Tuesday, December 16, 2008
All is now great at the Met. The Met is a marketing powerhouse. The product has improved, ticket sales are up, subscriptions are up, full houses are up and public perception has never been stronger.
The Met pioneered the program of broadcasting live operas in High Definition to theaters around the US and Europe. These programs have been a resounding success with nearly one million tickets sold for the 2007/2008 season. Approximately as many people saw the Met in theaters as did in the opera house. Mr. Rosen claims that the Met HD broadcasts are nearly a breakeven proposition with revenues approximately covering the incremental expenses. This is an astonishing accomplishment even if it is a little misleading. This analysis compares only the “incremental” expenses of the broadcasts. The cost of putting on the opera in the first place is not included. This cost is assumed to be allocated to the live audience. Unfortunately the live audience receipts only cover about half the cost of producing the opera. If these costs were fully allocated over the theater audience the HD broadcasts would be far from breakeven.
A couple of questions come to mind when considering the Mets astonishing turnaround over the past 2 seasons. First - is this new model financially sustainable for the Met? Second – what does this mean for the rest of the classical music industry?
Is this new model financially sustainable for the Met?
Simply stated – no one knows. Every year the Met provides a publicly accessible accounting of its finances. This is the tax Form 990 for non-profit organizations. The last Form 990 on record is for the fiscal year ending July 2006, the year before Peter Gelb started. It shows the Met raising its donation income by $16M to $114M while its revenue (primarily from ticket sales) rose by only $5M to $99M. The Form 990 for the year ending in July 2007 should be public soon. The speculation is that ticket sales have increased but that expenses and donations have increased dramatically. A few well healed donors have reached deep into their pockets to finance the extraordinary marketing programs, the significant costs of the new production model and the HD broadcasts.
Historically the Met has acquired about half its income from donors and half from ticket sales. Is the extra money needed to revive the Met only a temporary need, to get the company “over the hump”, or is it a permanent need to sustain the new model? If the new Met requires a lot more money to operate, and if that money has to come from donors, will those donors be there for the long haul? Can Peter Gelb and his successors continue to finance this model? Can they get the donor/ticket sales/expenses ratios back to historical levels or continue to sustain them at the new levels? Time, and the current global financial crisis, will bring significant light to this subject.
What does this mean for the rest of the classical music community?
It is early in the game for post-game analysis but there are some interesting questions and issues that are raised by the Mets activities.
1. Marketing works!
The Met hired a marketing wizard. He had never run a performing arts organization. He replaced the ultimate insider – Joe Volpe. Under Volpe the organization ran like clockwork but the audience was in decline. Gelb may or may not be an operational manager (indications are that he is not) but he was the right man for the times. Under his leadership the Met has had a rebirth. Every important metric is up and to the right. The lesson is that every part of the classical music ecosystem has to become excellent at the art and practice of marketing. This extends from the top managers of major organizations to individual artists. Competition for audience and donor attention is growing every day. While CDs are in rapid decline the video game industry is experiencing unprecedented growth. There are more options for how people spend their time. The other options are all being very well marketed. If classical music is to accomplish a turnaround like the Met it will REQUIRE a high quality and sustained marketing effort by everyone involved in the business.
2. The Met’s HD broadcast program is not a model for most other companies
Other companies have tried to emulate the Met. San Francisco Opera and Chicago Lyric Opera, Covent Garden and La Scala created similar programs and the attendance was very disappointing! One problem was that they delayed the performances to make the hours more suitable for the audience. This seems like a good idea but in fact it was not. One of the main attractions of the Met broadcasts is that it is not a recording – it is an event!! You are seeing it in real time, just like the audience in Lincoln center. As Anthony Tommasini noted in the New York Times:
“Central to Mr. Gelb’s conception of the Met’s venture was that broadcasts would be live: audiences in movie houses would vicariously experience the performance with patrons at the Met. Take away the live element and you take away a lot.”
