Financial Support in Creative Industries: The Influence of Public Funding on the Innovativeness of Dutch Performing Arts Festivals

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Financial Support in Creative Industries: The Influence of Public Funding

on the Innovativeness of Dutch Performing Arts Festivals

University of Groningen

Master of Science in Business Administration, specialization Strategy & Innovation

2013

Author

Damian Dariusz Kozak Student number: 1903578

Supervisor

R.A. (Rene) van der Eijk

Second supervisor

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Preface

“Before everything else, getting ready is the secret of success” - Henry Ford

There were two reasons I started the master Business Administration in Strategy and Innovation at the University of Groningen. The first one was obtaining a master degree on a university level. The second was linking this master thesis in some kind of way with my future ambitions to work in the entertainment industry. For many years already my fascination for the music event industry has grown, as well as topics like experience economy, creative industry, entertainment sector, etc. The positive vibe and the rush of organizing large scale events like concerts and festivals has been an ongoing source of inspiration. Surprisingly there has been limited research done in this field, despite the interesting and complex nature of the leisure event industry. Besides this, there could be a wide application of strategic insights from this industry to other industries.

Based on my future ambitions it would be therefore an absolute personal failure to not link this subject to my master thesis. In this research I link my passion for event management with my academic aspirations. During my current and previous education (Hospitality Management), life and work experience I have become aware of the power of networks and the strength of weak ties (Granovetter, 1973). To obtain my goals I therefore have made use of my weak ties resulting in an unexpected interesting interviewees list of renown experts in the field of the performing arts industry. I would like to thank Mark Hospers (Noorderzon), Daan Spoek (5 Days Off), Marelie van Rongen (Oerol), Theo van Dooremalen (November Music), Kunna Haan (AIR) and Raymund van Santen (De Parade) for their time, patient and wisdom.

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Abstract

The economic and cultural environments in which cultural institutions operate, are changing significantly recent years. Five major developments are coming together: governmental savings, decreased consumer spending due to economic crisis, local savings, changes in VAT-rate and decreased income from sponsorship. This study examines the influence of public funding on the innovativeness of performing arts organizations. Six Dutch art and cultural festivals are selected for this case study of which 4 receive public funding. The degree of innovation is studied by comparing four broad categories of innovation that are common to cultural institutions across the creative art sector: innovation in audience reach, artform development, value creation and business management and governance. Four organizations are characterized by high rates of intangible and artistic innovations leading to progressive artform development and broad cultural value creation. The downside is that visitors of performances are not able to easily articulate their preferences. Cultural institutions try to assist visitors which are not clearly able to articulate their preferences by making information about the artist, artforms, progressive program and the festival more accessible. Especially the public funded organizations of highly cultural focused festivals is on the forefront in using new technologies in extending audience reach. Funding may serve as a relieve for the financial pressure on these organizations, making them more willing to take risks and experiment. Some of the organizations also actively develop new products, services and experiences based on joint development. Innovative ideas with regard to business management seem to sprout in public funded, as well as non public funded organizations. However, findings show that most of the innovative business management ideas are to be found in public funded organizations.

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Executive Summary

The Dutch economic and cultural environments in which cultural institutions operate, are changing significantly recent years. Five major developments are coming together: governmental savings, decreased consumer spending due to economic crisis, local savings, changes in VAT-rate and decreased income from sponsorship. Stakeholders within the creative industry seem to provoke each other with fierce arguments; self-defending or attacking the cuts in funding for the creative sector of 125 million euros and tax-rate changes within the industry. According to the Dutch Government the new policy regarding the art and culture industry is focused on entrepreneurship, innovation and stimulants of generating own revenues. Critics however state that cultural life will become poorer, the threshold for audience will become higher and overall cultural damage unavoidable. The consequences will be that cultural offer will decline, diversity more slim, opportunity for top talent will diminish, innovation and the number of experiments will decrease, the international economic position will be affected negatively and employment will fall. There seems however no clear answer on what effects these decisions will have, especially not on the innovation characteristics of the industry. The aim of this paper is to add new insight regarding existent literature on this subject and to give practical recommendations for arts funders, policymakers, festival organizers and other stakeholders. This research brings together our knowledge about different financial resources of performing art festivals and our current understanding of innovation in the creative industries. It attempts to give new insights in conceptual development of the relationship between finance and innovation which is needed to facilitate more empirical studies on the subject within the field of the economics of the arts.

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life. Festivals are a part of an area’s “experience economy”, creating a temporary ‘creative space’ which can attract customers. The word ‘experience’ is a broad term that is used in leisure, retail and other services to describe the essence for which customer are seeking and paying for.

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Music, which does not receive any income from sponsoring. In table below an overview is given with the percentage of total budget which is covered by public funding.

Festival Percentage of total budget which is

covered by public funding Level of public funding support

November Music 70-75% High

Noorderzon 40-45% Medium

Oerol 25% Low

5 Days Off 20% (for 2013: 0%) Low

AIR Festivals 0% None

De Parade 0% None

Primary data collection is done by means of interviews with important stakeholders within the company to identify the main sources of value creation and innovation. For a full overview of all the interview candidates, please see table below. To supplement the primary data collected and secondary data analysis is done.

Festival Name Function

Noorderzon Mark Hospers General Coordinator

5 Days Off Daan Spoek (Financial) Director

Oerol Marelie van Rongen General Manager

November Music Theo van Dooremalen Managing Director

AIR Festivals Kunna Haan Head of PR, Marketing and Creative Content De Parade Raymund van Santen (Creative) Managing Director

To analyse the findings of primary and secondary data colocation the four dimensions are used: audience development, extending the artform, value creation and business management. A summary is given in the innovation matrix. All six cases are divided in three groups based on the percentage of financial income from funding, namely high to medium, low and no funding.

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type of audience for art, and advancing the artform by programming state-of-the art, has been already embedded in the mission statement of public funded organizations for many years. An exception would be De Parade, which also seems to have an important focus on presenting multiple progressive artforms but does not receive any public funding. Interesting to note is that especially the three funded organizations November Music, Noorderzon and Oerol are also internationally oriented regarding artform development.

