The financial crunch

Why did the Big Five commission McKinsey to make these reports? (See my previous post.)

Because by the end of the 1960s, orchestras were having bad financial problems. The Big Five first pondered this alone, then convened a conference of many orchestras, and brought in McKinsey. I learned this from Howard Shanet’s book Philharmonic, a history of the New York Philharmonic. I then asked the Philharmonic’s archivists if they had the report, and they got me a copy. (Thanks, Richard and Barbara!)

And what the report says is fascinating. Large American orchestras, McKinsey decided, were in a financial bind in part because of their expansion to 52-week operation early in the ’60s, and in part because they’d raised the weekly minimum musicians’ pay. This last, of course, was a double whammy. The musicians were getting more each week, and they were also being paid for more weeks. The report notes, however, that this wasn’t the only increased cost from the 52-week operation, so expenses ballooned even more than musicians’ salaries would account for. The basic point is pretty clear. Concerts didn’t pay for themselves; ticket sales didn’t cover their costs. So the more of them you gave, the more money you lost, and the worse your finances looked.

What solution did McKinsey propose? Here we breathe the air of another era. They mention, more or less in passing, the revenue from “private support” (a category they don’t break down into further subdivisions). But they don’t suggest that it could be increased. And they reject raising ticket prices, because that, they say, “would be inconsistent with [the orchestras'] objective of making orchestra performances available to a wide range of people.”

Instead, they offer what now seems like a fantasy, an increase in federal government support. The federal government, they say, should pay 25 percent of all orchestral expenses. This, they add, ought to seem perfectly reasonable, since European governments pay 90 percent!

Needless to say, this never happened. Instead, orchestras increased their private support. I’d love to know more of that story — how it happened, what stages it went through (and when those stages happened), how hard or easy it was, what people thought of it.

But here’s a reason why this history is especially interesting now. I’ve sometimes been told that the current classical music crisis can’t be as bad as I and others think, because “people always say classical music is in trouble.” I’ve even had the orchestral financial crisis in the 1960s thrown in my face. “See? They thought they’d die then, and they didn’t! So why should they be dying now?”

The reasoning here is sloppy, to say the least. How do we know there’s any relationship between the two crises? Maybe they had different causes. We have to look carefully at the facts in each era, before we can draw any conclusions. And we also have to look at the challenges faced each time. Even if the problems were similar, what were the solutions last time? Will they work now? Are other solutions possible now?

The McKinsey report shows that the 1960s problems had a different cause from the problems now. In the 1960s, orchestras got in trouble because they expanded their operations. Now they’re in trouble because they’re having problems simply staying where they are. Today’s troubles, we might conclude from that, are very likely worse.

But in one very basic way, the problems are similar. Both now and in the ’70s, orchestras need to find more money. In the ’70s, they did that by increasing private contributions. Can they do that now? I spent some time recently with one very well-run orchestra, which looked into its future and concluded that it couldn’t thrive unless it increased private donations to a rate for which there isn’t any precedent in orchestral history. They were talking specifically about the percentage of subscribers who contribute money.

The industry average seems to be — we need better stats for this — between 35 and 40 percent. This orchestra thinks it needs to raise that far beyond those numbers. Can they do that? How can they do that? And is there a limit to how far they can go?

That last question is very important, because of a theory floated many years ago by William J. Baumol and William G. Bowen, and published in their 1966 book, Performing Arts: The Economic Dilemma. According to this theory, the performing arts don’t show the increased labor productivity found in other sectors of the economy. That’s clearly true of orchestras — while manufacturing concerns keep making more and more goods with the same number of workers (or fewer), orchestras still need the same number of musicians to play the same concerts.

And so the performing arts over time get more and more expensive, compared to other activities. Corporations can pay their workers more and more, because the workers produce more and more. (Well  unions played a part, too; the corporations would have been happy to keep paying their workers at the old rates.) Orchestras have to pay musicians more and more, too, over time, to keep up with the income other highly qualified professional people earn. But their activities can’t sustain these pay increases, because the musicians aren’t producing any more than they previously did. (And there of course are other cost increases, too.)

So there’s always a struggle to find new revenue. A corporation just sells more, or introduces new product lines. An orchestra has to find new and previously unheard-of ways to get money. We’ve seen them struggle with that over time. That’s one big reason why the orchestra business has recurring crises.

But the present crisis, I’d suggest, is particularly bad. Orchestras now have two problems they never faced before. One is declining ticket sales. Wouldn’t you rather have a crisis when your halls, at least, are always full? And the other new problem, surely related to the first, is a decline in interest in classical music throughout our society. In 1972, when McKinsey made its report, Time magazine wrote far more about classical music than it did about pop. I mention Time only because I once sat in their library, counting the number of classical and pop music articles in every issue from 1980 to 1990. In 1980, there were approximately twice as many classical articles as pop; by 1990, the proportions had reversed. And now, of course, Time hardly mentions classical music at all.

