Waiting for a new business model for the arts.

"The air is full of our cries." (He listens.) "But habit is a great deadener."

What do nonprofit arts people mean when they say ‘the business model is broken’? I’ve heard this phrased decried ad nauseum in the US for at least the past three years. It was a working hypothesis before the economic downturn; now it seems to be a statement of fact. So what model are we talking about? The American ‘nonprofit’ model for the arts? A particular ‘business’ model used by individual organizations? A Stanford business school professor once gave me the following definition: a model is a representation of your beliefs about causality. Perhaps more interesting questions would be, what beliefs about causality underpin our ‘model’, and are they still valid?

Last year, in his post, One business model to rule them all, Andrew Taylor referenced a comment Clara Miller of Nonprofit Finance Fund made at an Americans for the Arts conference in 2010. She said, “There is one business model: reliable revenue that meets or exceeds expenses. Any questions?” I was at that session. A lot of people chuckled when she made the comment.

And then I remember thinking: So, which revenue sources are reliable at a nonprofit arts organization? Government arts programs across the country seem to go into duck and cover mode on a regular basis; corporations are often skittish—lavish one year and austere the next; foundations are overly cautious and generally dole out funds one year at a time, being careful to avoid enabling ‘dependency’; fewer and fewer people want to commit to buying a season’s worth of tickets up front; single ticket buyers are notoriously unpredictable; and individual donors are as varied as … well, individuals: some are dependable and loyal but many are fickle and elusive.

It seems like most arts organizations start each year with very little of their income committed and spend much of the year on pins and needles waiting to see if they will hit their revenue targets. Are we operating under a delusion that there is such thing as ‘reliable revenue that meets or exceeds expenses’ in the arts? And if so, is there a corresponding faulty belief that underpins our business model? For instance, that the arts are valued by our society?

Is this what we mean by ‘the model is broken’? Or is it something else? I would love to hear reflections on the ‘broken model’. What’s broken? How do we fix it?

Desolate Tree image from by lolloj licensed by Shutterstock.com. Quote from Waiting for Godot by Samuel Beckett.

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Comments

  1. says

    I believe you’ve hit upon a very important set of blunt questions here.

    I’d like to suggest you consider reading Michael Kaiser’s The Art of the Turnaround. It doesn’t provide clear answers, but it does lay out a fairly straightforward vision for how arts organizations can succeed.

  2. says

    Is there something to be said here for diversification? It’s a rare business that has income committed a year in advance, and yet by developing ways to bring in money from various sources–be that different products, investments, or industries, they are able to isolate themselves from all but the worst of economic downturns.

    Of course that’s much easier for large institutions than it is for small organizations working to the edge of their capacity already. Maybe some sort of co-op model that would allow small organizations to work together to generate the benefits of diversification available to large institutions without sacrificing their individual focus?

  3. Jesus says

    What I hear, when I hear people say “the model is broken” is that the money they feel they are entitled to as arts organizations isn’t getting to them. That for some reason, the grants they are writing are being ignored and given to other people, or just not being allocated to the arts in the first place. The model that was set up to get them money isn’t getting it to them as such, the model is broken.

    What I mean, when I say that the model is broken, is that its a stupid system. The model itself from the get go is wrong and broken.

    I come from a family of small business owners. At the end of the day, theatre companies, much as they like to deny it ARE businesses. People will pay money, or support your business, if you offer them a product worth their time and money.

    “But we can’t cover all of our expenses for a season from ticket sales alone!”

    Thats not my problem, nor the governments, nor the audiences. Produce within your means. Figure it out. Theatre companies will survive, and thrive, I think, if they focus on producing a product worth the time and money of whatever audience they are speaking too. (Audiences are not universal, nor should they be.)

    The expectation that the government, corporations, or the generosity of others should fun your business has never made much sense to me. The model is broken.

  4. says

    What I find most annoying in this conversation is the apparent lack of awareness on the part of conversationalists that there are already quite a few business models running in the arts. Some of them are equally as sustainable as any other business.

    • Danielle Loebs says

      Hello there!

      It is wonderful to hear that there are great business models running in the arts. Rather than getting annoyed because they aren’t well-known to some of the contributers to this forum, would you mind mentioning or sharing links to those models in order to help those of us who are trying to learn about them? I do wonder if this is part of Ms. Ragsdale’s intent when she starts the ball rolling on discussions with her thought-provoking blogs…

      Thank you!

  5. Heather Beasley says

    I suspect many of us live with the reality that there is no such thing as “reliable revenue that meets or exceeds expenses.” One broken element: our funding sources (except ticket buyers) demand that we come up with multi-year budgets formulated on the falsehood that we can precisely predict the unpredictable.

