This is Part I of a two-part series. Part I focuses on defining and challenging the cost-disease, while Part II examines its strategic implications for symphony orchestras.
Part I: What is the Cost-Disease?
If cultural academia proves accurate, then the fine arts, and symphony orchestras in particular, may be more outdated than anybody once thought. Although they have not degraded culturally or artistically, their business models seem less and less sustainable every year. We often hear how orchestras struggle to pull in audiences; demand has not kept up in a world with modernizing musical tastes. Yet this is only part of the story. Just recently, an Andrew Mellon Foundation report found that even if the average symphony were able to fill all of it seats, it could not recoup enough revenue to match its costs. Intuitively, this seems like a problem, yet we are reminded that nonprofits by definition do not make money. The longtime symphony observer will note that orchestras can fill the gap with various private and public funding mechanisms. But the problem is, orchestras were more self-sufficient in the past!
Baumol and Bowen studied this long-term trend in the 1960s. They found that the fundamental problem with performing arts was that the sector had little productivity increase; an orchestra in 1900 cannot perform a Beethoven symphony any more efficiently than an orchestra in 2009. By constructing an economic model that distinguished the productive and nonproductive (including the arts) sectors, they discovered that rising productivity led to higher wages in both sectors. Cost of living increased across the broad spectrum, and the nonproductive sector found itself mired with higher fixed costs every year. On the other hand, while the productive sector saw increased revenues from higher productivity, the nonproductive sector’s revenues remained relatively flat (relative demand does not change in this model). Ultimately, this led to less production (read: fewer concerts) in the nonproductive sector as managers substituted away from the arts toward more productive activities. Baumol later revised the model and found that production could indeed increase due to the income effect (performing organizations put on more shows to try and recoup income), but that revenue nevertheless accounted for a decreasing fraction of costs, and in particular labor costs.
Empirical evidence since that time suggests that costs have indeed risen faster than revenue. Many orchestras today will admit that they have this problem; though some fault may go towards aggressive labor unions or guest artist agents, the underlying problem cannot be denied. Performances have increased overall due to the founding of many more orchestras (with some federal and state funding solutions) as well as the increased support of private and corporate philanthropy, which is generally a good thing. Yet, with rising costs, is it possible for all these new orchestras to stay in business? Can private philanthropy continue to patch up an ever-widening gap between costs and reveues? Can demand somehow increase enough to bridge this gap?
Of course, the cost-disease theory has its fair share of objections. Some point out that labeling the arts as a “nonproductive” sector is a mistake; there are constantly new product and process innovations. While I believe that this is true of the sector as a whole, the classical arts, and especially symphony orchestras, do not readily reap these gains. The rise of recordings, for one, has been touted as a productivity innovation. Yet the benefits of this innovation distribute asymmetrically; smaller orchestras cannot compete with the brand name and mass recognition of the Chicago Symphonies and the Berlin Philharmonics of the world. This is compounded by the fact that there is a limited classical repertoire for all orchestras to capitalize on. Looking at financial data, most symphonies without international recognition indeed make little revenue from their record sales. What about repertoire innovations? Many orchestras rightfully include room for new composers and modern works in their concert schedules, but their impact is mitigated in several ways. First of all, while these innovations increase demand for the orchestra, they do not necessarily make the orchestra more efficient. Second, the definition of “orchestra” constrains the scope and nature of these innovations. For instance, new repertoire cannot save orchestras from the costs of 80 full-time musicians. Finally, this repertoire has difficulty penetrating the “high culture” stigma of a symphony orchestra. It is the orchestral experience, not simply the music itself, that determines the audience base, and this overall experience is oftentimes just too elitist or stuffy for the average concertgoer despite innovative music.
The arts as a whole are productive - new phenomena like digital music, youtube, and ever-changing musical innovations continue to be profitable. If the arts were another business sector, there would be creative destruction - symphonies might have been phased out of most regions and reduced to a few large cities, as both managers and audiences go toward the more profitable. Yet the mission and nature of classical music and symphony orchestras today is one of preservation. The gap between costs and revenues (known as the "performance income gap") therefore continues to rise, and demand has so far only been able to fill it through philanthropy. While I don't presume to announce that the sky is falling atop the roofs of symphony halls, I will say that the financial operating environment of symphony orchestras is gradually changing, regardless of economic fluctuations like the current one.
(stay tuned for part 2)
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