This has a downside in that it limits the broadcast geography. This is why the matinee performances are broadcast - the timing can be made to work for Europe and the western US. The Met has done a couple of secondary shows and they have made the HD broadcasts available over the internet on a subscription service. These are financially trivial and make sense as an adjunct to a successful simulcast program but they would never stand alone as a viable model. The key is to make the performance into an event!
Another factor is that the Met was the first mover in this market! We are seeing many markets evolve into a winner-take-all outcome. The first mover establishes the brand awareness and acquires the consumer loyalty. Later entrants are pushing uphill against a bigger, better known and more entrenched competitor. The demand is not large enough for many competitors so unless the first mover stumbles, the followers just get further and further behind.
A third factor is initial brand-identity and audience perception. I am a frequent patron of both the Met and the Chicago Lyric Opera. In my opinion Chicago produces a more consistent and higher quality product. However Chicago does not have the brand recognition of the Met which springs from the Met's location, the scale of their season and 50 years of national radio broadcasts which have turned the Met into a national company. This is a serious disadvantage.
My guess is that the Met and one or two European companies (Covent Garden, La Scala or Vienna) will be the only presenters with the scale, brand equity and financial means to create a sustainable business broadcasting HD opera.
3. The Mets broadcasts can both increase the global audience and cannibalize local markets
Every local opera company is fearful that their audience, lured by cheaper prices, star power and perhaps the crippling effect of the terrible economy, will abandon their local opera companies and attend Met broadcasts instead. Another possibility is that the Met broadcasts will stimulate the audience appetite for opera and increase attendance at local productions. My guess is that both are correct. Some people will substitute and some will be stimulated. Whether the net effect on the local company is positive or negative will depend on the actions taken. For the net effect to be positive, the local company will have to adopt an aggressive marketing campaign targeting the theater audience as well as the rest of the community. There is a danger of the “Wal-Mart Effect” where the big drives out the small. The small need to be aggressive, nimble, local and focused to carve out a niche for themselves. Without that response the effect could be very negative.
The Met business case proves that there is a market for classical music and that an aggressive, well executed and professional marketing campaign can revive that market.
It does not, unfortunately, provide a business or economic model for smaller regional companies. These companies must find a different way to stimulate their local market and derive benefit from the audience stimulated by the Met’s campaign. They cannot go global and the Met’s model will breakdown without the global scale to support it. I will capture some thoughts on the regional company’s responses options in a future blog in hopes of stimulating a useful discussion.
It also does not provide any insight into the future of recorded classical music. The success of the Met’s HD program rests on the live broadcast model. It creates an event, not a recording. If a recording results it will be a peripheral economic consideration and only possible because the costs are absorbed by the event economics.
Is “What’s good for the Met also good for the country”? It could be. The jury is out. The answer will depend on the quality of the response by the rest of the classical music community. Local companies cannot copy the Met but, with the right marketing programs, they can leverage the local audience stimulated by the Met broadcasts.
Sunday, December 14, 2008
“A business (also called a firm or an enterprise) is a legally recognized organization designed to provide goods and/or services to consumers, governments or other businesses. A business needs a market. A consumer is an essential part of a business. Businesses are predominant in capitalist economies, most being privately owned and formed to earn profit to increase the wealth of owners. The owners and operators of a business have as one of their main objectives the receipt or generation of a financial return in exchange for work and acceptance of risk.” – Wikipedia
The music recording industry involves a number of discrete businesses. These businesses link together in a sophisticated way to create a “supply chain”. Historically, the collaborative effort of these businesses created a viable economic ecosystem and an acceptable financial return for all participants.
The recording industry supply chain starts with the composers and performers. They create and perform the music.
Next step in the supply chain is the labels. They finance, record, manufacture, promote and market the music.
The next step is the distributors. They take CDs in bulk from the labels, warehouse them and ship them, on demand, to retailers or directly to the consumers.
