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Embracing The (Cost) Disease

Hat tip to Thomas Cott for bringing Jon Silpayamanant’s intriguing refutation of the idea of Baumol’s Cost Disease being the doom of arts organizations.

Silpayamanant correctly notes that sports teams have the same challenges as arts organizations. Just as it still takes just as many people to perform Hamlet as it did 100 years ago, improvements in technology haven’t brought efficiencies to baseball allowing them to play the game with only 6 people on the field. I was flabbergasted to learn just how small a percentage ticket sales comprise sports’ teams total revenues.

“The NFL, the most profitable of the Leagues, takes in 20% of its total revenue through Gate revenue while the MLB, the next in line in profitability, took in 35% in 2006 (down from 40% in 2001). The NBA gets roughly 33% of its total revenue from the gate.

[…]

So we have a performance income gap in the Sports Industry which is practically no different than the “structural deficits” found in Classical Music. But the former is considered “profitable” while the latter is increasingly being referred to as being in crisis. What has made up the shortfall in performance revenue for sports then? The most obvious revenue sources are through corporate sponsorship, merchandizing, and most importantly for the purposes of this post–Broadcast licenses (i.e. Television).”

As Silpayamanant points out, only a few sports franchises are profitable but thanks to revenue sharing “(the highest earners will give a disproportionate amount of their gross to distribute amongst the lowest earners), the field as a whole remains profitable.”

Now given the whole “non profit” element, I am not sure a ticket revenue sharing arrangement among arts organizations is viable. Television as a medium looks to be on the wane, but content licensing through online and other media might be viable if anyone figures out a workable model.

Merchandising might hold promise if arts organizations in a community or across a discipline got together and created some interesting products or services to distribute/license and then had some revenue sharing related to it.

But will arts organizations have the discipline and will to bond together toward a common cause and then have the patience to let their plans come to fruition?

A commenter on Silpayamanant’s blog reminds us that professional athletes were not always well paid and often had to work in retail during the off-season. In one of my very first blog posts I linked to Chris Lavin’s 2002 speech, “Why Arts Coverage Should Be More Like Sports,” where Lavin recalls that Wellington Mara who owned the NY Giants football team would give Lavin’s father piles of tickets in the hope of getting people to actually attend the games.

Success didn’t happen in the course of a couple seasons for the sport leagues, nor would it come quickly for any cooperative effort between arts organizations. One of the first hurdles would be a change in operational culture. Lavin’s call for arts organizations to be more open and transparent to the media is echoed today by people calling for arts organizations to make themselves more open and accessible to audiences.

Given the frequent questioning of the validity of the non profit business model for arts organizations these days, perhaps a league of arts organizations focused on monetizing anything that isn’t nailed down can comprise a viable way forward. I mean, heck, many orchestras are already running parallel to sports leagues with the threats of lock outs and hiring non-union players.

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5 Responses to Embracing The (Cost) Disease

  1. Jon Silpayamanant June 20, 2012 at 6:43 pm #

    Thanks for the mention, Joe–and the revenue ideas you mention at the end of your post were exactly things I’d considered as well. Revenue sharing would be difficult for the arts and given the nature of how that works with sports, likely its the revenue from the Broadcast licenses that take up the lion’s share of putting franchises in the black on average. Since the cap for player’s salaries is between 50% and 55% of total revenue there would be no way for just gate revenue to cover the costs.

    And yes! The main point, and I guess I didn’t really emphasize it in the post, is that Television is on the wane, and because of the focus on that 18-49 demographic, its likely that broadcast media economic model is flawed since the largest population cohort in the US is the baby boomer generation which is now starting to pass out of that demographic. The 45-65 year old demographic is almost as large as the 18-45 bracket and slowly growing. It doesn’t bode well for the broadcast model that this older cohort also has more buying power.

    It’s also unclear that age brackets matter as much as the Neilsen ratings would have Television believe if Alan Andreasen’s suggestive conclusions about the Stage in the Family Life Cycle being a much more predictive measure for concert behavior than the traditionally assumed age, income, or education groupings.

    I also wondered about merchandizing–I still have some items I picked up at the Met Opera gift shop when I was last there–couldn’t arts organizations create a line of products that might make wonderful keepsakes (especially for out of town visitors)–or at the very least, figure out a way to get recordings back in the market? Seems like there are plenty of opportunities for at least a modest increase in revenue here.

    I was actually not expecting to find the ticket revenue percentage to be so low–I expected to find something comparable to what we have in the performing arts. Or maybe even just a little bit higher–but finding that the NFL ticket revenue was so low was just mindblowing. I wasn’t at all surprised that ticket revenue has been decreasing.

    I think the most important idea here is that, in the end, the Sports industry has found a way to mitigate the Cost Disease (same might be said for the Pop music and possibly the Movie industries) and that has to do primarily with creating a scale economy–they’ve found a way to get a bigger audience to their ‘performances’ via mass media. And, ironically, Baumol (and Gomory) recently has (have) been on the leading edge of researching how Scale Economies can sometimes get too big to fail and has worked out a way to measure how scale economies become incumbent industries, thus locking out competition simply due to the size of the operation. It probably should not be surprising that practically all the Leagues operate via anti-trust exemption–thus effectively being cartels in a similar way to how Baumol and Gomory describe the retainable incumbent industries in their current research!

    • Joe Patti June 20, 2012 at 9:21 pm #

      Jon-

      Thanks for the extensive comment. I am actually looking forward to seeing what your research turns up.

      In respect to the NFL ticket revenue being so low, since you mentioned they were the most profitable, I assumed the percentage was so low because their other income streams were so lucrative rather than that ticket revenue was decreasing.

      Is that the case?

      • Jon Silpayamanant June 21, 2012 at 8:26 am #

        Joe,

        I think it’s important to mention (and I probably should have made that more apparent in my piece) that ticket revenue has, for the most part, grown for the NFL–it’s just shrunk as a percentage of total revenue (and I think that’s also what you mean).

        Basically, yes-for the NFL the Broadcast licensing revenue, in particular, is much more lucrative than ticket revenue and the growth of the former continues outpace the growth of the latter, hence the “performance income gap.”

        The ticket revenue growth has more to do with the creation of newer and bigger stadiums as well as higher priced seating (e.g. some tickets for the Super Bowl at the Dallas Cowboy Stadium were well in the 2+ grand region) as well as a higher proportion of luxury suites (average 20% as compared to the average 3% in older stadiums). Luxury suites can now generate as much revenue as the rest of ticket sales and that revenue is not shared.

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