As Broadway booms, why do most shows still lose money?

The Great White Way is awash in cash, as Broadway shows like the mega-hit "Hamilton" sell more tickets than ever. But four out of five theatrical productions lose money, a failure rate that has remained unchanged for years. Given the torrid box-office sales, how could that still be so?

If you invested in "Hamilton," of course, you have nothing to complain about. With 16 Tony nominations, the white-hot musical is expected to sweep those awards, Broadway's answer to the Oscars, on June 12. The hip-hop-themed extravaganza about founding father and first U.S. Treasury Secretary, Alexander Hamilton, has earned investors back their money several times. And it promises to deliver an earnings stream for years to its 100 investors.

By the reckoning of the Broadway League, the theater industry's trade group, the last season (2014-2015) racked up a record number of playing weeks, 1,626. That's the standard gauge of how long all the productions ran. Broadway-goers bought 13 million tickets last season (the 2015-16 season isn't quite over), up from 11.5 million in 2004-05 and 7.3 million in 1984-85.

"Hamilton," the most coveted ticket on Broadway -- it's sold out until next year -- churns out $500,000 in profit every week, with about half of that going to investors. The rich returns aren't confined to New York, as the show is branching out. A touring company will take it nationwide in 2017, with another production opening in Chicago for a long run and potentially one in London. That's also the happy fate of such successes as "The Lion King," "Phantom of the Opera" and "Book of Mormon."

But these are the exceptions. Of the 80 percent of shows that don't make their money back, most fold up with little notice. Then there are lavishly produced flops whose failure makes the news. That's particularly true when they feature big names. Rock star Sting's $15 million show, "The Last Ship," closed last season after 17 weeks of playing to small audiences. Even when he joined the cast, Sting's fame wasn't enough to turn around the show.

The biggest money-loser of all time was "Spider-Man: Turn Off the Dark," which cost $75 million to mount, featuring elaborate special effects and dangerous acrobatics. The superhero may have scored well in the movies, but the appeal didn't extend to the stage sufficiently to keep it spinning. While "Spider-Man" attracted crowds of tourists at the outset, the audience was never big enough to justify the enormous expenditures. It closed in early 2014.

"Spider-Man" illustrates, in an extreme fashion, why the old constant of a 20 percent success rate has remained unchanged: As Broadway revenue has surged, so have production expenses.

Adjusted for inflation, Broadway expenses totaled $156 million in 2000-01 and $200 million last season. Theater producer Ken Davenport ("Kinky Boots," "Spring Awakening"), who writes a celebrated blog called the Producer's Perspective, says the escalation stems from at least three sources:

Theater rentals. The costs of renting a theater have risen. The number of major theaters, those seating at least 500, is limited: Broadway has 40 of them, and competition is intense to book one.

Labor costs. These have climbed, as well. While organized labor is in retreat across much of the U.S., stage unions remain robust in New York. Labor makes up half the production budget.

Marketing expenses. More shows result in more competition to get noticed. With additional competition from the likes of Netflix, video games and other forms of entertainment, "you really need to get in people's faces about the theater," Davenport said.

Plays cost $2.5 million to $4 million. Musicals cost more, ranging from $6 million to $16 million. They involve more actors, an orchestra and elaborate scenery. They're also more popular, especially with tourists.

Given the steep odds of getting back an investment, why would anyone want to put money into the theater? "A financial adviser will tell you Broadway is a terrible idea to sink your money into," said producer Jim Kierstead ("Waitress," "Pippin"). "We have a number of very popular long-running shows on Broadway, at the moment, which get a lot of attention, making it more difficult for some of the others to find an audience."

Despite the risk, people keep on plunking money into shows -- the minimum is around $25,000 -- because they love the theater. This is much like going to a casino: You know you'll likely lose, but you'll have a fun time doing it. Investors get to attend opening-night parties, can bring friends and clients to their production and have great bragging rights.

Moreover, due to the rise in the number of shows on Broadway, investing in one is easier to do. Time was, you had to be connected because theater investing was confined to an elite crowd. Today, a number of producers -- they're the people who run the business side and gather the capital -- accept outside investors, as long as they are "accredited." This legal term means they have at least $1 million in net worth, not counting their residence, and earn $200,000 or more yearly.

And there's even a crowdsourcing venue that doesn't require you to be an accredited investor, as the amounts are small. Indiegogo lets you put in small amounts and in return you receive, not money, but swag like a script signed by the playwright. It raised $150,000 for "Star Trek" actor George Takei's play, "Allegiance," about his time in a World War II internment camp for Japanese-Americans.

Still, as the old song goes, there's a broken heart for every light on Broadway. That's the one aspect of the theater that won't change.

The 70th annual Tony Awards air on CBS this Sunday at 8 p.m. ET/7 p.m. CT.

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.