New York Metropolitan Opera | The New Business Model
The opera has long been regarded as the epitome of entertainment among the wealthy, as well as a symbol of a well-educated mind. For many, attending a performance at a famed opera house is a once in a lifetime opportunity. Offering a mix of both classical and new operas, the opera house becomes the doorway to an enchanted land.
The process of creating that fantasy land, however, is based in a startling reality of paperwork and business plans. For the New York Metropolitan Opera, reality came crashing into their fantasy world as bankruptcy loomed.
Are there lessons that can be learned from opera’s stage? No subtitles required – the new business model of the New York Metropolitan Opera provides clear lessons for entrepreneurs at every stage of business.
After taking a look at 1) the New York Met’s history, understanding how the Met went from 2) headliners to show stoppers and 3) discovering how the NY Met changed course with a new business model, you’ll be prepared for 4) lessons for entrepreneurs that can help revitalize (or continue to improve) your business.
NY MET HISTORY
Perhaps one of the most famed opera houses in the world, the New York Metropolitan Opera is America’s largest classical music organization. Established in the late 19th century, The Met began as an alternative to the other opera house of the time, the Academy of Music. Membership to The Academy of Music was a status symbol; admittance was restricted to the highest levels of society. The Academy embraced old money and saw little reward in allowing the industrialists of the time, who were newly rich, to join their ranks. In response to this social snubbing, the Met was formed to allow New York’s rising wealthy access to the entertainment world. With three levels of private seating and plenty of space to ‘see and be seen’, the Met quickly replaced The Academy as the highlight of the social scene and has remained at the forefront of society’s cultural observations ever since.
The popularity of the NY Met continued to grow through the 1900’s and the opera house underwent several transformations as a result. Transitioning from a theater-styled event that hired managers to produce operas into a national touring company helped to thrust the Met into the lives (and hearts) of Americans. The Met Opera Company began a tradition of performing regularly in Philadelphia, an 81 year tradition that brought opera to the city every Tuesday night.
Through the early years of the opera’s history, the need to transition from being a theater style opera to a full scale production opera house became more and more evident. Hiring a General Manager to oversee the daily operations of the organization was necessary and profitable for the company. A succession of general managers took over the running of the organization, sometimes in a shared authority role with artists.
For the first several years, the company was plagued with dismal financial success, primarily caused by the attempt to schedule as many performances as possible into a calendar year. A lack of oversight and a weak business plan were instrumental in keeping the Met on shaky ground. It wasn’t until the 1990’s that a new general manager took over with a distinct plan for the future that people began to notice something about the Met’s business plan was awry. During the 16 years of Joseph Volpe’s leadership, the Met expanded its showings – offering four world premiers and 22 Met premiers. An expanded international touring plan was implemented, the Met’s orchestra was built into a symphonic ensemble and the future for the beloved company seemed bright. Volpe retired in 2006, and a new visionary took over the planning and managing of the Met.
The new general manager of The Met, Peter Gelb, detailed his plan for the future of The Met, and it was breathtaking. Expand the opera’s showings, attract new viewers (without losing any of the current attendees) and reduce staging costs were all on the new manager’s To-Do list. Gelb initiated a series of collaborative efforts with other opera companies to bring new productions to the NY Met. In addition, he began to include directors of alternative industries in the production of The Met’s original programming; bringing in film, circus and theater directors. He expanded the offerings of The Met by introducing the concept of live viewings in high definition to movie theaters around the world – allowing attendees to enjoy a full-scale live production – all on the big screen. Despite his best efforts, however, he announced that the NY Met was filing for bankruptcy in 2013 and would cease to exist.
There are few events better than discovering a new rendition of a classic tale, performed brilliantly. The future of New York’s Metropolitan Opera House, however, is in jeopardy as its leadership scrambles to develop a plan to salvage this once proud company.
FROM HEADLINERS TO SHOW STOPPERS
To understand the decline of The Met, it is helpful to have a clear understanding of the key players involved in the crisis. Within The Met there are four main groups that have leading roles in the drama that takes place – behind the curtain.
