EC Obstacles In Leadership Case Report

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write a case write up answering the following question: 
What are the major obstacles Anne Ewers will have to overcome to integrate the two organizations?9-404-116
REV: AUGUST 8, 2005
THOMAS J. DELONG
DAVID L. AGER
Utah Symphony and Utah Opera: A Merger
Proposal
In late June 2002, Anne Ewers, general director of Utah Opera (UOC), sat reviewing costume
sketches for an upcoming performance of Giuseppe Verdi’s Otello. In less than two weeks the Boards
of UOC and the Utah Symphony would vote on whether to merge the two organizations. The
outcome of the vote, if positive, would have a significant impact on Ewers, who had been asked to
assume the helm of the merged entity and lead the integration effort.
A weakening of the economy, the bursting of the Internet bubble and subsequent collapse of the
stock market, and the tragic events of September 11, 2001 had led to a decline in public (e.g.,
government subsidies) and private (e.g., ticket sales and individual, corporate, and foundation
pledges) support for the arts. This trend had significantly hindered an already financially strapped
arts community across the United States and had left many arts boards of directors scrambling to
devise means to replace lost revenues in an effort to maintain the solvency of their respective
organizations. Salt Lake City was no exception, and board members of many local arts organizations
were laboring to preserve the arts in Utah.
In response, senior board members of the symphony and the opera and Ewers engaged in a series
of private conversations to consider the idea of merging Utah’s top two arts organizations in an effort
to economize on costs and perhaps expand the artistic potential of the two organizations. The
outcome of these conversations was a decision to convene a joint task force1 to further study the idea
of a merger between what many argued were two of Utah’s greatest cultural assets.
Ewers, who had a reputation among the executive committees at the opera and the symphony for
being energetic, enthusiastic, and capable, had been asked whether she would be interested in
becoming the CEO of a merged organization. At first she was cautiously excited about the
opportunity, but as the months passed and the public, various board members, staff members, and
artists began to express skepticism about and openly oppose the merger, Ewers recognized that
combining the two organizations represented a much greater challenge than she had initially
realized.
1 The task force consisted of members of the executive committees of the symphony and the opera—three from the symphony,
three from the opera, and one person who sat on both executive committees—and Ewers.
________________________________________________________________________________________________________________
Professor Thomas J. DeLong and Ph.D. Candidate David L. Ager prepared this case. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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404-116
Utah Symphony and Utah Opera: A Merger Proposal
The opera and the symphony boards were each scheduled to vote on the merger on July 8, 2002,
yet by late June 2002 it was still unclear which way the vote would turn. Ewers was excited by the
challenge of leading the merged organizations and the integration effort, but she knew that she
needed a well-thought-out plan for how she would integrate these cherished arts organizations.
Ewers’s reverie was broken when the costume designer arrived with the fabric samples for Otello.
Still, the question lingered in her mind: How would she realize the synergies that justified the
merger?
Arts Organizations in America2
Unlike major arts organizations in Europe and Canada, which relied heavily on government
agencies for their funding, orchestras, opera companies, theater companies, and other arts
organizations in the United States operated according to a very different financial model. A relatively
small portion of total income (approximately 6% in 2000–2001) came from federal, state, and
municipal governments (tax-supported income); the majority of income was generated through ticket
sales and individual contributions (earned income—approximately 46%), business and foundation
giving (private income—approximately 36%), and endowment and investment income
(approximately 12%).
Even before the economy had begun to soften in 2000, many arts organizations across the country
had attempted to increase revenues by adding more performances. Once a performance (play, opera,
concert) had been rehearsed, there was little incremental cost to the organization to present an
additional show. This was particularly true of symphony orchestras, which between the 1995–1996
and the 2001–2002 seasons had increased the total number of performances nationwide by 23%, to
37,000 concerts. Although this increase had corresponded with higher total symphony attendance (in
excess of 30 million seats for the 2000–2001 season), the tragic events of September 11th combined with
the downturn in the economy led industry experts to forecast that attendance in the 2001–2002 season
would be down by at least 4% from the previous year. Similar forecasts were being made for
attendance at other arts events such as the theater, opera, and ballet.
To compensate for the decline in attendance, ticket prices for the symphony had been increased,
and total income for the industry was expected to increase by approximately 1%; however, total
expenses were expected to increase by at least 2.5%, leading a majority of the orchestras across the
country to predict an operating deficit for the 2001–2002 season.
In addition to the decline in attendance, several other factors had contributed to the forecasted
deficit. Declines in public subsidies, particularly at the state level, as well as a decrease in endowment
and investment income threatened the financial viability of many orchestras. Endowment and
investment income had become particularly thin due to a depressed equities market that had lost up
to one-third of its value since January 2001.
State and local tax revenues used to subsidize orchestras had also stagnated, leading
appropriations to arts agencies to decline. The prediction was that such decreases would continue. In
addition, the number of arts organizations seeking public funding had increased, thereby further
decreasing the size of appropriations to individual organizations.
2 This section draws on Douglas J. Dempster, “The Wolf Report and Baumol’s Curse: The Economic Health of American
Symphony Orchestras in the 1990s and Beyond, ” Harmony, Forum of the Symphony Orchestra Institute, 2002.
2
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Utah Symphony and Utah Opera: A Merger Proposal
404-116
Utah Opera
The late Glade Peterson, a native of Utah and renowned operatic talent in Europe, formed Utah
Opera (UOC) in 1976. The new company presented its first opera, Puccini’s La Bohème, in 1978. UOC
was committed to staging opera productions, to promoting broad public knowledge and appreciation
of opera, as well as to creating opportunities for promising young artists to develop their talents and
to pursue careers in opera. Peterson served as general director of UOC until his death in 1990.
The following year, Ewers was named general director of UOC. Under her direction, the opera
continued to grow, increasing its number of annual productions from three to four. UOC attracted an
annual audience of approximately 130,000 patrons from Utah and neighboring states to its
performances at Salt Lake City’s Capitol Theatre. In addition to its regularly scheduled productions,
UOC staged performances for over 70,000 students3 throughout the state in an attempt to increase
their appreciation for opera and also to ensure UOC’s future audience base.
UOC had a permanent staff of 23 people (refer to Exhibit 1 for the organizational chart) engaged
in administrative functions such as the technical and artistic elements of opera production, music
administration, and community education. The artists, including soloists, artistic team, chorus,
ensemble, and orchestra, were each hired for a specific production. With the exception of the soloists,
most of these artists were locals. In the case of the orchestra, UOC engaged the services of the Utah
Symphony.
In addition to ticket sales, financial support for the opera was obtained from locally and nationally
based foundations, corporations, and individuals: The National Endowment of the Arts, the Utah
Arts Council, the Utah State Legislature, the Salt Lake City Zoo, the Arts and Parks Fund (ZAP), and
the Salt Lake City Arts Council. The UOC endowment fund had grown to $5 million by January 2002.
The UOC owned production studios on 2.9 acres of land and a sizable costume inventory (including
17 sets and 38 productions of costumes). These latter assets were valued at approximately $4.8
million. (Exhibit 3 presents financial data for UOC.)
Anne Ewers
Ewers was hired in 1991 to lead UOC. Prior to coming to Salt Lake City, Ewers had served as
general director of the Boston Lyric Opera, where she retired a $450,000 debt that she inherited from
her predecessor, built an endowment fund, and increased the number of productions from one to
three. Ewers had also served as assistant director to the San Francisco Opera and the Canadian Opera
Company, but it had been through her work directing operas that Ewers earned her early reputation
in the opera community. Over the course of her career, she had successfully served as stage director
for over 60 opera productions across the United States and abroad, including for the San Francisco
Opera.
During her 11-year tenure at UOC, Ewers had grown the company’s annual budget from $1.5
million to $5 million. She was particularly successful at fund-raising, in some instances successfully
soliciting donations from entities outside the state.
