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Professors Rohit Deshpande and Allen S. Grossman, and Research Associate Ryan Johnson, of the Global Research Group, prepared this case. The authors gratefully acknowledge the contribution of Senior Researcher Laura Winig of the Global Research Group. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1 -800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

R O H I T D E S H P A N D E

A L L E N S . G R O S S M A N

R Y A N J O H N S O N

The American Repertory Theater

To expand the boundaries of theater. — A.R.T. Mission Statement

In late September 2011, Diane Paulus, artistic director and CEO of the American Repertory Theater (A.R.T.) since the 2008–2009 season, walked through the Loeb Drama Center at Harvard University in Cambridge, Massachusetts, as the company was wrapping up its latest big show, The Gershwins’ Porgy and Bess. The A.R.T. was a not-for-profit regional theater company that was affiliated, through financial support, teaching assignments, and physical space, with Harvard University.

Founded in 1980, the A.R.T. had long been a beacon of new and challenging theater. Paulus, who made her name directing edgy musical theater, brought new life to the A.R.T. She attracted media coverage around an aesthetic that aimed to give the audience more ownership over the theater experience, excited theatergoers by experimenting with new venues, and received critical recognition for the breadth and range of the work she staged. Paulus’s approach, which stood in contrast to her predecessors at the A.R.T., was initially controversial and created a schism between supporters and detractors. The former felt it was revolutionizing theater, while detractors saw the approach as overly commercial and cheap. However, many of the shows were hits at the box office, and Paulus was confident that she could broaden audience demographics at the A.R.T. by delivering interesting, exciting, and relevant content.

For years, the A.R.T. had relied heavily on a subscription-based model—the traditional not-for- profit theater model—and attracted older patrons willing to both subscribe and donate. These patrons and their subscriptions provided the A.R.T. with cash up front, greater financial stability, and lower dependence on individual show revenues. However, since the late 1990s, the A.R.T. had seen a decline in subscribers and struggled to break even. Paulus’s approach, inspired by the mission of the A.R.T.—to expand the boundaries of theater—included operating two unique segmented venues, creating and presenting varied content that aimed to be both challenging and popular, and driving a sales and marketing campaign focused on single-ticket buyers, memberships, and dynamic pricing. This approach, which directly addressed the changing reality in regional theater, hastened a shift in the A.R.T.’s business model and moved the A.R.T. toward a younger, often more economically diverse demographic who were more likely to be single-ticket buyers. It was not at all clear that this new “single-ticket-based” revenue model could compensate for the continued decline in subscriptions.

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Donald Ware, chairman of the A.R.T. board of trustees, pointed out, “One of the challenges we face in the areas of programming and development is that our future depends on attracting a younger and more diverse audience, but we don’t want to lose our older, longtime subscribers in the process.” Early results showed some promise; the A.R.T. was closer to break-even than in previous years. However, some questioned if the A.R.T. was beginning to look like a commercial theater, focused on presenting theater that sold, rather than truly expanding boundaries. Despite the questioning, Paulus remained committed to fulfilling her vision of the A.R.T. mission in order to solidify the A.R.T. as a leading and financially stable not-for-profit regional theater.

Tough Times for Theater

By 2010, 60% of U.S. not-for-profit theaters were in the red; overall income had decreased 12% on

average since 2005 and covered 20.3% fewer expenses.1 From 2005 to 2010, show attendance had dropped by 3%, while the number of performances rose 3% and expenses nearly 10%.2 Also alarming was the drop in subscription income, which decreased 8.5%, with the number of subscribers falling 14%.3 Regional theaters depended on subscriptions to provide upfront capital, helping to offset risk and make budgets and fundraising targets easier to estimate and reach. As subscriptions declined, single-ticket purchases increased 7%. Many theaters stayed the course and sought to convert single- ticket buyers to subscriptions through messaging and incentives. Others attempted to create flexible subscriptions, a nod to the belief that single-ticket buyers were young and enthusiastic about theater but were discerning and had specific projects and themes in mind. Other theaters started to market to single-ticket buyers, accepting the trend as a “new reality” and attempting to compensate for the variability and unpredictability of single-ticket purchases with volume. However, this approach was more expensive; from 2004 to 2007, theaters targeting single-ticket buyers spent 22 cents on marketing and advertising for every dollar of single-ticket income, compared to 15 cents for every

dollar of subscriber income.4

Additionally, theaters faced stiff competition from cheaper entertainment options such as movies and small live music venues. The average theater ticket price hovered around $70, which stood in stark contrast to $10 movie tickets, or $40 dollar tickets for a live music show. Paulus commented:

Why are we losing our audiences, and why aren’t new audiences coming to the theater? It is common to explain these trends by pointing to the changing world outside the theater: Video games and interactive digital technology have shortened attention spans, and have therefore changed our audiences’ appetite for theater; how can we possibly compete, given the multitude of entertainment choices available in our world? . . . I believe the responsibility lies with the people who create theater. Could it be that as arts producers, we are failing to provide a theatrical experience that values the audience’s engagement and empowerment? If we want to truly broaden our penetration into the culture at large, we have to concentrate our attention on the total arts experience for our audiences.5

History of the A.R.T.