The last step is the retailers. They put the CD on the (physical or virtual) shelf and sell it directly to the consumer. They collect the money.
Each player in the supply chain brings unique capabilities that combine to make the supply chain work. The money paid by the consumer flows back through the supply chain (in a pretty convoluted manner) to provide the financial return needed by each member of the supply chain to make the system economically viable. (There is another “supply chain” through the broadcast industry to the consumer but I will ignore that for now as it represents a pretty small percentage of the total revenue generated.)
Technology and the Internet have spawned three separate phenomena which have undermined the financial viability of the traditional supply chain. These are:
· Internet retailers
· Direct digital distribution, and
What impact have these phenomena had on the supply chain?
The first casualties of this disruption were the physical retailers. All three of these developments have had the effect of reducing the number of CDs purchased at physical retail and undermining their financial viability. Thousands of CD stores are gone and the few that remain are under tremendous financial pressure. It is estimated that there are fewer than 200 physical retail outlets left in the US with a significant classical music inventory. With Borders on the brink of bankruptcy, this trend will only continue to its logical conclusion.
The on-line retailers had an initial boom based on their much lower cost structure and the breadth of virtual inventory that they can provide (they don’t have to invest in this inventory or the space to house it). The death of the physical retail channel drove many consumers to on-line sources. This was particularly true in the classical domain where ArkivMusic.com focused exclusively. Arkiv managed to grow for several years in a market where the primary demand was shrinking because their share of market was growing faster than the market was shrinking. However you can’t grow forever in a shrinking market. The latest year with complete statistics is 2007. According to the New York Times:
“A total of 500.5 million albums in the form of CDs, cassettes, LPs and other formats were purchased last year, down 15 percent from the unit total for 2006, said Nielsen SoundScan, which tracks point-of-purchase sales.”
This marks the 7th straight year of double digit declines from the peak year of 2000. See the graph below:
Vinyl peaked in the 1980s, cassettes around 1990 and CDs in 2000. You can project the CD curve yourself past 2005.
There are three distributors in the US who account for over 80% of the CD volume. These are Alliance, Baker and Taylor and Ingram. All three are struggling. Their customers are the retailers. The physical retailers are all but gone. The on-line retailers rely on the distributors to warehouse the CDs and to pick, pack and ship them to the consumers. This keeps the cost down to the retailer but passes that cost on to the distributor. As the business shrinks the cost of maintaining a huge inventory becomes unsustainable. Distributors are eliminating the low runners – the CDs will small or negligible volume. As you can imagine, the classical CD inventory is shrinking rapidly. This industry will continue to shrink and consolidate. It is likely that a niche player like Naxos will emerge and do for the distribution link in the chain what Arkiv did for the retail link. This will extend the life of the chain for a while.
In the classical recording industry the major labels are Sony, Universal and EMI. Warner was a 4th major but they exited the classical business 2 years ago. No one has to further describe the plight of the labels. Their troubles are regular news items for those of us in the industry. EMI Classics has 2 employees left in the US and they will be the next to go. Classical CDs account for about 3% of the CD sales and it is only a matter of time before Universal and Sony downsize again and eliminate the classical business. Naxos has a business model which is much lower cost and therefore they are better adapted to a lower volume market. As mentioned above they are well positioned to be the consolidator of the classical recording business and benefit from the demise of the higher cost competition. Their business model is controversial among the performers however because, in general, Naxos does not pay for the recording and they never pay residuals. This is a major factor in keeping their costs down but it does not pass the financial return benefit back to the performers.
There are a large number of boutique labels which do a very small business. They will continue on with business models similar to Naxos. Artists will be able to make CDs if they can find sponsors or some other way to finance the recording and production of the CDs. The major outlet for these CDs will be signing events at concerts. This will continue to be an important promotional activity but with the decline of the rest of the supply chain it is unlikely that these CDs will end up providing meaningful income to the artists.