3 This number represented approximately 10% of all school opera audiences nationwide.
3
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404-116
Utah Symphony and Utah Opera: A Merger Proposal
The Utah Symphony
The Utah State Symphony Orchestra Association first met on April 4, 1940 and held its first
concert on May 8, 1940. A year later the organization was renamed the Utah Symphony (USO). In
1947, Maurice Abravanel, an experienced maestro who had conducted at the Metropolitan Opera in
New York City, was hired by the USO as its conductor. Abravanel went on to become the
symphony’s music director and spent 32 years, until his retirement in 1979, developing the orchestra,
taking it from a part-time community ensemble to a renowned, world-class symphony. Under
Abravanel’s direction, the USO became one of the first orchestras from the western United States to
tour internationally. Abravanel was also successful in securing several recording contracts over the
years with labels such as Vanguard, Vox, Angel, and CBS. In 1993, Symphony Hall was renamed
Abravanel Hall in honor of the maestro and his legacy. Abravanel died in 1993 and was survived by
his wife, Carolyn Abravanel, who continued to be heavily involved with the Symphony Guild.
Abravanel had a reputation of defending his musicians vociferously; he succeeded in securing
them full-time professional status. Unlike artists who worked for the opera, musicians employed by
the USO received a full-year contract and earned a full-time salary. The American Federation of
Musicians (AF of M) represented them in contract negotiations.
In 1998, the USO hired Keith Lockhart as its music director.4 Lockhart continued in Abravanel’s
footsteps, and by 2002, the USO was one of the most involved orchestras in the country, performing
to a year-round schedule. In the 2000–2001 season the USO performed over 200 concerts.5 The USO
was considered to be at the top end of Group II symphony orchestras in the United States (Exhibit 4
presents a list of Group I and Group II orchestras), a designation determined by its level of annual
expenditures. The average endowment of Group I orchestras in 2001–2002 was approximately $76
million, whereas the average endowment for Group II orchestras in the same period was
approximately $8.8 million.6 (Financial data for the Utah Symphony Orchestra appear in Exhibit 3.)
The USO employed 33 full-time staff members and 83 musicians. (Exhibit 2 presents the
organizational structure for the USO.) Local concerts were performed at Abravanel Hall, which also
housed the orchestra’s administrative offices. These facilities were owned and managed by Salt Lake
County.
Keith Lockhart
Lockhart joined the Utah Symphony as its music director in 1998. Lockhart also served as
conductor of the Boston Pops Orchestra. Previously he had served as conductor of both the
Cincinnati Symphony and Cincinnati Pops orchestras. He had conducted more than 600 concerts and
created 50 television shows including PBS’s Evening at the Pops and Pops Goes the Fourth! As a guest
artist, Lockhart had conducted the major symphony orchestras of Chicago, Cleveland, Dallas, Los
Angeles, Montreal, New York, Philadelphia, Singapore, Toronto, and Singapore. Recently, Lockhart
had led the Utah Symphony at the 2002 Winter Olympic Games in Salt Lake City and in February
2002 had led the Boston Pops in the pregame show of Super Bowl XXXVI at the Louisiana Superdome
in New Orleans.
4 Two other maestros served as music director at the symphony between the time that Abravanel left and Lockhart was hired,
Varujan Kojian (1980–1983) and Joseph Silverstein (1983–1998).
5 Of note, the Boston Symphony Orchestra performs the same number of concerts a year but with a population at least three
times the size of that found in Salt Lake City.
6 By comparison, in January 2002, the Utah Symphony endowment was $10 million.
4
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Utah Symphony and Utah Opera: A Merger Proposal
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The Proposed Merger7
Mergers between major opera companies and symphony orchestras in the United States had been
rare. Although several organizations had considered such unions in the past, no significant merger
had materialized (e.g., Los Angeles Philharmonic, Minnesota Opera). There were, however, a few
exceptions.
In 1963, the Madison (Wisconsin) Symphony Orchestra and Chorus and the Madison Opera had
united under an umbrella organization known as the Madison Civic Music Association. They shared
an artistic director, an administrative staff, and the same development organization under the
arrangement. In 1993, after 30 years together and in response to “long-standing concerns about how
to run two different arts organizations under one banner,”8 the Madison Civic Music Association was
dissolved and the symphony/chorus and the opera became two entities with separate budgets and
governing boards. In an interview, Ann Stanke, executive director of Madison Opera, explained the
decision to separate: “We have different sets of problems, different audiences, and different methods
of doing things.”9
The president of the Madison Symphony Orchestra Board, Terry Haller, further explained the
decision: “There was a tension within the family. Sometimes the Opera felt like the poor stepchild.
Every time they wanted to do something, they had to get approval of their board and the parent
board. This [separation] gives each organization a sharper identity and a sharper focus.”10
In 1985, the Chattanooga (Tennessee) Symphony and the Chattanooga Opera merged their
operations to become the Chattanooga Symphony and Opera Association (CSOA). By merging the
two arts organizations, management of the new CSOA was able to embark on a search for a worldclass artistic director to lead the new organization. They succeeded in attracting Vakhtang Jordania,
the recently defected former director of the Karkov Philharmonic in the Soviet Union. The attention
and excitement that surrounded the search generated new enthusiasm for the symphony and the
opera in Chattanooga, so much so that in one year, the organization was able to eliminate its $75,000
deficit. Unlike the situation in Madison, the CSOA remained intact in mid-2002.
In September 1992, Laurence Gilgore, Connecticut Grand Opera (CGO) artistic director,
announced that the CGO would merge with the Stamford Chamber Orchestra to become the
Connecticut Grand Opera and Orchestra (CGO&O). Plagued by financial uncertainty that had
resulted in postponed performances, late paychecks, severe cost cutting, and rumors of bankruptcy,
the CGO looked to the merger as a means of achieving financial stability. The new organization
would offer a single series of fully staged operas, concert operas, and orchestral concerts between
November and June instead of a separate series devoted to concerts and operas. Gilgore assumed the
role of executive vice president, general director, and principal conductor for the merged
organization. CGO&O, like CSOA, continued to operate as one entity in mid-2002.
7 This section draws on Will Crutchfield, “Chattanooga Revitalizes Symphony,” The New York Times, October 14, 1985; and
Valerie Cruice, “Opera and Orchestra in Merger Con Brio,” The New York Times, September 20, 1992.
8 Susan Blocker, “Orchestra, Opera Plan to Separate Operations,” Wisconsin State Journal, November 16, 1993, p. 2D.
9 Ibid.
10 Susan Blocker, “Orchestra Board’s New President Sounds Off,” Wisconsin State Journal, August 28, 1994, p. 1F.
5
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404-116
Utah Symphony and Utah Opera: A Merger Proposal
Salt Lake City: An Idea Is Born
Scott Parker, chairman of the board of the Utah Symphony, had spent his entire career working in
the health-care industry overseeing numerous hospital mergers, all of which were intended to realize
economies of scale and to drastically improve the quality of health care in various communities.
Parker joined the Utah Symphony Board in the early 1990s and assumed the position of chairman at
the beginning of the 1999–2000 season. Throughout the 2000–2001 season and into the 2001–2002
season, it became clear to Parker that the situation confronting the arts community in Salt Lake City
and across the country had taken a turn for the worse. Parker commented on the situation the USO
faced in the fall of 2001:
The crisis that was developing in the arts community was very sobering to me. I was in a
place of responsibility with an organization that could find itself in significant difficulty. The
orchestra was very close to being in a deficit situation, with no break in sight. Not only had the
economy begun to falter, but also we had a contractual obligation to pay the salaries of the
members of the orchestra. In addition, the capital campaign had not been as successful as we
had hoped. We had always relied on the annual ZAP contribution, but there was an
uncertainty about whether this support would continue. There were fewer total dollars for the
arts and more organizations vying for them. Speed of action was essential. . . . I knew that
there was a possibility that we could quickly find ourselves over the edge.
