The cost squeeze — expenses

As I noted before, the orchestra cost squeeze is truly a squeeze. Or, in other words, it’s not a flat phenomenon, a simple matter of income declining, because ticket sales and donations are falling off. No, it’s got another dimension: expenses are rising. And the falling income/rising expense squeeze gets worse over time. 

Previous posts: the overall situation, declining ticket salesdeclining donations

Here’s the rising expenses part of the story.

Expenses rise, first of all, for all of us — businesses, nonprofits, individuals. Inflation. Rising gas prices. Heating costs. We all know the drill. 

And then, over time, there are particular things for which orchestras have been spending more — marketing and development (the fancy word for fundraising, though there’s more involved: for instance, urging people to leave an orchestra money in their wills). 

The increase in these costs has been going on for a long time, because before the 1970s, orchestras spent hardly anything for either of these things. Ticket sales were a much larger percentage of income, and when extra money was needed, patrons were on hand to donate it, apparently without needing to be searched for, or asked. I don’t mean to say that finding money always was easy, but it was a lot easier than it is now. That’s why orchestras, back then, didn’t have much in the way of fundraising budgets.

Same for marketing. In the late ’60s and early ’70s, the biggest orchestras sold all their tickets. 100%. Or at least that’s what consultants from McKinsey noted, after studying orchestra finances. 

Late in the ’60s, a financial crisis hit, because the orchestras expanded to 52-week seasons, and also paid their musicians not just for more weeks, but at a higher rate. In the wake of that came the marketing and development departments. Orchestras had more seats to sell, and more money to raise.

    The cost disease


But now we get to the killer part of the long-term rise in expenses — the Cost Dsease, also known as Baumol’s Dilemma, after William J. Baumol, the economist who first suggested what I’m about to summarize. 

The principle — generally accepted by economists — is simple enough. Suppose you’re a company that manufactures things (or, these days, contracts to have them manufactured). As time goes on, the manufacturing process gets more efficient. Productivity rises. So you spend less money to make more widgets. 

This happens more or less through the entire economy. So we all (very generally speaking) get richer. (Obviously, I’m leaving out such factors as glaring income inequality, which normally I care a lot about.) Because we’re richer, we can have things we didn’t have before. Computers. iPhones. More sophisticated cars. More varied clothes and food. We take these things for granted. They’re part of our lives. We expect to be paid enough so we can buy them. Which, if we work for a company that shows increased productivity, isn’t hard for our employers to do.

But some big players in our economy get left out of this. These are institutions (very typically nonprofits) that don’t show productivity gains. Orchestras, for instance. It takes just as many musicians to play a symphony now as it did 50 years ago. Or hospitals. Or universities.

Orchestras, in fact, are less productive than they were, because (see above) they need larger staffs, for marketing and development. And so orchestras fall behind the rest of the economy. Their costs keep rising, just everybody else’s do. Just like General Electric, or Ralph Lauren, they have to pay higher salaries than they used to, so their musicians — and the people on their staff — can buy computers, and nicely varied food. 

And the orchestras themselves need computers for their offices. But there’s no way they can fund their rising expenses with greater productivity. So their costs keep rising, faster than their income. This would happen even if ticket sales and donations still were strong! 

So as time goes on, even when their finances seem healthy, orchestras still are forced to scramble for money. As one sign of this, the percentage of their income that comes from ticket sales has been falling for quite a long time. Which means the percentage of their income that they have to go out and find has been rising, leading to higher development costs over time, which means they have to raise still more cash, which means…

I don’t want to get melodramatic about this, but the Cost Disease is real, and makes orchestra financing troublesome, even without the scary new squeezes we’ve been seeing in the past few years.

I’ve explained the Cost Disease before, but maybe this elucidation is clearer than the others.
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Comments

  1. Scott Winters says

    Greg,

    The League of American Orchestras just announced a change to their annual conference in June. They’ve added a third plenary session “to address the issues that have led to the crises in Detroit, Louisville, Honolulu, Syracuse, and Philadelphia.”

    I’m glad to see this change – until now the conference schedule has included no real mention of the growing crisis.

    I’m just wondering, have you been asked to participate in any forums or panels this year?

  2. richard says

    Baumol’s Dilemma is taking its’ toll on the whole arts/entertainment industry. “Blame” the internet! If something can be digitized; it will be! And the effective cost/value of a copy has approached zero.