We can all supply other examples. There are far fewer classical radio stations than there used to be, big classical record labels can’t make a profit any more from classical music, classical record stores are dying out. And pop culture rules our world today in ways that nobody could have imagined in 1972. I’m not going to say that orchestras can’t solve their problems now, but at the very least, they’re up against barriers they never had before.

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Comments

  1. ken nielsen - sydney says

    Very interesting stuff, Greg. The shape of the financial model is something that particularly interests me.

    Have you had a chance to look at other expenses than players salaries? I suspect administration costs are way up. And marketing also.

    In business, where the marginal cost of another sale is close to zero (if the hall is not sold out, it costs nothing to fill another seat) the theoretical advantage of benefit or other marketing looks very good.

    The equivalent in a similar industry – airlines – is price cutting or differential pricing.

    Anyway, I suspect orchestras are getting lots of advice from consultants about the benefits of marketing activity. And the need for audience research etc to support it.

    All very persuasive, but I do get uncomfortable about a musical organisation spending an increasing percentage of its money on activities that do not make music.

    PS I came from a business background where similar issues arise. I was always taught “put your money into the product”.

    Good thoughts and questions, Ken. I think a lot of money goes into development, aka fundraising. In a large American orchestra or opera company, the development department is the largest in the institution, often by far.

    Marketing costs are important, too. As for the marginal cost of selling a few more seats, someone from a very successful American orchestra (the best-managed that I’ve ever been in personal contact with) told me that it wasn’t worth the money to sell a few extra seats. If they’re not sold out, they’d rather put the dollars into fundraising. They get more benefit — more dollars — per dollar spent than if they’d put the money into selling the last few seats

    Your final idea, from your business experience, would be hard to apply to orchestras. Or at least the conventional wisdom would say that. They’d probably say they’re already spending all they can on artistic things. They’re probably wrong, and this is probably a great failure of imagination. I think they should contemplate your wisdom.

    Which leads to a question. How do you apply that idea with your opera company?

  2. says

    I’m fairly new to this blog, so I appologize if this has alread been discussed ad nauseum previously, but: why is it such a terrible thing if orchestras decline? The world changes, music changes; orchestras are still basically a 19th/early 20th century ensemble. There have been other ensembles before orchestras and there will be others after them. There’s a lot fewer swing bands now than there were in 1940 and it’s much less lucrative. Is this a terrible thing? Or is this just a result of the natural evolution of musical taste? Why should orchestras be any different?

    Jon, this question is very much worth asking. I’m not sure we’ve ever focused on it here.

    I agree with you. Orchestras might not be necessary, and might not survive. This bothers people in the orchestra world, but it’s no less true because of that.

    I stress orchestras’ problems here because I’m trying to establish that there seriously is a crisis about how classical music currently works. Some people don’t believe that. There’s more data available about orchestras than about other kinds of classical music institutions (and I also know more about orchestras), so I tend to use them as examples of how serious the current problems are.

    If orchestras did disappear (or vastly cut back), I do see one big problem. They’re the main hope most classical instrumentalists have of getting work. That might be an odd thing to say, given that there aren’t that many jobs available, and most classical instrumentalists will never get one of them. But the existence of these jobs keeps a lot of the classical music business alive. Take music schools. Would they have any plausible reason to train all their oboists and bassoonists if these people weren’t going to get any work? I doubt it, and I think they’d have a lot more trouble raising money. Which means they’d find it hard to survive.

    There are all kinds of interesting things going on outside the classical music mainstream — classical music things, I mean — but they don’t make enough money to support the musicians involved in them. Almost every classical musician I know of — even the most alternative — are supporting themselves playing mainstream gigs. Somebody (this is a real example) might play in an edgy string quartet, and be best known for that. But she’s also flying off to Florida regularly, to play in an orchestra. Without that job, she’d have trouble paying the rent.

  3. Randy says

    I am not surprised at the declining proportion of earned revenue to total expenses for symphony orchestras. A parallel exists with private colleges. Their net tuition (after discounting scholarships) has declined for many years. The colleges figured out that endowment is the long term solution to the Baumol dilemma. I can envision the day when endowment will need to produce 50% of a major Symphony operating budget (that is a lot of endowment assuming a 5% draw).

    Hi, Randy. Good to see you here. And isn’t this exactly your strategy for the orchestra you run? Very bold. Do you know if there are others trying it?

  4. says

    Thanks, Greg, I will say something about Pinchgut Opera, the small company we set up here in Sydney 5 years ago. It isn’t a model for anything other than itself but we have applied some of the thoughts I developed over my business career.

    Firstly we decided that, artistically, we would put the music first and allow the other elements – set, costumes etc – to support but never to swamp the music. That saves money but, as Lindy Hume, director of our current production, Idomeneo, said: “A small budget doesn’t preclude big ideas”. So, by far the greater part of the production budget goes on music and musicians, all of whom are professional and paid appropriate rates.