To complicate matters, the CEO of the symphony announced that he would be leaving at
the end of February 2002. This was a difficult situation because it is not a simple matter to find
a tested professional to lead a symphony organization.
So in the midst of pondering our dilemma an idea struck me. What about a merger with the
opera? There undoubtedly were economies of scale to be realized, and both organizations were
in the same business. In addition, Anne Ewers, the general director of Utah Opera, had a
reputation as an outstanding artistic talent with a great business sense.
In mid-December 2001, Parker approached the other members of the symphony’s executive
committee with the merger idea, explaining that not only would a merger help alleviate some of the
financial pressure the symphony was experiencing but also would solve the problem of recruiting a
quality CEO. The initial reaction of the executive committee was mixed. There was a concern that the
two organizations were too different. Despite the concern, the executive committee eventually agreed
that Parker should approach Ewers to see if she would be interested in becoming CEO of a combined
opera and symphony.
Parker explained his next move:
I met with Ewers and asked her what she thought about becoming the CEO of a merged
opera and symphony. I explained that it represented a challenge that no other leader in music
had undertaken. She didn’t say yes, but she didn’t say no, either. She said she would like to
think about the opportunity and get back to me.
Three weeks later, in mid-January 2002, Ewers called. She said she would be very
interested.
In October of 2001, Parker had accepted a full-time voluntary position that would require him to
move to New York for his church. His church assignment would begin in June 2002. In November
2001 he had approached Chase Peterson, a long-serving member of the Utah Symphony Board, and
asked him if he would assume the chair of the symphony. Peterson agreed, and the two men decided
that it would be advisable for Parker to step down in early 2002. It was during this leadership
6
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Utah Symphony and Utah Opera: A Merger Proposal
404-116
transition that Ewers indicated to Parker that she believed that the merger merited a thorough
evaluation.
Knowing that Ewers supported further consideration of a merger, Parker and Peterson together
approached Lockhart, the symphony’s music director, about the idea. The executive committee had
been adamant that under no circumstances did they want to compromise their relationship with
Lockhart.
Lockhart explained his reaction to the idea:
My initial knee-jerk reaction when Parker first proposed the merger was negative. Change
is a pariah in this business. People, including me, tend to cling to existing models. I eventually
realized that my main reason for believing it [the merger] was a bad idea was because it was
different.
I also realized at the time that if I had said no to the idea, the merger would not have gone
forward. Parker made it abundantly clear to me that his and the executive committee’s first
priority was to retain me. With that in mind, I agreed that we should explore the idea in
earnest.
Although both Parker and Peterson were committed to the idea of the merger, they were not
completely without their reservations. As Peterson explained: “There was no precedent for a merger
between a major symphony and an opera working. The Utah Symphony was by far the leading
orchestra in the eight Rocky Mountain states and among the 20 leading orchestras in the country.
Utah Opera, on the other hand, was a good regional opera company, but it had not yet reached the
status of the symphony.”
In early 2001, Parker and Peterson met with Ewers; William Bailey, chairman of the board at the
opera; and Herb Livsey, the incoming chair and board member at the opera, to discuss the possibility
of a merger.
Bailey described his initial response to the merger idea:
One concern expressed by opera trustees was the financial strength of the opera vis-à-vis
the symphony. The opera had a reserve fund and was financially stable and because of the
business model could be flexible and adjust the size of the opera or eliminate projects that had
not reached their fund-raising goal. The symphony, on the other hand, was a 52-week
orchestra that did not have that flexibility. Another concern was that even though the opera
could become a tier-one arts organization through the merger, the opera would lose its
identity.
In spite of these concerns, the five in attendance at the meeting agreed to approach their respective
executive committees about the possible merger. In late January 2002 members of the symphony and
opera executive committees agreed to consider the merger in earnest. An eight-person joint task force
made up of three members of the symphony executive committee, three members of the opera
executive committee, one person who sat on both executive committees, and Ewers was convened in
February 2002 to study the idea and to report back to the respective executive committees once their
investigation was complete. The members of the task force received strict instructions that under no
circumstances were they to discuss the merger with anyone except for the executive committee
members and Lockhart. Contingent upon a favorable recommendation from the task force, it was
decided to publicly announce on March 14, 2002, that a merger of the symphony and the opera was
under consideration and that the respective boards would vote on whether to merge the two
organizations on May 15, 2002. This date would be later changed to July 8, 2002.
7
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Utah Symphony and Utah Opera: A Merger Proposal
The Merger Is Made Public
On March 14, 2002, at 10 a.m. the Boards of Utah Opera and the Utah Symphony met separately to
review the preliminary findings of the task force and to decide whether to proceed to seriously study
the possibility of a merger. Both boards agreed that the potential for a merger should be further
investigated.
At noon on the same day, staff and orchestra members at the symphony and staff members at the
opera were informed that a merger between the two organizations was being explored. One member
of the orchestra remarked, “Neither I nor any of the other members of the orchestra’s musicians or
staff knew anything of the proposal until it was announced March 14.”
At 1:30 p.m., Parker, Bailey, Ewers, and Lockhart held a press conference to publicly announce the
merger proposal to the Salt Lake City community. At the time, Parker explained that he and other
proponents of the merger hoped that among other things the merger would “increase the new
entity’s ability to attract world-class artists, maximize efficiency of administration and planning, give
donors a greater return on their investment and create new educational opportunities.”11
According to Ewers, the initial response to the news was positive. But, over the ensuing weeks
and months, that changed, and it became clear to Ewers that she would need to consider each of her
constituents carefully before deciding how best to respond to them and how best to proceed with the
integration should the respective boards decide in favor of the merger.
A few weeks following the announcement, the joint task force engaged an external consulting
firm, Joan Madison Collaborative, as well as Ernst & Young, to research and to produce an
independent review of the potential merger. Their findings would be presented to the respective
boards in time for the members to review them before voting on the merger on July 8, 2002.
Different Individuals and Groups React to the Merger
Lockhart Responds
Although he had agreed that the merger idea should be given some consideration, some
suspected that Lockhart was cautiously optimistic about the possible marriage. At the press
conference on March 14, he had been quoted as saying, “Orchestras around the nation are hanging on
by their fingernails. Perhaps the model is broken and needs re-evaluation. The only negative I
perceive about this idea is that this type of merger hasn’t been done in America before.”12
Lockhart wanted to minimize any disruption that the merger might cause both to himself and to
the artists he represented. As he explained:
From the public’s perspective, I am the head of the symphony, but the reality is that this is a
two-headed organization. One person provides the artistic vision, with sensitivity to the real
world, and the other person seeks, secures, and manages the financial resources, with
sensitivity to the purpose and mission of the organization.
11 Celia R. Baker, “Utah Symphony and Opera Study Merger of Operations; Symphony, Opera Study Consolidation,” Salt Lake
Tribune, March 15, 2002, p. A1.
12 Scott Iwasaki, “Symphony, Opera to Merge?” Deseret News, March 15, 2002, p. B1.
8
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Utah Symphony and Utah Opera: A Merger Proposal
404-116
When Parker first mentioned Ewers to me, I knew little about her except that she was the
artistic head of the number two arts organization in Utah. Parker explained that he felt there
were great potential synergies to be realized by merging the symphony and opera and that he
and several other board members believed that she was capable and competent.
Ewers and I met for several hours in early March. My impression of the meeting was that
Ewers was a good listener and that she was extremely energetic.