The A.R.T., founded by Robert Brustein in 1980, was one of the country’s most acclaimed resident theaters; it had won Tony Awards, the Pulitzer Prize, the National Theater Conferences’ Outstanding

Achievement award, and numerous local prizes.6 Under Brustein’s tenure, reviews heralded the A.R.T. as “the most successful, cosmopolitan, and ambitious repertory theater in present-day America” (London Observer) and “one of the most vital influences on the U.S. stage in the last twenty

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years” (International Herald Tribune).7 In 2003, it was named one of the top three regional theaters in the country by Time magazine.8

By 2011, the A.R.T. had presented more than 200 productions, over half of which were premieres

of new plays, translations, and adaptations, and had performed in 21 cities in 16 countries.9 Through its affiliation with Harvard University, the A.R.T. artistic staff taught undergraduate theater classes and the A.R.T. housed the Institute for Advanced Theater Training, offering graduate-level training in acting, dramaturgy, and voice and an M.F.A. degree from the Moscow Art Theater School.10

In 2011, the A.R.T. consisted of two venues, the Loeb Drama Center and OBERON, named after the king of the fairies in William Shakespeare’s A Midsummer Night’s Dream. The Loeb’s 530-seat theater was the venue for most A.R.T. productions, typically hosting an average of four to six shows per season, with 25 to 40 performances of each show. The Loeb had a full liquor license and concessions could be purchased before the show and during intermissions. OBERON was a club theater with a 300-person capacity, limited seating, and flexible stage space. Patrons could visit its bar as well as mingle, dance, and party throughout the club during shows. The A.R.T. maintained two performances a week of The Donkey Show and produced two subscription productions at OBERON. In addition to season programming, the A.R.T. curated the use of the space for other local and emerging arts groups. OBERON made the A.R.T one of the first theaters in the country with a club theater as its second stage. (See Exhibit 1 for seating charts.)

For the upcoming 2011–2012 season, the A.R.T. had 1,800 subscribers. Subscriptions cost $200– $555 and gave subscribers access to all shows. The not-for-profit aimed to break even, and received significant financial and physical space support from Harvard University. (See Exhibit 2 for the A.R.T.’s financials.)

Competition for the A.R.T. included other theater companies in Boston such as ArtsEmerson, the Huntington, New Repertory Theater, and Actors’ Shakespeare Project. Traditional regional theaters around the country, such as the Guthrie Theater in Minneapolis, Minnesota, the Goodman Theater in Chicago, Illinois, and the Yale Repertory Theater in New Haven, Connecticut, competed for product and national awards and recognition.

Evolution of the A.R.T.’s Directorship

The A.R.T. had only three artistic directors in its history, founder Robert Brustein (1980–2002), Robert Woodruff (2002–2007), and Diane Paulus (since 2008). Brustein’s aesthetic was regarded as a

fearless and experimental take on classics.11 He relied on a steady company of actors to establish the A.R.T. as a hub for avant-garde works that challenged traditional notions of theater and original interpretations of classic plays. When he retired, few doubted Brustein’s legacy of staging unique, audacious theater and reimagining and contemporizing classics, helping to start the careers of many controversial writers and directors and helping to build the foundation for not-for-profit repertory theaters around the country.

In 2002, as his replacement Robert Woodruff was announced, Brustein described him as “one of

the most imaginative and visionary directors in the world.”12 At the A.R.T., Woodruff presented challenging works that often defied interpretation and mystified audiences. Expenses rose and ticket sales fell. During his tenure the A.R.T. began to draw on its endowment more than usual to cover costs.13 As Woodruff’s contract expired, the media reported that Harvard University decided not to renew Woodruff’s contract based on financial concerns.

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Woodruff defenders, including former actors and board members, decried the decision. “The responsibility of Robert Woodruff was to be creative and a genius, and that’s what he did,” argued

one advisory board member.14 Another board member posited that things were changing in theater: “What is the new paradigm? There is nobody at an administrative level searching that out. It’s too much to ask a Robert Woodruff to be stepping out of his creative zone.”15 In 2008, after a search to replace Woodruff that took well over a year, a search committee from Harvard University picked Diane Paulus, a widely acclaimed theater and opera director, as the A.R.T.’s new artistic director.

Diane Paulus

After graduating from Harvard College in 1988, Paulus moved to New York City and decided to pursue directing. In 1993, Paulus, along with her future husband, Randy Weiner, cofounded Project

400, a small theater troupe that gained notoriety for producing unique, populist musical theater.16

In 1999, Paulus and Weiner began production on The Donkey Show, a disco-music-inspired version of Shakespeare’s play A Midsummer Night’s Dream. The show was performed at a club theater where drinks were served throughout the show, disco music blared, and cast members mingled with the audience before the show. Paulus remarked, “Everybody thinks theater has to be where you go inside a certain kind of architecture where you sit in a chair that’s bolted to the floor and you look at a stage. . . . That is a very small piece of theater history. . . . Theater was festival, theater was nightclubs; I really believe rock concerts and the way certain rock stars commune with an audience is

closer to what the Greek [theater] festivals were like.”17

In 2007, after stints directing Mozart and Monteverdi operas and the success of The Donkey Show, which had run continually since 1999 in various venues, Paulus directed a revival of the musical Hair, an “American Tribal Love Rock Musical,” on its 40th anniversary. The revival was first staged by the Public Theater at Central Park’s Delacorte Theater and later moved to Broadway, London’s West End, and a national tour. Paulus’s version of Hair was showered with praise for bringing the spirit of the times back to the stage: it won both a Tony Award and a Drama Desk Award for best revival of a musical, and Paulus’s standing as a leading director was raised. (See Exhibit 3 for biography of Paulus’s career before the A.R.T.)

Paulus and the A.R.T.

Named artistic director in 2008, Paulus was tasked with revitalizing the A.R.T.18 Paulus was thrilled: “I took the job at the A.R.T. because its mission is ‘to expand the boundaries of theater.’ I can throw my blood, sweat and tears into that mission, because that’s exactly what I’ve been doing all my life.”19 Paulus spent one year listening to constituencies and studying before making big changes at the A.R.T., including transforming the Zero Arrow Theater, located at the other end of Harvard Square from the Loeb, into a club theater and renaming it OBERON. She recalled, “I spent a year developing my ideas and meeting audiences and talking to people about revitalizing the vibrancy of the theater.”20

Some found the match surprising; a New York Times critic said that “the club kid got the Harvard

job”21 and described Paulus’s works as “Generation MTV in their sensory overload, often with compact running times and orgiastically esoteric in their sourcing, these productions could take the

starch out of the most tightly stuffed J. Press shirt.”22 While Paulus’s strong focus on musical theater and the inclusion of the audience in the theatrical experience had brought her high critical acclaim in the past, she explained her aesthetic goals at the A.R.T.: “What I am trying to do is create challenging,

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avant-garde theater that is also popular. I really don’t believe these need to be mutually exclusive.” As part of this effort, the A.R.T. rolled out a new branding initiative, “Experience the A.R.T.” Paulus explained:

“Experience the A.R.T.” seeks to revolutionize the theater experience through a sustained commitment to empowering the audience. This audience-driven vision will completely transform the way we develop, program, produce and contextualize our work. A new allocation of A.R.T. resources will give equal importance to the social aspects of theater and the potential for a full theater experience, including interaction and engagement before, during and after the production. I believe that if theater is to remain a vital art form, it must give audiences a voice, a sense of ownership and a feeling of importance in the theatrical event.23

First Season

As the 2009–2010 season opened, Paulus was explicit about moving the A.R.T. aesthetic toward “populist theater with integrity” in an attempt to bring in a new demographic and expose more people to theater. 24 “My belief is that the theater is more than just the play on the stage,” Paulus said. “I believe very much in the theatrical event and how that can be newly defined.”

