21st Century Conductor

The Economic Environment of American Symphony Orchestras is relevant to every orchestra that is facing a changing funding position, and in combination with The Search for Shining Eyes, a pointer to the relationship between orchestras the world over and Generations X & Y.

 

Download the report here:

 

Economic Environment of American Symphony Orchestras.pdf

 

EXECUTIVE SUMMARY

1. What issues does the report address? The Mellon foundation requested a factfinding study of (1) cyclical and trend developments in the economic health of the symphony orchestra industry and (2) influences on performance and nonperformance revenues and expenses of orchestras. The hope is that analyses of these influences will clarify decisions facing symphony orchestras and help individual symphonies to assess and project their own economic health.

  

2. Which symphony orchestras are included in the analyses? The main sample includes every symphony orchestra that was one of the largest 50 symphonies in the United States (based on budget size) for at least two years during the 1987/88 through the 2003/04 concert seasons (the period covered by the data). Each symphony that meets this requirement remains in the sample throughout the 17-year period, irrespective of its rank in other years. This approach produced a sample of 63 symphony orchestras (listed in Table A1) that includes some orchestras whose “economic health” either declined or improved over the period along with orchestras whose economic health was stable. The sample represents over 70 percent of orchestra revenues and expenditures in the United States and provides the raw material for most of the analyses in this report. Some descriptions of basic industry trends use data from the 32 symphony orchestras that reported information in every year during 1987-2003 seasons (Sections III and VI).

  

3. Where do the data come from? The League of American Orchestras (formerly the American Symphony Orchestra League) provided data on the financial and operating characteristics of symphony orchestras. (Individual orchestras submit these data following a template established by the League.) Information on local market characteristics, such as population and per capita income, come from publicly available U.S. government data. Opera America provided data on the financial and operating characteristics of their members. In presenting the results of statistical analyses of large numbers of arts organizations, the report preserves the confidentiality of the data provided by individual organizations.

  

4. How is the report structured? Section II (particularly Exhibit I) explains the model of orchestra finances underlying the analyses. The economic challenges faced by symphony orchestras begin with the fact that their performance revenues from concerts, broadcasts and recordings do not cover their performance expenses for artistic personnel, concert production, marketing, and general administration. The resulting performance income gap has worsened over time and will worsen in the future. Symphonies try to offset the performance income gap with nonperformance income, including contributions (from individuals, businesses, and foundations), government support, and investment income. The annual financial balance of a symphony indicates the extent to which nonperformance income has offset the performance income gap. Vi  This report seeks to describe how the various elements of performance revenues, performance expenses, and nonperformance income and expenses are linked to three sets of potential influences: (1) Policy decisions of symphony orchestras, (2) characteristics of the local market, and (3) competition from other performing arts organizations.

 

  

5. Broad developments. The graphs in Section III show the main trends based on the 32 continuously reporting orchestras, whose presence throughout the period signals their superior economic health. Even this group of comparatively healthy orchestras has encountered significant economic challenges, including a worsening of the performance income gap (Graph 2), declining attendance per concert (for virtually all types of concerts) that limits performance revenue growth (Graph 1), and a tendency of performance expenses to grow more rapidly than other costs in the economy (Graph 3). This group of larger orchestras has also experienced changes in the distribution of performance revenues (Graph 6), performance expenses (Graph 7), growth of private contributed support (Graph 4), and a decline of government support (Graph 5). The remaining sections of the report explore linkages between these economic developments and orchestra policies, market characteristics, and competition for attendance and contributed support from other performing arts organizations using the complete sample of 63 symphonies. The analytical results therefore reflect the experience of orchestras at varying degrees of economic health.

  

6. Cycles and trends in revenues, expenses and contributions (Section IV). The financial health of symphony orchestras is sensitive to the general state of the economy. The burden of recessions on orchestras results as much from the decline in contributed support—particularly private contributions—as from cyclical change in the performance income gap. Recessions worsened the overall surplus/deficit position of the average symphony in this sample, while business expansions improve the overall financial balance. Holding the influence of general economic conditions on symphony finances constant, upward trends in private contributed support and investment income offset both a long term decline in government support and the long-term deterioration in the performance income gap. As a result, there was a modest trend improvement in the overall surplus/deficit position of orchestras in the late 20th century.