In June 2002 Lockhart received a copy of a merger viability report. Stapled to the back of the
report was a copy of the organizational chart. Lockhart remembered feeling sandbagged at the time,
since no one had consulted him prior to drawing it up. He explained his reaction to the
organizational representation:
The organization chart showed me reporting to Ewers. My immediate reaction was—you
are asking me to have less control than I had in the previous organization, and you are asking
me to report to someone with whom I have no previous or practical working experience. On
some level I understood what they were looking for, but at the same time my first
responsibility was to protect the interests of the symphony. I did not want to lose control.
The musicians represented the largest internal interest group [the audience is the largest
interest group] in the proposed merger. They speak, and are contracted, as a collective unit.
Although I do not negotiate their contract, they look to me to protect their interests. My success
in this position depends on maintaining a trust relationship with the orchestra. If this trust is
broken, so is my effectiveness. An orchestra has the collective power to render a conductor
ineffective if they so choose. Of utmost importance to the orchestra and to me was that the
status of the orchestra be maintained and that neither the length of the season nor the number
of players be reduced.
Some players were worried that, since the opera general director was being proposed as
CEO of the merged organization, the orchestra would become an appendage of the opera, as is
the case in a situation like the Vienna State Opera/Vienna Philharmonic model. Since the
symphony was four times larger as an organization than the opera, I didn’t think for a moment
that this was a possibility but was adamant with the musicians that I would never allow such a
thing to happen.
The Musicians Respond
The Utah Symphony employed 83 symphonic players, who received annual salaries of between
$50,000 and $85,000. These artists were unionized, which lent stability to the organization but had led
to what some in the community described as “wages that as a consequence of the union may have
been too high given the size and status of the Utah Symphony.” Orchestra salaries, related benefits,
and payroll taxes represented approximately 60% of total program expenses for the symphony. These
were expected to increase significantly in the coming two years as per the collective bargaining
agreement with the orchestra’s union. Specifically, salaries were to increase by 12.9% from 2002 to
2003 and by 6.8% from 2003 to 2004.
The relationship between orchestra musicians and the Utah Symphony Board and management
had not always been amicable. In the past, the board had reopened the collective bargaining
agreement and altered it such that the musicians were worse off in terms of their salaries. Some of the
musicians openly accused the symphony board of having entered into merger discussions as an
excuse and ploy to reopen and renegotiate the terms of the current collective agreement.
9
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404-116
Utah Symphony and Utah Opera: A Merger Proposal
The musicians, upon learning about the proposed merger, had convened an ad hoc committee to
represent their concerns to the board. Although they recognized that the Boards of Utah Opera and
the Utah Symphony would ultimately decide whether the merger would proceed, they nonetheless
acknowledged that the musicians would be critical to the future success of the symphony and to
success of the merger. In late June 2002, just before the board was to vote on the merger, Christine
Osborne, chairwoman of the musicians’ ad hoc committee, presented a set of guiding principles that
the musicians’ group believed were essential for the future of the symphony:
•
An organizational structure that protected and enhanced artistic excellence
•
Effective fund-raising
•
A budget strategy that improved the position of the Utah Symphony as a major 52-weekseason orchestra
•
A strong collective bargaining agreement13
The Community Responds14
Shortly after the press conference, in March 2002, the task force hired an ombudsperson to survey
members of the symphony and opera as well as the larger arts community to understand how the
idea of the merger was perceived beyond the members of the two boards. Word of the project quickly
became public, and the consultant was soon inundated with calls from irate symphony and opera
patrons fundamentally opposed to the idea of a merger. On May 1, 2002, the ombudsperson
completed his report and presented copies simultaneously to the local media and members of the
task force. The report summarized many concerns.
One community member, a prominent Utah businessperson who contacted the consultant,
disputed the suggestion that the merger would save costs. As the community member explained:
The two organizations are radically dissimilar in scale and action. In budget, the symphony
predominates, and in fixed assets the opera predominates. More important, the opera has no
performing artists under continuing contract, while the symphony has an entire orchestra. The
components of the opera and symphony seasons are so dissimilar it is hard to imagine any
economies of scale, whether in purchasing, staff, or administration . . . more important, the
organizational cultures of the opera and the symphony are very different.
Other members of the community feared that by merging the two organizations each would lose
its individual identity and traditions. One opera supporter explained:
The two arts are quite different, with the opera being an often risqué and bawdy production
and the symphony being a more staid performance art. I’m worried about the symphony
losing its identity. All it took in Minnesota was a name change to the Minneapolis Symphony
and morale dropped. I’m worried that the symphony will lose its status if it merges with the
opera.
13 Scott Iwasaki, “Opera Symphony merger: Sweet music?” Deseret Morning News, July 7, 2002.
14 This section draws on the ombudsman report, “Proposed Mergers of the Utah Opera and Utah Symphony.” It was
presented to the Utah Opera Board and Utah Symphony Board May 1, 2002.
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Utah Symphony and Utah Opera: A Merger Proposal
404-116
Some members of the community questioned Ewers’s ability to manage a symphony. As one
symphony supporter observed:
Not one person on the merger task force has experience in orchestra management. Pro
formas and organizational charts are being created by people who do not have the first idea
about what it takes to run a symphony orchestra. . . . I fear that projections are not rooted in
reality. I also believe that proponents of the merger are so eager to see it work that they are not
being thorough and realistic when they draft proposals for new programs that are extremely
problematic.
Another skeptic averred:
The job is too great—artistically, financially, and managerially. I am worried that Ewers
might assume the top post. Although she’s been great at fund-raising and has been a devoted
and hard-working manager of the opera, we are concerned about her people management
skills and what many who work with her describe as an autocratic style in dealing with staff.
At times she makes unilateral decisions and fails to consult with those who are expected to
implement these decisions.
Finally, there were some members of the community upset about the process that had been
followed:
It appears quite obvious to me that the conclusion to merge was arrived at, and we are now
in the process of trying to come up with facts and assumptions to support a predetermined
conclusion. This backward process has left the proponents of the merger in the rather
embarrassing position of not having any intelligible rationale to support their conclusion to
merge. I have heard the thought expressed that no one has come up with a reason not to
merge, therefore let’s proceed. There is no forum for those of us who have thoughts on why the
merger is a bad idea. I fear that many of the suppositions being made to support this decision
will not receive proper scrutiny. The makeup of the task force and the limited time constraints
cast a cloud of objectivity over this entire process.
Two weeks earlier, in mid-April 2002, Carolyn Abravanel, the widow of Maurice Abravanel,
publicly announced that she was opposed to the merger in the form of an open letter to the
community. In an interview conducted shortly after the letter appeared, Ms. Abravanel was quoted
as saying: “Maurice would never take second billing to anyone. He would be hammering the inside
of his casket [about the merger].”15
The opera was not without its “inside” critics of the proposed merger. Leslie Peterson, the
daughter of opera founder Glade Peterson, resigned from her position as director of operations at
Utah Opera, explaining: “I do have concerns about the merger, and I disagree with the direction
management is taking.”
In early July 2003 Dorothy Stowe, a retired dance and music critic, wrote a piece in the Deseret
News that captured the sentiments of a large majority of the members of the Salt Lake City arts
community: “I don’t care to be told how, from a business standpoint, the opera and symphony might
be better off with this merger. They are not mere businesses. They are [objects of affection],
community jewels, temperamental [entities] with which we must exercise extreme patience.”16
15 Celia R. Baker, “Abravanel Widow Blasts Symphony-Opera Merger,” Salt Lake Tribune, April 14, 2002, p. D3.
16 Dorothy Stowe, “Merger Spells Failure,” Deseret News, July 3, 2002.
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Utah Symphony and Utah Opera: A Merger Proposal
The Final Act
Over the six months leading up to the vote, Ewers had come to realize that the process of merging
would be far from easy. To begin, she would need to bring two different cultures together. She
characterized the difference in the two organizations:
These are really two different cultures that are products of their respective environments.
