Now we know what makes the perfect storm that topples arts organizations. Yesterday in the Philadelphia Inquirer, Philadelphia Orchestra Board Chair Richard B. Worley laid it out. The story is classically cautionary.
”Today, our unrestricted endowment is nearly exhausted, our emergency fund has also been depleted, and our cash reserve has fallen to $3 million. Absent additional funding, we will run out of money soon.
“Our costs are too high, but the basic cause of our financial problem is declining revenue. The audience is the lifeblood of the orchestra, providing ticket revenue and a vital donor pool. But over the last two decades, attendance has declined from 250,000 to 150,000 annually, and half of that decline has been in the last five years. As a result, ticket revenue has declined to only a third of expenses, and donations have fallen to half the level of other major orchestras.
“For years, our costs increased as revenues declined, and our operating deficit is expected to reach $14.5 million this year. In the face of such deficits, we drew down our unrestricted endowment and, as that dwindled, raised $15 million in emergency funding from the board and a small group of donors.
“Second, the orchestra does not have $140 million in assets to meet obligations. The orchestra and the Academy of Music together have $140 million in restricted endowments. We are limited by law and donor restrictions to spending only the income from endowments, not the endowments themselves. And spending the endowments, even if allowed, would be a path to ruin, shrinking income and our ability to attract endowment gifts.”
The absolute centerpiece of this is the second paragraph. The orchestra has lost on average 10,000 ticket buyers a year for the past five years, meaning that earned income has fallen to only represent a third of all revenues. So, you ask, can’t this be the new normal? Can’t organizations survive just fine on a 33% earned-66% contributed revenue split? I’ve actually seen plenty who are attempting to say this is the new model of health.
But it isn’t, and Worley’s well chosen words say why. When audiences get too small, they don’t provide the lifeblood or pipeline to keep an organization healthy. In any given year, there is always huge audience attrition. People die, move, put their leisure money elsewhere. As a result, every organization needs enough of those casually interested ticket buyers to survive the attrition and stick around, ideally now as a more regular attender, eventually even as a subscriber. And there have to be enough of those regular attenders who stick to become new donors, to replace the donors who every year also leave through attrition. If the system has too small a base, you are mathematically out of luck. For example, draw your attender triangle on its base, then split it into four segments. Label each segment from the bottom up as follows: casual, repeat, sustained, supportive. How broad is your base? Broad enough to make sure that top section is large enough to do its job?
In the new normal, that top section of the triangle now has to churn out – inspire, win, give, cause to give –the staggering portion of the budget that now has to come from contributions. How realistic is that when the base is shrinking faster than ice cubes in July?
A lot of people will blame the marketers for not doing their job, and as the musicians’ leader John Koen correctly points out in his own letter to the Inquirer, crucial marketing and development positions at the Orchestra have long remained unfilled. No doubt, as so often happens, this was in an effort to save salary costs – but at the peril of generating essential revenue, and even more so, at generating that base of the triangle that has to be rebuilt.
Yet, there is a far, far bigger issue at stake here. Quite simply, marketing has to emerge on such a scale, with such ability to change consumer behavior as we have never seen before to save this orchestra and hundreds of other arts organizations and entertainment presenters around the country.
The issue is as much one for Hollywood and movie theatres everywhere as it is for symphony orchestras: Consumers have changed the way they spend their leisure money, and techno-apps gains have been live entertainment’s loss. Just last week, I took a look at some recent household spending trends with data available from the Bureau of Labor Statistics. I chose three variables: entertainment tickets and admissions; spending on audio-visual equipment, and a relative constant – spending on women’s apparel.
The game changer, of course, is audio visual. Our insatiable thirst for new apps, new eReaders, new tunes and tablets and a million new games has grown and grown and grown. That’s just fine as long as household resources keep growing and growing along with it. But say you only have so much money to spend – ah, the recession – and then say you spend more of it on new gadgets than ever before. Something suffers, right?
Notice how closely spending on clothing and entertainment parallel each other all along the way, until suddenly at the $200,000 + household earning level, entertainment springs loose. But really examine how vastly different spending is on apps and stuff: look at that huge chunk of household money.
This relatively fresh data (it was released in October, 2010) spells out the new normal for all live entertainment: you’ve got a far smaller slice of your consumer’s budget dedicated to you than ever before. Given this, how realistic is it to expect to build the bottom of that triangle to the level needed?
When we talk about a structural problem in the arts, it begins right here, not just on the balance sheet at the Symphony. Perhaps, if the recession vanishes, there will be more household money, more ability to blur the stark numbers above. But a blur is all it will be.
Only with herculean marketing efforts to pry dollars away from the newest cool stuff are we likely to survive. Only with equally herculean investments that insert the arts into technology to create new revenue streams will the badly needed new revenue sources really open up. The entire consumer system around entertainment has to change. And somehow, we’ve got to make that happen. Or what we see in Philadelphia will just keep playing and playing, coming sadly and soon to a city near you.
So take a good, hard look at doing marketing the right way. Just how aggressive does your institution need to be to chip away that household spending on apps and tablets and move those dollars into the fees and admissions column? Just what needs to happen to ensure that you have the audience lifeblood that Philadelphia so needs and lost?