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Economics behind orchestra dispute: slouching toward the Lake Wobegon Symphony

Minnesota Orchestra musicians performing Sunday at the Lake Harriet Bandshell
MinnPost photo by Jana Freiband
The Minnesota Orchestra musicians performing Sunday at the Lake Harriet Bandshell to an audience of thousands.

The Minnesota Orchestra and Orchestra Hall play an important part in my life.

I first heard George Gershwin’s “Cuban Overture” at one of Leonard Slatkin’s “rug concerts” in the 1970s. My wife and I had season tickets while we were college students, putting us in the first row at Orchestra Hall, where we could see the member of the double-bass section who wore soft cloth shoes instead of dress shoes like his section-mates.  

At Orchestra Hall I saw Van Cliburn in the 1970s, Maynard Ferguson in the 1980s, Tony Bennett in the 1990s and the Count Basie Orchestra in 2000s.

Over the last year I’ve observed the lockout and cancellation of the 2012-2013 season at Orchestra Hall and tried to make sense of it. Economic theory suggests two explanations: one that applies to the 2012-2013 lockout and season cancellation and one that illuminates the current contract negotiations, including the potential loss of music director Osmo Vänskä.

Comparing the lockout and restaurants

Have you ever gone to a restaurant and observed: “No one is here. How can this place stay in business?” If you think about it, it’s pretty clear what’s up: If a restaurateur signs a six-month lease, they might lose less money continuing to hire cooking and wait staff and open every day than by closing the doors and paying off the lease.

Economists call this the shutdown decision. A company must decide whether it will lose less money by operating and earning some revenue rather than by closing and earning no revenue.

My hunch is that the Minnesota Orchestra board made a similar decision. Faced with the choice of playing concerts away from Orchestra Hall while it was being refurbished, they figured they would incur smaller losses by locking out the musicians and canceling all concerts than by paying the musicians, renting alternative venues and holding performances.

Comparing orchestras and used cars

Suppose you’re at a used car lot and find two cars that look exactly the same on the inside and outside, have the same number of miles and are priced the same. Which one should you buy? The dealer might know that one of them has a cracked cylinder head and the other doesn’t, but you can’t tell. In the absence of some kind of law requiring the dealer to completely disclose all problems with their cars, you’re stuck. You’ll have to take your chances and pick one of the cars and pay the same price regardless.

This is a situation in which the buyer and seller have asymmetric information. Economists observe this problem in markets ranging from used cars in the United States to milk quality in India to financial markets in developing economies.  

I think that the orchestra's governing body, Minnesota Orchestral Association, understands the asymmetric information problem. Specifically, they are betting that a typical concert-goer cannot tell the difference between a top-flight orchestra (the Los Angeles Philharmonic under Gustavo Dudamel) and a very good orchestra (the Minnesota Orchestra under Eiji Oue.) They also estimate that they can generate the same amount of revenue — sell the same number of tickets at the same prices — with a top-flight orchestra and a very good orchestra. So, in this scenario, it makes sense to field a very good ensemble that generates a smaller loss.  

If I’m right, then Maestro Vänskä is on his way out and a lot of new musicians will be joining the Minnesota Orchestra. That will be fine with the board, as there are conductors and musicians of good quality who will be happy to come to Minnesota and play in Orchestra Hall. Season-ticket sales will stay about the same and, with a refurbished hall, a reduced orchestra schedule and more non-Minnesota Orchestra events, revenues will rise and costs will fall.

If this happens, it might be best if the board changes the orchestra’s name. I suggest that they call the new ensemble the Lake Wobegon Symphony — where the management is strong, the hall is good looking and the orchestra is above average.

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Comments (21)

Lake Wobegon Symphony

There is already a Lake Wobegon Brass Band. I think it's unlikely that Garrison Keillor would touch this with a ten foot pole.

Profits

I think it's a mistake to think management is driven by some sort of profit revenue. And I think the problem is simpler than that. Management made it's planning on the assumption that the Minnesota Orchestra would be a second class orchestra and would be paid appropriately. Through a fortuitous chain of circumstances, which included a lucky conductor hire, and some unexpectedly favorable offhand comments in a couple of reviews, expectations and quite possibly even the reality changed. Almost in spite of itself, our local band is bidding to join the ranks of the country and the world's elite orchestras. To get there and to stay there entail more money, more commitment, and more plain and simple hard work. Orchestra managers didn't plan for that, and they ran scared, quite possibly with good reason because the possibility that our orchestra has become world class does not necessarily imply that it's managers have become world class. They have and had two choices before them. They can put on the brakes in the whole process, reduce costs, lose that conductor who brought them the fame and prestige they didn't expect and didn't necessarily want. Or they can take the plunge, sign the deals that take the risk that somehow world class status can pay off in the form of revenues that we can't clearly forecast now. Deals which also might very well mean the replacement of this management team with one capable of meeting the challenge of running one of the world's great orchestras.

