Arts revenue and the fallacy of the “savior demographic” (younger audiences)

How much public funding went into supporting the operating expense of this ball game?

How much public funding went into supporting the operating expense of this ball game?

I’m sifting through a number of studies and economic data regarding Sports finances in preparation for a case study comparing revenue contributions for sports and performing arts organizations and there are far too many interesting things to not mention, if not post a properly cited blog post on (that will come a bit later).

The received wisdom from the Chicken Little Think Tank (the “Classical Music is failing” camp) that with declining revenues from ticket sales (sometimes referred to as “performance income” or more erroneously, “earned income”) as a proportion of total revenue for classical music organizations and the [purportedly] declining audience (as well as the increasing median age of the audience) there’s this notion that the industry must get a bigger [and younger] audience to offset the performance income gap (the gap between performance revenue and operating costs).

The figures (depending on whom you ask and which studies you look at) show a steady decline from roughly 7o% or 90% of ticket revenue covering total expenses (back in 1937) to between 35% and 40% of ticket revenues covering expenses today (less for Opera and Ballet).  In other words, the performance income gap is increasing showing us that there are structural deficits built into what is practically a service industry which cannot have an increase in production to offset rising costs due to inflation.  This is known as the Baumol Cost Disease.

Lisa Hirsch and I have been having a conversation about the similarities of the Sports Industy with regards to the Cost Disease in my previous post and I foolishly tried to have a discussion with Greg Sandow regarding this issue in a previous post at his blog.  The basic idea is that Sports Teams function no differently than Orchestras in so far as they are just as prone to the Cost Disease since it will still take as many players to play a game today as it did a hundred years ago.

But there’s really no reference to the cost disease in this industry which is a for-profit business.  Why is that?  One reason, and much of this is due to the revenue sharing amongst teams in a League, is precisely because on a whole the sports industry is profitable even if a number of individual teams aren’t profitable.  An example, during the period of 1995-1999 only three out of thirty Major League Baseball (MLB) clubs made a profit.  But due 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.

This is little different than the marketing issues I brought up in the previous post regarding putting big efforts into promoting the Blockbuster movie to offset the poorer performing movies–a studio (or record company, for this matter since this is how they used to operate) can prop up the big earners and still come out making a profit even if half a dozen movies lose money while the rest barely break even.

In John Vrooman’s article, “Theory of the Perfect Game: Competitive Balance in Monopoly Sports Leagues” (Review of Industrial Organization, 2008:31) he gives Gate revenue for three of the four major Sports Leagues for the year(s) preceeding the publication.  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.

These numbers aren’t very different than the ticket revenue in Classical Music.  But is there the same kind of structural decline as has been described by Baumol and Flanagan?  Well, it looks like it’s a big yes.  The two years’ Gate revenue mentioned above for the MLB can be traced back further.  For example, between 1969-1973, the Gate Revenue averaged 61% of total revenue (Source:  1969-73– House Select Committee on Professional Sports.  Inquiry into Professional Sports.  94th Cong. 2d sess. Part 2, 1976, p. 372.).  The data is relatively complete and shows a comparable, if not sharper, decline to Orchestra performance revenue as a proportion of total revenue.  I’m still compiling databases on the other Sports League Gate revenue trends but this seems to be the norm.

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).

The way this works is that Television studios/stations (much like radio) sell ad space.  The real customers of media broadcasting are corporations, not its viewers.  A thirty second ad during the Super Bowl can coast upwards of hundreds of millions of dollars and in many cases ad revenue through media licensing can make Sports Leagues (proportionally) as much as Gate revenue if not significantly more.

The odd thing about Television licensing is that businesses look at the demographics of the viewership.  The magic demographic in the Nielsen ratings is the 18-49 year one–this is the demographic which will determine that a Television Station can demand the highest prices for ad space.  It wouldn’t matter if a show is the highest rated sindicated show currently on the air if the 18-49 year demographic doesn’t comprise a significant proportion of its viewership.  Shows with high ratings have been cancelled simply because of this fact (such as the second highest rated show, “Harry’s Law,” and the popular “Jesse Stone” made for TV movies).  In other words, the older demographic is demonized by Television because it doesn’t fit into the demographic that businesses [arguably] consider to be the best one to target (e.g. the 18-49).

The irony is, with an aging population, this is making less and less sense since the buying power of the older demographic is so much higher.  But this bias against aging audiences is being seen replicated in talk about the demographic of audiences for classical music which is ironic since one could wonder what the actual demographic for Sports is (given that the recent NEA study has also show a decline in audiences for ‘benchmark’ Sports events).