  

7. Concert attendance (Section V). Annual concert attendance declines sharply in ecessions and increases during economic expansions. After holding general economic conditions constant, annual attendance has increased as orchestras have added concerts to their schedules, but adding concerts yields smaller and smaller attendance gains. In fact, attendance per concert declined throughout 1990s and into the new century. Even if every concert were sold out, however, the vast majority of U.S. orchestras would not earn sufficient income to cover all performance expenses. Once the number of concerts has been set, an orchestra’s ticket pricing and marketing policies influence attendance per concert. Higher ticket prices discourage some vii attendance but raise performance revenues. Higher marketing expenditures increase attendance at regular season concerts. Only expenditures on mail and phone campaigns are significantly related to pops concert attendance. Incremental expenditures on all types of marketing activities are subject to diminishing returns—successively smaller gains in attendance per concert. Location also influences attendance, which is positively related to an area’s population (but is not significantly related to either the real per capita income or unemployment rate in an area). To a small degree, symphony and opera performances may compete for attendees: An increase in opera ticket prices raises symphony attendance (and conversely), with other influences held constant. This competitive effect is quantitatively small, however.

 

  

8. Artistic Costs (Section VI). Artistic costs constitute the major expense category of expense for orchestras but have declined as a percent of total costs. Most symphony musicians are unionized, and their salaries are set in collective bargaining agreements signed by both labor and management representatives. Between the 1987 and 2003 concert seasons, the minimum and average effective salaries of regular orchestra musicians increased more rapidly than consumer prices, the average wages and salaries of other unionized workers in the United States , and the average wages and salaries of nonunion workers. Payments to guest soloists and guest conductors have increased at about the same rate as the salaries of orchestra musicians.

 

  

9. Public and Private Support (Section VII). All symphony orchestras must rely on private philanthropy and government support to offset their performance income gap, but orchestras differ widely in the extent to which they rely on private contributions by individuals, businesses and foundations. Government support is invariably a less important source of funding than private philanthropy. The highly varied structure of nonperformance income for orchestras indicates that they do not follow a common model for achieving financial balance. Philanthropic contributions to orchestras depend on the characteristics of their market areas, the development activities of the orchestras, and (to a small extent) the development activities of competing performing arts organizations. Orchestras in areas with higher per capita income receive more private contributions. Orchestra ticket-pricing, concert programming, and fundraising policies also may influence the level of contributed support. Once the effects of an area’s economic capacity are held constant, the effect of fundraising activities on contributed support appears more modest than sometimes claimed. For larger orchestras, there are indications that annual fundraising expenditures do not immediately pay for themselves. There is some evidence of competition between different performing arts organizations for contributed support. Although the evidence is not ironclad, it appears that a small proportion of increased private contributions to operas comes at the expense of symphony orchestras in the same area, and vice versa. While, this competitive effect is small in the vii ata for the late 20th century, it could lead to a mutual and mutually unproductive scalation of development and fundraising expenditures by all competing arts rganizations.

 

   

10. Endowment (Section VIII). The returns on endowment experienced by individual symphony orchestras are highly dispersed even though they all have access to the same.capital markets when they invest their endowments. Returns to endowment investments are cyclically sensitive (Exhibit 4). In the early 21st century, the endowment policies of most symphony orchestras permit annual draws from the endowment of 5-7 percent in nominal terms. The actual draws of some symphony orchestras appear to exceed this policy. Actual symphony orchestra endowments are not sufficiently large to cover performanc deficits at prudent endowment draw rates (Exhibit 5). Endowment draw rates that would offset performance deficits in the short run are so high that they would cannibalize endowments to a point where it could sustain only smaller draws in the future.

Taken from: 

REPORT TO ANDREW W. MELLON FOUNDATION

The Economic Environment of American Symphony Orchestras

Robert J. Flanagan

Graduate School of Business

Stanford University

Stanford, CA 94305

(flanagan_robert@gsb.stanford.edu)

March 2008

© Robert J. Flanagan