Paulus divided her first season into three festivals, each organized around a theme. The first was “Shakespeare Exploded!” which included The Donkey Show (performed at OBERON); Best of Both Worlds, an R&B and gospel musical inspired by Shakespeare’s The Winter’s Tale; and Sleep No More, a recasting of Shakespeare’s Macbeth performed at the Old Lincoln School in Brookline, in which the audience could roam from scene to scene, each in a different room. The second festival, “America: Boom, Bust and Baseball,” featured Gatz, a theatrical adaptation of novelist F. Scott Fitzgerald’s The Great Gatsby; Clifford Odets’s Paradise Lost; and Johnny Baseball, a world premiere musical by Robert Reale, Willie Reale, and Richard Dresser about the Boston Red Sox and the integration of African- Americans into baseball. The final festival, “Emerging America,” a collaboration between Boston’s Institute of Contemporary Art and Huntington Theater Company, introduced new artists and works.25

In Paulus’s first season, attendance nearly doubled from the previous year.26 The theater, which had a $10.9 million operating budget, expected to almost break even, a significant achievement in the theatrical arena where costs often exceeded direct theater revenues and sustainability relied on other funding sources such as gifts and endowments. The A.R.T. received a $1 million grant for artistic initiatives from the Andrew W. Mellon Foundation, and Harvard University doubled its annual financial support to $2 million.27

Paulus’s supporters hailed her as a revolutionary, a director breaking down barriers and reinventing theater. Oskar Eustis, the artistic director at New York’s Public Theater, commented: “She is engaging seriously with the classics, but she’s figuring out ways to do them that reverberate in the exact historical moment we’re in right now. She’s also extremely interested in theatrical event, and thinking about social transactions and using those ideas to create a genuinely experimental theater that is not a reproduction of what anybody else is doing. It’s not working within any received tradition; it’s taking traditions and breaking and altering them.28” Internally, an A.R.T. staff member reflected, “I have watched audiences in this building for 12 years. I watched them disappear and I watched them reappear. This year I watched people jump with joy at the end of shows.”29

However, her detractors felt that Paulus’s aesthetic was commercial, aimed solely at selling tickets and making headlines, and that the A.R.T. had lost sight of its mission, which they interpreted as a need to push culture forward by staging serious, often esoteric plays, regardless of box-office sales.30

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Two A.R.T. board members who resigned after Paulus’s first season expressed their opinions in a letter to Paulus: “The problem as we see it is that you are destroying the heritage of the A.R.T. by making it into something completely different—a place to preview musicals heading for Broadway, musicals in general, and sensory saturated productions generating visceral experiences that often include pandering to sexual appetites.”31 One former A.R.T actor said, “Shakespeare serves The Donkey Show as an effective marketing tool, but the process is not adaptation. It is not reinvention. It is, simply and precisely, exploitation. The resulting shows were popular, fun, and in one case visually stunning, but they contained none of the power, intellect, and beauty of Shakespeare. They didn’t need to. That’s not how they seek to impact the audience.”32 Paulus felt that such criticisms missed the point: “I am creating visceral experiences, challenging yet relevant theater that creates a renewed feeling of involvement, engagement, and ownership for the audience.”

Brustein focused his criticism on the departure of longtime staff, including the executive director, general manager, and comptroller, saying, “This theatre was based on the idea of a collective company, and it’s no longer the theatre it was without that company. While Diane has every right to choose her own staff, I have been very upset by the abrupt way in which so many loyal and dedicated people have departed.”33 However, in the 1990s under Brustein and then Woodruff, the A.R.T. ensemble had been reduced to just five actors, who were given consistent work but were not salaried, a departure from a true repertory theater.34 Additionally, Brustein recognized Paulus’s artistic ability and range: “Diane has been doing some remarkable things at the A.R.T., and has managed to attract a whole new generation of spectators, primarily through the use of music . . . in her approach to classical plays and new work. The most interesting thing about Diane’s work is its

unpredictability. A single season can be a cornucopia.”35

Paulus was cognizant of her polarizing role, and yet she remained confident in her work and vision. “I knew that in my first season I couldn’t just drop a stone in the ocean,” she explained. “I had to drop a boulder to wake people up about the A.R.T. We’ve done that, and now we have audiences again who want cutting-edge work, who want to be challenged, but who also won’t be falling asleep at the theater.”36

Second Season

At the start of her second season at the A.R.T., Paulus seemed encouraged by the controversy. “For me it’s an absolute continuation of the history of the A.R.T.,” she noted. “The most gratifying comments I hear are from people who have been supporting this theater for years, and they say to me, ‘You may be doing different things, but that’s exactly what Bob Brustein was doing in the ’80s and the ’90s at the A.R.T.—leading us into new territory.’” She hired two new executives: Diane Borger as producer and Anna Fitzloff as director of marketing and communications. (See Exhibit 4 for short bios of key staff.) Paulus said, “You know, when you take over a theater, you can sort of gingerly, over many years, turn the ship in a different direction. But I guess that’s not my nature. I really felt that I was going to have to deliver and show the audience at A.R.T. what I meant. So I went

pretty deep pretty fast.”37

Highlights from her second season included continuing The Donkey Show; the box office hit Cabaret by John Van Druten and Christopher Isherwood; Alice vs. Wonderland, Brendan Shea’s take on Lewis Carroll’s original; The Blue Flower, a world premiere musical by Jim and Ruth Bauer; D.W. Jacobs’s one-man show, R. Buckminster Fuller: The History (and Mystery) of the Universe; a new adaptation of Sophocles’ Ajax; and a world premiere rock-musical version of Aeschylus’s Prometheus Bound, with script and lyrics by Steven Sater and music by Serj Tankian, the Grammy award-winning lead singer