No industry can exist without a healthy supply chain. The CD recording industry supply chain is VERY unhealthy and getting worse by the day. No one in the supply chain can make an adequate financial return. Without a supply chain – or at least without the current supply chain - what happens to the recording industry?
Digital downloads save the industry?
Some people put their faith in legal, purchased, digital downloads. Apple totally dominates the legal download business. From an article in the New York Times, November 9, 2006:
“A recent study estimated that Apple has sold an average of 20 songs per iPod — a fraction of its capacity. The rest of consumers’ music files — 95 percent or more — come from ripped CDs, possibly including discs from their own collections, and illegal file-trading networks, the study said.”
Theft is the major source of music on the IPod. Check this URL for another data point for your consideration - “Average teen stores 842 stolen tracks on their IPod.”
If you think Apple is in the business of selling music you are seriously deluded. Apple is in the business of selling IPods. Selling music is a necessary sideshow for Apple and, with 75% + of the market they barely break even. I personally spent 2 years as an investor in and manager of a major legal download business. I can tell you from painful personal experience that there is no long term opportunity in competing with Apple and selling digital downloads. The margins are razor thin and the market is shrinking. It is true that classical buyers are less likely to steal than teenagers but, unfortunately they are also older, less technology savvy and much less likely to be active users of the Internet and Internet commerce. According to the Soundscan data presented at 2008 NARM, classical CDs accounted for 3% of CD sales in 2007 but classical downloads accounted for only 2% of downloads. The supply chain for digital downloads is no healthier that the supply chain for CD sales.
The definition of “business” observed that the ultimate objective of a business is to earn a financial return. A supply chain is only as strong as its weakest link. For a supply chain to operate successfully all participants must make an adequate financial return. We define the recorded music supply chain as a system where recorded music is created by performers and composers, paid for by consumers and there is adequate financial return to create and maintain a healthy supply chain. There is no prospect of this supply chain enduring through the next decade.
There is a lesson to be learned from Apple however. They are using the ITunes store as a promotional tool to sell IPods. The power of music as a promotional tool is enormous. The best way for artists, performers and composers to leverage the recording of music in the internet age is to use it to promote their performance-based income opportunities. In this application recorded music has enormous potential if it can be created and distributed at low enough costs to justify its promotional value. Recorded music has a great future but the business model will be radically different. Future postings will explore this further and, with luck, the discussion generated will be useful to the community.
Tuesday, December 9, 2008
In the 20th century, recording and distributing music was an economically viable industry. It satisfied the needs of the consumer (to have access to recordings of artists and repertoire) and it compensated the performers, composers, labels and distributors for their efforts.
For classical artists and ensembles, recordings served many purposes. For the most popular performers recordings could provide significant income. For others the income was secondary to the promotional value of being recorded. The best artists and ensembles were recorded. The more frequently you were recorded, the more prestigious the label and the more well regarded the accompanists the more money, status and promotional value the recording created. Recordings served as a proxy for the status of the artist or performer. Whether the recording created the status or the status created the recording was unclear but the two came as a pair.
The Internet and attendant digital technology has fundamentally disrupted the recording industry. Today anyone can make an infinite numbers of copies of a recording and can share those copies with anyone else at no cost and with little or no effort.
Technology has no ethics. It may be wrong to copy a recording and share it but you cannot base an industry on a presumption of moral behavior. Even if a significant number of industry participants follow the rules, a large percentage will not. The practical, social and economic difficulties of making the industry work are insurmountable when a large share of the revenue vanishes and the moral minority who play by the rules are constantly confronted by the reminder that others do not. Attempts to legislate or to litigate proper behavior have completely failed. There is no practical and/or scalable way to enforce the desired behavior. The 20th century recording industry is dead.
The remaining 3 “major” labels – Universal, Sony and EMI - will be out of the classical business within 2 years. They will create no more than a handful of additional classical CDs. With the possible exception of a few “crossover” artists the labels will drop all of their classical artists. The majors will focus on trying to salvage their pop business and will abandon classical because it is more trouble than it is worth. The 20th century recording industry and business model is obsolete. It will soon be gone.
