Of business models and the breakage thereof

Every crisis creates its own buzz phrases. Hurricane Lehmann and the resulting economic meltdown has created a suitably scary one for our industry, and I’m hearing it more and more: “the model is broken.”

The latest manifestation is an article by Michael Kaiser, president of the Kennedy Center in Washington DC, on the Huffington Post website:

One of the Fellows participating in the Kennedy Center Arts Management Institute raised a serious question with me: can the traditional model of a symphony orchestra work in the United States? He observed that salaries are very high for musicians, conductors and guest artists, and ticket demand is not strong enough to cover most of these costs. High ticket prices are stifling that demand and contributions will continue to have to grow very rapidly to cover inflation.

I cannot argue with this analysis. Somehow the cost structure for American orchestras has risen to the point that every orchestra is likely to struggle to make ends meet…

Already we see a series of regional symphonies closing, shortening their seasons or radically restructuring their contracts with musicians. Unfortunately, this is an ugly process that all too often is pursued with a sledgehammer.

Frustrated board members and administrative staff often approach restructuring with a feeling of vengeance: the musicians are getting what they deserve. They are all overpaid anyway argue the leaders of the restructuring.

While supply and demand must be used to evaluate salaries, the salaries for orchestral musicians are virtually always less than the salaries of the stagehands who set up their music stands and chairs! The challenge is that there are so many of them. A major symphony has over 100 musicians; their salaries represent a large and fixed cost.

So boards and administrators who are trying to make ends meet, and do not have the wherewithal to build earned and contributed income, look to reduce this high fixed cost. Musicians, unfortunately, are easy targets, for they have far fewer employment opportunities than the administrators who employ them; when a situation gets ugly the administrator can leave for greener, or friendlier pastures, the musicians are left to deal with reduced weeks of work and lower salaries.

Actually it is possible to “argue with this analysis.” First of all, not only is ” every orchestra… likely to struggle to make ends meet,” but this has been the case literally for decades. I think it would be more helpful to look at what costs are rising relative to what revenue sources.

Musician compensation, for example, is going up in some places and not in others. My orchestra is making the same salary as we did over ten years ago, although obviously health insurance costs have gone up. And we don’t appear to be unique in trying to pay 2009 prices on mid-90s incomes.

I suspect that there are some near-universal trends in our business, though. One is that most endowments increased in value substantially over the past two decades and orchestras grew increasingly dependent on them, which is a big problem when endowments tank as badly as they have in the last year. Another is that marketing costs are increasing inexorably compared to ticket revenue. Another is that staffs are getting larger (part of the marketing costs are, of course, staff costs). And probably the most important is that audiences, while relatively stable in absolute terms, are decreasing relative to the US population, and what we know of attendance trends for live music of all kinds is not encouraging for a future in which we depend on paid attendance.

Claiming that “the model is broken” because it’s hard to balance orchestral budgets in the middle of the worst economic downturn in 70 years is like claiming that a cool summer day disproves global warming. But I suspect we will look back on the past year and the coming several years and recognize that one possible business model for American orchestras has been breaking down for a while now; the current storm simply stripped away the curtains.

The good news is the way we’ve run orchestras the past few decades is not the only way it can be done; it’s not even the only way it can be done to produce orchestras of artistic excellence that pay musicians a living wage. The current model is a non-profit version of a long-running Broadway play. But why should a non-profit imitate a profit-making business?

Non-profits bear that description for a reason; they’re not supposed to make money. Non-profits are supposed to produce social benefit – and not solely (or necessarily at all) out of what we call “earned revenue.” We don’t have for-profit universities (or at least very, very few); universities receive massive government subsidies and private donations, as well as charge tuition. We don’t have for-profit primary education; even private schools depend on donations. We don’t have for-profit libraries. We certainly don’t have for-profit art museums; most museums depend on massive donated endowments which, for some strange reason, they call “collections.”

And most of these non-profits have a much clearer idea of how they differ from for-profit enterprises than do orchestras. They don’t expect to make lots of their budget from user fees (what we call “ticket sales.”) They don’t expect to spend massive amounts of money and staff time on marketing in order to capture those user fees. What do most orchestras really net on ticket sales after all the money spent marketing those tickets (which often includes guest artists, if truth be told) is subtracted from the gross? Add in the sunken cost of the very sexy new venues built to encourage those people to buy tickets, and the net begins to look very small indeed.

The most telling line in Kaiser’s article was:

…salaries are very high for musicians, conductors and guest artists, and ticket demand is not strong enough to cover most of these costs. High ticket prices are stifling that demand and contributions will continue to have to grow very rapidly to cover inflation.

But that’s not really the way orchestras work, even now. Money is famously fungible, but I’ve always thought of ticket income as going to to pay the marginal costs of giving concerts. Contributions (and past contributions in the form of endowments) are what pay the fixed cost of having a full-time orchestra. There’s a profound difference between paying to have an orchestra and paying to use that orchestra; contributions pay for the former, ticket sales for the latter.To use an analogy from the museum world, the cost of having an museum comes from donations in the form of buildings and art; the cost of using the resulting museum is paying the utility bills and the staff salaries.

From my observations, the current model is coming unglued in the relationship between the costs of using the orchestra donated by the community and the money netted from doing so. To give a stark example: if the musicians in my orchestra worked for free, ticket sales still wouldn’t cover the marginal costs of giving concerts. Worse, this has been going on for quite a while now. And, as in our struggling to make 21st century ends meed on 20th century incomes, we’re probably not alone in that either. That looks like a broken model to me.

I don’t know what a new model of a sustainable orchestra will look like. I don’t think it’s going to look like a shrunken version of the current one, though.