, is commonly understood to be a pool on a pool – and not common practice. When you add in the amortization factor well, sometimes you might as well just stay home for all you’ll earn under those conditions.

Please permit a digression: Since a touring producer’s documents will often show little indication of profitability or even any potential for profits, why do producers mount tours, anyway? Because many tour producers have taken a lesson from Hollywood and are not only producing the tour. They are (1) managing the tour; (2) booking the tour into theaters on the road; (3) owning, in whole or in part, many of the theaters on the road; (4) paying a royalty to the originating producer – which they either are or are a part of; (5) paying themselves a royalty as the tour producer; (6) taking a “cash office charge” for each of their roles in the production – as producer of the Broadway production, as producer of the tour, and as a general manager – to cover the same items of expense three different times; as well as (7) taking each separate item of expense as an itemized deduction on the operating statement; plus (8) earning whatever profits the tour might generate.

In this fashion, just as Hollywood studios don’t have to have a film show net profits to earn a lot of money for a studio, a tour producer can do well without ever breaking even on paper. Now that producers think they can also build their recoupment of the production expenses into the weekly expenses – through amortization – the only question one can ask is: Why would a producer not mount a tour?

Such amortization factors are rarely certified by the Guild as part of an APC for the Broadway production, except in the most particular circumstances. Even where such amortization factors have been approved, any decrease in the royalty the author would otherwise have been paid is treated as a “deferral” – and not as a waiver of Guild minimum guaranteed royalties. The author is made “whole” for the amounts deferred with large upfront advances, substantial over-scale weekly minimums, additional percentages of net profits, and a reduction in producers’ future subsidiary rights revenues until author is made whole  and then some.

However, let’s mention one form of amortization that has crept into operating statements without anybody’s approval: “closing costs.” These are the expenses inherent in closing a show – taking out the sets and lights, etc. Historically, these expenses – while technically occurring after opening night – were considered production expenses incurred as a necessary consequence of opening a show and were given either a line in the production budget or paid out of a maintained “reserve fund” in the production budget.

In recent years, some managers have concluded that, without regard to custom and established practice, since closing actually takes place after “opening night,” it does not have to be treated as a production expense. They then proceed as if this assumption were true and, without notice, consent or discussion with authors, amortize a totally arbitrary amount per week as an allocation toward closing costs. So, rather than having to raise the initial capital to open and close a show, they are raising just enough to open the show and then reducing weekly profits – in whatever weeks they choose and in whatever amounts they choose, thus having the creatives foot a portion of the bill – to pay for the show’ s closing.

Sometimes, they take a very small amount, and it has little economic impact on the author, but if the amortized expense is such that it pushes a playwright from receiving, for example, 10% of gross in a profitable week to making $1,000 for a “losing week,” then the impact can be enormous for the author. 

One obvious solution would be to allow producers to treat the closing costs as a weekly expense in the week that the show actually closes, and it's hard to argue with such a position. However, be aware that closing weeks can be very profitable, as people try to see the show before it leaves, and a producer can wipe out a hefty royalty that week with such a practice.

At the conclusion of the seminar, there was an enthusiasm by all involved for learning about such new developments and a commitment to meet again next season and keep each other apprised of the ongoing efforts undertaken to more effectively represent writers for the stage.

PRODUCTION EXPENSES 

SECTION 4.04 (b) For the purposes of determining Recoupment of each Company, the costs incurred in presenting a Company shall include the following “Production Expenses”: fees of designers, directors, general and company managers; cost of sets, curtains, drapes and costumes; cost or payments on account of properties, furnishings, lighting and electrical equipment; premiums for bonds and insurance; unrecouped option and advance payments to persons other than Author; rehearsal charges, transportation charges, reasonable legal and accounting expenses, advance advertising, publicity and press expenses and other expenses and losses actually incurred in connection with the production and presentation of the Play up to and including the Official Press Opening of such Company and all sums described in SECTION 6.01(b) herein to be paid, as Production Costs, to a third party who presented the Play in the Territory as a Developmental Production or as other non-First Class Performances; but there shall not be included any compensation paid to Producer or to any person rendering the services of a producer other than a cash office charge not to exceed $1,500 per week (regardless of the amount actually paid) commencing 4 weeks before the opening of rehearsals and continuing until the Official Press Opening of the Company and other than Producer’s Royalty (as defined in SECTION 5.13 herein). No amounts charged as Production Expenses shall be charged again as operating expenses, or vice versa.

OPERATING EXPENSES

SECTION 5.01 (a) For the purposes of this Contract, the term “Weekly Breakeven” shall mean, for each Company presenting the Play hereunder, the operating expenses of such Company for each Performance Week as set forth in the accounting reports as customarily prepared by the accountant engaged by Producer. For the purpose of determining Weekly Breakeven, operating expenses shall consist of the following: $3,000 of Author’s Royalty (regardless of the total Royalty actually paid to Author), compensation paid to the cast, director, stage manager, general and company managers, press agents, orchestra, and miscellaneous stage personnel, transportation charges, weekly cash office charge not to exceed $1,500 (regardless of the total cash office charge actually paid to Producer), advertising, press and publicity costs, legal and accounting expenses, the costs of exhibiting television commercials, theatre guaranty and expenses, rentals, miscellaneous supplies and all other reasonable expenses of whatever kind actually incurred in connection with the weekly operation of the Play, as distinguished from Production Expenses, but not including any compensation to Producer or a person rendering services of a producer, other than $1,500 of Producer ’s Royalty, or any money paid to Producer by way of a percentage of the Gross Weekly Box Office Receipts or otherwise for the making of any loan or the posting of any bond, or any sum paid by Producer to any trade association of producers and/or theatre owners.