As Yul Brynner might say, "It's a puzzlement".

Great idea and clever article

That sounds like a business decision made by the orchestra and that is where the state should discuss its role as a non profit with a public trust.

I must have missed it

When did the Pohlads buy the Orchestra?

Minnesota Orchestra--A MN Priority Prize Fading into Sunset

Clearly the problem is a combination of Mn Orchestra Management lack of community attention that is far to focused on the immediate finanacial status and not on what being Mn class quality really means. For several years now the MN focus is on sports, entertainmment etc. and not on MN quality. A measure of this is why can be spend billions on stadiums and now $300M on U of M training facilities and meanwhile we let a world class orchestra fade into the sunset. Asking some community so called leaders why the priorities are as they are the answers amaze me that the citizens have demanded the sports complexes and the U sports program is broken. Yet when we ask about the orchestra the comments is that the orchestra is only an elite smal group that can get by without support. I was a supporter of the benefits of sports to the Mn economy etc. but for now i wish to state that there will be no more support from our family until we put all the state funding on hold until we reset the priorites of the community to a point that the orchestra can continue along side the other organizations and the Institute of Art, and the Walker do not appear on the next cycle of decaying organizations --and also do not forget the Guthrie. Bottom line stop the state funding-- the Mn investigation of the Viking owner funding risks was a eye blink only by the stadium commission -- clearly a top level " all is OK' look to keep the ball rolling. Very Sick Approach to how we thought quality was the trademark of government in MN. Our community has be misled and is being shaped by people without serious visons. Our community will continue to be much different than which normal evolution of change would bring. Can we fix it - Up to a couple weeks ago I was confident that we would --now down is the normal. Memories wil be great the future will be dull.

Dave Broden

Sorry David

But it's a fact that the Orchestra is only important to a very small segment of the community. Look at the media coverage when the major sports leagues go on strike or are locked out. Things get done because of huge public pressure. Like it ot not, this stalemate has continued to exist because really, virtually no one cares.

Call their bluff?

So if their intent really is to get rid of Maestro Vänskä, what would happen if he said, "Don't worry, I'm not leaving. Let me know when you've got this whole thing worked out and I'll be ready and waiting."?

Clearly the problem is a

Clearly the problem is a combination of Mn Orchestra Management lack of community attention that is far to focused on the immediate finanacial status and not on what being Mn class quality really means.

Maybe, but that's an issue to be raised with charities and the politicians. We can make the decision to regard the orchestra as a community asset and do what we did with the Twins and Vikings, write them a check to keep them here. For whatever it's worth, I am in favor of that solution, but nobody else seems to see the dispute in those terms. For some reason we are willing to give hundreds of millions of dollars to profit making organizations which are then shipped out of state, but giving far less to a nonprofit organization where the money mostly stays here, is out of the question.

"So if their intent really is

"So if their intent really is to get rid of Maestro Vänskä, what would happen if he said, "Don't worry, I'm not leaving."

Given their druthers, I am sure orchestra managers want what many of the rest of us want, to have our cake and eat it too. But the orchestra is run old and cautious men and women, who are perhaps a bit more conscious of the fiduciary responsibilities then some of us would like. They are also not risk takers. So while in theory they would like Vanska to stay, it wouldn't be the end of the world if he goes. And even without Vanska, and with an orchestra that falls back to second class status, they still get the prestige of being involved with the orchestra. And now they have more bars which will certainly help the pain.

The arts never make money, in

The arts never make money, in a profit sense. They may break even sometimes, with a great ballet season and choreographer or stunning special exhibitions or genius theater director or a fabulous orchestra leader. The problem with our MN Orchestra is that both its board and administration have failed at their job, which is to safe-keep the organization so the musicians can do theirs.

They should not have begun all this with a frontal attack on the self-respect and economic viability of individual musicians and the world-class group they formed. The board should have justified its absurdly large size (people are on the board because they have, or might, give lots of money to the Orchestra, not because they know anything about running an orchestra), by mounting a splashy fund-raising to re-build the endowment. Beat the drums, so to speak. Using the newly-refurbished Orchestra Hall as the drum surface. It would have been splendid, everyone together to salvage something we value.

Instead, we have musicians gone, the conductor about to leave, no movement on any agreement, and real enmity existing in the organization that remains.

Board and administration flubbing their jobs.

CarFax

To follow your used car metaphor, if one is faced with two apparently identical used cars, the smart buyer will purchase a CarFax report which lists any major repair work done on the car (I've done this).
Basically this is what the musicians are doing:
requesting a CarFax report on the Orchestra management's budgets, which would provide the information necessary to make an informed decision on whether to 'purchase' the proposed contract.