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of System of a Down; and Death and The Powers: The Robot’s Opera, composed by Tod Machover, libretto by Robert Pinsky, and story by Robert Pinsky and Randy Weiner.38

Prometheus Bound, which showed at OBERON, cast the character Prometheus as the first prisoner of conscience. The A.R.T., in partnership with Amnesty International, dedicated the performances to eight “Amnesty actions” prisoners of conscience and individuals at risk who were being silenced by their governments. The effort related a Greek tragedy to current human rights violations and brought in a new audience to OBERON. The Boston Globe called Prometheus Bound “mind-numbingly loud,” and the Boston Herald described it as a “highly entertaining ride” that brought a unique demographic to the theater.39 Paulus commented, “That audience does not look like the typical A.R.T audience— there’s no question about it. It looks like a rock club, people 30 and younger. There are a lot of men in the audience, which is not your typical demographic for the theater. We are uncovering the next audience that we can begin to bring to the theater.” However, many of the A.R.T.’s subscribers were turned off by the show’s genre, its loudness, and the atmosphere created inside OBERON. Paulus struggled to reconcile the issue: “Every theater in America says, ‘We want the young audience.’ But you have to deliver something that actually will meet that young audience’s appetite. The real question is, how do you broaden your demographic without losing your core?”

Planning Ahead

By the end of the 2010–2011 season, Paulus had again delivered strong results at the box office. To begin the 2011–2012 season, Paulus and the A.R.T. planned to stage an adaptation of The Gershwins’

Porgy and Bess by George Gershwin, DuBose and Dorothy Heyward, and Ira Gershwin.a The show, scheduled to play at the Loeb, cost more than an average show to stage. The A.R.T., while cautious in budgeting, was optimistic that ticket sales for the highly anticipated event would bring in significant revenue. Additionally, the A.R.T. received a substantial enhancement to help cover additional costs.b Onlookers speculated, partially because of the enhancement and also because of Paulus’s strong New York ties and previous success in reviving Hair, that the show was bound for Broadway. Paulus said:

The Gershwins’ Porgy and Bess is classic but highly controversial. The Gershwin and Heyward estates actually came to us because they wanted a version out of the opera house and back to the popular roots of the piece. The Gershwins’ Porgy and Bess is a microcosm of the bigger issues that I’m trying to tackle at A.R.T. Many people look at Porgy and Bess as a piece of art in the opera canon, but how many kids have ever seen it? Is The Gershwins’ Porgy and Bess going to be so radical in terms of what is theater? No. But do I hope I will diversify my audience and bring people into the theater who don’t usually come to this theater because this is a show about, written for, and performed by African Americans? Yes.

Moving into her third season, Paulus felt the controversy around her aesthetic was dissipating. “The controversy is more or less gone,” she remarked. “Now, how do we make this ship go? It’s the business model that we need to tackle now, not the content.”

a Originally intended as a “folk opera,” Porgy and Bess was the story of Porgy, a disabled black beggar living in the slums of Charleston, South Carolina, who attempts to rescue Bess from a violent and possessive lover and drug dealer.

b An enhancement was a contribution, often made by a commercial theater producer, to a theater to produce a show with some rights and ownership clauses attached—i.e., the right to move the show to Broadway or to use the sets and costumes at the end of the run. Most often it was money put forth to get a chance to see the show on a live stage and how it played before making the larger investment of producing it on Broadway.

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Expanding the Boundaries of Theater

As Paulus reflected on how to continue innovating in order to stay relevant both with content and as a sustainable not-for-profit, she returned to her interpretation of the mission. “For me, when I look at our mission I would say that expanding the boundaries of theater is synonymous with talking about the audience,” she explained. “Our mission can‘t be just artistic; we have to think about the audience, community, business model, venue options, driving single-ticket sales, targeting our marketing. All of our efforts in those areas are born out of our mission.” Paulus saw the changing theater landscape and her ability to attract new demographics as an opportunity to experiment with new business models for a not-for-profit theater. Paulus was unapologetic about her attention to the business side of the thriving theater and frustrated by claims that the A.R.T. was becoming a commercial theater: “The difference between for-profit and not-for-profit is [that] in a for-profit the driver for your decisions is to make money to return to shareholders; in a not-for-profit every decision is driven by your mission. If, at a not-for-profit, you make a surplus or earn more money than you thought you would, that doesn’t make you a for-profit theater, as long as you are true to the mission.”

Slipping Subscriptions

The A.R.T., along with most other regional theaters in the U.S. in the 1980s and 1990s, had built its business model around subscriptions. This model supplied the theater with a predictable revenue source at the beginning of each season, as well as a solid base from which word of mouth around its shows could spread through the community for additional single-ticket sales. For many years, this model worked well: it offered artistic directors insight into their consistent and important patrons, allowed for targeted fund-raising, and facilitated forecasting and budgeting. As Paulus noted, “Subscribers are essentially people saying, ‘I believe in your theater and I’ll give my dollars to see everything.’ With that, you don’t have to push individual ticket sales. It’s a strength not-for-profit regional theaters have that the commercial theaters don’t have, and something we don’t want to lose.” However, as with regional theaters around the country, the A.R.T.’s subscription base was declining, dropping from a high point of 10,000 in the mid-1990s to 1,800 by 2011. Borger commented:

The subscription model is dying, partially due to aging demographics, but I think it has to do more with the fact that people don’t want to commit in advance. I think the whole industry needs to look at how we are going to replace subscriptions. It is crucial to the survival of regional theater. I know that it is much harder to sell single tickets, and I know it is a completely different way of thinking, but we are going to have to do it.