Key players and their role in the crisis
Union Groups. One of the main roles at The Met belongs to the unions. To begin with, the Met is made up of sixteen union groups. These groups control everything from opening the door in the morning, building and maintaining the set, the orchestra, the stage hands and more. In an effort to reduce the company’s deficit, the Met asked union groups to accept a plan that would reduce their compensation. The unions refused and went on strike. The unions’ assertion that the two-thirds of $327 million operating costs that go to the unions aren’t enough to maintain the union’s standards is interesting. This claim seems ludicrous in light of the imminent demise of the company altogether. Rather than accepting a slightly lower paycheck, they would rather receive nothing if it means not having to compromise.
Managers. The general overseer of the opera house, the manager is primarily responsible for the day to day operations and planning of the company. Under the leadership of a strong manager, the company thrives. The development of new ideas and opportunities falls to the manager, and the failure to maintain the opera’s vision also is laid upon the manager. The manager oversees the budget, and is responsible to negotiate with the unions for the responsibilities and compensation for the year. Under the current manager’s leadership, the opera house was on the brink of collapse due to increased spending and a reduced income.
Contributors/Sponsors. The NY Met Opera House is funded primarily by contributors or sponsors. This can be through corporate sponsorships, personal endowments and other events though the year that are generating both interest and support.
Endowment Fund. A source of income, the opera company would use a percentage of the interest from the endowment to supplement their other income. By withdrawing a percentage of the principle, not the interest, the endowment has suffered and will quickly be used up if alternative measures are not taken.
With the benefit of hindsight, it is clear to see a path of strategic missteps taken by the opera. One of the initial elements that began the downward spiral was the conversion of the opera company to a travelling show. While initially, the benefit seems to be twofold: increase the Opera House’s visibility and generate additional revenue, the execution of the plan did not work as expected. The addition of a travelling company to an already taxed budget left no room for a conversion to travelling. Additionally, taking the show on the road added to concerns about the safety of the show, including actors and musicians.
Another tactic that was tried early on was the reduction of the number of shows that the company offered. An exhausting regimen of over 200 performances a year was cut to less than 20 in an extreme effort to complete the sale. The obvious solution to financial worries may not always be the most efficient one; however, as the reduced number of shows limited the opportunities the company had to sell tickets.
In the world of the opera, the unions have a large amount of power. By failing to negotiate with the unions early in the process, the entire company ground to a halt when the unions went on strike. A refusal to negotiate and an almost arrogant approach to compromising with the union could have been the end of the negotiation process.
Instituting a new breed of opera experiences was one method of expanding the revenue stream. The Live performances are broadcast at movie theaters across the country. Initially it appeared as though the idea would be a success, but the ticket sales quickly stagnated. With ticket sales at a plateau, the live performance shows seem to be a revenue loss.
While scrambling to find new revenue streams, the management of The Met began to use the principle of the endowment, not the interest. In previous years, the interest of the endowment would be used to supplement the revenue of the company. Now, as the principle begins to dwindle and the ticket sales are down, the smaller endowment may never recover from the amount taken.
The management came up with a solution: cut wages. Unfortunately, he forgot to clear it with the unions, and they were not happy with the arrangement. With both sides failing to reach an agreement, the unions went on strike and the company shut down. Protesters picketed, the public reacted with opinions in the paper and eventually the management sat down with the protestors.
Quickly running out of money, the opera had no choice but to announce its intention to file for bankruptcy protection. While advocates of the opera demanded that the city step in, the mayor refused, claiming that the opera company needed to get a handle on their out of control spending.
Although there are several factors within the opera house that affected the profitability, there are several outside forces which combined to create a hostile environment for the opera company. Higher production costs drove the prices of everything on stage up, forcing the artist’s creativity and talent for making more out of less. Finding ways to reduce these costs while still maintaining a standard of excellence is the opera company’s goal.
