Interesting take on orchestra financial troubles

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Haydnseek
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Interesting take on orchestra financial troubles

Post by Haydnseek » Sun Apr 30, 2006 3:03 pm

Finance woes at symphony likely to keep it out of tune
Jay Hancock
April 23, 2006

http://www.baltimoresun.com/business/ba ... 497.column

Maybe what the Baltimore Symphony Orchestra really needs is a corporate "right-sizing."

Get some McKinsey & Co. consultants in there. Re-engineer the woodwind section. Do we really need both violins and violas? Trade in music director Marin Alsop for a teleprompter.

If that happened, of course, the BSO would cease to be a philharmonic orchestra and start resembling a really nice stereo system.

Classical orchestras, as economist William J. Baumol once pointed out, can't downsize very well. Whereas General Motors can make a car with a fraction of the workers once required, Mozart's Prague Symphony takes just as many musicians to perform as it did two centuries ago.

For orchestras soliciting the paying public, that's a cost issue. Costs are at the heart of the BSO's difficulties, and the recently announced raid on its endowment to pay debts is something of a sideshow to the real issue, which is future cash flow.

Three weeks ago, the symphony disclosed that it took nearly a third of its $90 million endowment - $27.5 million - to retire debt caused by previous budget deficits. Nothing wrong with that, except that cultural organizations like to live off the milk from their endowment cows and avoid drilling into the beef if they can help it.

The transaction will certainly help the BSO's balance sheet. The orchestra had more than $20 million in debt and other liabilities on the books last year. The endowment aid wipes most of that out and leaves the orchestra with several million in cash. "Fresh start" and other cautiously cheery words surrounded the capital shift, according to the news dispatch by The Sun's Tim Smith.

But the balance sheet isn't the BSO's problem.

The income statement is.

The symphony's revenue from concerts and other operations was up last year by a heartening 11 percent, to $12.4 million, in the fiscal year ending in August, the BSO's financial statements show. But costs, which were already far more than revenue, rose even more.

The 2005 operating deficit was $18.6 million, up from an $13.8 million loss in 2004.

The symphony's operating expenses, in other words, have been more than twice its operating revenue. Not the sort of thing they like to see at the nearby Merrick School of Business at the University of Baltimore.

As noted, this isn't a business. The orchestra has generous donors who help fill the gap, but donors generally like to build an endowment rather than finance current operations. Symphony management has realized it must address the huge operating deficits.

Paring debt will help expenses only marginally, saving maybe a million or two in annual interest, assuming whomever covered the deficits charged interest. What really matter are demand for the symphony's product and the cost to produce it, and in these categories symphonic orchestras are working at a disadvantage in the 21st century.

The inability to downsize is only part of the economic challenge. There is also the competition for symphonic laborers and the distracted life of the modern entertainment consumer.

While classical concert ensembles are stuck in time, the rest of the world has raced forward with productivity improvements fueled by trains, factories, computers and so forth. That led to big income gains for the workers whose jobs are helped by those technologies. (The more people produce over time, the more they earn.)

But the BSO must pay musician salaries that are competitive with those of productive modern workers even though the economic output of a baroque cellist is basically the same as it was in 1750. That gives the orchestra an economic handicap that will be on display when musicians negotiate a new contract this year.

Another challenge noted by economists is the modern menu of competing entertainment and the time it takes to hear a symphony.

For some people, the "opportunity cost" of sitting through, say, Beethoven's Fifth, is higher now - hey, Survivor is on! - than it was in 1808.

The farther into time they travel from their origins, the more symphonic orchestras stand out from their surroundings. Of course, that's why people love them. Whether enough people love them to pay for them, however, is the problem.

Copyright © 2006, The Baltimore Sun
"The law isn't justice. It's a very imperfect mechanism. If you press exactly the right buttons and are also lucky, justice may show up in the answer. A mechanism is all the law was ever intended to be." - Raymond Chandler

Ralph
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Post by Ralph » Sun Apr 30, 2006 8:27 pm

It'll be interesting to see if Marin Alsop can improve the financial picture through increased donations AND ticket sales.
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