    This is especially difficult when government and private foundations demand to know by percentage/ amount not only our projected ticket sales, but other secured and pending funders, as though we can read the minds of board members at funding organizations years in advance. Instead of taking on the responsibility of funding us on our organization’s purpose and merits, there is often a crowd mentality based on who else is already funding us and where else we’re applying.

    I think the corresponding delusions are far more fruitful to investigate. Imagine a world where funders had to evaluate arts organizations without access to their financials. What would that selection process look like?

    Perhaps a second problem is the underlying fallacy is that funders fund artistic excellence. They fund financial solvency, but the two are not synonymous.

  6. says

    Indeed you have raised the big question that is at the very root of what arts organizations are struggling with “fixing” today. In terms of defining what constitutes the arts “business model,” I think the issue is financially related, and less philosophical or cultural.

    The St. Paul Chamber Orchestra launched a major vision planning initiative a few years ago, which included forming a Business Model Task Force. The outcome of their work was an objective for the orchestra to focus time, expertise, and resources toward building and strengthening sustainable sources of revenue. This idea was also the topic in a groundbreaking session on “A New Financial Model for Orchestras” (title not verbatim… but orchestra managers will remember) at the League of American Orchestras conference. The bedrock of sustainable revenue in the arts is patron generated.

    In any successful business, a successful model is one that motivates investors to capitalize the business at a level that is capable of attracting customers, and one in which customers buy products repeatedly, resulting in a solid or competitive market share. Most businesses spend most of their time and resources on acquiring and retaining passionate, loyal customers. In the arts, patron-generated revenue is the ONLY sustainable revenue source in the mix. Yet, most arts businesses depend on patron-generated revenue for maybe half to two-thirds of their annual income needs, and spend considerable time and resources on costly development activities in the extremely fickle government, corporate, and foundation sector. I think in some ways that the institutional philanthropic capitalization machine in the US is largely broken (the satircal article you mentioned in the Nonprofit Quarterly was a painful if funny eye opener.)

    Where the crack widens to a fissure in the arts business, is in chronic undercapitalization. How many arts organizations in the U.S. open and operate indefinitely “on a shoestring” and with structural deficits that are funded with borrowed money from advance ticket sales (“Subscribe Today” was originally applauded as much for cash flow as it was for generating patron loyalty!)

    I believe that undoubtedly, ALL arts organizations are known for their high skill in stretching every available dollar to its maximum value. But our arts organizations open their doors before they really understand the investment required to build and sustain a business over the long term. Obviously, you need great art as a core product to drive patron revenue, and you need to educate the audience on your art form at every opportunity, from childhood to retirement. But what arts organizations also need is adequate capital to bring their programs to life and sustain the underlying operations needed to support production.

    As it happens, endowment building, or its closely related buzzword sister, “capacity building,” being promoted by foundations today is related to building patron-generated, sustainable revenue. Our largest, finest arts organizations are well capitalized with substantial endowment investments. These endowments usually come to reality through motivated, passionate, dedicated patron investments. Yet, a lot of small to mid-size organizations view endowment building as a luxury rather than a necessity. Endowment campaigns seem like daunting mountains that only groups like the Cleveland Orchestra or the Brooklyn Academy of Music can climb. But that’s not true. A superb example of capitalization in the small organization is Spivey Hall in Morrow, Georgia. There we see a visionary founder who understood that great music doesn’t just happen if you build a superbly designed, intimate music hall alone. The groundwork for Spivey Hall included a substantial programming endowment at the start, one that has sustained excellence in programming there ever since. Additional external funding allows Spivey Hall to put icing on its cake, but they don’t depend on it to survive.

    I believe that there are small arts organizations who are wasting their limited time and resources by applying to the NEA, and competing with larger, more entrenched non-profits in the increasingly fickle corporate and foundation sector. I also believe that too many arts organizations create progamming because it meets funding guidelines somewhere.

    Instead, if arts organizations focus the majority of their time and energy on building programming, engaging a broader patron base, and developing plans to acquire, motivate, and leverage patron loyality in their organization’s activities, more endowments could eventually be built, and as endowments grow, the less dependent organizations will be on temporary and non-sustainable sources of capital. Capacity building is perhaps one step forward to fixing what is broken.

  7. says

    Hi Diane –

    Greetings from Nonprofit Finance Fund! Thanks for such a thoughtful post. We’ve been asking ourselves some of the same questions recently, particularly as we invest $10 million of capital funds into ten leading arts organizations that are implementing plans to increase their reliable net revenue and artistic vibrancy. Your post inspired me to write a full response at the link below on our blog:

    http://nonprofitfinancefund.org/blog/reliable-revenue-waiting-godot

  8. says

    Thanks Diane for launching and reframing this essential conversation. I think a big sandtrap in the ‘business model’ conversation is that we immediately focus almost entirely on the ‘revenue model’ — which is only a part of what a ‘business model’ provides. Then we often forget the fact that an essential part of the nonprofit arts business model is discounted or volunteer labor, in-kind or contributed goods and services beyond cash, borrowed space, displaced expense (‘I’ll make the promotional flyers on my copier at work’). So, ‘reliable revenue that exceeds expense’ is equally informed by the revenue and the expense.