Additionally, some of the changes that Paulus and her executive team implemented may have had an impact on total subscription numbers. “One of the things that we did was streamline subscriptions by cutting the number of different subscription packages offered. We felt like we needed to focus the process and make things clearer both for the subscribers and for us,” Fitzloff explained. “We tried to address all the subscription ‘turnoffs.’ We made the package simpler, allowed patrons to pick their dates while having access to the best seats at the best prices, but they had to commit to the whole season up front.” The A.R.T. also lacked detailed data on the subscribers who had dropped off in recent years, and questions remained about how the A.R.T. interacted with and catered to subscribers. Fitzloff commented, “Maybe one of the reasons the A.R.T. has had a lot of attrition in our subscribers over the years is we have not provided consistent benefits and rewards. I would like to invite them to workshops, invite them to previews, give them something special. I think this would help build loyalty and word of mouth, too.”

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Implementing Memberships

Searching for a middle ground between subscription and single-ticket buyers that would help to drive consistent patronage, the A.R.T. introduced memberships. An A.R.T. membership, which cost

$25 in 2010 and $50 in 2011, offered members early access to tickets.c The A.R.T. signed up 800 members in 2010, despite losing 400 subscribers. In 2010, the net income from members’ single-ticket purchases and membership fees roughly equaled the lost subscription revenue for that year. However, the number of 2009–2010 subscribers that became members was less than 10% of the lost subscribers from that season. Fitzloff pointed out additional differences from the subscription model: “Subscribers are locked in to all the shows but get a serious discount—between 25% and 40% off the full ticket price. With membership you don’t get that discount, but you do get access and flexibility. Basically it’s insurance to get to see the shows you want to see.”

Two Venues, Two Audiences

OBERON, largely on the popularity of The Donkey Show, emerged as a strong, consistently sold- out venue. It attracted a radically different demographic—younger, more daring, and more economically diverse—than the Loeb. Paulus noticed the shift:

We have segmented our approach, because at OBERON I have a greater chance to change the model: there’s the option of no seats; we have a bar and a coat check. Just by definition, the architecture of that space allows you more freedom. So, certain shows belong there and can break through. Even if I had done it here at the Loeb, it would not have had the same vibe. I could have cut off the seats and had a bar, etc., but it would not have sent the same signal to the audience that they can behave differently. It wouldn’t have the same allure.

Since Paulus arrived, OBERON had risen in popularity and notoriety, both among fans and theater insiders. Paulus remarked, “So many young people who want to create theater for me want their shows done at OBERON, but it is a very difficult model because of its small capacity. When you look at a theater model, it’s all about capacity, and the most we can sell in that venue a night is 300 tickets. The Loeb can sell 530. And we’re a fixed-cost business.” While the production cost for the Loeb was significantly higher (with productions ranging from $150,000–$900,000 compared to $150,000–$300,000 per show at OBERON), based on the size of the venue and depending on the size of the cast, lighting, music, and staffing requirements, the Loeb had potential to generate significant revenue with its larger house size and higher average ticket prices ($41 compared to $30 at OBERON). Inherently, running a show at the Loeb carried more risk. The group had successes at the Loeb, most notably R. Buckminster Fuller: The History (and Mystery) of the Universe, but other shows were more challenging, and the A.R.T. had not completely cracked the formula for success there. “We struggle with how to sell out the Loeb consistently,” Paulus acknowledged.

Paulus was encouraged by the upswing of OBERON, however. “There’s no question that what’s happening at OBERON is a success,” she noted. “The vibrancy of that exchange, of that new audience, of the demographic . . . theaters around the country are calling us, saying, ‘We want to have an OBERON. How do you do it?’” However, the consequences of segmentation between the Loeb and OBERON weighed heavy on Paulus’s mind. With the rising success of OBERON the group had to make crucial decisions about which venue was best, both artistically and financially, to host new content they were developing. Paulus reflected, “Most theaters don’t even have an OBERON.

c In 2010, an A.R.T. membership did not include any discounts. In 2011, the membership included waived transaction fees on ticket purchases and other small discounts.

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So now, we have made an OBERON and it is successful. What’s the consequence? We are really in the thick of it.”

Fitzloff felt that the audience segmentation between Loeb and OBERON was inevitable and pondered ways to custom tailor the messaging:

Right now, the trend is the more targeted and specific you can be, the better, and you’re going to have to have a different message for every segment. Not everything at OBERON will be your cup of tea and not everything at Loeb will appeal to you. ArtsEmerson is doing something smart now. They’re giving these clues that are very subtle: the “founders” series, the “experimental” series. It is not a true subscription model, but they’re indicating to people if you’re a bit out there/out of the box, you may like this production, and if you are a bit more traditional you will like that production. I can see A.R.T. doing something similar with OBERON. We need to keep some kind of overarching experience, or a Loeb-only experience, and maybe there’s an OBERON pass—some way to go to whatever is happening at OBERON of your choosing.

However, drawing on its mission, the A.R.T. team hoped that they could also continue to bring people out of their comfort zones, exposing them to all kinds of theater. Borger reflected on this challenge:

I want people to expand, broaden, be surprised. I don’t want any part of culture to be shut off to people because they’ve only had one part marketed to them or because it is so closely fitted to what their needs are and they think, “This is what I like and I won’t like the other stuff.” I’m in not-for-profit because I’m driven by an idealistic view of it. I think we should choose the very best work we can do and put it on to the best of our financial ability, and I think we should market the hell out of it so that everyone thinks it might be interesting to see. I do feel that people who don’t think they like the theater could like it. I think older people could be exposed to what younger people are thinking or vice versa. I think the theater is a great communal event, and when people are all in that shared space, breathing the same air and laughing or crying to the same thing, that is really important.

