Baumol’s cost disease

2012 Year In Review

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I often tell people that it surprises me what postings take off. There are things I write that I think are really insightful that barely get any notice. Other posts that I just dash off after hours of trying to think of something pithy to write about will garner all sorts of attention.

I pretty much see it as a parallel for the whole non-profit arts experience so I don’t take it personally if I don’t get a lot of attendance at the stuff I deem to be brilliant masterpieces.

However, looking back at the posts that garnered the most attention in 2012, I am assured that my dreck isn’t rising to the top.

The most traffic by far went to my post Forget Dynamic Pricing, Use Placebo Pricing

The Next Most Visited Page was The About Me page (you like me, you really like me!)

But the second most visited post was Your Mouth Says Innovative, Your Pictures Say Status Quo

Third, is unexpectedly, Dramaturgy Is Everyone’s Responsibility. In the coming year I may have to explore the subject more often.

Fourth and Fifth were June’s Embracing The (Cost) Disease and last month’s Expectations Feed The Disease. I wrote about Baumol’s Cost Disease three times last year and two of those entries popped into the top 5 so apparently the subject is of some interest.

What I was most inspired by this year was an animated typographic video of Ira Glass’ advice about creativity. The post I included it in is a little long and doesn’t do justice to the frisson I experienced when I watched the video so I won’t link to it. However, I used the video in a couple presentations this year, including a middle school career day.

My favorite line is right near the beginning where he talks about how when you first start out, what you are making isn’t really all that good, “But your taste, the thing that got you into the game, your taste is still killer.”

Like Glass, I wish someone told me that when I was first starting out.

Expectations Feed The Disease

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Thai-Klingon cellist Jon (J’onn) Silpayamanant commented today on a post I did on economist Tyler Cowen’s discussion of Baumol’s cost disease as it relates to the arts. He quickly followed up with another comment apologizing because he assumed I was talking about piece Cowen did in 1996 rather than a more recent post on his blog where he makes much the same point.

I started to write a slightly snarky response wondering if Cowen had been more efficient writing the more recent piece because he had better technology and 16 years of thinking about it to back him up or if he was subject to cost disease because it took just as long to write four or five as it did back in 1996, inflation has made his time more expensive and he had to distill down 16 years more experience into a thoughtful entry.

At that point it occurred to me that every time people talk about cost disease related to the arts, they do it in connection with the actual performance. Other parts of creating art has actually benefited from greater efficiencies. Computers aid the design of performance elements as well the transmission and discussion of those designs allowing them to be received and acted upon much quicker than in the past. The marketing and advertising of the performances are likewise aided by technology in terms of design and dissemination. LED lights promise to cut electricity bills by an enormous amount once the ability to control and insure the quality of the light improves.

The quality of the performance itself also has much more potential of benefiting from technology in terms of the amount of research the performers, directors, choreographers, conductors, etc can do in preparation. Every aspect of the performance can be informed by concepts promulgated half the world away. In many respects, the audience is getting a much better product than they were years ago and it is made possible less expensively than in the past.

In fact, they are in a position of being far more informed about a performance they are about to see than a person with the same level of experience with the arts 10 years ago might have. Of course, the whole issue we have is whether the audience values that experience or not.

Had Cowen used this approach in support of his argument that the arts aren’t really impacted by cost disease, I might have been a little more receptive to it.

In some respects, I think that non-profit performing arts have done a great job of employing technology to keep their costs under control, (often to the detriment of the artists, orchestra musicians in particular these days), in comparison with the movie industry where technology has resulted in sky rocketing costs. They employ wide spread distribution options like movie theatres, DVDs and streaming as a substitute for economizing.

It is often said there is a lesson in that for the performing arts but just like the independent film maker, the small arts organization would have to depend on a relationship with a big company with the resources to replicate something on the scale of the Metropolitan Opera and National Theatre broadcasts.

Of course, many times audiences demand the spectacle that technology brings to the movies and some of that carries over to even the solo artists that Silpayamanant mentions. While touring solo might have been a cost cutting measure at one time, that often isn’t the case any more with the huge tours many major acts take on the road.

As an aside, I wonder at the economics of J-Pop groups like AKB48 which has 66 active members spread out across four performing teams. Even though they don’t tour, that is a lot of people to support.

But getting back to the discussion of Baumol’s cost disease, even though people cite the fact it still takes as long to perform a particular work as it did X hundred years ago, it probably really isn’t those two hours of performance that is the costliest part of the process, it is everything else that surrounds it. Because of audience expectations about their experience more preparation precedes the performance, much of which involves salaries and benefits.

