Chicken Little, PhD

Every so often some economist discovers that orchestras can’t exist. The latest is Robert J. Flanagan of the Stanford Graduate School of Business:

Most major symphony orchestras in the United States regularly spend more money than they take in, and some dip so far into endowments that they risk their long-term survival, according to a new report commissioned by the Andrew W. Mellon Foundation.

“The industry should realize that there is an inherent long-term economic challenge,” said Robert J. Flanagan, the Konosuke Matsushita Professor of International Labor Economics and Policy Analysis at the Stanford Graduate School of Business and the study’s author. “Nowadays, even if symphonies filled their halls for every concert, the vast majority would still not be able to cover their performance expenses.”

Although recessions exacerbate their woes, Flanagan said many symphonies have financial troubles even in good times. Attendance has been declining for most types of concerts, and orchestras may not be adequately scrutinizing the returns to their expenditures on marketing and fundraising, said Flanagan, an amateur musician since childhood who plays clarinet and saxophone. He said larger symphonies, for example, appear to spend nearly twice as much on fundraising as they realize through donations.

Some orchestra managers told Flanagan they disagreed with that conclusion, but other symphony officials he interviewed were hardly shocked.

“Some of them say it doesn’t surprise them because many symphonies have a bias towards revenue growth strategies and a bias against cost-cutting strategies,” Flanagan said, adding that nonprofit board members often shy away from conflict. “It’s not clear that they’re willing to be as tough minded about costs as directors in the private sector.”

That, by the way, is code for “boards give away the store at negotiations with musicians.” He expands on the subject:

In many U.S. industries, companies have been able to increase salaries gradually because technology has made workers more productive. Flanagan said symphonies have much slower productivity gains—technology isn’t about to turn a string quartet into a string duo—but musicians still expect bigger paychecks. The salaries of symphony musicians increased more rapidly than the pay of most other groups of workers in the late 20th century. Higher ticket prices did not fully compensate for cost increases, but those higher ticket prices reduced attendance at a typical performance.

Any stumbles in the economy only exacerbate the problem. A slumping economy reduces attendance as well as philanthropic support, but has little moderating effect on performance expenses.

Flanagan said the study’s scope did not try to identify similarities among the 17 symphonies that usually did have surpluses.

Which actually might have taught us something.

What’s interesting about this report (and why I’ve categorized it under “clusterfucks”) is why it exists at all. To make a long story short, it exists because, in 2005, the Andrew W. Mellon Foundation commissioned it. This commission stemmed from the work of the so-called “Elephant Task Force” within Mellons’s Orchestra Forum. The elephants asked Flanagan to do a report on orchestra finances, with a specific emphasis on the extent to which orchestra finances were influenced by cyclical factors within the economy.

Flanagan was given data by the League of American Orchestras, as well as by Dance/USA and Opera American, on institutional finances over time and went off to crunch numbers. He came back with a draft that was first unveiled in a semi-public setting at a meeting in July 2007, to which the AFM and the player conferences were invited. They were not happy. Nor were some others at the meeting. So Flanagan was asked to revise his report.

He did. More meetings, more unhappiness. Even more revisions ensued, which were to be reviewed at a meeting this month. There was apparently an understanding amongst those close to the process that the report would not be released for a while, and would be accompanied by a “framing document” which would attempt to put the report in context (and, frankly, to make the changes that Flanagan was unwilling to make).

Unfortunately, Flanagan had other ideas. He had already presented an overview of his report in October 2007 at a conference at UC Berkeley (an overview with a stark anti-musician bias). Perhaps he got impatient with all the revisions, but, for whatever reason, the report in its entirety (minus any “framing document,” of course) was placed on the Stanford website yesterday and a press release sent around the world on Business Wire.

There has already been some press about the report. Susan Elliot of Musical America summarized it as follows:

A Stanford University study has found that most U.S. orchestras spend more money than they take in and that those who dig into their endowments are risking their future viability.

The author canvassed 63 orchestras, including the 50 majors. Findings: although concert attendance is in decline, orchestras have changed neither their marketing nor their fund-raising techniques. For every $1 spent on the latter, the return is 51 cents.

Most board members “shy away from conflict” and so are not as tough on the bottom line as they would be in their day jobs. Also, while technology has enabled smaller employment rolls in the rest of the world, “The salaries of symphony musicians increased more rapidly than the pay of most other groups of workers in the late 20th century.”

Those greedy musicians. David Stabler of the Oregonian, on the other hand, didn't get the memo:

His biz background shows. For example, he suggests that orchestra managers are not as "willing to be as tough minded about costs as directors in the private sector."

You don't say.

Yes, orchestras need to be business minded, but no, they do not operate like private companies. For one, they have high, fixed costs like hall rent and salaries. You can't just cut jobs.

"All those violas doing the same job. Too much duplication!" I can just see it. In lean times, only Vivaldi and string music. In fat times, Strauss and Mahler.

I predict an article in the Columbus Dispatch tomorrow on how Flanagan vindicates the Columbus Symphony’s downsizing plan. There’s a reason that the musicians’ definition of “nanosecond” is “the length of time between when any bad news about any orchestra is printed and when it’s brought to the negotiating table by management.”

Update: Drew McManus didn't get the memo either:

The only positive aspect I've noticed in what I've read is the report's commanding grasp of the obvious. In fact, if I didn't know better I'd swear it was produced by the U.S. government (empty seats are bad, m'kay?)