Single-Ticket Strategy

With declining subscriptions and increasing segmentation, Fitzloff and her marketing team realized that marketing to single-ticket buyers was becoming a large part of their job. “We are selling the individual product—a show—more often than the whole season,” Fitzloff said. “Our subscribers will fill the equivalent of three performances per show, and we average 30 performances per show, so 27 of our performances will be a single-ticket climb.” Furthermore, the A.R.T. had a relatively inflexible schedule, due to a desire to put on a range of four to six shows a season and the fact that the Loeb was a shared space with the Harvard-Radcliffe Dramatic Club, who used the venue for their fall and spring mainstage productions. The lack of flexibility limited options when hoping to extend a popular show.

The single-ticket sales strategy was challenging, especially for an institution that had relied on subscriptions for so long. The amount of risk involved was orders of magnitude beyond what the A.R.T. was comfortable with. As one A.R.T. manager pointed out, “It is scary to start every show at dollar one with nothing in the bank.” Paulus got at the heart of the problem:

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In this business, every show is different and we don’t know what we’ve got until we make it. We have good scripts, actors, director, good set designers—but you don’t know how it’s going to turn out, as much as you think you have the right equation. That is the burden of our profession. You can’t replicate it. It is an ephemeral thing. This is the million-dollar question because it gets to the heart of the question of what do you do as a not-for-profit theater that needs to sustain across shows? If we turn solely into a single-ticket buyer—every show is its own unique audience—it is really hard.

Knowing the Customer

Fitzloff recognized that in order to fight slipping subscriptions and to form a stronger single-ticket subscriber target base, she would need to have a good understanding of the customer. “For tickets we’ve sold, we collect e-mail, name, telephone, address, what they’re purchasing, and a source code/promotion code,” she explained. “We know if they buy via phone or Internet. We still have not learned how to use our new database as fully as we can. It was implemented in fall 2009. I think there is more sophisticated mining of the data that can be done. If we segment our database better, we can figure out who to reach, when and where to reach them, and with what messaging.”

The A.R.T. also had a social media presence, with over 3,500 followers on Twitter and approximately 6,000 on Facebook. As Paulus noted, “For Prometheus Bound, a big driver of attendance was social media. People tweeting about the show to the point where even before we were reviewed, people had thought it was reviewed because it was in the blogosphere.” However, Fitzloff was not clear how big a tool social media could be, how efforts could be monetized, and if it was opening a dialogue with the right people, “The folks on Facebook are very engaged and involved,” she observed. “But they’re largely students—people who will be here for a little bit of time and move on.” According to Fitzloff, since Paulus had taken over, and with the emergence of OBERON as a popular second venue, the A.R.T. was able to expand its sales to the local student population: “We sell a lot of student tickets for OBERON. We’re in the middle of a major academic center with the highest student population anywhere, so we work hard to cultivate that population.” But Fitzloff also wanted to draw hip, smart, mid-career professionals as well as empty nesters looking for a different type of night out on the town and was less clear how to reach and make an impact on this demographic.

Fitzloff also wondered how she could creatively package shows and reach out to the A.R.T. e-mail list, which numbered 45,000. “Our e-mail list is a general pot of people who like the A.R.T brand but have not necessarily indicated a preference for the Loeb or OBERON. In messaging we packaged Ajax and Prometheus Bound together because they are both Greek tragedies, but the plays were told in completely different ways, and we felt the comparative experience would be interesting for audiences. Did it fly? It did not.”

Dynamic Pricing

One step the A.R.T. took, in order to offset the uncertainty of single-ticket purchases and take advantage of popular shows that often gained momentum later in runs, was to explore the use of

dynamic pricing.d The first step was streamlining the single-ticket pricing offerings. For every performance, a $25 ticket price was added, creating an affordable option. The $25 ticket option also

d Dynamic pricing was pricing goods and services at the highest price that consumers would deem acceptable based on prior reactions to similar price ranges and points and demand for product. Other pricing factors were manufacturing cost, market place, competition, market condition, and quality of product.

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allowed the A.R.T. to advertise all its shows as “tickets from $25.” The A.R.T. then sought to eliminate printing a price range for tickets in the media, allowing for more flexible pricing especially at the high end. The “tickets from $25” strategy allowed the A.R.T. staff to shift ticket prices based on demand. Fitzloff noted:

During The Blue Flower we saw that Saturday nights always had 30%–40% in-advance ticket purchases, so we immediately increased prices for Saturday nights. Then for Ajax and Prometheus Bound, we raised prices for particular high-demand dates in advance of the single- ticket on-sale date. If demand was high, we raised prices. We raised prices for the end of the Prometheus Bound and kept them low at the beginning because most tickets are sold for the end of the run. I hope that by using this model, too, subscribers will see that they get the best price by buying a subscription.

The changes the marketing team put into place streamlined the single-ticket buyers’ experience and also effectively reduced published ticket prices by 18% for the season.

Yet Paulus and the A.R.T. team realized that the effectiveness of dynamic pricing was limited by their inability to extend the run of shows. “To take full advantage of dynamic pricing you have to be able to run shows longer. So when you have something good you can maximize it. If we could extend Prometheus Bound we would start to see a good return. Same thing for Sleep No More. It was in the third week of the initial run that ticket sales started to go up.” Paulus, at times, wrestled with how best to schedule shows at the A.R.T.: “It’s hard. You’re trying to program things in so you make a commitment. If you were to leave openings, it’s a risk because you may end up dark during those times. You don’t know if something’s going to be a hit.” Ultimately, the A.R.T. played it safe by offering a full schedule of shows with little if any extension time built in for popular shows. This strategy, while potentially limiting the overall revenue generation capability of any one show, ensured that the A.R.T. put on a large variety of content; exposed audiences to many voices, playwrights, and theatrical forms; and limited the risk of losing significant revenue if shows were unpopular. The one show that operated outside of this traditional framework was The Donkey Show. Paulus reflected, “We run The Donkey Show on Saturday nights now and it helps subsidize the other experimental work at OBERON. To me this is a creative use of capital. I don’t understand why so many not-for-profit theaters are trained to balance to zero. If we see an opportunity to make money, we will, and then we’ll reinvest in our operations.”