The symphony environment is staid, and as a result symphonies tend to be slow to change and
not used to having things happen quickly. The opera, in most communities, is second to the
symphony, and in order to compete must always be looking for new ways of fund-raising,
marketing, reaching out to the community, and communicating with the public—this has led
opera companies to be, relatively speaking, much quicker to adapt to change.
In addition, reports in the local media about the community reaction to the proposed merger were
creating barriers. Ewers understood that she needed the support of the local community if the merger
was going to succeed. She would need to figure out how to convert community attitudes.
Finally, there was the issue of how the organization should be structured. Most symphonies were
organized such that both the CEO and the music director reported directly to the board.17 Ewers
wondered whether this was the most efficient structure given the changes that she would need to
make. Could she afford to have someone second-guessing her every move? Yet, she understood that
this was a sensitive issue. As Chase Peterson had explained to her:
If Keith [Lockhart] were to report to you, there is a question about whether this would
represent an affront to the dignity of the conductor. Would this somehow compromise his preeminence? When Lockhart joined the Utah Symphony in 1998 the arts community in the U.S.
perceived him as a Pops star, but he wanted to be seen as a serious conductor. The Utah
Symphony was his means to step onto the big stage of symphonic work.
Remember, both Keith and you can exercise a veto if the final arrangement doesn’t seem to
be right to either of you. That said, I believe that we have two of the most qualified people to
lead this merger. Think back to 1776 when we had Washington, Jefferson, Adams, Madison,
and Monroe intact. The time for revolution was right, and the country needed them to get it all
started. Then once established, lesser folks like Polk, Harrison, Buchanan could keep it going.
After responding excitedly to the costume designer’s fabric samples, Ewers continued to ponder
the events of the past six months, and her mind returned to thoughts of how exactly she would
integrate the two organizations if the outcome of the vote were positive. What would she do first?
Who would she talk to first? What would she say? How should she choreograph what could
arguably become her magnum opus?
17 The national organizations for symphony and opera, the American Symphony Orchestra League and OPERA America, both
endorsed the unprecedented reporting arrangement in light of the fact that Lockhart, like many other music directors,
conducted more than one orchestra.
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404-116
Exhibit 1
Utah Opera Organizational Structure
Director of
Finance
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Dir. of
Marketing
Board of
Trustees
Development
Resource Mgr.
Bill Bailey
Chairman of the Board
Anne Ewers
General Director
Leslie Peterson
Dir. of
Operations
Dir. Education &
Communications
Accountant
Info Systems
Manager
Office
Manager
Publicist
Subscriptions
Manager
ArtTix
Executive
Assistant
Development
Associate
Assistants
Development
Associate
Apprentices /
Interns
Costume
Shop Mgr.
Ward Mistress
Crafts/Millinery
Draper/Cutter
Stitchers
Designers
Director of
Production
Telemarketer
Wig/Makeup
Master
Assistants/Crew
Production Personnel
Supertitle Personnel
Designers
Artistic Team
(Artists)
Nonsalaried occasional
workers
Source:
Utah Opera records.
Music
Administrator
Technical
Director
Properties Master
Asst. Tech.
Director
IATSE Crew
Chorus Master /
Assistant Conductor
Chorus
Orchestra
Principal Coach
Accompanists
Ensemble
-13-
404-116
Exhibit 2
Utah Symphony Organizational Structure
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Board of
Directors
President and
CEO (vacant)
Director of
Finance
Finance
Associate
Receptionist
Systems
Administrator
Dir. Mktg. and
Communications
Associate Dir.
Marketing
Audience Dev.
Assistant
Audience Dev.
Manager
Associate Dir.
Development
Associate Dir.
Development
Development
Intern
Associate Dir.
Development
Assistant Dir.
Development
Assistant Dir.
Development
Personnel
Manager
Asst. Personnel
Manager
Auditions
Coordinator
Librarian
Assistant
Librarian
Operations
Assistant
Director of
Development
Scott Parker
Chairman of the Board
Orchestra
Manager
Keith Lockhart
Music Director
Source:
Utah Symphony records.
Artistic
Administrator
Education Programs
Coordinator
Director Ticket
Services
Associate Ticket
Services Coordinator
Associate
Conductor
Assistant
Conductor
Principal Guest
Conductor
Musicians (83)
Assistant Dir.
Development
Stage and
Properties Mgr.
Assistant Stage
Manager
-14-
Utah Symphony and Utah Opera: A Merger Proposal
Exhibit 3
404-116
Operating Income Statements FY2000–20001 (historical) and FY2001–20002 (projected)
FY 2000–2001 (historical)
Symphony
Opera
FY 2001–2002 (projected)
Symphony
Opera
Revenue and Contribution
Performance revenues
Government grants
Contributionsa
Investment incomeb
Guild income
Otherc
TOTAL
$ 3,836,513
3,124,999
4,460,268
817,505
155,434
3,829
12,398,548
$1,028,177
977,322
2,189,987
177,730
40,000
327,900
4,741,206
$ 4,516,308
2,904,312
5,080,040
910,013
110,001
243,000
13,763,674
$ 733,900
958,882
2,843,941
183,327
30,000
365,999
5,116,049
Expenses
Programd
Management and general
Fund-raisinge
Otherf
TOTAL
10,447,382
670,832
1,164,026
-12,282,240
3,017,069
583,358
210,031
348,339
4,158,797
11,851,541
722,110
1,187,980
-13,761,631
3,337,968
612,705
217,702
474,672
4,643,047
SURPLUS (deficit)
$
$ 582,409
$
$ 473,002
116,308
2,042
Source: Utah Symphony and Utah Opera.
a This item represents contributions from individuals, corporations, and foundations.
b The symphony drew approximately 5% from its endowment fund annually. For the opera, investment income represented
interest and dividends from operating accounts and the endowment. Historically, the opera had not used interest or dividends
from the endowment but rather had reinvested these monies back into the endowment.
c For the symphony, this amount related to box office fees and rentals. For the opera this item included revenue generated
principally from the rental of sets, props, costumes, wigs, and supertitles and could vary significantly from year to year.
d For the symphony this item included orchestra salaries, related benefits, and payroll taxes. For the opera these expenses
related to production costs and varied according to the performance schedule.
e This item represented salaries and benefits for development staff. With respect to the symphony it also included an
approximately $100,000 bad-debt expense which represented the annual charge due to pledges that were never actually paid.
f This item relates to expenses incurred by the opera related to its rental of sets, props, costumes, and wigs to other opera
companies.
15
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404-116
Exhibit 4
Utah Symphony and Utah Opera: A Merger Proposal
Group I and Group II Orchestras in the U.S. and Canada (listed alphabetically)
Group I
(expense budgets
greater than $13.5 million)
Group II
(expense budgets between
$5.2 million and $13.5 million)
Atlanta Symphony Orchestra
Alabama Symphony Orchestra
Baltimore Symphony Orchestra
Buffalo Philharmonic Orchestra
Boston Symphony Orchestra
Calgary Philharmonic Orchestra
Chicago Symphony Orchestra
Charlotte Symphony
Cincinnati Symphony Orchestra
Colorado Symphony Orchestra
The Cleveland Orchestra
Florida Orchestra
Dallas Symphony Orchestra
Florida Philharmonic Orchestra
Detroit Symphony Orchestra
Fort Worth Symphony Orchestra
Houston Symphony
Grand Rapids Symphony
Indianapolis Symphony Orchestra
Honolulu Symphony Orchestra
Los Angeles Philharmonic
Jacksonville Symphony Orchestra
Milwaukee Symphony Orchestra
Kansas City Symphony
Minnesota Orchestra
The Louisville Orchestra
National Arts Centre Orchestra
The Nashville Symphony
National Symphony Orchestra
The Naples Philharmonic
New Jersey Symphony Orchestra
New World Symphony
New York Philharmonic
North Carolina Symphony
Oregon Symphony
Orchestre Symphonique de Montreal
The Philadelphia Orchestra
Orpheus Chamber Orchestra
Pittsburgh Symphony
Pacific Symphony
Saint Louis Symphony Orchestra
The Phoenix Symphony
The Saint Paul Chamber Orchestra
Rochester Philharmonic Orchestra
San Francisco Symphony
San Antonio Symphony
Seattle Symphony
San Diego Symphony
Toronto Symphony Orchestra
Syracuse Symphony Orchestra
The Toledo Symphony
Utah Symphony
Source: Interview with American Symphony Orchestra League.