The downside of artistic innovation is that visitors of performances are not able to easily articulate their preferences. Cultural institutions try to assist visitors which are not clearly able to articulate their preferences by making information about the artist, artforms, progressive program and the festival more accessible. Especially the public funded organizations of highly cultural focused festivals is on the forefront in using new technologies in extending audience reach. Funding may serve as a relieve for the financial pressure on these organizations, making them more willing to take risks and experiment.

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1. Introduction

“Politics is the art of postponing decisions until they are no longer relevant” - Henri Queuille

Most of the studies that examined festivals and special events have focused on their economic and social impacts or reasons and motivations of people to attend them. In contrary to those studies, this study focuses on a more organizational perspective in order to understand the link between financial sources and their influence on innovation. Many truculent debates take place within the Dutch creative industry and the government because of drastic interferences by the Dutch government in the economic landscape of the creative sector in 2011. Every actor within this debate seems to provoke the opponent with fierce arguments; self-defending or attacking cuts in funding for the creative sector of 125 million euros (Zijlstra, 2011) and constant overall tax-rate changes within the industry. However, they seem to have no clear answer on what effects these decisions will have, especially not on the innovation characteristics of the industry. Not very surprisingly, as O'Sullivan (2006) already pointed out, is that within studies the implications of characteristics of innovative activity for resource allocation - especially the allocation of financial resource, with a few notable exceptions - has largely been overlooked. Will the creative industry be stimulated to show some cultural entrepreneurship, as policy makers hope for? Or will innovation and creativity decline and lead to an artistic deficit, as most actors within the art sector fear for? In this case study the Dutch festival industry is used to analyze the effect of public funding on the relationship between financial resource and the and the degree of innovation. The reason for choosing the festival industry is the interesting fact that large scaled events and festivals have been developing rapidly in the Netherlands and offer a broad spectrum of different services. In the last 30 years the number of festivals has increased fivefold. The largest growth took place between 1955 and 1985. During the period between 1995 and 2007 the number of festivals increased 40%. Between 2007 and 2011 the number increased with 15% (Respons, 2011). Next to this, the festival industry roughly got divided in self-sustaining commercial festivals on the one hand and festivals that highly depend on funding on the other hand. Before this report continues with the research description, the current situation in the economic landscape of the creative industry is sketched, which led to the commencement of this research.

1.1 Changing economic landscape of the Dutch creative industry

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employment rates within the creative sector compared to other European countries. Next to the directly added value of the creative sector to the Dutch economy, the sector also has a broader economic value. One could think of income generated from tourists, which increase catering and transportation income, and investments in constructing and renovating cultural buildings.

Within the economic landscape several actors play an important role. Around two thirds of the sector is self-sustained in a commercial sense (Zijlstra, 2011). Of the remaining subsidized part 40% is generated by revenue by the market (which counts for around €2 billion). All other income comes from subsidies from local municipality, government (including all funds) and the provinces. Thus, income from the market is the primary financial resource of the creative sector. This income is generated from ticket sales and memberships, catering revenue and other directly related income. Also included are gifts from the philanthropic sector, contributions from private funds, like VSBFonds and Prins Bernhard Cultuur Fonds, and sponsoring from companies. Between 2005 and 2009 income from commercial means has increased steadily. However, the effects of the financial crisis that started in September 2008 could not be analysed until now. The (temporary) effects of the crisis will accompany radical changes in the economic landscape of the creative sector due to new Dutch government policies and savings.

The first important area of impact is the value added tax regulation. In 1998 the VAT rate was lowered to 6% for performing arts. Before this, the general VAT of 17,5% was applied. These changes were introduced to compensate for the increased costs performing arts were facing due to the Working Hours Act1_{and ageing of population (Vermeend, 1998). Besides this, the possibilities to increase}

labour productivity within performing arts are limited while salaries are rising just as in the other parts of the economy. This is also referred to as the Baumol’s cost disease (Baumol, 1967). The disease of Baumol's makes the performing arts sector vulnerable when policies are introduced that increase employee costs. The goal of lowering the VAT rate was not to decrease the entrance fee for visitors, but to prevent (additional) increase of entrance fees that would otherwise be inevitable in order to compensate for the Working Hours Act and ageing population. The VAT rate changes turned out to have fairly positive effect on the sector; the balance between ticket sale loss and increase in personnel costs was stable. A research performed on the request of the Ministry of Education Culture and Science by APE2_{shows that the performing arts industry recovered from the initial negative impact}

of personnel costs policies introduced by the government (Goudriaan, De Groot, Notenboom, Schrijvershof and Van Hout, 2008). Additionally, the research of APE states that there are two more

1 _{Working Hours Act (Melkert, 1995): regulations for how many hours per day people may work and when someone is}

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alternative measures that could be taken besides lowering the VAT rate and compensate for increasing costs. One of these is helping the cultural sector to generate more visitors by means of innovative ways of sponsoring and marketing. Secondly, one could separate different kind of performing art genres and allocate different VAT rates to each genre (however this might have a less effect due to high administrative costs). In the years that followed the sector did not face any major changes until after the Dutch general elections of 2010 during which the Rutte cabinet was installed. On the 30th of September the coalition agreement “Freedom and Responsibility” (Rutte & Verhagen, 2010) finished successfully between VVD1_{and CDA}2_{(Rutte, 2010). This agreement was the first step towards}

reforming the cultural industry. The main focus of the agreement is the fact that the Dutch cabinet has agreed that within the field of culture there should be more room for entrepreneurship and to reduce governmental interference. One of the main pillars of the “Dutch Tax Plan” (2011) is encouraging entrepreneurship and innovation, especially in the creative industry. The Dutch government would like to put more emphasis on the commercial need of organizations in performing arts and stimulate artists to become more entrepreneurial in generating own revenue (De Jager, 2011). One of the first drastic measures for the cultural sector was enacted on the 1st of July 2011. The Dutch government decided to increase the value added taxes of performing arts from 6% to the general VAT-rate of 19%. An exceptional position created for the performing arts industry by the low VAT charges no longer fitted within the philosophy of the Dutch cabinet Rutte and therefore no longer maintained as of July 2011 (De Jager, 2011). As an additional note, the Rutte cabinet referred to the evaluation report of APE (2008) from which emphasis that the VAT increase of 6% to 19% (a price increase of 12,3%) would lead ‘only’ to a long term decrease in demand of 4,3% within the performing arts sector.