Finally, single-ticket sales challenged the A.R.T. marketing staff to plan earlier and have a more focused message. This was not always an easy thing, according to Fitzloff:

We begin selling these shows not knowing exactly what they’re going to be. As a production begins, we pick up the tools or words on how to describe it. At the outset we know it has music by X and it’s about Y. We start to put together some language to sell the show in collateral and media releases. Once the show is in rehearsal and previews, we tweak that language so that we’re as clear as possible about that experience. What will someone hear? What will it feel like when they see the show? It gets changed on the website, materials, with the box office, etc. Then we also do a lot of filming of the show (during rehearsal if we can), and we cut that up and try to put together previews of the work. We use that in all of our electronic messaging and on our website. Do we have that information as early as I would like it? Not always; it depends on the production.

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Doing It the A.R.T. Way

As Paulus and her team worked to transform the A.R.T. into a beacon for exciting, cutting-edge theater and attempted to fulfill the mission to expand the boundaries of theater, they encountered the toughest challenges that were facing regional not-for-profit theaters around the country. Borger said:

Everyone is watching the A.R.T. to see if we can make it work. Diane came in with such a strong and clear agenda, and she is such a charismatic and persuasive person that when she speaks, people listen. And even if people don’t want to admit that many of their theaters are dying or in trouble, they know in their heart of hearts that they are. And the big difference with Diane is not just articulating a vision but the willingness to follow through. Diane hasn’t been an artistic director before. When Diane tries something, it doesn’t occur to her that other people say, “You can’t do that.”

As Paulus reflected on the beginning of the third season, she was excited. The Gershwins’ Porgy and Bess had sold out the entire run at the Loeb, and approximately two-thirds of the audience were first- time A.R.T. audience members. By October 2, the end of the show’s run, over 27,000 people would see the show at the A.R.T., with an average ticket price of $62. The show received strong media coverage and generated a consistent buzz for weeks leading up to it. With The Gershwins’ Porgy and Bess headed to Broadway in December 2011, it would mean that four shows that began at the A.R.T. would have played in New York by the end of 2011: Sleep No More, The Blue Flower, Once, and The Gershwins’ Porgy and Bess. As the show jumped to Broadway, the commercial producers would need to fill more seats over a longer period of time and remain attractive to a different, more diverse audience in New York, another tough test for A.R.T. content.

Additionally, Paulus and the A.R.T. team acknowledged that, while The Gershwins’ Porgy and Bess was a success both critically and financially, it took almost two years of planning and was a huge endeavor for the theater that was not immediately replicable. At the front of the team’s mind was how to best capitalize on the buzz, energy, and momentum created by The Gershwins’ Porgy and Bess. With so many new A.R.T. audience members, the team knew it had a unique opportunity to keep them excited about other offerings that season and convert them into regular A.R.T. attendees. While the show had offered the A.R.T. a huge lift and a nice financial cushion at the beginning of the season, the team felt that real success would be measured in making success sustainable and consistent.

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Exhibit 1 Seating Charts for Loeb Drama Center and OBERON

Loeb Drama Center

OBERON

Source: “Loeb Drama Center,” the A.R.T. website, http://www.americanrepertorytheater.org/node/55; and “OBERON,” the A.R.T. website, http://www.americanrepertorytheater.org/venue/oberon, both accessed July 2011.

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Exhibit 2 A.R.T. Financials (all numbers in $)

Statements of Financial Position 2010 2009 2008

ASSETS

Current Assets

Cash and cash equivalents 453,688 440,660 31,238

Accounts receivable 16,766 21,156 69,766

Current portion of grants and pledges receivable 765,719 1,047,962 325,874

Student receivables, net of reserve 732,567

Prepaid and deferred program expenses 250,619 562,653 393,843

Other Current assets 50,212 42,616

Total current Assets 2,219,369 2,122,643 863,337

Long term deferred expenses 129,211 135,943

Non-current accounts and contributions receivable 532,697 358,541 484,789

Investments 14,064,413 14,151,140 20,659,883

Fixed Assets, net 2,506,188 7,265,690 7,148,672

Total Assets 19,322,667 24,027,225 29,292,624

Liabilities and Net Assets

Current Liabilities

Accounts payable and accrued expenses 761,355 218,737 238,166

Advance program revenue 1,458,107 1,355,526 1,370,119

Total current liabilities 2,219,462 1,574,263 1,608,285

Advances for federal student loans 203,723 271,984 351,697

Long Term note payable 5,700,000 5,700,000

Total Liabilities 2,423,185 7,546,247 7,659,982

Net Assets

Unrestricted 6,664,491 5,737,753 7,568,704

Temporarily restricted 7,104,383 7,612,617 10,933,330

Permanently restricted 3,130,608 3,130,608 3,130,608

Total net assets 16,899,482 16,480,978 21,632,342

Total Liabilities and net assets 19,322,667 24,027,225 29,292,624

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Exhibit 2 (continued)

Statement of Activities and Changes in Net Assets 2010 2009 2008

Program Revenues and Public Support

Program Revenues

Ticket Sales 3,150,430

Tuition and related fees 1,893,612

Auxiliary earned income 1,011,981

Concessions, net of cost of goods sold 572,606

Miscellaneous income 209,102

Total Program revenues 6,837,731 4,417,015 4,481,715

Contributed Supporta

Total contributed support 6,568,056 6,040,420 3,767,516

Total program revenues and contributed support 13,405,787 10,458,435 8,249,231

Net unrealized gains (losses) on investments 1,413,273 (6,013,374) 382,329

Total revenue, investment gains (losses) and other

support 14,819,060 4,445,061 8,631,560

Expenses

Program Expenses

Core production and education activity 11,980,745 8,472,746 7,846,863

Tours, booked-in events and other 259,236 496,152 690,924

Total program expenses 12,239,981 8,968,898 8,537,787

Support Services

General and administrative 1,857,734b 912,448 867,957

Fundraising 604,642 561,817 589,441

Total support services 2,462,376 1,474,265 1,457,398

Total expense 14,702,357 10,443,163 9,995,185

Changes in net assets 116,703 (5,999,102) (1,363,625)

Net assets, beginning of year, as restated 13,011,635 21,003,493 22,367,118

Net assets, end of year 13,128,338 15,004,391 21,003,493

Source: Company documents.

a. Includes Harvard University subvention, endowment spending policy and transfers, grants and contributions, in-kind goods and occupancy, and special events.

b. Includes one-time reorganization cost.