    Look at the panic in Hollywood over Netflix and streaming in general. TV and movie execs are scrambling over how to monetize their products.

    Of course the whole recording industry is circling the drain. I’m an old fart, and I haven’t paid for recorded music in years, and I can pretty much listen to anything I want.

    Pop musicians are only going to make money by taking the show on the or through product endorsements/tie ins or by selling paraphenalia to fans. I think the days of the ueber-rich entertainer may be winding down.

  3. Tom says

    I remember reading about the Baumol Dilemma during my masters program in arts administration. There are a couple of issues with Baumol & Bowens’ theories:

    1. The fundamental issue of productivity has existed since the late 1700’s, when orchestral concerts first became accessible to a general, ticket buying public. Yet in spite of this, the number of orchestras grew throughout the late industrial revolution and in the atomic age.

    2. The lack-of-increasing-productivity model is incomplete, as it does not address the effects of market theories on supply and demand.

    I would argue that the number of symphony orchestras grew from the late 1700’s until recently, because demand was increasing as well, a byproduct of increased average personal wealth stemming from productivity increases. More people were wealthy enough to demand and pay for receiving access to the luxury good that is symphonic music. Anyone marginally familiar with economic theory will know that if demand exceeds supply, prices for the good in demand will rise. This negates Baumol’s Disease in a demand-driven environment.

    Gold is a fairly useless metal, with practical applications mainly in tinting, electronics and chemical prodction. Only 10% of what is produced annually today is used for those purposes, with 90% going towards human vanity in the form of jewelry, and human folly, in the form of investment. Yet its price spikes and bottoms drastically, as we have seen in the last 40 years. It has an almost wholly demand-driven value, since it is practially useless, insofar as supply far exceeds industrial demand.

    Like gold, symphony orchestas – analyzing their inherent value in brutal market terms, which few people seem able to do – have a very low functional value, but can have a high perceived value based on societal vanity and civic investment.

    Let us say that classical symphonic music has a demonstrable positive effect on the human mental state, and on ancillary businesses, such as restaurants, taxi services, babysitting services and the like. This might be roughly equivalent to the real usefulness of gold, i.e., 10% of its total annual production. The rest is civic vanity and investment. It is often demonstrated by quotes from patrons and politicians in the form of “for a city of our size, it is a matter of pride to have a world-class orchestra” or “we’ve been attending for 40 years and love this orchestra and maestro so-and-so”. Are these arguments valid and do they represent value? Is gold’s really worth around %1500 an ounce, and does it make a person better-looking if they wear it as opposed to if they did not?

    It would seem that orchestras are not too dissimilar to gold, though of course their market cycles have been much longer hitherto. The other branches of the entertainment industry are much closer in its ebbs and flows of fashion to the price-cycles of gold, but that is because they are much more in touch with market mechanics, insofar as they are a perceived good by a much larger segment of the general population than orchestras, which, as market research has shown, only attract approx. 4% of the total human market at best.

    The real reason, I believe, for the orchestral crisis of the 1990s until today has been a bubble created by the Rockefeller cultural initiatives of the early 1960s. Not Baumol’s disease. With the Rockefeller cultural initiatives, market conditions not unlike the housing bubble of today, were created. Now the bubble is exploding, and orchestras are crashing.

    Before 1960, the US had a much smaller number of orchestras than today. With the advent of the NEA and increased attention from funding sources, local government, corporate and foundation, the number of orchestras grew, as did the salaries of musicians, and (nota bene, though that’s a separate discussion) the cost of maestros and soloists. In the 60s and for a few decades forward, this was perhaps justifiable from a market perspective. Electronic reproduction quality was far lower than the actual live performance sound experience, and a relatively well-educated population with a connection to established national-romantic cultural roots were willing not only to buy tickets, but also donate individually, to attend their local orchestra. Soon every mid-size city in the U.S. had its own professional orchestra, and every major city suburban/state region of the U.S. had their regional orchestras.

    This favorable environment started eroding sometime in the 1980s, concurrently with the advent of the CD, the decline in elementary education quality in the U.S., and various demographic shifts.

