Posts filed under 'Music Business'
This is the next installment in my blog series “The Art of the Deficit”. Part 3 will focus on the “Productivity Gap” in the symphony orchestra. Part 1 was an introduction to this series focusing on the dysfunctional business model of the modern American symphony orchestra. Part 2 focused on the lack of government funding and the resulting operational cash flow coming from the private sector. In Part 3 “Productivity Gap” I intend to dig deeper into these organizations to see how rising labor costs affect their bottom line and the lack of productivity affects the financial stability of organizations.
Productivity is defined by measuring the output of production, per the unit of input. Labor productivity is usually described in terms of output per worker per hour. There are several formulas and theories that help economists draw conclusions about the productivity of different industries. In the case of the symphony orchestra, there are the musicians, admin staff, and costs of production(output). This is in relation to the concerts(input) performed. Unlike industries such as agriculture or industry, orchestras need the same amount of people to play the specific repertoire as they did hundreds of years ago. They are virtually unchanged. If a Mahler symphony used over 100 people a century ago when it was composed and premiered, the same amount of people are used today. In terms of productivity, orchestras cannot use a specific technology, innovation or new business idea to produce the same product with less people and in turn less cost. When this wall is encountered, this is known as a productivity gap.
Wages and labor costs need to rise in order to keep up with the inflation of all goods and services throughout the general economy. A symphony orchestra is a very labor intensive situation. The payrolls(output) can be quite substantial, in relationship to the concerts(input) produced. The concert performance is the product. The nature of the concert business leaves ensembles open for business for only a hand full of hours. If an orchestra plays two concerts in a given week, they are only in their setting for about five hours. These organizations have difficulty penetrating new markets, attracting new customers and shrinking their workforce. The output rises without any gains in input. This is where the productivity gap comes into the equation. It is in this situation, where the imbalances take effect. This is partially the nature of the beast. From an artistic point of view, professional organizations want to be as true to the score and the composers wishes as possible. I agree with this completely on an artistic level, however the macro effect of having such a labor intensive situation can take its toll on the budget of an orchestra. These are fixed cost systems with relatively little mobility to change their economic models. This leads many ensembles into a financial conundrum.
I disagree with the notion that orchestras are supposed to lose money because they are non-profits with an artistic mission. It is in this balance that is the biggest concern. When output rises without any correlation to the input, the deficit balance becomes a real problem. Most of the budget difference is made up with charitable donations. In Part 2, I talked about how most of the money for the arts comes from the private sector. It is very important to the patrons that their money is used properly and can be accounted for. When these balances become so out of whack that the survival of the organization is in question, their reaction is going to be to pull back and not invest their money in these particular groups. The cardinal rule of the non-profit world is to never show financial weakness because nobody wants to save a sinking ship.
Entrepreneurship and new ideas are going to be the solutions to these problems. A perfect example of this is what the Metropolitan Opera is doing with its broadcasts to movie theaters around the world. They are taking advantage of a digital medium and in turn are going to make a great deal of money that will add to their bottom line for generations to come. Granted most ensembles don’t have the legendary reputation of this famous institution, however I think cultivating new ideas to increase non-earned income is really the key to long term survival. I personally would like to see orchestras make money doing non-music related projects. They can create and develop departments to form new businesses and alliances to make more money. Weary foundations that have been burned over and over giving money to arts groups and seeing it squandered, can make their grants initial investments in building up more cash flow possibilities for arts groups. Endowments are really the saving grace and most important and reliable way to enter the future. I will devote time to endowments in its own segment later on in this series. When the costs of total production rise faster than than ticket income plus private charitable donations, what is to be done? This is the question of our generation. The answers lie in new paradigms of thinking, use of 21st century technology, and a fresh entrepreneurial spirit that can lead us in a new direction.
September 14th, 2008
This is the second installment of my new series “The Art of the Deficit”. The focus of this post is to demonstrate how federal funding from the National Endowment for the Arts impacts the budgets of professional orchestras. Public funding of the arts in America has a long history of being inadequate and even controversial. Unlike our counterparts in Europe where state funding of the arts is in the billions, artists in the United States are left to fend for themselves. The goal of this series is to dig deep into the reasons why many orchestras are running millions of dollars in the red year after year. When the numbers are crunched and the role of the NEA is investigated, the results are very revealing.