Another interesting issue of Broadcast has to do with how that affects the audience attendance for the actual live event.  The 72 hour sellout rule for media blackouts (within a 75 mile radius of the game) is currently being contested after 40 years due more to fan demand than the industry (which wants to keep it in place), and Peter Gelb has mentioned that he believes the Met Opera has lost some of its live audience in major nearby cities like Boston due to the HD Casts in movie theaters.

Add in the fact that Sports Stadiums rarely cover their start up costs and only half of them actually cover their operating costs and we have to wonder how much public contribution actually goes into propping up the profitability of the Sports Industry.  Never mind how much taxpayers help to recoup loss of tax money due to corporate welfare for those companies that do pay for advertising during Sports broadcasts.

And that, folks, is what I hope to explore in the case study–how much public contribution actually goes into Sports and how that compares to non-prof Performing Arts Organizations non-performance income due to donations (which are tax-deductible) as well as the relative economic impact made by a local Sports team as opposed to a local Orchestra, Opera Company, or Ballet.

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25 thoughts on “Arts revenue and the fallacy of the “savior demographic” (younger audiences)

  1. In thinking about the major league sports numbers cited for the 1960′s, I’m reminded of the player salaries of that era. In his autobiography, football great Gale Sayers wrote about off-season jobs for NFL players. He himself worked for Sears in the off season.

    It would be interesting to see beginning level pay and average pay for all these sports, by year, against the ticket income. It doesn’t go up because of inflation. Player pay jumped once TV was part of the mix.

    • Right, Gail–TV licensing most certainly brought up the pay levels of Athletes far above what inflation would have done had there been no significant non-performance income brought into the mix. That’s very interesting that NFL players had off-season jobs–thanks for posting that.

      Since I’m still very new to the Sports Economics side of things I will definitely see if those kinds of figures for pay by year even exist as it would give us a very interesting look at how external factors–especially the ability of Sports Leagues to create economies of scale by broadcast licenses–have shaped operating expenses.

      • And a bunch of the players will have ads that they work on. I wonder how much of the revenue goes to the player and how much goes to the team. I’ve seen a number of spots where the players will sport their jerseys. Of course, unless you’re a very well known player like Manning (either brother) or Brady or Vick or whoever (I really only know football), you need the jersey to say “hey, yes, I am an (insert team name)” for the general population.

      • Yeah, I’m not sure how that works out. I know until recently, individual teams weren’t allowed to make their own licensing contracts–that was until the Dallas Cowboys licensed to Pepsi. Short out of court settlement later, other franchises were then allowed to do the same. I suspect it might work the same way now for individual players!

  2. Okay, this is really really really interesting. I’ve often wondered just why the younger audience was supposed to have such mystical powers, and whether it was a good idea for classical music — one of the few entertainment arenas where women over 40 aren’t put into dematerialization chambers and grey hair isn’t the kiss of death — to ape the youth-uber-alles attitude of popular culture. Like you said, older folks have more buying power.

    Also glad to see you bring up the fact that most sports teams are NOT profitable. We think they are, but many cities lose money on them and make it up on merch and broadcasting.

    I sometimes wonder how much of the classical world’s fascination with younger audiences is up to the fact that a lot of people thumping that drum are college professors, and the majority of people they interact with on a daily basis are between 18 and 22. That is such an unnatural environment in general, where everyone is very young, and those who aren’t are essentially focused on “parenting” them. It’s easy to think that those vibrant, chatty kids that make up 90% of one’s workday are the only people that matter.

    • Mystical powers, indeed! I am saddened that this field (and the arts in general) have fallen into this trap. I’m afraid Richard Florida has had some hand in this (see my post pingback a bit above) trend. That and the relative [popular and economic] success of the Pop Music Industry (which I’ve also taken some time to debunk here). That buying power of the older demographics is quickly becoming an issue of dissent as well–broadcast media companies are starting to realize how much money they stand to lose by not looking into audience segments rather than the 18-49 demo.

      And that’s the sad thing about the Sports Industries–the teams and owners are the ones who recoup their losses through the non-performance revenue. Usually the cities lose a lot of money while they continue to subsidize the field usually be footing and average of half the costs of new Stadiums–and then raising taxes to cover daily operating expenses. Public subsidy of the Sports Industry is quickly becoming (or really, has been) a very divisive topic!

      And the economic impact of big sports evens, such as the Super Bowl, almost never make up for the difference for the cities. one of the reasons I’ve chosen to do this particular case study is precisely because there was a longitudinal analysis of the local economy in Indianapolis after the construction of the RCA dome (which was recently demolished after the Lucas Oil Stadium was built). It showed no net effect on relative wage increases of local businesses which they authors have found to be a much better predictor of positive economic impact. In conjunction with raising local sales/hotel taxes have actually created a net decrease!

