A Risky Business Get Riskier

The slow burn of the 'off and on' pandemic makes for a tricky time for many businesses that depend on crowds... While COVID-19 is still out there, unlike this time last year, there are options for risk mitigation... so everything is open. There's also the unfortunate realization creeping in that this thing isn't going to […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] A Risky Business Get Riskier By Berna Barshay The slow burn of the 'off and on' pandemic makes for a tricky time for many businesses that depend on crowds... While COVID-19 is still out there, unlike this time last year, there are options for risk mitigation... so everything is open. There's also the unfortunate realization creeping in that this thing isn't going to go away so fast and is likely to become endemic, which has many people resuming their regular activities. For better or worse, most people and businesses are learning to continue as they did in the time before the pandemic. With the wide availability of vaccines and better therapeutics – and hopefully even better therapeutics just around the corner – stadiums, arenas, theaters, concert halls, and movie theaters have all returned to their normal programming with few, if any, restrictions. But venue-based entertainment requires spaces to be pretty full to make money. The attendance level to breakeven varies a lot depending on the type of event... For example, breakeven will be much lower for a movie theater than a Broadway show. Venues that only breakeven with high attendance might suffer if even a sliver of the dedicated audience stays away because of coronavirus fears. This made people worry about how things would go when Broadway reopened... When theaters once again swung open their doors this fall after an 18-month pause, international travel restrictions were still in place. The local-dwelling Broadway audience also skews older... would that cohort – more at risk for COVID-19 complications – come back? Broadway economics look a lot like those of the venture capital business... A few giant home runs offset a whole bunch of wipeouts. While Broadway has three shows that have topped a billion in revenue and counting – The Lion King, Wicked, and The Phantom of the Opera – and several more that have generated billions as franchises playing around the world, most shows never become profitable. In a recent deep dive on Broadway economics, business site The Hustle notes... On Broadway, 80% of producers and investors struggle to recoup their investments, a number that has stayed consistent since at least the 1960s. Almost everyone agrees tickets are too expensive, yet slashing prices would almost certainly lead to greater failures. While any individual Broadway show is likely to be a bust for its investors, the overall industry enjoyed fantastic growth for the 35 years leading up to the pandemic, with revenues up every year. Take a look...  Source: The Hustle Total industry revenues up every year for the market but lots of wipeouts for investors? Investing in Broadway is sounding more and more like investing in tech startups! --------------------------------------------------------------- Recommended Links: [Divided States of America]( 30 states have legal access to an exciting way of wealth generation, but tens of millions of Americans are still being denied. With $516 billion at stake... it's just not fair. One option for these Americans is to cross the borders, make money, and cross back. Or they could take advantage of this online revolution and get a chance to cash-in from anywhere in America. [Get the full details here](. --------------------------------------------------------------- [Warren Buffett can't touch these stocks, but you can]( Joel Litman has found a unique set of 23 stocks that major investors like Warren Buffett can't touch... but you can. In fact, these stocks came directly from Joel's unique system that's produced average gains of 123%. He'll be revealing the names and tickers – for free – in his event tomorrow at 8 p.m. [Click here to register](. --------------------------------------------------------------- Growth has been driven by a healthy mix of attendance and ticket prices... From 1984 to 2019, attendance had a compounded annual growth rate ("CAGR") of 2.4%, while inflation-adjusted prices grew at a CAGR of 1.5%. But it may feel like prices have risen a lot more than that to regular theatergoers. That's because the price tag on the top tickets has risen a lot... but the wide availability of discounted tickets for most shows for large parts of the year brings down the average price. So while center front orchestra seats priced above $200 and sometimes as much as $1000 will give a buyer sticker shock, the reality is that many people are enjoying discounts of 20% to 50% off of advertised prices (but not at Hamilton or The Lion King!). A fun fact from The Hustle piece: 33% of first-time Broadway-goers got their ticket at the TKTS booth, where you can buy last-minute tickets for up to 50% off. Tickets are so pricey because Broadway shows are expensive to produce and theaters are small, so there is no way to scale up revenues on the fixed-cost base other than charging more for those limited numbers of seats... and here's where that analogy to tech venture capital breaks down! For every Hamilton show where demand exceeds supply, pushing ticket prices to the stratosphere, there are tons of shows that can't fill the house without slashing ticket prices... and that's where you get to the 80% loss rate for investors. The risky economics of Broadway... Getting a show to opening night generally costs $3 to $5 million for a play and $10 to $20 million for musicals, although a few outliers cost much more. Spiderman: Turn Off the Dark cost a reported $79 million to make. Even the magic touch of Disney's (DIS) Marvel and the star power of music from Bono and The Edge of the rock group U2 couldn't save this musical from losing $60 million. One of the other most expensive musicals ever made was the adaptation of Disney's 1994 animated film The Lion King, which cost nearly $28 million to put on. That one turned out better, though... It has grossed $8.3 billion worldwide over the last 24 years. Talk about a rate of return... A fun fact: Both Spiderman and Lion King were helmed by director Julia Taymor (at least initially... she was later replaced at Spiderman). Like many hedge fund managers... she clearly swings big – and either makes or loses a lot of money as a result. Except for musicals made out of big corporate properties – like the Disney ones – the initial capitalization to put on a show is usually raised by lead producers in $25,000 to $50,000 chunks from many small investors. These small investments are like lottery tickets for the investors, who tend to be motivated by the love of the genre as much as the potential return... Otherwise, why would you invest when you have an 80% chance of losing money? Of course, if your one investment happened to have been in Hamilton or Wicked... you probably did more than alright. Once a show is being performed, the weekly overhead is high... as much as $200,000 to $500,000 per week... sometimes more. Take a look at this sample budget...  