16
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A Handbook of Cultural
Economics, Second Edition
Edited by
Ruth Towse
Professor of Economics of Creative Industries, CIP PM, Bournemouth
University, UK and Profes:wr Emerita, Erasmus University Rotterdam,
The Netherlands
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© The editor and contributors severally 2011
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or
otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GLSO 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 20 I 0939205
IJ
FSC
www.fsc.org
MIX
Paper from
responsible sources
FSC® C018575
ISBN 978 1 84844 887 2 (cased)
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Printed and bound by MPG Books Group, UK
10 Baumol’ s cost disease
James Heilbrun
In 1966, William J. Baumol and William G. Bowen published Performing Arts: The
Economic Dilemma. Their book was extraordinarily influential and it is generally agreed
that analysis of the economics of the arts had its origin in that work.
The economic dilemma Baumol and Bowen referred to was the problem of financing the performing arts in the face of ineluctably rising unit costs. These, they argued,
are the result of ‘productivity lag’. The resulting cost pressure has come to be known
as ‘Baumel’s cost disease’. Productivity is defined by economists as physical output per
work hour. Increases in productivity over time may occur for the following reasons: (1)
increased capital per worker, (2) improved technology, (3) increased labour skill, (4)
better management, and (5) economies of scale as output rises.
As this list suggests, increases in productivity are most readily achieved in industries
that use of a lot of machinery and equipment. In such industries output per worker can
be increased either by using more machinery or by investing in new equipment that
embodies improved technology. As a result, in the typical manufacturing industry the
amount of labour time needed to produce a physical unit of output declines dramatically decade after decade. The live performing arts are at the other end of the spectrum.
Machinery, equipment and technology play only a small role in their production process
and, in any case, change very little over time.
That is not to say that technological improvements are entirely absent. For example,
stage lighting has been revolutionized by the development of electronic controls and
audience comfort greatly enhanced by air conditioning, which also facilitates longer
seasons and more flexible scheduling. But these improvements are not central to the
business· at hand. As Baumol and Bowen point out, the conditions of production
themselves preclude any substantial change in productivity because ‘the work of the
performer is an end in itself, not a means for the production of some good’ (ibid.,
p. 164). Since the performer’s labour is the output – the singer singing, the dancer
dancing, the pianist playing- there is really no way to increase output per hour. It takes
four musicians as much playing time to perform a Beethoven string quartet today as it
did in 1800.
The productivity lag argument
The productivity lag argument can be summarized as follows. Costs in the live performing arts will rise relative to costs in the economy as a whole because wage increases in
the arts have to keep up with those in the general economy even though productivity
improvements in the arts lag behind. It is not suggested that artists must be paid the same
hourly wage as workers in other jobs, since working conditions and the non-monetary
satisfaction obtained from employment differ across occupations. Rather, the argument is that all industries, including the arts, compete to hire workers in a nationally
integrated labour market and that artists’ wages must therefore rise over time by the
67
68
A handbook of cultural economics
Table 10.1
Hypothetical illustration ofproductivity lag
Widget industry
Output in widgets per work hour (opw)
Wage per hour (w)
Unit labour cost (ulc) per widget= w/opw
Symphony orchestra
Output, measured by admissions per
work hour (opw)
Wage per hour (w)
Unit labour cost (ulc) per admission= w/opw
1990
2000
Change(%)
20
+20
+20
$0.50
24
$12
$0.50
2
2
0
$20
$24
$12
+20
+20
$10
$10
0
same proportion as wages in the general economy to enable the arts industry to hire the
workers it needs to carry on.
Of the five sources of increased productivity cited above, only economies of scale as
a result of longer seasons is really effective in the live performing arts. With only that
factor to rely on, the live performing arts, as Baumol and Bowen emphasized, ‘cannot
hope to match the remarkable record of productivity growth achieved by the economy
as a whole’ (1966, p. 165). As a result, cost per unit of output in the live performing arts
is fated to rise continuously relative to costs in the economy as a whole. That, in brief, is
the unavoidable consequence of productivity lag.
A hypothetical example
In Table 10.1 we compare two industries, the widget manufacturing industry in which
productivity rises steadily, and the symphony concert industry in which it is stagnant.
The widget manufacturer
Output per work hour (opw) is measured by widgets produced per worker per hour. We
assume that it rises from 20 widgets in 1990 to 24 in 2000, an increase of 20 per cent.
Wages rise at the same rate as productivity, going from $10 per hour in 1990 to $12
per hour in 2000. Unit labour cost (ulc) equals wages per work hour divided by output
per work hour. In 1990, ulc equals $10/20 widgets, or 50 cents per widget. In 2000, unit
labour cost is unchanged. Though wages have risen 20 per cent, so has output per work
hour, leaving ulc still at 50 cents per widget. Thus wages in a progressive industry can rise
as fast as productivity without causing any increase in costs.
The symphony orchestra
To explain and quantify output per work hour for a symphony orchestra, we make the
following assumptions:
Capacity of concert hall= 1600
Concerts per week = 5
Potential admissions per week= 5 x 1600 = 8000
Number of musicians = 100
Baumol’s cost disease
69
Musicians’ work hours per week= 40
Orchestra hours per week = l 00 x 40 = 4000
Orchestra output per work hour (opw) = admissions per week divided by orchestra
hours per week = 8000 divided by 4000 = 2.
As to wages, we assume musicians are paid $20 per hour in 1990. By the year 2000
musician wages have risen 20 per cent, to $24 per hour, in order to keep pace with rising
wages in the general economy. Unit labour costs, which equal wages per hour divided by
output per work hour, therefore rise from $10 to $12. Thus unit labour cost rises by the
same proportion as productivity lags.
Historical evidence on costs
The historical record strongly supports the hypothesis that, because of productivity lag,
unit costs in the live performing arts have increased substantially faster than the general
price level. Baumol and Bowen (1966) provide abundant examples, pieced together from
remarkable historical sources.
Using a set of account books for the Drury Lane and Covent Garden theatres in
London covering the years 1740-75, Baumol and Bowen calculate that the average
cost per performance came to an estimated £157 in the five-year period 1771-2 to
1775-6. For the sake of comparison, they estimated that the average cost per performance at the Royal Shakespeare Theatre in 1963-4 stood at £2139, or 13.6 times its
eighteenth-century level. Over the same period (1771-2 to 1963-4) the general price
level in England rose to about 6.2 times its initial level. Thus ‘the cost per performance
over the period as a whole went up more than twice as much as the price level’ (ibid.,
p. 183).
The above conclusion is based on the comparison of costs of two different organizations at two points in time. Baumol and Bowen were also able to measure the change in
costs within a single organization over a long period. For the New York Philharmonic
Orchestra they put together a nearly continuous cost history covering 1843 to 1964.
Over that period cost per concert rose at a compound annual rate of 2.5 per cent while
the US index of wholesale prices rose an average of only 1.0 per cent per year (ibid.,
p. 186).
For the years after World War II, they analysed data on 23 major US orchestras, three
opera companies, one dance company, and a sample of Broadway, regional and summer
theatres. Table 10.2 shows that in every group the results were the same: cost per performance rose far faster than the general price level.