I had the opportunity in 2007 to attend a National Endowment for the Arts grant workshop. The workshop was a basic introduction to the NEA, what their mission is, and how one goes about submitting grants. I didn’t go for any specific project, just out of curiosity for how this agency works and how it relates to the orchestra field. What I learned was a real eye opener in terms of how the agency corresponds to the fixed cost structure of the modern symphony orchestra. After sitting through about three quarters of the presentation I had my fill and left. When I returned home, I pondered about what the real relationship was between our government and its support for the arts.
The biggest revelation of attending this workshop is that the NEA only provides grants on a project by project basis. They made it extremely clear that they do not support the daily operations of any arts group. Every grant proposal was to be in reference to a specific project. I was under the impression that they would give an orchestra funding and that the money would support the general operations of the organization. If this is the way the NEA functions, how does this relate to the bottom line of an orchestra budget?
The question I posed to myself was this. I compared the grant amount that each orchestra received with the size of their annual budget. The numbers were shocking. So small. For example, lets take the Columbus Symphony in Ohio. They are in the middle of a financial crisis right now. Their annual budget is around 12 million dollars and their 2007 grant from the NEA was $15,000. That is barely 1/8 of 1%. This is almost a negligible amount. The ratio is about the same even when you look at the big budget groups. The Los Angeles Philharmonic received the highest grant for an orchestra in 2007 at $100,000. Their budget is around 70 millions dollars. That leaves their percentage at around 1/7 of 1%. Even though something is better than nothing, the numbers and percentages are very telling.
Orchestras also have the opportunity to get government support from state and local agencies. The Columbus Symphony received a grant of $153,082 from the Ohio Arts council in 2007. This works out to be just over 1% of the total budget. Local governments(cities and counties) often have a much more difficult time giving support due to their smaller budgets and lack of resources.
The 2008 fiscal year budget for the NEA is $144.7 million, up $20 million from fiscal year 2007. Even though this slight increase is encouraging, this an extremely small number to support the thousands of artistic companies in the nation. This is to be split among every museum, dance group, library, theater group, orchestra, etc. In comparison to the 3 trillion dollar federal budget, this is a drop in the bucket. It doesn’t even compare to the payroll of the New York Yankees, which is over $200 million.
In conclusion, the lack of government support leaves the American orchestra almost completely dependent on the support of the private sector. Unlike Europe where state arts funding is commonplace, orchestras are financially on their own. Perhaps we are no different than any other business in a market economy. This is a fact of life and we have to learn to live it. The chances of any substantial increase in government funding are slim to non-existent. We need to look at different ways that orchestras can make money and offset their propensity to be millions of dollars in the red on an annual basis.
To read a complete list of NEA grants to orchestras in 2007 click here.
February 11th, 2008
This is a new series that I am launching on the blog. The intention of “The Art of the Deficit” is to focus on the business aspect of the orchestra world. I have always been interested in the way that these institutions operate (or don’t operate) and the dysfunction that surrounds their work. Mismanagement and orchestras are two words that seem to go together. As an orchestral musician, I can’t even count the times when I heard people say “That group was mismanaged” or “they ran the group into the ground” Due to my entrepreneurial nature, I have always been interested in what makes business’s work and how they operate behind the scenes. When it comes to orchestras, what I found when I started studying their business models was intriguing. After observing the landscape in the late 1990’s I finally said to myself “What is really going on here?”
During my final year as a member with the New World Symphony, I observed the Florida Philharmonic heading towards financial ruin. I auditioned for the group twice and had many colleagues of mine from New World won auditions there and joined the orchestra. One day while reading the local newspaper I saw a headline that left an indelible imprint on me. It read something like this “The Florida Phil needs $500,000 in 48 hours” They needed this to make payroll. I sat there and wondered what an experienced business person would think when they read this. I was shocked by the financial desperation that this group was going through. What if I won that audition and that was my job. What would I do if my employer vanished like a puff of smoke? It is not like musicians can just go get another job. Seeing this with my own eyes was a very powerful experience.
When you peel away some of the layers, you see that these institutions are tremendously expensive to operate. At times they almost look like unfunded liabilities. If you have 100 musicians in the ensemble making $90,000 a year, that is $9 million dollars just for the musicians. Conductor salaries are in the millions and the big name soloists can garner $50,000 to $75,000 dollars a performance. Everyone knows that tickets sales barely cover anything. Any orchestra is lucky if a 1/3 of their costs are covered from ticket revenue. I personally think they bolster this percentage in order to make it seem like they have more money coming in from tickets than they really do.