Next to the increased tax-rate, the Dutch government also decided to change the economic infrastructure of the creative sector as of 2013. After the Second World War the Dutch government became an important actor in financing of the cultural sector (Zijlstra, 2011). Grants and funds were divided by specialists in the field, which often had a specific preference for innovative and progressive cultural work. Due to changes in society, like individualisation and freedom of choices, critics and specialists were no longer seen as the only gatekeepers in the field. According to Zijlstra3

(2011) the cultural subsidy-model was no longer sufficient. To balance policies in the art sector with developments in society, the government decided to reduce its interference in the market. Zijlstra (2011) propagates that the Dutch government played a too influential role as financier within the

1 _{VVD (Volkspartij voor Vrijheid en Democratie): “Peoples Party for Freedom and Democracy”, a conservative-liberal} political party

2 _{CDA (Christen-Democratisch Appel): “Christian Democratic Appeal”, a Christian-democratic political party}

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creative sector, leading to less attention for audience preferences and entrepreneurship. After many years of annual increase in subsidy amounts, the creative sector is facing a turning point.

On the 1st of January 2013 the Dutch government planned to economize 200 million euro within the art sector, of which 125 million euro for the cultural basic infrastructure: the cultural institutions and the funds which receive direct subsidies from the government. As a part of the savings the government also decided to merge some of the seven funds that are in charge of the distribution of the subsidies. One of the merger is the ‘Fonds Podiumkunsten’ with ‘Fonds Cultuurparticipatie’ in order to increase efficiency. Zijlstra (2011) is referring to the fact that the cultural sector is increasingly becoming fragmented and shows a lack of decisiveness. Furthermore Zijlstra is justifying his decisions on the research of commission d’Ancona (2006) and Ploeg (1999). D’Ancona (2006) pointed out that specifically the performing arts sector has distanced itself from society and shows shortcomings in linking supply to demand from the audience. With regard to the Dutch cultural subsidy-model, Ploeg (1999) stated that the dynamics in cultural industry has been hampered due to the dominance of specialists and too much dependence on subsidies. All these points weighed heavily in the planned measures in order to strengthen the creative sector, stimulate entrepreneurship and increase innovativeness.

The starting point of the government is to put more emphasis on the economic interests of the cultural industry. The policies are based on 4 main pillars, namely:

1. Internationalisation 2. Renewal and talent 3. Cultural education 4. Gifts to culture

In the light of this study especially point 2 and 4 are interesting. The policy of the government of stimulating cultural entrepreneurship is not applicable for every field within culture according to Zijlstra (2011). Exceptions are promising initiatives which still are not well known by a broad audience or those initiatives which would otherwise not come to existence. The government still sees itself as an important facilitator of stimulating culture initiatives of development and innovation, which would otherwise not be initiated by the market.

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to optimise the fiscal instruments to stimulate the culture of giving by reducing any barriers and make sure various laws are adjusted to one another.

Critics however are sceptical about the governmental decisions (Daalmeijer, 2011; “Nederlandse btw-verhoging”, 2011; “Protest tegen kunstbezuinigingen”, 2010). The advice report of the Dutch Cultural Council (Daalmeijer, 2011) with regard to the cultural subsidy saving states that cultural life will become poorer, the threshold for audience will become higher and overall cultural damage unavoidable. The consequences will be that cultural offer will decline, diversity more slim, opportunity for top talent will diminish, innovation and the number of experiments will decrease, the international economic position will be affected negatively and employment will fall. The new policy regarding the art and culture industry is focused on entrepreneurship and stimulants to generate own revenues. The division of grants and funds in 2011 will depend mainly on the reinforcement of this policy. At the same time the VAT is increased on ticket sales, for many organizations an important source of income. A paradox seems to emerge; on the one hand government would like to simulate entrepreneurship by supplying less grants and funds, but at the same time it increases the charges on the main source of income, namely ticket sales. In 2012 the Dutch government decided to undo the controversial VAT increase for the performing arts. On the 1st of July the VAT rate was lowered to the former 6% (Weekers, 2012). Zijlstra states that the temporary increase of VAT rate negatively affected the reliability of the planned governmental measures of economy within the cultural sector (“Zijlstra betreurt hogere btw”, 2011). The debate of cultural entrepreneurship, influence of governmental funding and the effect on innovation however stays contemporary.

But which impacts will the measures of economy have on the innovativeness within the cultural sector, and especially the festival industry? The government is convinced it will stimulate entrepreneurship and innovation, but what effects can be expected based on current knowledge of the industry? In the next chapters this study attempts to investigate this matter more thoroughly.

1.2 Research description

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1.2.1 Research question

To research the above this paper focusses on the Dutch performing arts festival industry, because the Netherlands is a perfect example of a leading nation in professional organization of large scale events. The significantly developed market in the Netherlands lends itself for a case study. This study will try to explain the influence of public funding on the type and level of innovation of festivals. The aim of this paper is to add to existent literature on this subject and to give practical recommendations for arts funders, policymakers, festival organizers and other stakeholders. Most examples are taken from the ‘conventional’ areas of music, dance and theatre, but expectedly many of the arguments apply equally to wider areas where elements of liveness and skill are presented. Besides this it would be of great value to extend current theories about the relationship between art and commerce in the festival industry. To get a better understanding of the festival industry and the link between funding and innovation, the following research question is defined:

“Which influence does public funding have on the innovativeness of performing art festivals?” 1.2.2 Outline of research

To start a meaningful research with a solid theoretical framework, discussion and presentation of results in the end, one would have to start with some profound definitions. The topic of this paper is shaped within the cultural sector of the economy, or what most scholars would call the ‘economy of culture’. The arts comprise a significant area of economic activity. Therefore, the theoretical reflection aims at clarifying most definitions. The following chapter elaborates on the framework used for this research. The framework used for this research defines the degree of innovation as independent variable. As a dependent variable we have source of income. The moderator in this research the amount of public funding. In the methodology chapter the choice for type of research is explained. For this research six festivals are selected as case studies. Primary data collection is done by interviews with stakeholders within the organisation. The findings chapter presents the finding from primary and secondary data collection. The discussion chapter elaborates on the findings and provides further insight based on the four innovation categories common to the creative industries. The last chapter draws conclusions and presents implications for theory, art policymakers and festival organisations . In the last paragraphs limitations and further research suggestions are provided.