An international comparison
Baumol and Bowen also found that their evidence, although rather sketchy, did support
a conclusion that the problem of productivity lag is international in scope. In the theatres
they investigated in the UK in the 1950s and 1960s, ‘cost per performance rose at a rate
of 7 to 10 percent while prices went up at about a 4 percent rate’ (1966, p. 201). In the
USA, ‘Costs rose during the postwar period at an annual rate close to 4 percent while
prices went up between 1 and 2 percent’. Thus the ratio was roughly 2 to 1 in both countries, suggesting to the authors that the problem of productivity lag ‘knows no national
boundaries’ (ibid., p. 201).
70 A handbook of cultural economics
Table 10.2
Growth in expenditure per performance and in the wholesale price index,
postwar period, USA
Organization
Period
Average annual percentage increase
(compound rate)
Expenditure per
performance
23 major orchestras
Metropolitan Opera
City Center Opera
New York City Ballet
Theatres:
Broadway sample
Regional theatre A
Regional theatre B
Regional theatre C
Summer theatre
Source:
1947-64
1951-64
1958-63
1958-63
1950-61
1958-63
1958-63
1955-63
1954–63
Wholesale price
index
3.1
1.3
4.4
2.0
2.3
0.3
6.0
11.2
1.4
0
6.0
0
2.5
0.9
3.6
0
0
0
Baumol and Bowen (1966, Table VIII-3, p. 199).
The earnings gap
From the beginning, Baumol and Bowen were concerned about the financial implications of productivity lag for performing arts firms. The principal implication, as they saw
it, was that, because of productivity lag, costs would rise ineluctably. Revenues, having
no built-in growth mechanism, would necessarily lag behind, and the earnings gap would
grow continuously.
At this point we must define some terms. The absolute size of the earnings gap equals
expenditures less earned income. Its relative size equals that amount as a percentage of
earned income. Since non-profit firms generally cannot run an operating deficit, the gap
must be approximately covered by unearned income. The amount of unearned income is
therefore another measure of the gap.
In the foreword to Baumol and Bowen’s book, August Heckscher, director of The
Twentieth Century Fund, which had financed its publication, wrote: ‘It is not only that
the live performing arts do not pay for themselves, but that, within the developing economic system, they will show deficits of increasing size’ (1966, p. vii). Indeed, a whole
chapter of the book is devoted to ‘Trends in the Income Gap’ and the final chapter, entitled ‘Prospects’, deals with little else. Moreover, the authors found evidence of a growing
earnings gap not only in the USA and the UK, but also in Italy and Sweden.
On the basis of postwar experience, Baumol and Bowen estimated that, from the mid1960s to the mid-1970s, expenditures of performing arts firms would rise between 5 and
7 per cent per year while earned income would rise only 3.5 to 5.5 per cent yearly, resulting in continued relative (as well as absolute) growth of the gap. Fortunately, that did
not happen. Expenditures continued to increase rapidly, but in some art forms earned
income rose as fast or faster, so that the gap in some areas declined in relative size. Data
from a Ford Foundation study (for which Baumol was a consultant) show that, from
1965-6 to 1970-71, the gap as a percentage of total expenditures rose for symphony
Baumol’s cost disease
Table 10.3
The earnings gap: contributed income as percentage of total revenue
Symphony
orchestras
Opera a
Ballet
Modern dance
Non-profit
theatres
Note:
Source:
71
Sample
size
Beginning
year
(‘%)
Ending
year
(‘Yc,)
Change
39
1972
36.4
1992
35.4
-1.0
24
7
6
39
1981
1983
1983
1980
48.7
36.6
43.0
38.0
1991
1992
1992
1992
46.2
34.2
56.1
38.1
-2.5
-2.4
13.1
0.1
a Excluding the Metropolitan Opera.
Felton (1994).
orchestras and non-profit theatres, but fell for opera, ballet and modern dance companies (Ford Foundation, 1974, pp. 388-93). A study by Samuel Schwarz and Mary G.
Peters (1983) indicated that, in the 1970s, the relative size of the gap fell substantially in
ballet, modern dance and non-profit theatre, declined slightly for symphony orchestras,
and was approximately stable for opera.
More recent data gathered by Marianne Felton ( 1994), indicate that the gap continued
to decline into the early 1990s, except in the field of modern dance (see Table 10.3).
It should be noted that in the UK a study by Peacock, Shoesmith and Millner of the
performing arts in the 1970s found no evidence of the cost disease in that decade.
Apparently, the extremely high rate of inflation in those years induced performing arts
companies to adopt cost-reducing policies that temporarily halted the operation of the
cost disease (see Tawse, 1997b, p. 351 ).
On the whole, then, dire predictions that productivity lag would lead to a relentlessly
increasing earnings gap proved to be incorrect. A number of factors can work to offset
the effects of productivity lag. In this instance expenses of performing arts companies did
increase more or less as predicted, but earned income rose at an equal or slightly higher
rate, so the relative size of the gap began to decline. What explains the rise in earned
income? Apparently, ticket prices rose much faster than the general price level without
causing a drop in attendance. (I say ‘apparently’ because we have no summary measure of
ticket price movements.) As a result, box office revenues, adjusted for inflation, rose substantially. Thus productivity lag in the arts persisted, but so did some of its potential offsets.
Interpreting the earnings gap
Something more must be said by way of interpretation. Schwarz and Peters point out
that, since performing arts firms in the non-profit sector cannot normally operate with
a cash deficit, an earnings gap cannot exist unless unearned income is available to cover
it. Emphasis on the earnings gap as the starting point in a financial analysis leads one to
think of unearned income as a passive factor that responds after the fact to the financial
needs of the company. But one could just as well look at it the other way around and
argue that the existence of unearned income makes it possible for a performing arts firm
72 A handbook of cultural economics
to finance expenditures in excess of earned income. A very large earnings gap for a given
firm might indicate, not that the firm is in serious financial trouble, but rather that it
has succeeded in finding generous outside support, probably in response to its very high
quality of operation.
Is there an ‘artistic deficit’?
Faced with the continual upward pressure on costs generated by productivity lag, firms
in the live performing arts might be expected to seek ways of economizing by gradually
altering their choice of repertory or their production process. For example, theatrical
producers might look for plays with smaller casts or plays that could be mounted with a
single rather than multiple stage sets. Or they might try to compensate for higher costs
by shunning artistically innovative plays that do not draw well at the box office and so
have to be ‘carried’ by revenues from more conventional offerings. Orchestras and opera
companies, too, might be driven away from innovative or ‘difficult’ material by box office
considerations. Or, operating on the cost side, they might select programmes with an eye
to reducing rehearsal time or hire fewer outside soloists or other high-priced guest artists.
Although experience clearly teaches us that firms will respond to rising input costs
by economizing in the use of the offending inputs, economists interested in the arts are
likely to be disturbed when they find firms in the performing arts doing just that. They
are offended at the notion that Hamlet is no longer viable because its cast is too large,
or that piano concertos will be less frequently heard because soloists have become too
expensive. When that occurs it has been said that performing arts firms are reducing their
fiscal deficit by incurring an ‘artistic deficit’.
It is worth noting that this problem is peculiar to the performing arts. In the fine arts
-for example, in architecture- we fully expect practitioners to adapt their ‘products’ to
changes over time in the relative prices of alternative inputs. We are not surprised to find
that modern buildings are devoid of the elaborate hand-carved stonework that decorated
important buildings in earlier times. Indeed, the aesthetic rationale of the modern movement in architecture was precisely to design buildings that could use machine-finished
materials in place of the increasingly costly hand-finished ones. In this instance it is not
too strong to say that the necessity of adapting was the challenge that gave rise to a whole
new school of design.