    A favorite current description of a business model comes from the *Business Model Generation* book by Alexander Osterwalder and Yves Pigneur:

    ‘A business model describes the rationale of how an organization creates, delivers, and captures value.’

    Essentially a version of your colleague’s ‘beliefs about causality,’ with the added essential element of value.

    • Stephanie says

      Adding onto what Andrew said about expenses being a critical part of the biz model, I think very little labor at nonprofit arts orgs is “discounted” – or whatever amount is discounted, probably won’t add up to a significant portion of the budget. And for performing arts organizations, labor costs almost always increase each yr because their “product” is people (actors, musicians, dancers) and people want raises each year to at least keep up with inflation and health insurance costs. As the Baumel/Bowen report in the 1960′s stated, it is impossible to make an orchestra play or a dance troupe dance more “efficiently” without impacting the artistic quality or ultimately the structure and mission of the organization (e.g. an orchestra which decides to perform chamber music so it doesn’t have to hire as many musicians eventually shifts its focus from being a full symphony to being a chamber orch – per-service orchestras have more flexibility with this, but not the full-time professional orchs, who currently have to pay all of their musicians regardless of how many of them actually perform). For performing arts orgs, paying people – whether employed by the org or contracted – accounts for the vast majority of expenses. So if an org really wants to restructure its biz model to be more sustainable, salaries MUST be part of the discussion.

      What no one wants to talk about is that the explosion of entertainment options in the last 15 yrs and the decline of arts education over the last 40 yrs necessarily impact reasonable revenue expectations, which then must impact what an org can spend. These facts, plus the aging and passing of the Baby Boomers, mean that there is and will continue to be a smaller base of traditional arts patrons and donors. “The arts” need to take on a much broader meaning in order to be relevant to today’s culture. It’s showing people that the music they hear on the radio/TV/iPod was created by people who had musical training. The art, posters, and even billboards they see every day were created by people who were trained in some form of visual art. However, once we get people to see the art around them, we can’t then ask them to fall in step with what the “arts” have been in the past (symphonies, theaters, museums). If we posit that the arts are relevant today, we have to make our org structures relevant, too, instead of relying on the systems of the past. This could mean that second-tier cities (Pittsburgh, Cleveland, Detroit) might not be able to pay their first-tier orchestra musicians the salaries they currently enjoy or support the same number of theaters in their current form.

      The other things that really gets my blood boiling is the fees commanded by A-list artists (soloists, music directors, top actors and directors) which cannot possibly be recouped by the presenting org, and then the artist bemoans the small audiences and the decline of arts ed. High artist fees contribute to high ticket prices, which lead to smaller audiences, which lead to people thinking that art is only for rich people.

      I’ve gone on long enough (for now)…

  9. Baxter says

    As one who has served on several nonprofit boards, of theatres and visual arts institutions, this is an issue I’ve considered over a number of years. In raising money for arts groups, I’ve found that one problem is that many people don’t know what a nonprofit arts organization is, or why they exist. They’ve never thought about it.

    Many Americans, when they do consider they question for the first time, latch onto the idea of the market as the source of all values; if it doesn’t make a profit, it’s not worth doing. (“Jesus”, above, would be one example of this thinking.) I generally explain that while I am a capitalist (having a small business myself), and I believe that markets do many things well, markets do not do all things well. A nation with only arts organizations which operate at a profit (ticket sales over costs) would be such an impoverished place that few smart, creative people would choose to live there.

    The greatest museum in America, the Metropolitan, has never “made money”, and it never will. They don’t cover their expenses from entry fees; in fact, entry to the Met is actually free (there’s a “suggested donation” but you don’t have to pay it, and many other museums in this country and elsewhere do not charge admission). In other words, the Met depends on “the generosity of others” to exist.