    The then-named ASOL handled the Rockefeller-inspired growth about as well as Alan Greenspan handled the national economy by holding interest rates too low for too long. the ASOL advocated for more emotional appeals and increased funding for too long. Instead, both parties may have done better to realize, that not every American actually could afford a house, nor should they be on a stock market-driven pension plan, just like not every city or region in the U.S. could or should have its own symphony orchestra. So foundation and corporate funds were squandered to prop up marginally effective orchestras, instead of focusing on the demonstably efficient and technologically progressive ones. However, as the League of American Orchestas is in no way a regulatory body, it can’t be blamed for playing its advocacy role. But the League could have brought more economic sense into the debate rather than focusing on best-practice lectures, audience-building and fundraising workshops. Cost-cutting workshops were never very popular with boards, managers and – especially – musicians.

    Therefore, the situation today is unsurprising not because of Bowen’s “disease” but because of supply and demand. There are simply too many orchestras and too few audiences around. Bowen’s Disease offers no solution to the productivity issue. However, orchestras defined as luxury goods, have their future defined less by the level of production than by the laws of supply and demand.

    There will be a radical culling in the number of orchestras in the U.S., which will probably bring their number down to levels last seen around 1900, when they were truly civic-driven (in our day also recording-driven) cultural institutions. People will likely have to travel to a large city to hear a live symphony orchestra, and it’ll be difficult and expensive to obtain tickets. Their rarity and vanity appeal, as it once was in 19th century Europe, will then allow those surviving orchestras to pay their musicians productivity-driven wages, despite Bowen’s model. People will always want to have the amount of gold they are wearing beheld by others in the foyer of a symphony hall during intermission.

    In a way, we should be less worried about orchestras today, since economic theory provides a reasonably accurate prediction of their future. The question is, rather, what is going to happen to the music departments of colleges and universities and their graduates in the U.S., which today are producing classically trained musicians at a rate which could be likened to building thousands of million dollar mansions in downtown Detroit every year now and far into the future.

    And where is the perception of reality among already employed musicians and their unions? They need to institute their own paradigm shift, or they, too, shall soon be eating cake.

  4. Marcus Overton says

    Many people my age (late 60s) can remember that time in the 60s when the Big 5 orchestra members won the argument over expanding seasons to 52 weeks. It was as clear then as it is now that the ripple effect would lead to disaster. The situations in Charleston (to give one example among many)and elsewhere are the ineluctable result of the disconnect between rational thinking (well, we are an orchestra, too, so we must also perform 52 weeks a year — and if there is not enough audience for that in our location or community, well…well, we ware just as good as the New York Philharmonic or the Chicago Symphony, and we ought to be treated the same….etc. ad infinitum) and a realistic, honest self-assessment of who we are, where we are and how we cna do the most with the resources that are available to us.

    Your post does not ask the question of whether or not these orchestras which are stranglilng on their costs have been the victim of distorted thinking and unrealistic self-assessment. A widget manufacturer who is not realistic about his market will soon go out of business, and an orchestra that refuses to be realistic about what it is and where it is will do the same, sooner or later.

  5. ken nielsen says

    Well explained, Greg.

    Orchestral performances are becoming relatively more expensive (compared to iPods, TV sets and other things that can take advantage of productivity increases) so if we want them to continue we have to pay more.

    If we don’t – or if not enough of us do – orchestras will contract or disappear. As an economic event – this is entirely normal. Servants became too expensive because there were better paid jobs available.

    For those of us who care about music and who believe that a live performances is a greater experience than a recording, we must be prepared to pay more. And persuade others to do the same.

    Dunno whether it will work, but after a lot of thought, I am convinced that there is no silver bullet.

  6. says

    Dear Mr. Sandow,

    This is the first comment I’ve made here, so first, let me just say I am a huge fan of your blog. Hearing your insights into the Philadelphia Orchestra’s economic problems is fascinating; your reporting on how classical music is branching out is is really inspiring.

    I was wondering if you’ve been following any of the “Culturomics” research that has popped up in the past year or so. I did a search of all the mentions of composers like “Bach” “Gershwin” and “Beethoven” over the past 200 years, and although the frequency with which these composers are mentioned has decreased since their peak around the 60’s, it seems like in the past few decades their popularity hasn’t diminished all that much (http://americavsbeethoven.blogspot.com/2011/05/playing-around-with-culturomics-data.html) I was wondering if you had any thoughts on this. Is it possible that classical music’s economic problems are not necessarily tied to how much people think about classical music (as reflected in how much they write about it)?