As I noted above, technology has brought efficiencies and quality to many parts of the preparatory process. What is it coming down to now is balancing the expectations about the quality of the experience and the cost of delivering it with what people are willing to pay. Right now the focus seems to be on how much of the product can be trimmed back before people notice and become concerned with the drop in what they value.

While this is translating into seeing how many musicians an orchestra can cut before people figure the music is suffering, you see the same thing manifesting in other areas of your life as well. Just try to buy a half gallon of ice cream these days. You will find it is 1.75, maybe 1.5 quarts.

I don’t think that is really a sustainable practice. There should be an corresponding push to shift customer expectations too, and not toward accepting less ice cream and music for the same price, but rather expecting a slightly different sort of experience surrounding a quality performance. I am not sure exactly what it would look like. I know I would like it to be less structured and more educational than what we have now.

Yes Virgina, There Is A Cost Disease

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Over on the Marginal Revolution blog, Tyler Cowen opines that the arts are not impacted by Baumol’s cost disease.

2. I do not see the arts as subject to the cost disease very much at all. As for the “live performing arts,” the disease seems to afflict the older and less innovative sectors, such as opera and the symphony. There is plenty of live music these days, it is offered in innovative ways, and much of it is free.

I was a little confused by this point since all it really proves is that people aren’t charging for live music and doesn’t really address that there are costs involved with the performance.

Admittedly, he does seem to imply that innovation in the way the artistic product is offered makes all the difference. Back in June, I noted that Jon Silpayamanant made the point that there are alternative ways to make money when offering an experience.

Cowen goes on to say, (my emphasis)

“4. In many sectors of the arts, especially music, consumers demand constant turnover of product. Old music becomes “obsolete” — for whatever sociological reasons — and in this sense the sector is creating lots of new value every year. From an “objectivist” point of view they are still strumming guitars with the same speed, but from a subjectivist point of view — the relevant one for the economist – they are remarkably innovative all the time in the battle against obsolescence. A lot of the cost disease argument is actually an aesthetic objection that the art forms which have already peaked — such as Mozart — sometimes have a hard time holding their ground in terms of cost and innovation.”

I will grant him that some of the cost disease problems can be attributed to an adherence to aesthetic ideals rooted in the past and a resistance to innovation.

But I am not sure if consumers are truly demanding a constant turnover in product. There is reluctance to sample anything new and unfamiliar among consumers. This isn’t necessarily confined to symphony and opera where you might argue the new material is being presented to the wrong audiences (i.e. older existing audiences whose tastes are already set).

There is as much a sense of risk aversion among audience as among content creators. Broadway shows are often revivals or derivative of works that have already proven their success. Playwrights bemoan the fact that regardless of their proximity to Broadway, few theatres are producing new works.

The same is true with movies. The most well attended movies this summer were based on comic books. Even the plots of those stories had been revamped numerous times in the comics format. The plan for the adaptation of J.R.R. Tolkien’s The Hobbit went from two movies to three leaving fans to wonder, if the three books of the Lord of the Rings took three movies to tell, (albeit with much left out), how is the one book of The Hobbit going to be stretched to three?

A fair bit of emotion and nostalgia is responsible for perpetuating the conditions which contribute to Baumol’s cost disease. One of the points Cowen makes reinforces this:

“Live music” may seem like it doesn’t change much, but lifting the embargo on Cuba would boost the quantity and quality of my consumption of spectacular concert experiences, as would a non-stop flight to Haiti.

Opportunity rather than innovation is the only thing having any bearing on the quantity and quality of his consumption. It isn’t necessary for Cuban musicians to made any changes whatsoever since 1962 when the embargo began, they just need to be available.

There is an element of his aforementioned “aesthetic objection that the art forms…have already peaked” in this point as well. It is difficult to take an entirely objective view of a product or service possessing an artistic element.

If quality of product could be maintained by paring down performers and replacing them with technology, The White Stripes would have been a model everyone emulated. As interesting as the band’s work might have been, there wasn’t a rush to form duo performance groups.

It may be a difficult to define Platonic ideal, but there is a minimum one can offer before the perception of the experience suffers. Ultimately, because it is his area of expertise, I might find myself having to concede Cowen’s point in the face of a more detailed argument. But I think given that the resources necessary to provide the central experience remain generally constant, Baumol’s cost disease does indeed impact the arts significantly.

As for the solution, at this point I keep coming back to Jon Silpayamanant’s idea that ancillary elements surrounding the experience need to be developed in order to support it.

Embracing The (Cost) Disease

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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.