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Exhibit 3 Diane Paulus Biography

Paulus grew up surrounded by music, theater, and dance. By the time she reached high school she was primarily interested in musicals, combining her skills in acting, dancing, and singing. Paulus attended Harvard University and wrote her senior thesis on the Living Theater, an experimental theater company founded in New York in 1947. After graduating in 1988, she moved to New York and quickly decided to pursue directing.

Project 400 In 1993, Paulus, along with her future husband, Randy Weiner, cofounded the Project 400 Theater Group. One of Project 400’s first shows was a rock-musical version of The Tempest. Paulus signed a local band to compose and perform songs for the show. The band played the songs at bars during gigs to rehearse for the show, and many became local hits. Paulus recalled, “By the time we actually did the show . . . there was a whole feeling [in the community] about the show. . . . It just taught me how you make theater in a way that feels organically grown. In other words, how can you make a show that has relevance for a community? And I think that’s been a theme with everything I’ve done.”

The Donkey Show In 1999, Paulus and Weiner began production on The Donkey Show, a disco-music inspired version of William Shakespeare’s play A Midsummer Night’s Dream. The show was performed at a club theater where drinks were served throughout the show, disco music blared, and cast members mingled with the audience before the show. The performance was loosely based on Shakespeare’s original play; Puck, for example, was transformed into a drug dealer on roller skates. The show featured popular disco hits, including “Car Wash,” “I Love the Nightlife,” and “You Sexy Thing.” The Donkey Show immediately attracted big audiences, much larger than Paulus was used to. She remembered, “People would come week after week after week, and it just showed me what it means when a show finds its audience—and what that energy, what that kind of communion is. So we just started realizing that’s the show we want to keep doing.”

Entering opera In 2000, Paulus directed the Chicago Opera Theater’s staging of Claudio Monteverdi’s L’Orfeo. It was widely considered a success, and Paulus went on to direct two more Monteverdi operas, Il ritorno d’Ulisse in patria and L’incoronazione di Poppea; followed by three Mozart operas, Don Giovanni, Le nozze di Figaro, and Cosi fan tutte; and then an opera version of the David Lynch film Lost Highway, an English National Opera co-production with the Young Vic Theater Company. Paulus pointed to a need for theater to encompass story, spectacle, ritual, learning, and a transaction between performer and spectator: “If I can create a theater event that starts to do all of those things, call it whatever you want to call it. That’s going to be entertaining. It’s probably art. But whatever it is, it’s vibrant. It’s alive.”

Hair In 2007, the New York Public Theater approached Paulus about directing the 40th- anniversary production of the musical Hair in New York’s Central Park. Hair, billed as “The American Tribal Love-Rock Musical,” was a musical about hippies living in the East Village neighborhood of Manhattan in 1967. Paulus’s version was showered with praise for bringing the spirit of the times back to the stage four decades after the events. By 2009, Hair was Paulus’s biggest hit: it had moved to Broadway, won both a Tony Award and a Drama Desk Award for best revival of a musical, and raised Paulus’s standing as a leading director.

A.R.T. Paulus’s A.R.T. directing credits included The Gershwins’ Porgy and Bess, Death and the Powers: The Robots’ Opera, Prometheus Bound, Johnny Baseball, Best of Both Worlds, and The Donkey Show.

Source: Casewriter research; and Dmitry Kiper, “Diane Paulus,” Current Biography Monthly Magazine, May 2010, http://www.hwwilson.com/currentbio/cover_bios/cover_bio_05_10_diane.cfm, accessed July 2011.

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Exhibit 4 Profiles of Key Staff

Diane Borger joined the A.R.T. in the fall of 2009 as the executive producer for Sleep No More and

took on the full-time position of producer for the A.R.T in March 2010. Borger spent over a decade as general manager at the Royal Court Theater in London, where she produced more than 150 productions, including The Seagull, Rock ‘n’ Roll, and The Weir, which she also transferred to Broadway in New York. Previously Borger spent 13 years as deputy head of the National Theater of Great Britain’s Studio, where she oversaw the readings, workshops, and classes for some of the most prominent playwrights, actors, and directors in the United Kingdom. Borger has a Master of Arts in Theater from Ohio State University. In 2009, she returned to the U.S. to take on the mantle of producer.

Anna Fitzloff was the director of marketing and communications at the A.R.T. Fitzloff was responsible for developing and overseeing the execution of the marketing sales strategies and audience development initiatives for all A.R.T. performances, directing institutional collateral, branding, and messaging, and providing support to the education and outreach program. Prior to joining the A.R.T. team in the fall of 2010, she was the director of marketing at the Harris Theater for Music and Dance, a not-for-profit performing arts center in Chicago’s Millennium Park. Fitzloff joined the Harris Theater staff just before the facility’s completion and inaugural performance in November 2003. During her tenure, Fitzloff worked to grow the theater’s attendance to more than 125,000 patrons annually, and created seasonal campaigns, institutional messaging, and robust online sales tools. She was instrumental in the implementation of an integrated customer relations management tool, Tessitura, and leveraged the new resource by designing a consortium business model with other regional organizations. Prior to joining the Harris Theater, Fitzloff worked for Steppenwolf Theater Company, managing all aspects of the subscription department including the complete fulfillment experience for 24,500 subscribers. Fitzloff has been a guest speaker at the annual international Tessitura conference on the topic of regional consortium business models and at Chicago’s Arts & Business Council on tracking ROI and data segmentation. Fitzloff holds a BS from Indiana University School of Music. She has also completed several courses at the Center for Non- Profit Management at the Kellogg School of Management.

Source: “American Repertory Theater announces two new executive appointments,” A.R.T. press release, http://www.americanrepertorytheater.org/media-room/press-releases/american-repertory-theater-announces-two- new-executive-appointments, accessed July 2011; and casewriter research.

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