      I loved the comment you made on your blog about the academic professor/student environment—and actually had a discussion about that on Lisa Hirsch’s facebook wall with her and Eric Edberg. I think you’re on to something important w/r/t the idea of biasing due to the immediate environment. Whole disciplines in psychology have studied such robust behavioral phenomenon!

      • Quick-quick reply: Might be interesting for you to look into the NHL lockout as well. There are MASSIVE adjustments in the works (including increased salary givebacks for players as well) as a result of the league expansion during the go-go 90s, and it’s causing major headaches nowdays since few of the cities the NHL expanded into are actually profitable. It’s causing them headaches since they need to spend more to have a fighting chance, and it’s causing headaches for the profitable hockey markets who are finding themselves (unfairly?) hamstrung in order to keep from overwhelming the unprofitable ones. In reality, the NHL should probably only have about 16 teams in it. At most.

        And agreed on pop music, too — it’s so easy to look at the award programs, see the limos and expensive clothing and think the whole industry is swimming in money, but it’s not.

        More mulling later …

      • I hadn’t looked too closely into the NHL but understand that on the whole it is probably the least profitable of the big four. The revenue sharing is the least for the NBA and NHL–which, supposedly leads to the least competitive outcomes for seasons–at least that’s the rationale, and some have found looked at season winners, playoffs, final fours, etc. to see that when competition is more even (purportedly due to revenue sharing) then a wider variety of teams wins. I’m definitely going to look into the NHL since it’s the latecomer to this business and obviously has some very different obstacles to deal with–and players salaries in general I haven’t taken a close look at, though I understand that it’s mostly capped at roughly above 50% of revenue for all the leagues!

        Looking forward to your thoughts on the Pop Music industry–it’s another I think is so highly skewed especially once you take a look at the musicians who aren’t the top superstars and who, on the whole, are struggling to make a living with music or simply treating it as a hobby. That and some of the level of sexism that happens at the local level of the field need to be more openly discussed!

  3. Pop is highly skewed even if you do look at the best sellers — at least, it’s skewed in terms of where the money goes. It’s not always to the bands or writers. There’s a reason why a lot of pop types are heading for Bandcamp in such large numbers …

    A major part of the NHL’s current problems stem from the same problems that plagued Starbucks, really — they just grew too much too fast, and now there’s either a dieback or else they have to find a way to make the profit-making components subsidize the ones that aren’t. One of the less popular aspects of the buzzword-du-jour of “sustainability” is also the most often ignored: SLOW GROWTH. No one wants to hear that. :-P

    And yes, the fact that the classical music world stands a strong chance of “catching” the virus of sexism worse than it already has it by trying too hard to adapt to the pop model is a significant concern for me. No musical world BUT classical uses the blind audition, and without that, the number of women musicians in any arena plummets like a rock. If I have to choose between having a billion-dollar classical music industry with limousines and designer gowns at the awards shows, and having a classical music world where I can enjoy people like the 70-year-old Martha Argerich and Sofia Gubaidulina, I’ll take the latter.

    This is such a huge subject …

    • Right–when acts like U2 and Lady Gaga can’t cover the costs of their tours and yet hundreds of millions of dollars are pumped into them, someone is obviously making some money.

      Yes–slow growth! I think that’s where Tyler Cowen had it right–post WWII the US was booming–everything had explosive growth–Sports, Broadcast Media, Classical Music, Pop Music/Record Labels–and we’re just seeing the tail end of that growth as all the industries slowly decline. The subsidization happens in all of them, and happening more and more as the industries become less and less profitable!

      And thank the gods I’m not the only one worried about the shift into a pop model possibly leading to a more sexist climate–the blind audition thing is perhaps one of the greatest things about the classical music field and I would hate to see us lose it and then women musicians by attrition–that would be an even greater loss than the loss of the ensembles themselves, I think!

  4. […] I’d looked at the Nielsen ratings for television in the past when I’ve blogged about the decline of television. Nielsen ratings are based on relatively large samples and there has been a consistent drop in ratings for the top television series since the system started rating them in 1950.  Note that the rating reflects the percentage of the total population of televisions tuned to a particular program. In 1950-51, the Texaco Star Theater on NBC had a rating of 61.6 and by 2012-13, NCIS on CBS has a rating of 12.3.  With more television, cable, satellite, and now digital transmission which can cater to niche markets, there are far more options for differing tastes. I said as much in my Savior Demographic post: […]

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