Source: The Hustle These high operating costs are why filling the house is so important, and why doing eight shows per week is crucial. Right now, Broadway is challenged because tourism in New York City is down... 65% of seats are usually sold to tourists. Additionally, some local theatergoers are hesitant to return while the pandemic is ongoing. These were headwinds anticipated even before the reopening. But another one has emerged: performance cancellations. With breakthrough COVID-19 infections again on the rise, an increasing number of shows have had to cancel performances. Disney's Aladdin was plagued with cancellations earlier in the season, just after its reopening night. Over the weekend, musicals Mrs. Doubtfire and Freestyle Love Supreme needed to cancel performances. Last night, the performance of The Temptations musical Ain't Too Proud had to be canceled. And just this morning, Tina – The Tina Turner Musical canceled both shows scheduled for today, and Harry Potter and the Cursed Child canceled the matinee while leaving the evening show on the schedule. Wicked, the long-running hit based on the Wizard of Oz, also canceled shows this month. The show must go on... but not if too many actors are testing positive or thrown into quarantine. All these shows operate with an ample number of understudies and swing performers... but the amount needed to avoid these cancellations appears to be too high to be practical. Canceled performances are a big headwind to making money because all the ticket revenues need to be refunded, but the vast majority of the operating expenses still need to be paid. To sum it up, Broadway revenues look like they are down about 20% versus the same period in 2019... This seems not that terrible of an outcome, given the big drop in tourism, the cancellations, and the segment of the population still wary of big crowds. For the weekend ending December 12, Broadway's box office totaled $30.5 million, spread over 235 performances at 32 shows. In 2019, the most comparable week – ending December 15 – Broadway total receipts were $38.9 million, spread over 35 shows and 268 performances. It looks like revenue per show is down about 12% versus two years ago, and having three fewer shows open and a bunch of performances canceled is dragging down revenues another 10%. Revenue down only 12% per performance actually sets up kind of bullishly for when tourists come back... as long as that happens before the pent-up demand from locals – which is clearly high – runs out. While industry group The Broadway League has decided not to resume the release of results on a per-show basis for now, it's pretty clear at least some shows are doing quite well... Since its official opening last week to a slew of strong reviews, the musical revival of Company has posted to its social channels on several days that it has sold out. The show is boosted by the strong reviews and the casting of Patti LuPone – a musical theater legend, the original Broadway Evita, and a consistent box office draw. The show has also garnered a lot of interest because of the recent passing of its creator, Stephen Sondheim, who many consider to be America's greatest musical theater composer. Not faring as well are the shows that have announced early closings, including the plays Is This A Room and Dana H., as well as the musical Diana, based on the late Princess Diana. I'm not sure how much can be read into these early closures, though... straight plays that aren't revivals have a notoriously difficult time finding an audience, and the reviews for Diana were frankly terrible. Investing in Broadway is a long shot even in the best of times, which these clearly aren't... Broadway could have a rough winter ahead if the recent pick-up in the pace of cancellations is any indicator. The fact that it has been so hard to keep cases down among vaccinated performers as it has become colder and new variants of the coronavirus have emerged could be foreshadowing a delay in the return of tourists or more reluctance on the part of locals to attend shows. That said, revenue at around 80% of 2019 levels is probably better than I would have guessed if you asked me a year ago. Even though this is a solid result given the lack of tourists, most shows are probably losing money with revenues down this much. Broadway is down... but not out. There are probably a handful of shows making money right now... and when the virus subsides, that number will climb. Between now and then, there will be casualties. But people will keep trying to put on shows. With a history of 80% of shows leading to investor losses... The people who put their money, hearts, and time into these efforts have always been hopefully betting on creating outliers. Now they will be more than ever. Monday's essay on controversial home exercise company Peloton (PTON) drew lots of letters... Have you returned to attending live theater and concerts? If not, what would make you more comfortable doing so? Do you think people are crazy to invest in these shows when you lose at least some of your money 80% of the time... or do the huge returns when you hit the right investment make it worth it? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). The first batch of letters, though not a scientific sample, points to home exercise not being a fad... "Hello Berna, You asked about my experience with my NordicTrack treadmill. I have owned it for four years, and I put on 2,800 miles before the bearing assembly broke on me. Luckily, I purchased a five-year warranty, and it was repaired free of charge. I am using my treadmill the same as I was before COVID-19 hit. I have no plans to go to a gym. Finally, I don't think I would not buy something due to an on-screen death of a fictional character. I hope you have gotten something from this e-mail." – Troy P. "I own a piece of hydro-rowing equipment. I continue to use it less than I probably should but haven't stopped using it. It is a good overall exercise, and it can be as hard or as easy as I make it. I had hoped my wife would take to it, as it doesn't have to be an overly strenuous workout, but she has not. I consider the $40 monthly subscription a bit pricey, but there is not another option that I am aware of. I have belonged to a gym; I prefer to work out at home. I personally find the heart attack story episode hilarious. The stock market reaction to that is pitiful." – Bill B. Berna comment: Bill, I agree it is a dumb reason for the stock to go down. But that tells me that the stock is in weak hands, and people are just looking for an excuse to sell. "I have owned an elliptical machine for 13 years. I still use it regularly. It goes in streaks with the weather where I use it less in the summer and more in the winter. Peloton could see similar seasonality." – Fred R. Berna comment: Fred, I agree seasonality could be a factor for sure in Peloton's recent drop in workouts during the summer quarter. Regards, Berna Barshay December 15, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](