Breaking down the maths of museum earnings: An ominous assessment of exhibition profits

There is a basic problem in suggesting that earned income can keep a museum afloat

The membrane separating art museums from commercial organisations has never been more porous—but although there are reasons to celebrate this increasing business acumen, warning signs are appearing in museums in both Europe and America.

Take blockbuster exhibitions. The robust attendance figures at galleries in recent years are largely attributable to high profile, big name shows, which directors stage to keep their institutions in the public eye. The money earned from these projects can make for healthy year-end reports with gross receipts from tickets, merchandising, catering, rental events, memberships, and other earned income sources giving the impression that a museum is not only sustaining itself, but thriving.

The net income from these shows, however, is rarely reported. After factoring in the true costs of mounting exhibitions, including a percentage of staff salaries, along with unsold merchandise, the wear and tear on facilities, and the missed opportunity of developing the permanent collection, research, education, and back-of-the-house functions, the picture is often less rosy. Museums with important collections, big endowments and large tourist markets can usually manage both their core mission and big shows and possibly even net a surplus—but mid-sized and smaller museums often end up scratching their heads at year-end accounting once the debris of the spectacle is swept away. Nevertheless, it is often the number of visitors through the door, not the net return from admissions income, let alone the quality of the offer, which earns approval.

American museums are ratcheting up their commercial activities, raising admissions fees, expanding shops and restaurants, paying more attention to rental events and corporate partnerships. These museums aspire to being seen as commercially intrepid, but the fact is that they could not survive without the huge subsidies they enjoy from individual giving, in turn encouraged by tax-exemption, which will result in a $40 billion tax subsidy across all charitable sectors in the US this year. Meanwhile, European museums are trying to shift away from relying on a hefty proportions of state funding and towards earned income. But in doing so they lack the support relied on so heavily by their American peers: most US art museum incomes are a result of private donations by generous, wealthy patrons, and not from business activities.

As European ministries look to craft new incentives for individual philanthropy modelled on the US system, conservative American lawmakers are pursuing the elimination or drastic reduction of both tax exemption and the estate tax—the vehicle that has benefited charities for decades by making the transfer of wealth from individuals to their heirs easier if enough of it is passed onto a so-called 501(c)3 organisation, one deemed charitable in purpose. In a pincer move, the US Congress and the Internal Revenue Service are simultaneously investigating alleged excesses and abuses among non-profit organisations. One result of this may be to reduce their implied burden on the Treasury by broadening application of the Unrelated Business Income Tax, a tax on income realised through non-educational initiatives. While this effort has been slowed by the costs of the Iraq War and Hurricane Katrina, if it regains momentum it would lead to reduced benefits for those making gifts of cash and art to museums, and thus to reductions in contributed income.

Meanwhile, in continental Europe, museums are being given what at first seems like an opportunity: be allowed to keep all their ticket sales in exchange for a reduced annual subsidy from government. By shifting from the public purse to the purses of the public there is an intuitive improvement: lessened bureaucracy and an opportunity to tailor offerings to the audiences who make use of museums.

But the price can be considerable: lessened pressure on museums to explore ways of serving non-traditional audiences, increased pressure to stage exhibitions and events that privilege mass appeal over educational value, and erosion of the commitment to the core activities: conservation, documentation, publication, and education. If “Star Wars”, Armani retrospectives and for-profit shows like “Tut II” become the rule, it will be harder still to argue for tax-exempt status. Nevertheless, reductions in public funding, and with it a reduction in public accountability, is pushing museums towards a market paradigm, a sink-or-swim mentality based on maximising earned income, as sources for contributed income shrink. A key question for those advocating this shift is this: how efficient can art museums become as they shift to an attractions-focused model?

There is a crude way to measure efficiency: divide a museum’s operating costs by its number of visitors. The Louvre’s annual operating budget is around E150 million, and it attracts some six million visitors a year. This results in a notional per-visitor cost at the low end—around E25 per person. Yet a normal ticket costs E8.50. Furthermore, school groups, discount pass-holders, members, and tour groups drive up the number of free or heavily discounted attendees—as many as 40-50% of museum-goers can avoid the full-fare ticket at many museums. So per-visitor income is in fact lower than such simple arithmetic may suggest.

Thus there is a basic problem in suggesting that earned income can keep a museum afloat: it would have to extract tens of dollars more per person to get it on a sensible commercial footing. Yet the more adventurous museums are in pursuing commercial opportunities, the faster lawmakers will reduce public subsidies and tax advantages for philanthropic support. So we face the emergence of a two-tier system of haves and have-nots. The museums in the biggest markets with the largest collections and endowments will make their way with least difficulty. The rest will eventually have to alter their business model or merge as income shrinks and costs rise. The best way forward for art museums on both sides of the Atlantic is to create compelling experiences of their permanent collections, more modest changing exhibitions, encourage public and philanthropic arts support, and stage blockbusters only when the return on investment is worth it—both financially and artistically.

The writer is a principal with AEA Consulting of New York and London.

Originally appeared in The Art Newspaper as 'Warning: earned income can be bad for museum health'