What makes the performing arts different is that the past provides much of the substance that we want to see performed. We do not want Hamlet with half the characters
omitted because of the high cost oflabour. Nor do we wish to give up symphony concerts
in favour of chamber music recitals simply because symphonies employ too many musicians. We want the range of ‘artistic options’ to include the option of hearing or seeing
performances of great works that were invented under very different economic circumstances from our own. There would indeed be an artistic deficit if today’s companies
became financially unable to present for us the great works of the past.
Have our performing arts institutions, responding to financial pressure, already begun
cutting back along some dimensions of quality? Are we even now the victims of an
artistic deficit? Some of the evidence is what social scientists call ‘anecdotal’, but there
is systematic evidence, as well. Table 10.4 reproduces data from a study by the Baumols
showing that average cast size for all non-musicals produced on Broadway fell from 15.8
in 1946-7 to 8.1 in 1977-8. More recently, I have shown that, from 1983 to 1998, com-
Baumol’s cost disease
Table 10.4
73
Cast size of Broadway plays
Broadway season
1946-7
1953-4
1957-8
1962-3
1967-8
1972-3
1977-8
Average cast size
15.8
14.4
13.4
12.4
8.9
10.2
8.1
Note: As a result of printing/editing errors, table II did not actually appear in the cited source. It is used
here with the permission of the authors.
Source:
Baumol and Baumol (1985).
panies have produced popular operas at the expense of new or less well-known works,
which could be interpreted as evidence of a growing artistic deficit in the field of opera
(Heilbrun, 200 I, pp. 63-72).
Income from the mass media in the USA
Some years ago it was suggested that performing arts firms might be able to earn income
from the mass media to help relieve the financial pressure generated by productivity lag.
Symphony orchestras, to pick the most obvious example, might be able to earn royalties
from the sale of recordings. Theatre, ballet, and opera companies, in addition to earning
royalties from the sale of pre-recorded tapes or videodiscs, might be paid for performances on broadcast or cable TV. After all, in the analogous case of professional sports,
earnings from television far outweigh income from ticket sales.
Unfortunately, this potential revenue never materialized. Royalties are trivial for
most US symphony orchestras, and the trend has been down. (See the evidence cited in
Heilbrun and Gray, 2001, pp. 148-50.) Nor did performing arts companies ever earn
significant income from television performances. In the early days of commercial television, the networks made a modest effort to present high culture on the tube. But as time
went by and public television became increasingly important, the commercial networks
virtually abandoned cultural programming to the public stations. A commercial market
for culture on TV no longer exists.
In assessing the prospect that the mass media might at some future date become heavy
purchasers of performing arts material, there is further bad news: Hilda and William
Baumol have shown that programme production costs on television are subject to inflation on account of productivity lag for exactly the same reasons as costs in the live sector
are (Towse, 1997a). Thus the same cost problem that bedevils live production of the
performing arts reappears to limit the prospect of substantial sales to the mass media.
Baumol’s good news
The problem of productivity lag exists only because there is persistent technological
progress in the general economy that causes a rise in output per work hour and in real
74 A handbook of cultural economics
wages, in other words a rise in per capita income, which, in turn, increases the de~and
for the arts. In the case of the live performing arts, that means the demand for tickets
increases: at any given price level the public will be willing to buy more tickets than it
did previously. Thus, while productivity lag causes ticket prices to rise, which will lead
to a decline in quantity demanded, rising income to some extent offsets that effect by
stimulating ticket purchases. This does not mean that productivity lag causes no problems, but only that rising living standards work to mitigate them. Perhaps an analogy
is in order. Because of productivity lag in the business of high-quality food preparation, the price of a meal in a gourmet restaurant has risen sharply in recent years. That
probably causes a good deal of anguish to both customers and owners, but it has not
prevented the gourmet restaurant business from growing. A similar effect is likely in the
live performing arts. Baumol and Bowen were criticized for failing to emphasize that
possibility, but Baumol has corrected that failure in a more recent paper (Baumol, 1996,
pp. 183-206).
Productivity lag docs not justify subsidies
The hypothesis that productivity lag is bound to cause a long-run increase in the real
cost of the performing arts was often cited by arts advocates as a justification for public
subsidies. Without subsidies, it was asserted, either ticket prices would have to rise continuously, which would end all hope of reaching new audiences, or else performing arts
companies would face increasingly large deficits that would force many of them out of
business. Leaving aside the fact that there are some alternatives to these gloomy predictions, it must now be emphasized that productivity lag per se does not provide justification for government subsidy. Productivity lag is a market process that would cause
unit cost to rise in any technologically unprogressive industry. But there is no reason to
subsidize an industry simply because it is technologically unprogressive. On the contrary,
given that its real costs are rising relative to those in more progressive industries, it is best
to let its prices increase to reflect the rise in real costs. As long as markets are operating
efficiently, those higher costs will be absorbed optimally by the economy. We would all
be better off if there were no technologically unprogressive industries, but, since there
are, matters are made worse, not better, if we use subsidies to prevent market prices from
reflecting their true costs. Lag or no lag, subsidies can be justified only by some form of
market failure.
Indeed, economists have written extensively about market failure, and Baumol and
Bowen discuss the rationale for public support of the performing arts in Chapter XVI
of their book. But this is not the place to enter into that large and complicated subject.
See also:
Chapter 15: Costs of production; Chapter 43: Opera and ballet; Chapter 44: Orchestras; Chapter 47:
Performing arts.
References
Baumol, Hilda and W.J. Baumol (1985), ‘The Future of the Theater and the Cost Disease of the Arts’, in Mary
Ann Hendon, James F. Richardson and WilliamS. Hendon (eds), Bach and the Box, a special supplement
to the Journal of Cultural Economics. Akron: Association for Cultural Economics, table II. As a result of
printing/editing errors, table II did not actually appear in the cited source. It is used here with the permission of the authors.
Baumol’s cost disease
75
Baumol, William J. (1996), ‘Children of Performing Arts, the Economic Dilemma: The Climbing Costs of
Health Care and Education’, Journal of Cultural Economics, 20, 183-206.
Baumol, William J. and William G. Bowen (1966), Performing Arts: The Economic Dilemma, New York: The
Twentieth Century Fund.
Felton, Marianne V. (1994), ‘Historical Funding Patterns in Symphony Orchestras, Dance, and Opera
Companies, 1972-1992’, Journal of Arts Management, Law, and Society, 24,8-31, table II and ‘Historical
Funding Patterns in Nonprofit Theaters, 1980-1992’, unpublished manuscript, table I.
The Ford Foundation (I 974), The Finances of the Performing Arts, Volume I, New York: The Ford Foundation.
Heilbrun, James (2001), ‘Empirical Evidence of a Decline in Repertory Diversity among American Opera
Companies 1991/1992 to 1997/1998’, Journal of Cultural Economics, 25 (!), 63-72.
Heilbrun, James and Charles M. Gray (2001), The Economics of Art and Culture, 2nd edn, New York:
Cambridge University Press.
Schwarz, Samuel and Mary G. Peters (1983), ‘Growth of Arts and Cultural Organizations in the Decade of
the 1970s’, a study prepared for the Research Division, National Endowment for the Arts, RockviJle, MD,
Informatics General Corporation.
Towse, Ruth (ed.) (1997a), Baumo/’s Cost Disease: The Arts and Other Victims, Cheltenham, UK and Lyme,
USA: Edward Elgar.
Towse, Ruth (ed.) (!997b), Cultural Economics: The Arts, the Heritage and the Media Industries, Vol. II,
Cheltenham, UK and Lyme, USA: Edward Elgar.
Further reading
Heilbrun and Gray (2001), Chapter 8 is a somewhat expanded version of this chapter. Baumol and Bowen
(1966) is, of course, the Urtext on this topic and Towse (1997a) is a nearly complete collection of Baumol’s
writings on the subject.

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