Having experience producing concerts and paying musicians, I was startled to be on the other side and see how lopsided the cost structure is. I still remember the day when I had my “Revenue Epiphany” Revenue is the most important thing to an enterprise. Revenue is defined as the amount of money coming in. Now I realized why earnings on Wall Street are so important. Understanding that this is an artistic endeavour and cultural institutions are not publicly traded corporations, the money coming in is just as important. I think we are at a point now where the cost structures of these orchestras are hitting a wall. It is like a ship. Once you move all the furniture to one side, the momentum starts pulling you over. If the cash flow out consistently exceeds the cash flow in you are in trouble. It is like trying to stop a leak in a dam with your finger.
In the old days, one angel donor would write a check at the end of the fiscal year without questions asked and that would erase the structural damages for that budget cycle. That was easier when the deficits weren’t in the millions. Most of these issues were probably kept behind closed doors and not made accessible to the public. This is the beauty of the information age. In the past, one would have to go to a library and look up some 1000 page book on the top of a dusty case to look up financial info from a previous year. One of my goals of this series is to be a real time observer to financial situation of orchestras. Since all professional orchestras are 501-C3 non profits, their information is in the public domain.
This will be an exciting adventure to say the least. Since this is my business, it is also very personal. The epidemic of structural deficits is upon us and needs to be dealt with. The last thing we want for musicians is their orchestra vanishing from the face of the earth. Even though deficit spending is an addiction in our modern day society, it does not absolve the orchestra industry of its personal responsibility for its own financial health.
For a animated version of the picture at the top of the post CLICK HERE!!!
January 21st, 2008
In 1994 to 2004, the John S. and James L. Knight Foundation set out on an ambitious task to study and fund the world of the American Symphony Orchestra. The decade long $13 million initiative focused on many activities; some of which are the relationship the organizations had with audiences, fundraising, programming and the role of the musicians themselves. There is a tremendous amount of information in this prolific endeavour. I want to focus on a specific study that was commissioned early in the start of this enterprise.
In 2000, the Knight Foundation commissioned a study of orchestras and the public that they serve. The study was called “How Americans Relate to Classical Music and Their Local Orchestras” It was conducted by the research firm Audience Insight, LLC. and involved 25,000 people in 15 different markets. This specific research activity was the largest discipline specific study of arts consumers ever completed in the United States. The results were quite interesting.
Here is an excerpt from John Bare on the Knight Foundation website:
“Using different sets of measures to identify potential classical music consumers, the study explored adults’ affinity for classical music and then their ties to a specific orchestra. Crisscrossing these two dimensions, the study produced a market segmentation model that categorizes potential classical consumers into one of eight “prospect” groups. In all, about 27 percent of adults are prospects for their local orchestras. The rest of the adult population has so little interest in classical music that they cannot be considered likely customers for local orchestras.The top prospects fall into a group called Captured Prospects — people who are current subscribers or single-ticket buyers who attended a local orchestra concert more than once in the preceding year. That group is very small. The 15 orchestras attract only between 2 and 4 percent of adults in their communities on any sort of a regular basis. The second group, Low-Frequency Alumni of the orchestras studied, includes consumers who have been to a concert by the specific local orchestra at least once but now attend seldom if ever. That group is larger, about 15 percent of adults in communities of the orchestras studied. They’re considered prospects because they have had a trial experience with the orchestra at some point as an adult.Another 8 percent are the group called Uninitiated Prospects — adults who may have never attended a concert by the local orchestra, but who indicate they have a close relationship with classical music. Some, for instance, have friends and family members who attend concerts.”
The statistic that had an indelible imprint on my mind when I first was aware of this study is that subscribers and single ticket buyers to the symphony are 2 to 4 percent of the population on average. Noting that this is a niche marketplace industry, having a 2-4% market share is a tight spot. This leaves 96% of the population of this country not regularly attending or even thinking about attending concerts. The classical music industry has a mentality that it is the end all, be all of culture. Music conservatories add to this false belief that the world revolves around their art form. Well, here it is folks. Market share is so important in business and every CEO in the world is obsessed with increasing it. I guess the good news is that if we increase ours by 1%, the effects could be amazing. On the flip side, if we slip by 1% the results could be devastating. In addition, another amazing statistic is that 74% of orchestra ticket buyers played an instrument or performed vocal music at some point in their life.
To read the complete study click here. For more information on the Knight Foundation click here.
January 16th, 2008