The remaining viable classical label will be Naxos. Their costs are dramatically lower and their business model allows them to operate profitably in a smaller industry and with much lower sales numbers. A primary contributor to Naxos’ lower costs is the fact that they don’t pay any residuals to the performers. There is no income potential for performers in the Naxos model! They will profitably produce CDs for several years longer than the majors.
There will be a small number of “vanity” labels left but their volume will be microscopic and they will operate on the same financial model as Naxos. They will ultimately disappear as well.
Virtually the entire recorded history of classical music will vanish from the world. None of the pre-2000 material had digital rights cleared when it was recorded and the cost of clearing these rights now dwarfs any income that could result. There is no commercially viable model for reviving this material.
Music will still be recorded but it will have to be recorded very inexpensively. Cost considerations will dictate that music will be recorded live and music will be distributed “raw” – without the extensive engineering designed to make it “perfect”. This music will capture the excitement of live performance and the audience will expect character, excitement and imperfection rather than the homogenized perfection of the studio recordings of the past (This is a big issue for many performers - Get over it!). Live recordings will completely replace studio recordings, new recordings will completely replace old recordings, the shelf life of (most) recordings will be brief, fresh recordings will have maximum value to the audience.
Payments to everyone involved in the recording of live music will be reduced or eliminated reflecting the repurposing of recorded music. When recording was a revenue generating industry it made sense to share that revenue with all participants. Now it is a brand building and audience development industry. The value of brand building and audience development is shared by all participants. Recording and distributing live performances preserves, sustains and enhances the brand equity and commercial viability of everyone involved. Each paarticipant benefits from the value created.
Everyone will have an internet connected home theater. Webcasting live music into the home will still retain significant economic value. The audience will pay either through subscription or pay-per-view models. Live performances will be perceived as an “event” rather than a recording. Reaching a broader audience through webcasting will be a critical strategic component of any 21st century performing arts organization.
So – where does this leave the classical world?
The 3 Laws of Classical Music in the 21st Century
- Money will be made by performing, by donations, by sponsorships and, in some cases, by endorsements.
- Recorded music will have no commercial value other than promotion. It is not a tool for revenue generation – it is a tool for brand building and audience development.
- Every download and every stream of recorded music increases the promotional value of that music and increases the brand equity of the performer and presenter. It does not cannibalize recording revenue because there is no recording revenue! It does not cannibalize ticket sales – it enhances ticket sales by enhancing brand equity and building audience demand!
A Plan of Action
As the performers and presenters watch the recording industry melt away under them – what should they do!
- Recognize that the CD is dead. Recognize that there is no direct revenue to be made by recording. Act now!
- Be an artist/entrepreneur! The 21st century artist, performer or presenter cannot focus on the art and let someone else worry about the economics. Promote yourself tirelessly and broadly.
- Get your music recorded, put on the net and make it as widely available as possible! Stream it! Download it! Put it everywhere you can. The promotional value of recorded music will no longer rest on the prestige and promotional engine of the label. Instead the promotional value of music will lie in how broadly it is disseminated, where and by whom. Every time your music touches the public it will enhance your brand awareness and your economic value as a performer.
There is a lot of denial in the classical music world. Performers still believe that a CD represents a badge of honor. They can't let go of the obsolete recording business model. They cling to the fantasy that there is intrinsic value in recording and that they should be additionally compensated for the recording of a live event.
This is toxic thinking!
It prevents us from confronting reality, from making a plan to deal with reality, from moving on and succeeding in the 21st century. It prevents the industry from adopting a business model that will assure its survival. It wounds us all. Living in the past can assure that classical music shares the fate of the US auto industry.
Don’t fight the future. Embrace it. Adapt to it. Make the future your friend!