1.2.3 Research scope and domain

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prepared and build up intensively and the performance takes place on a certain day and can last up to a couple of days. Although most events are repeated on an annual base, we can state that we are dealing with temporary performances. Furthermore the cases studies are selected on two main determinants, namely amount of public funding and the aim of the festival. Other variables like organizational structure, output (number of performances, number of stages, number of tickets sold, number of visitors) and input and costs are less relevant. Furthermore a sample of six case studies is selected from 700 festivals in 2011 (Respons, 2011). A larger sample was not possible due to time constraints, and which could reduce the validity of results. The selected festivals however are one of the most largest, influential and oldest festivals in the Netherlands. The findings can therefore still give new insights and provide evidence for further research.

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2. Theoretical Reflection

“When bankers get together for dinner they discuss art, when artist get together for dinner they discuss money” - Oscar Wild

2.1 Economics of the arts

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The characteristics of cultural economics are;

1. that the activities concerned involve some form of creativity in their production;

2. that they are concerned with the generation and communication of symbolic meaning, and; 3. that their output embodies, at least potentially, some form of intellectual property.

According to Throsby (2001) this standard interpretation allows us to proceed with a working definition of culture in a functional sense. It could be regarded sufficient if all three of these characteristics are in order for the interpretation of culture to apply to a given activity. Next to the traditional definition of arts (music, literature, poetry, dance, etc.) this sense of the word ‘culture’ would include activities such as film-making, story-telling, festivals, journalism, publishing, television and radio. The whole scope of products and services within this field can be caught in the term ‘cultural goods’. While the above listed three criteria may be sufficient for providing a functional definition of culture and cultural activities, it certainly raises questions for purpose of economic analysis. There has been some debate among cultural economists as to whether a class of goods called ‘cultural goods’ exists that can be differentiated in some fundamental way from ‘ordinary economic goods’. The above definitions are an important step in making those distinctions. There is no universality to be claimed for the above two definitions of culture. They are by no means mutually exclusive but overlap in a number of important ways. But as a basis for proceeding, the definitions will serve our purpose.

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role. Especially in policy terms, in a world where economists are kings, one would need to position himself by means of economic credentials. What better way is there to do so by cultivating the image of arts as an industry. Eventually the value-loaded discussion of the arts as an industry has to deal with this two sided, at first sight somewhat conflicting views; at the one hand the purely artistic view and on the other hand the more economic view. The artistic view can be defined as the ‘art for art’s sake’ (Caves, 2000). This refusal of the artist to be caught in the mesh of social statistics, to bow down, to conform, to serve; this defiant assertion of the ‘unique’ against the laws of the herd; is what we understand by the doctrine of art for art's sake (Guerard, 1936). The property implies that artists turn out more creative products than if they valued only the incomes they receive (Caves, 2000). It is almost obvious that for example creative products like paintings and poems may be produced for many other 'sakes' than that solely of art: artists are not wholly impervious to the profit motive (Guerard, 1936). The artists themselves have likewise become more and more than ever aware of the economic dimension of their work, using ‘economy’ not just in the narrow sense of the direct financial interaction of consumers and suppliers, but also in the broader domain of the social benefits and costs arising from artists activities (Throsby and Withers, 1979). This aspect of the problem is best represented in the life and works of Oscar Wilde1_{; artist have no desire to ignore it}

(commercialization), but it will not be the main object of their quest. Both art lovers and artists themselves will argue that the inconsistencies, spontaneity and unpredictability in behaviour in the arts will always defy rational explanation, because these responses derive from notions of mystery, imagination, and the unfathomable creative impulse (Throsby, 1994). Data however according to Thorsby (1994) suggest otherwise. Tastes for the art do seem to be moved by systematic phenomena, such that aggregate behaviour of consumers and of artists, can be modelled in ways that are mostly consistent with economic theory.

For the sake of good order we surpass this discussion and focus on the sorts of definitional issues that are important in any industry study. Further in the report the value discussion and trade-off between the two different views will be brought forward again. We first focus on the core arts as an industry and further specialize ourselves in the field of performing arts.

2.2 Definitions of the cultural industries

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the locus of creative ideas, and radiating outwards as those ideas become combined with more and other input to produce a wider range of products and/or service. For this report we look at performing arts as an art form which can be regarded as an industry, although it generally embraces more than just the original producers. The festival industry for example refers to an enormous range of participants, including, musicians, dancers, event organisers, sound and light technicians, promoters, stage builders, security and so on, although the core of the industry is the original creative performer. Throsby (2001) presents it as a concentric-circle model, in which the arts lying at the centre of the cultural industries, and with other forming layers or circles around the core, extending further outwards as their use of creative ideas is taken into a wider production context. The identification of key indicators of size, nature and extent of economic activities seem for form some difficulties for these types of industries. Difficulties of classification arise, for example output, employment and trade. In order to not further complicate and narrow down the discussion, we proceed to the definition of the performing arts as an industry.

2.3 Definitions of the performing arts industries

The debate of what the word ‘art’ entails is a rather extensive one, if not even unresolvable. Fortunately we are able to be a little less speculative in our delineation of the area of interest here. Eventually we are concerned with live production of theatre and music. From a first perspective this seems rather straightforward with regard to the clarity of this definition, but there are many difficulties in classification. How about, for example, large public spectacles such as parades, circuses and sporting events, which undoubtedly contain theatrical elements (Throsby et al., 1979).

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events and amateur performances. We regard to media however, there will be a further exploration of the interaction between the performing arts and the reproducing media (Throsby et al, 1979).