    Secondly, we decided to manage the company with an absolute minimum of bureaucracy. Again, I stress that we are small: at this stage, four performances of one production a year. So, we have three part-time staff managing artistic administration and marketing. And we are able to use volunteers (such as me) for much other work.

    We did decide early on to use technology as much as possible. We could not run the company the way we do without email. Our artistic director, Antony Walker, lives in Washington DC and travels most of the year on conducting jobs. Those of us in Sydney communicate by phone and email and meet in coffee shops. I hope that even when we need full-time staff we can avoid having an office. (I managed a region stretching from Korea to New Zealand for a $1 billion food company some time ago, mostly from my briefcase. And that was when we only had phone and fax- no email).

    Something I learnt in business is that, as an organization gets bigger, it needs people and systems to run itself. A lower percentage of the work done is directed outside – customers etc – and more is directed inside. HR people, communications and so on. This is necessary but essentially unproductive work. I smile when I see businesses and other organizations merge, and get larger, to secure efficiencies through synergies. It almost never happens. (No, I don’t really smile, I groan).

    Coming back to what we have been discussing, I feel uncomfortable about orchestras and such spending a higher percentage of their revenue on non-artistic activities: marketing, fund raising, research. As you have said, most businesses have increased their productivity – greater output per hour worked – but orchestras can’t do that. No jokes about the brass being under under-utilised, so they should double on cello. That is why ticket prices have increased in real terms which other things have become less expensive.

    But it seems to me that many arts organisations have become less efficient in other areas: marketing etc. There are opportunities to use technology better to communicate with audience and potential audience, for example.

    My guess is that a large part of the drop in concert going can simply be explained by price. Compared to most other things, tickets have become a lot more expensive. A business mentor once taught me that you never know what your product’s price elasticity is, but you can get it’s negative. That is why costs are so important.

    If you will allow me a short commercial, may I mention Pinchgut’s website http://www.pinchgutopera.com.au which contains among other good stuff our regular newsletters that we use to involve our audience in the company. Also, this year we are using a blog with daily notes on the rehearsal process. http://www.pinchgutopera.typepad.com.

    Thanks, Ken. Very interesting. I’d love to see whta you’d thik if you got inside an orchestra’s adminisitration,and could judge whether their marketing and development work is really too expensive. I know they keep track of things like the cost of selling a ticket, so they have benchmarks of at least some sort for tracking their productivity.

    As for why ticket sales are down…I think orchestras theorized that they had a lot of price elasticity. And then they felt that experience proved the theory right.Which doesn’t mean that they were correct about that! But I’d love to see some studies that might determine how various factors contributed to the decline in ticket sales. How much is duje to price, for instance, and how much to declining interest in classical music? The two might go together, of course. Someone not so strongly interested obviously might not want to pay so high a price.

  5. says

    1. It’s not simple. The problem, again from my business experience, is that it is almost always possible to convince yourself that money is being well-spent.Or that a budget should go up.My discomfort comes from the rate of growth I have seen in non-artistic expense for arts organisations.

    2. It’s pretty well impossible to determine reasons for sales decline, just as it’s impossible to determine why people don’t come.

    In the early 80s my then boss told me that we should manage our food business so we never had another price increase. I laughed – not a good career move. What he meant was that with inflation down to 2-3% a year we should be able to squeeze that out of the cost structure each year. And he was right. We did have price increases – and some reductions – but they were for strategic reasons, not cost pressure.

    It is a different way of thinking.

    I really wish we did not have to talk so much of money – I’d rather talk of music but…

    But…without the money, no music.

  6. says

    Just to be as pedantic as possible, I’m going to point out that Greg’s discussion of elasticity in his last response is a little confusing. What we should be saying is that orchestras theorized that demand for their product was highly inelastic, meaning that it did not vary much with price. If the demand elasticity for orchestral tickets was high (if the slope of the demand curve was high, in other words), it would mean that orchestras would have a huge incentive to control ticket costs, since each additional price increment would drive a whole new flock of buyers away. (Now I’m mixing metaphors!)

    So if orchestras overestimated how inelastic demand for their product was, or the demand elasticity changed due to changing cultural conditions (i.e., people don’t like classical music as much), we’d have both a demand curve with a higher negative slope and a supply curve shifting to the right. Which makes for a lot greater decline in ticket sales than the orchestra might have expected.

    Thanks. This isn’t pedantic at all. It’s very precise (far more precise than I was), and very helpful.

  7. Hussain says

    As for as financial crunch is concerned,many reasons are involved behind this crisis.Foremost cause is dysfunction of our economic system(capitalism)where every individual is struggling to gain maximum profit as soon as possible owing to this, corruption and fraud have flourished and every common person is being deprived of from his legitimate rights.

    the second and utmost point is concentration of the wealth into few hands, at result poorer became poorer and richer became increasingly richer.

  8. ray says

    the conductors are being paid huge salaries too – and when guest soloists are featured, they get large fees too. Maybe this is part of the problem.

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