"They also estimate that they

"They also estimate that they can generate the same amount of revenue — sell the same number of tickets at the same prices — with a top-flight orchestra and a very good orchestra. "

I don't believe the MOA thinks that and I think they are wrong if they do. There is virtually no doubt at all, that a world class Minnesota Orchestra can generate more revenue than a second tier orchestra, which is what it has always been. The problem is that a world class orchestra would be more expensive and more challenging to run. I think it's also the case that a world class orchestra would need a world class management team, which I don't think it has now. By making a commitment to step up in quality, I think this management would be running themselves out of their jobs. Whether that awareness is playing a role in their decisions is something I just don't know.

"Faced with the choice of

"Faced with the choice of playing concerts away from Orchestra Hall while it was being refurbished, they figured they would incur smaller losses by locking out the musicians and canceling all concerts than by paying the musicians, renting alternative venues and holding performances."

I do think management thought this was a good time to take on the union. After all, this is a lockout, and not a lockout. But what they misjudged was the determination of the musicians, and the full depth of the existential threat that the orchestra now faces. They are second tier managers of what bids to become a first tier orchestra, and they have always been out of their depth.

Great Article...

It occurred to me yesterday that perhaps Maestro Vanska can't leave without incurring major financial harm to himself.....undoubtedly his contract has a buyout if the orchestra were to dismiss him; perhaps that financial benefit will not obtain if he quits. Perhaps he must stay or lose his shirt. We can always hope that that will compel him to stay through these difficult times. Perhaps.

"It occurred to me yesterday

"It occurred to me yesterday that perhaps Maestro Vanska can't leave without incurring major financial harm to himself.....undoubtedly his contract has a buyout if the orchestra were to dismiss him; perhaps that financial benefit will not obtain if he quits."

You would have to know the specifics of his contract. It's possible that the MOA is in violation of Vanska's contract by not providing him with an orchestra to conduct. And of course, his leaving would get the orchestra off the hook of paying him. In any event, and an ugly separation is neither in the interest of the orchestra or Mr. Vanska.

A great idea!

In as much as our state and city political leaders have been asked or expected to weigh in to solve this vexing problem, I may have thought of a solution. Why not have the Orchestra Board sell the newly remodeled Orchestra Hall to the State/City/or 5 county metro area. A suggested price would be $100 million. The hall could be leased back to the Orchestra Board for a nominal amount. The $100 million could be added to the endowment, and even our astute Board leaders, who after all run the country's fourth and fifth largest banks couldn't help but to make 7% tax free income. After all, that's a no brainer as investment grade corporate bonds are paying that. The income would erase the $6 million dollar annual operating deficit. Government could finance the purchase with a modest sales tax increase or perhaps electronic pull tabs, and even issue tax free revenue bonds. There is precedent-the government financing of arenas for all of our professional sports teams and even stadia for the University of Minnesota. And this is for the preservation of one of the State's most valuable cultural assets!

And you know, I'll bet there are a lot of us who would be willing to buy "seat licenses".

The only problem is that to be worth that much money,...

...the Orchestra's key players would need to suffer some sort of violent injuries during performances to get the crowd excited and bring 'em back for more.

Is there a classical music so kinetic, so hair-raisingly violent that the Orchestra will need a medical staff and a gurney at hand during performances ? Ice-packs to reduce the swelling ? If so, I think we've got a real winner here. Forget white wine in the lobby bar - don't even stock it; the beer sales will go through the roof !!

The building

The solution doesn't have to be complicated, And one solution is what we did with the Twins and Vikings, write the orchestra a big check. You don't have to go through a lot of gymnastics like buying and leasing back the building to do that.

As a practical matter, unless you can buy it without restrictions and turn it into condos or an office building or whatever, Orchestra Hall is worthless. Worse than worthless if you look at it on an opportunity cost basis.It's function is to provide a venue for orchestra concerts and it really isn't useful for any other purpose. This, by the way, is true of other facilities like the various athletic buildings around town.

TV

Think of it like a television. You might spend a thousand dollars on a big screen TV with all sorts of bells and whistles but how much is it worth if there is nothing to watch? Similarly, an rchestra building is worthless without an orchestra or a football stadium is worthless without a football team to play in it. Content, as always, is king. Another economic fact the Minnesota Orchestra managers missed somewhere along the way.

Can someone start ....

using photgraphs of the Orchestra Board. I for one would like to put a face to a name.

Price

Elsewhere today, there is an article talking about 50 million dollars the city is going to pay for renovations to the Target Center they own. This pretty much sums up the problematic concept of public ownership of these kinds of buildings. With respect to stadiums, arenas and orchestra halls, ownership means that the owner gets mostly the liabilities while someone else gets the assets. In these kinds of transaction, the building wasn't an asset the public received, it's part of the price the public paid.