The demand side is harder to define because of the wide differences in the substitution available to the taste of different consumers. A demand function for attendance at live events in theater, opera, dance, and music would be expected to contain own price, price of substitute entertainments, consumer income, and quality characteristics of performances as explanatory variables (Throsby, 1994). With performing arts the diversity of the product, and the discrimination of consumers in deciding their attendances at particular performances, suggests that the qualitative characteristics of events are likely to dominate price in determining demand. The most common problem is the allocation of time and resources that best meet the consumer’s preference or taste. There are many other goods and services that compete for time and money of the consumer, in which some are closer substitutes than others. Besides this, the consumption of the live arts is highly time- intensive, indicating that the price of leisure time is likely to be more influential in determining demand than the ticket price itself (Throsby, 1994). Furthermore in the determinants of demand in the performing arts, a distinction can be made between demand for immediately accessible entertainments such as popular music festivals, live entertainment and so on, and demand for what often is referred to as “higher” performing arts, including opera, classical music, jazz, classical and modern dance, etc. The festival industry which is analysed in this report can be classified to the former case. The less discriminating nature of demand means that substitutes are more readily available, and hence own-price responsiveness is likely to be greater. But despite all the efforts there is no clear gap in the chain of substitutes for the performing arts enabling us to cordon off an area of demand and label it as “the demand for the performing arts”. Throsby and Withers (1979) therefore proposes a characteristic rather than a substitution approach to demand. The live characteristic would again be emphasized because of the reason it is obviously demanded. In order to experience empathy and interaction between audience and the live performance, the audience demands to see the skill and effort of the performers. In addition the audience is looking for interaction not just as the sum of each individual reaction, but also for the group experience (which again affects the performance).

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characteristic may cause some difficulties in this further research, but is definitely an important factor. An important factor regarding the topic of this paper is that the aesthetic judgment as to what is and is not ‘art’ in the performing arts may not be necessary from the viewpoint of financial support. The reason for this is that many of the wide ranged performance activities are likely to be commercially viable without the need of private or public assistance. Economic theory can often provide good reason why some commercially viable activities should be assisted, but political reality indicates a greater likelihood of assistance being provided for those which demonstrate financial difficulties beyond their own control. A discussion that will definitely be brought forward later on in the report.

2.4 Distinctive features of the performing art industry

Before we take a closer look at the festival industry, we look at features which distinguish performing arts enterprise from other types of firms in the service industry as described by Throsby and Withers (1979). Within the performing arts there is a difference between “permanent” performances (such as theatre, opera, drama, etc) and “temporary” performances which are established to mount a single production. For the festival industry we take a look at the second form of performing arts, in which the event is prepared and build up intensively and the performance takes place on a certain day and can last up to a couple of days. Although most events are repeated on an annual base, we can state that we are dealing with temporary performances.

2.4.1 Organizational structure

First of all, there is a difference between profit-seeking or non-profit-seeking in how performing art firms are organized (Throsby et al, 1979). The non-profit or commercial performing companies predominantly rely on earned revenue for their income. In a certain way they are very similar to other commercial enterprises. These kind of performing arts firms are mostly to be found on the “popular entertainment” end of the spectrum. The non-commercial firms are structured quite differently. In most cases the non-profit status receives official recognition enabling privileges to be enjoyed such as exemption from income tax, local rates, etc. The people that manage the firm are mostly also deeply involved in the artistic side of the business.

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exist where the added constraints on the nonprofit firm result in “better” outcomes than obtained with for-profit firms. Hansmann (1980) argues that one such case occurs when purchasers of a firm output cannot ascertain whether the output is actually produced. Whether we prefer the for-profit or nonprofit depends upon whether we can contract with the for-profit firm to provide more benefits than those implicitly guaranteed by the nonprofit. This means that consumers may prefer nonprofit firms when buyers lack information or cannot adequately judge the quality of goods or services offered. In addition to this Weisbrod (1977) suggests that voluntary established and financed nonprofit organizations represent a response to an unsatisfied demand for public goods, where consumers consider the level of government supply of such goods to be inadequate.

Although above characteristics can be applied to the performing arts industry, Throsby (1994) states that the most direct explanation of the existence and distribution of different types of firms in this area comes from an examination of market characteristics and consumer motivation. In certain parts of the performing arts industry the demand curving the firms is dealing with is above average cost over a reasonable range of output and hence profits are possible. These areas mostly correspond with the popular entertainment side of the industry, where for example increased profits can be made by differential ticket prices for different groups. Within another party of the performing arts industry, the average cost facing the firm is everywhere greater than demand, with no ticket prices that can cover the costs, even with differential ticket pricing for different parts of the house. In this case the gap between income and expenditure has to be closed if production has to occur under these conditions. These funds can come from resources like voluntary contribution or government subvention. Because donors are not likely to contribute to a firm where there is a possibility that funds provided by simply adding directly or indirectly to profits taken by the firm owners, it’s most appropriate for enterprises to be incorporated on a nonprofit basis (Thorsby, 1994).

In general, neither consumers or governments are willing to support unprofitable enterprises in other areas. The case with the performing arts however appears to lie in the fact of social worth of the firms output as perceived both by voluntary contributors and governments (Thorsby, 1994). The public support and its rationalization is an interesting discussion which will be explored in the chapter of ‘cultural entrepreneurship’.

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2.4.2 Output

Within the tertiary or service sector, which the performing arts belong to, it is often difficult to measure output (Throsby et al, 1979). Performing arts firms, like other productive enterprises, combine labor and capital with given technology to produce output. While inputs employed by the firm are clearly enough defined, the specifications of output is not so straightforward (Throsby, 1994). There are a few alternative possible to measure the service produced in quantitative terms. Examples are:

1. Number of performances given, number of days of the festival 2. Number of stages

3. Number of artist that perform 4. Number of ticket available to be sold 5. Number of tickets actually sold 6. Number of visitors

The interpretation of output in these terms does not capture the fact that the purpose of a performance is to provide a “cultural experience” for an audience which itself may be thought of as the final product. However, this alternative measure of the output of a performing company by looking at the number of attendance over a given period of time seems most suitable in defining output (Throsby, 1994). It is necessary to make a distinction in the performing arts between output produced, measured as the number of tickets available for sale over a given period (equivalent as an output variable to the number of performances, duration of the performance), and output sold, measured as actual numbers paying to attend. The reason for this is that there is one important distinctive feature with regard to output, namely the co-production with the audience. Output does not occur unless someone experiences it. In this case Throsby and Withers (1979) suggests that if production is undertaken and no visitor turns up, the situation is analogous to a manufacturer producing goods for which there is no demand, except that in the festival case the product can not be stored for sale at a later date. The number of tickets sold clearly represents the total available supply of the commodity produced by a performing firm. However cultural festival are often also totally free of charge, which means that the output should be measured in number of visitors that are attending the festival. Finally it is interesting to mention that according to Throsby (1994) output of the performing arts can be characterized as a mixed good, with joint production of a private component enjoyed by individual attendees and a public-good component deriving from the value of the arts and culture to the society at large.