The higher production costs combined with dwindling ticket sales created a budget deficit that may take years to recover from. The overall economy has declined, and people are spending less discretionary money. This reduction in ticket sales can lead to devastating revenues.
CHANGING COURSE: THE NEW BUSINESS MODEL
Renegotiate union contracts
One of the primary components in the new business model is the renegotiated staff and union contracts. By sitting down to negotiate with the unions, the management and the union leaders were able to come to an agreement that both parties could abide by. Referring to their agreement as ‘an equality of sacrifice’, both parties were able to walk away from the negotiation table with a plan they could feel comfortable with. In addition, both parties agreed to work with an independent financial analyst to monitor the continued growth of the new model. As part of the new deal, the management agreed to a reduction in administrative payroll costs that were equal to the cuts in labor. The general manager also voluntarily took a pay cut of over $1 million annually as part of the sacrifices being made to save The Met.
Revenue Enhancement Strategies
A primary complaint of the labor unions was the lack of new sponsors. This created an environment where the largest source of revenue was coming from ticket sales, which had dwindled down to an alarming 79% of previous year’s attendance. As part of the renegotiated contracts, the management agreed to actively seek additional sponsors to supplement the endowment and ticket revenue.
Another strategy to increase revenue is to expand the show offerings. The addition of the live performances was creative and trendy, but tickets sales stagnated quickly. Additional show offerings must be developed in order to continue to attract new attendees while maintaining the existing opera aficionados.
Spending for the NY Met skyrocketed with the advancement of the new general manager in 2006. The investment in new shows, launching the live performance program and expanded facilities forced the company to institute a pay cut across the board for the company. During the negotiations, union leaders expressed dismay at the excessive spending that had been taking place. The resulting compromise included a premise that spending would be curtailed.
LESSONS FOR ENTREPRENEURS
What lessons can an entrepreneur learn from this tragic tale of woe (one can imagine the mournful sounds of a dying song playing in the background)? The long, rich history of the New York Metropolitan was almost erased from the annuals of history, in part due to the actions (and failures) of the people who were actively engaged in the daily operation of the company. How can an entrepreneur avoid these same pitfalls?
Take action early. When finances start to get tight, the natural reaction is to keep everything on a short financial leash and ‘keep an eye on things’. While a natural response, this can be a deathblow to a company on its last legs. It is wise to observe the operations of the company, but it should never take the place of action.
Be proactive. Don’t wait for a small problem to snowball into a huge disaster. The NY Met failed to take action in light of dwindling attendees and the rising costs of set construction.
Make hard decisions. It is easy to become emotionally attached to parts of the company that you’ve built. The processes that you’ve put into place, the employees that you hired, even the building that you established your company in can all become ‘icons’ that are hard to replace. Unfortunately, those same icons can become anchors that prevent a company from moving forward because you are trapped in the past. It is never easy to make hard decisions, which is why there are much fewer bosses than there are employees; someone has to make the tough calls. When a company is in financial distress, it is not time to wax nostalgic about the days gone by, it is time to be proactive and make the necessary decisions to move the company forward.
Stay in communication with all parties. No one likes to admit that they are having problems. Financial problems, especially, seem to be difficult to talk about. As an entrepreneur, however, it is essential that open communication is maintained during financial stress. Keeping the investors, employees and other active parties in touch with what is going on is an excellent way to help share the burden, as well as enlisting help in developing strategic plans for the future.
Strategic planning and oversight is essential. It is important to have a strategic plan for the future, but the plan is worthless if there is no oversight to ensure that the plan is being followed. In addition, monitoring the success and/or failure of a plan can provide guidance about pivoting or expansion.
The crisis at the NY Metropolitan Opera has been averted, temporarily. Thanks to decisive action, enduring negotiations and a continuing commitment to the arts, The Met has a new business model to take into the future. Despite how one may feel about the performance of opera, there is a sense of satisfaction that the cultural icon will continue to shine.
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