    Since I live in Atlanta, I have used the following examples to make this point, but you can adapt them to your own locale: Yes, we could have a for-profit symphony orchestra, but it wouldn’t be the multiple Grammy winning ASO which people come from all over the region to hear. It wouldn’t be a 100+ member orchestra which plays a full season of great music, including considerable new music. Instead, it would be a 30 piece pops band, doing about a dozen concerts a year of the same 30 or so pieces. And it wouldn’t be very good.
    Yes, we could have only for-profit theatre in Atlanta, but it would consist of (a) traveling Broadway musicals at the Fox, and (b) a long running comedy about a Buckhead family whose son gets engaged to a Hooters waitress [it's an Atlanta thing]. There would be no Shakespeare, O’Neill, Miller, or Mamet. No Tony-winning Alliance theatre, no Horizon, 7 Stages, Actors’ Express, Theatrical Outfit….well, I could go on, but the point is that most theatres worth seeing in this country, New York included, are nonprofits. (By the way, there’s an excellent Tax Court opinion summarizing the differences between for-profit and nonprofit theatres. No, really.)
    As for museums, for-profit thinking breaks down completely in this arena. If a museum buys a $40 million dollar Rembrandt, there’s no way, even in a hundred years, that such a purchase would be recouped by increased entry fees or other income attributable to the Rembrandt. As a business decision, buying that Rembrandt (or any expensive work of art) just doesn’t add up. But it’s what museums do, because it’s part of what they exist to do. To ask “does it make money?” in this context is incoherent.

    So a city without substantial nonprofit arts institutions is not a city worth living in. And it wouldn’t be an economically competitive city for long, as talented people with choices would mostly go elsewhere; so even if you don’t care a whit about the arts, there’s still a compelling reason for you to want significant nonprofit arts organizations in your city.

    For committed arts advocates, part of the challenge is recognizing that we have had decades of propaganda from the political right (apart from religious conservatives) that markets are the only source of value, and that, if it doesn’t make a profit, it’s not worth doing. Once you get people to admit that, yes, there are things worth doing which don’t earn a profit, and which require charitable giving, then the conversation shifts to all the great arts institutions, large and small, which would not exist otherwise

    • says

      “Baxter” – thank you for the eloquent and thoughtful comments. Nonprofit arts organizations need board members with your understanding of the role of nonprofit arts organizations and your ability to make the case for them.

      I would be very interested to read the Tax Court opinion that you mentioned.

      Thanks, again, for commenting.

  10. Jonathan says

    I would be very interested to hear about some examples of business models that successfully address the Performance Income Gap in ways that do not rely solely on contributed money, (ie. subsidy, grants, or donations.)

    Here in the Netherlands we have just seen the subsidy pie shrink significantly the last months and we have a very young tradition of personal and corporate giving, as the state has been the primary supporter of culture until very recently.

    We have a very vibrant arts culture that is aching for new approaches and seems ready to experiment.

    The laboratory is open. Anybody got ideas?

    • says

      I would say increase earned income through new technology, digital content avenues. Kind of like merchandising but in a way that makes sense for the arts sector. Making arts and culture part of the conversation, make the sector interact with the business community in ways that are productive on both ends. I am over the hand out approach. I am even reluctant to join the ranks of an official non-profit with Jamaica Arts Development Foundation, Inc. somehow i hope we can strike a balance that only very roughly uses an antiqunated non-profit model.

    • says

      Thank you Hannah for sending the link to this. I am obsessed with this subject doing lots of work in the Caribbean Region and South Florida. Thank you and I will chime in as soon as i finish the article!

  11. Daniel Lewis says

    Diane, my experience suggests orchestra managers’ shortcomings are masked by claims of business model shortcomings. Disciplined measurement, disclosure and data supported decisions is woefully inadequate.

    Orchestra managers and boards need to know, but don’t know each product’s economics; using cost accounting to allocate all institutional costs, earned and contributed revenue to each product. This is relatively easy.

    New products typically loose money initially, but hopefully attract new audience, whose value can be estimated using demographic data and customer lifetime value projections. This is more difficult, but important since there is considerable product experimentation.

    Daniel Lewis

    • Elaine Calder says

      Daniel,
      Your second and third paragraphs make sense, and the orchestra managers I talk to understand and perform the kind of analysis you describe. (I manage the Oregon Symphony in Portland and am just returned from a managers meeting in NYC with about a dozen managers of orchestras with similarly-sized budgets, seasons and orchestras.)
      So my question has to be, what is your specific experience that leads you to the conclusions in your first paragraph?

      • Daniel Lewis says

        Elaine, my work experience is Progressive Insurance, where I designed and implemented this system in 1975, and it still is Progressive’s most important management system.

        My related orchestra experiences are past Cleveland Orchestra board executive committee, chaired the Florida Philharmonic which closed in 2004 during my tenure, founded and chair the Musical Arts Association of MIami which supports the Cleveland Orchestra Miami Residency 3 weeks every winter, funder and observer of the League of American Orchestra’s Institutional Vision seminar which has exposed me to about 30 participating orchestras in various states of leadership and management problems.

        An aside, I chair the Spring for Music board, and hopefully will meet you in NYC in May.

        Dan

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