2.4.3 Input and costs

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that a significant volume of labour supplied to the performing arts, is made available at less than the market price for labour which prevail in most other occupations for a person of comparable ability and education. The main reason for this is the way of life of many that are active in the arts industry. Caves (2000) describes this phenomena as ‘art for art’s sake’. This property implies that artists turn out more creative products than if they valued only the income they receive, and on average earn lower pecuniary incomes (Throsby et al, 1979).

The capital resources are mostly expressed in ownership or renting a stock of capital equipment in the form of lighting rigs, stage machinery, musical instruments, sound and electric gear, costumes, props, decoration, food and beverage stands, etc. There is a division here to be made from a financial perspective. The capital used may be divided into investments and operating capital. The capital resource use by the company in “setting up” a production could be seen as investments. The costs to run the performance may be regarded as being met out of working capital (Throsby et al, 1979). 2.4.4 Sources of revenue

Firms in the performing arts industry also create revenue by sale of their output, as any other commercial firm. With regard to commercial festivals the income from box office sales comprises all or most of the earnings. However, an import part of the performing arts output is supplied by firms which do not and could not survive on their present form on earned revenue alone. They are dependent on a large part on funds from federal, state or local governments, corporations, charitable foundations, beneficent individuals, or from some combination of these resources. In a next chapter the source of revenue is analysed more in deep as it forms an important key factor in this report (Throsby et al, 1979).

2.4.5 Objectives of the firm

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vision. The artists share a common genuine feeling that the arts are intrinsically goods and socially necessary, and manager of performing arts firms are therefore motivated by a desire to see appreciation of the arts spread among as wide a public possible. None of these objectives however can be attained without some form of attention for financial consequences of its actions. So on the one side one should keep in mind a realistic picture of the objectives in which the performing arts firm aims to maximize attendances subject to a quality constraint, and eventually also subject to the condition that revenue from all sources should at least cover total expenditures. An ideal picture which is not always realized in practice (Throsby et al, 1979).

2.5. The festival industry

Eventually we have arrived at the final station of narrowing down our scope, namely the festival industry with its distinctive type of event. An event can be seen as a product with a unique blend of activities, which are the tools for achieving the overall event aims and satisfying needs. On of such an event product are festivals. There are many different types of festivals, but this report specifically aims at music festivals, which mostly is a blend of music, theatre, dance and other performance art (Yeoman, Robertson, Ali-Knight, Drummond and McMahon-Beattie, 2004). In most occasions the festival is an annual event, which most of the time takes place outdoors. Festivals have the characteristics which are described in performance studies by Schechner (2003); as a movement of people to a place set apart where object (props and sets) and people (actors, musicians, audience) are assigned a symbolic value and roles. It is a place where all attendants observe rules and conventions which are different from those of everyday life. Festivals are a part of an area’s “experience economy” to use Pine and Gilmore’s (1999) term, creating a temporary ‘creative space’ which can attract customers (Morgen, 2007). The word ‘experience’ is a broad term that is used in leisure, retail and other services to describe the essence for which customer are seeking and paying for (Morgan, 2007). An experience occurs when the service is performed in a unique, memorable way which involves the customer as a participant. In the literature of Pine and Gilmore (1999) this memorable experience creates a competitive advantage rather than product- or service quality. The experience is at its most satisfying and memorable when it achieves the state of total absorption that Csikzentimahalyi ( 2002) calls flow, as mentioned by Morgan (2007). The consumption experience is seen as a subjective state of consciousness shaped by hedonic responses, symbolic meanings and aesthetic criteria, or as they put it, fantasies, feelings and fun.

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2004). Stakeholders who comprise the event organization may range from politicians, to volunteers, vendors, regulatory officials, government officials, sponsors, representatives of the media and a host of others too numerous to name. Each stakeholder plays a different role in the whole process of festival creation, of which many are an important source of income for the festival. Therefore, it is essential that event organizers determine early in the process how to produce more stakeholder benefits rather than deficits. In order to achieve this, the event organizer must invest time in research to determine the key benefits each stakeholder expects from his involvement in the event (Allen, Harris, Jago & Veal, 2000).

An important issue arising is the increasing number of cultural events and festivals which have has led to a commoditization effect. Festival organizations have to find new ways to distinguish themselves from the competitors in the current market. New business models are created to find other sources to create income for festival organization. Value creation and appropriability would be an important first step towards finding new ways or revenue resources and fight of competitors (Yeoman et al, 2004). Governments are often asked to provide financial support for special events. There are sometimes good economic and non-economic reasons why a government may provide such support for special events that have the capacity to create income and jobs in the short term and generate increased visitation and related investment in the longer term. Special events can also result in associated social and cultural benefits to a destination; for example, they can enhance the exchange of ideas, foster creativity, provide forums for continuing education and facilitate experience transfer (Allen et al, 2000).

Research with regard to events has tended to focus mainly to economic and social impacts or on the motivations of visitors (Morgan, 2007). What is less researched is the nature and goals of an event and it’s financial resources. With the framework as described previously, I would like to give better insight in the strong and weak points of different types of festivals by analysing their innovativeness.

2.6. Innovation in cultural sector

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resources like sponsoring and donations. In a competitive and difficult environment, innovation seems to be the key to gaining a competitive advantage. When applied to the art organizations however, there is no clear definition of innovations itself. Bakhsi and Throsby (2010) have pointed out this deficit in literature, stating: “Our lack of knowledge about the ways that artistic organizations adopt, utilize and contribute to innovation partly reflects a lack of a systematic understanding of how innovation relates to the core functions of such cultural enterprises. It also reflects the absence of an established methodology for analysis of innovation process in the cultural sector.”

On the one hand funders and policy maker stress the importance that arts and cultural organization should be more innovative, but there is little clarity about what innovations really entails in the arts and cultural context. The main reason for this could be that the value of the artefact is usually overwhelmingly based the ‘content’, their cultural meaning or the experiences they help create. When looking at three characteristics of cultural outcomes several issues arise, namely information, experience and service (Miles and Green, 2008).