Further update: Henry Fogel, president of the League of American Orchestras, also didn't get the memo:

In the 45 years that I have been professionally associated with symphony orchestras in America, I have lost count of the number of times an alarm has been sounded about the state of crisis in which they exist, sometimes with warnings of the imminent demise of the industry. So far, at least, those alarms have proven to be false ones - and for the most part, symphony orchestras are more vibrant, healthy, and vital now than they have ever been. That does not mean that they don't have challenges, much like the entire non-profit field, but it does mean that they have learned how to address them.

The latest alarm bell is a study produced by Prof. Robert J. Flanagan of the Stanford Graduate School of Business. The report was commissioned by The Andrew W. Mellon Foundation, and it studied statistics from the largest American orchestras between 1987 and 2003. Data was provided to Prof. Flanagan by the League of American Orchestras. There is no question that there is much very valuable information in the report. It adds considerably to the body of knowledge about the field of orchestras, and it can and will be an extremely useful tool for advancing our understanding of our business model, stimulating debate, and ultimately helping the field to develop and implement adaptive strategies for the future. Most importantly, it provides a platform for serious future research.

Prof. Flanagan's study provides an opportunity for orchestras to continue to discuss, as they have been doing, the value of understanding the dynamic environment in which they exist, and adapting to it. It confirms what we already know: that orchestras do not operate in a vacuum but are intimately tied to the health of our communities. We at the League of American Orchestras are continuing to intensify our efforts to gather best practices and disseminate them throughout the orchestra field. The League is, in fact, already in the process of significantly increasing its efforts to carry out some of the research that the report recommends.

The final two-to-three years of Prof. Flanagan's study (2001-2003) coincided with a severe economic downturn, and the psychological damage done to our country by the events of September 11, 2001. No one will dispute that a majority of our non-profit organizations in America suffered economic troubles in that time. It is unfortunate that the post 2004-05 period did not comprise the final period of the study, because the trends were far better in those years. Over the past few years not only have fundraising and overall fiscal performance improved, but ticket sales have as well. After a few years of flat or declining ticket sales during the early 2000s, there was an 18% increase in ticket sale income to orchestra concerts between the 2004-05 season and 2005-06. And, equally encouraging, paid attendance at classical concerts for American orchestras in 2005-06 was 11% up from the previous year, again after a few years of flat or declining attendance. Attendance for all concerts given by orchestras - including family, education, pops, chamber, summer, and youth concerts - was also up 11%.

Prof. Flanagan points to the fact that musicians' wage increases outpaced inflation during the period of his study. I think it is important to note that the 3.8% average annual increase in the salary of the orchestras he studied is 0.1% over the rate of increase for liberal arts college faculty during that same period, 0.2% under the rate of increase for employees of hospitals, and precisely the same rate as other health-service industry employees (these figures are from the U. S. Bureau of Labor Statistics). Thus, musicians' salaries track extremely well with those of other employees in the non-profit sector. It is also very important to note that Prof. Flanagan excluded musicians in hundreds of orchestras with budgets smaller than his sample (which consisted of the 50 largest orchestras).

He da man.

Comments

[drew mcmanus]

"Didn't get the memo" indeed. I've checked with no less than 20 other prominent cultural bloggers who are not also paid print journalists or have a direct connection to Stanford or Mellon and none of us received the report's PR. It makes me wonder what sort of understanding Stanford's marketing department has on the performing arts environment. For example, if Robert Flanagan and Stanford's Marketing Department missed the fact that there's a thriving cultural oriented new media environment that is much easier to contact than traditional print media, what else did the report miss?

[Andrew Druckenbrod]

Well, I got the press release, and I am so much richer for it. I have one word for this report of monumental insignificance, "Duh!" It's going to start a run on obvious comments, it's so good at stating them -- such as "Any stumbles in the economy only exacerbate the problem."
A more sophisticated response is on my blog, Classical Musings:
http://www.post-gazette.com/pg/08081/866768-386.stm
Anyone know how much money was spent on this study? My guess is it could have really helped an orchestra or two.

Andrew Druckenbrod,
Post-Gazette Classical Music Critic

[Joe R.l]

It's easy to be critical of this study and call it "obvious" but remember - most of the general public doesn't know that orchestras are so poorly managed and are struggling to survive. Flanagan provides the tough medicine that most arts managers, union musicians (and enabler critics) aren't willing to face up to. After all: Just because orchestras are non-profits doesn't mean that they shouldn't show positive financial results to their boards, donors, etc.

[Rich]

I concur with Joe. Stanford Business School is one of the top 3 business schools in the US. The Mellon Foundation is widely respected. I think they know a little more about how institutions are run than some classically trained musicians.

[Robert Levine]

"Stanford Business School is one of the top 3 business schools in the US. The Mellon Foundation is widely respected. I think they know a little more about how institutions are run than some classically trained musicians."

Of course, if the commenter had actually read what Mellon wrote about the report, he might have concluded (as did I) that Mellon was essentially disowning large chunks of the work they had paid for.

Oddly enough, I went to Stanford, for a while even as an econ major. In fact I grew up on campus in what was known as the "faculty ghetto." I learned many things there. One of the most important is that academics know a lot about their specialty. They don't typically know a lot about anything else.

A better approach for Rich to take would be to read Flanagan, and then to read my critique, and then and only then decide who he thinks is right. Letting the reputation of the GSB at Stanford do his thinking for him is just lazy.