Information: the goods and services within the creative industry can have unusual proprieties, because they can be mostly consumed repeatedly. This is mainly the fact with information products that can be translated to digital form, like CD or DVD. This issue is mainly associated with intellectual property rights (IPR’s). In the creative industries the scope of patenting is mostly rather limited (except for software), but copyright, trademarks and design rights are more common. The discussion around this topic is constantly reshaped by technological and organizational innovation.

Experience: An experience is ‘co-produced’, by an interaction between the creative good and its consumer. Within the festival industry the audience often produces some of the content of the creative product and/or consumers (in)directly affect each other’s experience. Gilmore and Pine (1999) identify four categories of experiences: entertainment, education, escapism and aesthetic. Many events combine several of these features, where innovation may involve shifting between or adding multiple types of experience (Miles and green, 2008).

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realm of ‘transformation’ in which the customer themselves become the product, being processed into ‘better’, improved people.

Finally another feature of services that it is easy to copy, contrary to for example complex technological innovations. Imitation however does not seem to deter innovation. Most service even report that they are less concerned about copying and imitate than manufactures. Collaborations may relate to standard setting, whereby ﬁrms agree to introduce products or services based on a jointly developed, common standard. This can be about establishing the basis of competition, and these agreements are particularly important where new products or services are relatively easily copied, but costly to develop. Rapid copying of innovations is thought to be a common problem in services. Standard sharing can also be aimed at encouraging the market, which can be reluctant to take up a new technology/service when there is only one provider; it also encourages suppliers of peripheral products and services to support the innovation (Tether, 2002).

The situation currently it that just a few researchers have applied the insights of innovations studies to the creative industries in general. There are however some specific industries which did get a lot of attention from management and innovation scholars. For example the fast growing, technology specific videogames industry and the film production industry. Unfortunately innovation and creative industries studies have hardly been brought together. The main reason according to Miles and Green (2008) is the predominance of aesthetic issues and consideration of content in creative industries products. The aesthetic innovation is characterized by so called ‘soft innovations’, which relates to innovations which are themselves largely aesthetic in nature. They involve new product and new ways of producing products. On the other hand there is also ‘content creativity’, which lies close to the concept op aesthetic innovation. Authors point towards innovation involving content, aesthetic or experience; in which measuring the innovations seems not to be the challenge, but rather defining the extent of such innovations. Definitions of innovations mainly focus on technological innovations, on which the factor that identify the significance heavily rely on functionality. Market impact would however be a useful readily available metric for measuring the significance of aesthetic innovations. Another difficulty is how to make a distinction which is used for more conventional technological innovation - such as the extent of which an innovation is radical or incremental, or whether it is new to a firm or new to the market.

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2.6.1. Hidden innovations in the creative industry

Finally the authors point out the importance of so called ‘hidden innovations’ within the creative industry, which was introduced to describe innovations and innovation processes that were not being given sufficient credit in innovation studies, policies and indicators. According to Miles and Green (2008) the scale of hidden innovation in the creative industries seem to be great, and the forms it takes appear the extraordinarily diverse. There are four different sorts of hidden innovations, which by identifying them could help improve mapping and measurement of innovations within the creative industry:

1. Innovation that is the same or similar to activities that are measured by traditional indicators, but which is excluded from measurement. R&D is often organised differently compared to those familiar in high-tech industries. There are no dedicated department or professionals, but the activity is usually built into product or project development, or carried out in the course of work that is underway.

2. Innovation without a major scientific/technological basis, such as innovation in organizational forms or business models. For these innovations to be encompassed by innovation studies, we need satisfactory ways to differentiate ‘new’ activities from those that are present in other markets. These degree of newness can be from new to the firm, the industry or the whole world.

3. Innovation created from the novel combination of existing technologies and processes. New combinations of technologies and processes, with the content itself designed, produced, organised, stored and delivered through technological systems and social processes. It is a central feature in many creative industries and is also referred to as ‘repurposing’.

4. Locally-developed, small-scale innovations that take place ‘under the radar’ and are therefore unrecognised or accounted for.

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3. Conceptual Framework

“The art of simplicity is a puzzle of complexity” - Douglas Horton In the following chapter elaborates on the research framework used for this study. The research framework is visualized in figure 1. The following paragraphs elaborates on each variable. The framework used for this research defines the degree of innovation as independent variable. As a dependent variable we have source of income. Festivals have four main financial resources: public funds, private funds, sponsors and income from audience. The moderator in this research the amount of public funding.

Figure 1. Research model

3.1 Main sources of income

Festivals normally have 4 main financial resources: public funds, private funds, sponsors and income from audience. Research of 56 festivals by Ranshuysen (2007) has revealed that the majority of the festivals make use of governmental funds (national and regional). Also private funds turn out to be an important source of income for many festivals. Another form of financial resource is sponsoring, which can be divided in:

1. Financial benefits

2. Non-financial benefits – different kind of materials or services

3. Media sponsoring – newspaper or broadcasting station which can provide huge exposure for the event

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of income. The reason for these festivals to do this is to attract more festival attendees by keeping the entrance fee low or even for free. Besides entrance fee, also catering forms an important source of income. Other sources of income from audience are for example merchandising, company- or group packages, rental or “friends-of”-groups, however these are by far not that significant as income from entrance fee’s and catering. In the end the research concludes that only 1/3 of the source of income is based on audience or sponsoring and that most festivals mainly depend on governmental grants and funds.

The interesting part of the Ranshuysen (2007) research is the way the authors stress the importance of festivals to pursue more what the author likes to call ‘cultural entrepreneurship’. Requesting funds takes a lot of time and effort of the festival organizers, because each grant and fund request have their own (often changing) criteria and are provided for a certain period. By focusing more on income from audience and sponsoring will lead to a greater sensitivity for festival visitor needs and a greater attention for marketing efforts.

The research of Ranshuysen (2007) however reveals that festivals are trying to get more income from primary resources, but unfortunately fail to do so due to the fact that most of the time and effort go in requesting grants and funds and looking for new talent to fill the program of the festival. Compared with the attention for talent development, cultural entrepreneurship hardly does get any attention. A paradox arises because, according to the author, with the search for new talent the organization also obliges itself to create enough audience. This could be achieved by investing more in cultural entrepreneurship. Options are increasing sponsor sources or income from audience. A higher income from audience could be achieved by price differentiation, because social- and knowledge thresholds seem to have a higher influence than price thresholds.

Festivals should pay more attention to cultural entrepreneurship to create more income besides grants and funds, and become a source of new marketing methods and stimulating activities to attract audience to admire the new talent.

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marketing concepts and organising many activities next to music performances. Innovation seems to have an important role in festival industry, regardless of the type of festival. To get a better insight into the source of income and the link with innovation, it would be interesting to take a closer look into this issue. On the one hand, one would have to look at the different types of income a festival has. Secondly, the type of innovation should be analysed to see if there is a certain pattern. Results should give festival organizers a better understanding of their innovative character and give learning opportunities to stimulate cultural entrepreneurship.

3.2 Amount of public funding

In this research different financial resources are examined, with particular emphasis on the influence of public funding, the proportion of income accounted for by public subsidies. In this report we refer public funding as to financial resources that comes from the public treasury (“Meerjarige activiteiten subsidie”, 2011). Public funds can come through international, national and province or local government channels. On of the biggest funding bodies of the Netherlands is Fonds Podiumkunsten. Public funding can vary between single investments of structural support covering multiple years.

3.3 Degree of innovation

Miles and Green (2008) propose a conceptual framework in order to understand innovation in the creative industries by linking it to specific business processes; an interesting starting point for further research in the light of this report. The authors suggest an innovation taxonomy which identifies large numbers of locations of innovation within creative business, all of which apply with varying degrees of relevance to arts and cultural institutions: firm innovation; innovation in production/pre-production; content innovation; user experience innovation; and innovation in communication. They look beyond the diamond model presented in their research, which according to the authors needs to be extended in the case of creative industries. One of the differentiating features is that the framework of Miles and Green (2008) extends the conventional business processes, so as to include those involving consumer experience and co-production activities. The conceptual framework is visualized in the “Olympian” model that can be seen in figure 2 (Appendix I). An overview of the 15 areas within the lists of sites relating to innovation in different business processes is presented in the table below.

Table 1: 15 specific areas of innovation in the creative industries (Miles & Green, 2008)

1. General administration & financial management

Innovations are likely to be very similar across firm in many sectors, with differences among firms being influenced by issues like firm size, the range of branches or sites which work is undertaken.

2. Business model Innovations may involve how finance and profits are made.

3. Value chain location and positioning

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or outsourcing.

4. Communications With suppliers, collaborators, supply chain partners, etc. Innovations can relate to tools and techniques for relating to partners and for managing these relationships.

5. Internal communication The management of human resources and work organization. Innovation could relate to knowledge management systems to new training systems.

6. Back-office/backstage production

Processes in which the product is designed, scripted, rehearsed, prototyped, etc. In case of the festival industry the processes may even be rendered visible as part of consumer experience. Innovation can involve the application of new technologies or procedures to such preparatory work.

7. Transaction Innovation may centre on the process of payment for access to product. It may involve technological issues like online booking systems and loyalty cards, but also less technological issues such as various types of tickets and membership scheme.

8. Marketing and customer relationship management

Within the creative industry the specialized innovation approach may reflect consumer or business client requirements, and the interactive nature of many creative products.

9. Content of product The core material which is consumed to produce the desired experience. Innovation can range from the creation of completely new genres of content through to reframing of familiar content within a new context.

10. Performance and production processes

The product is generated through creative work, often in the form of a performance by artists, actors, musicians, etc. – though this performance may be recorded and/or consumed immediately (in which case process and product overlap considerably).

11. Product format The creative product has a particular format and character depending on the sort of performance that it involves

12. Delivery of product How information content, or the physical medium for such content, reaches the consumer (or how the venue for the performance and display is constituted). The creation of new venues, the repurposing of existing venues, the restructuring of venues to provide new dimensions to the consumer experience, are all options for innovation.

13. User interface with product

How the consumer engages with the product, their points of access to content and functionality. Innovation can involve divisions about which facilities are created and used, as well as how they are configured and rendered appropriate settings for the experience in question.

14. User interaction In part the scope for the user interaction is determined by interfaces (point 13). But creative products can also reflect consumer inputs beyond this. Moreover, the consumer experience may be determined by interactions among consumers. Co-production is an important feature of many creative services.

15. User capabilities Lies within the field of ‘user experience’. For example the development of consumer skills and taste required to secure full benefit from creative products. Typically innovations here lie beyond the creative firm’s business processes, and are undertaken by users themselves (however, they can involve suppliers of consumer technologies, rather than player from the creative industries).

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Major innovations may well involve action and novelty across several of these sites. These innovations often include the introduction of a whole series of individual creative products, as we see tie-ins between a festival performance, a smartphone application, DVD compilation released afterwards, merchandise, website – or even series of such tie-ins. Eventually this adds a complexity to the analysis of (commercially) major creative products, as any of these site may take various forms. Linking this to the more tradition innovation literature, an innovation within any of the site previously mentioned is liable to involve a mixture of radical and incremental technological development and/or organizational change. Within the user experience field the creative product could also involve incremental and radical innovation as in regard to new creative content and/or aesthetic design. This innovation is linked with efforts to shape the experience of users.

Unfortunately this conceptual framework of Miles and Green (2008) is not always useful with regard to arts and cultural organizations, because within the creative industry there are significant differences in how these organizations relate to innovation. Bakhsi and Throsby (2010) mention the different objectives between for example publicly funded organizations and not-for-profit organizations, where in the last mentioned organizational form the maximization of profit or shareholder value is not the main goal.

In order to conceptualize innovation within the cultural institutions, Bakhsi and Torsby (2010) suggest another approach. The authors propose to see innovation as a response to disruptions within the value chain that characterize the production and distribution process. There figure illustrates (figure 3, Appendix I) the value chain for cultural institutions, differentiating between the production, distribution and consumption of artistic content on the one hand and flow of contents, services and money on the other. The interesting part about this figure is that is shows the different trade-offs which cultural institutions have to face when following up their mission. This figure proposes a solid base for further investigation within the festival industry, because possible trade-offs are identifiable within this specific sector. Trade-off include for example access versus revenue generation, creative vision versus responsiveness to audience, artistic experimentation versus revenue maximization and public value generation versus revenue generation, etc.

Financial Support in Creative Industries: The Influence of Public Funding on the Innovativeness of Dutch Performing Arts Festivals