by R. E. Coleberd
Introduction
My presentation, "The Economics of Pipe Organ Building: It's Time to Tell The Story," is the viewpoint of an economist, not a builder or a musician. It reflects my fervent conviction that organbuilders must be aware of the economic parameters which shape their business. I also strongly believe that builders must communicate the unique dimensions of their age-old craft to their constituents and clientele. This, in my judgment, will contribute to the support so essential for their well-being in the challenging years ahead. My goal was to present some facts and figures for the builders to think about, to discuss with their colleagues, and perhaps to use in presentations to prospective clients. As one builder has remarked: "Organbuilding is an anachronism in the American economy."1
Assumptions
We begin with certain assumptions which are critical to the discussion. First, we call attention to the fact that no two builders are alike. Each builder has his own vision of his enterprise, his product and his market. We also recognize that APOBA is a far more diverse group today that it was thirty years ago when it was comprised primarily of comparatively large firms building non-mechanical instruments.
Second, as an economist, I define organbuilding as an industry. By industry we mean a group of firms and suppliers engaged in building the instrument and its components on an ongoing basis. Organbuilding is categorized by the US Department of Commerce in the Standard Industrial Classification seven digit code 3931-211. In building a one-of-a-kind product, organbuilding differs radically from the traditional view of industry as comprised of a handful of relatively large firms manufacturing automobiles, appliances, pharmaceuticals and computers. Therefore, because of the unique highly individual and artistic nature of organbuilding as an age-old craft, some builders, perhaps particularly small shops, view organbuilding as no more an industry than sculpting, portrait painting, or even piano concertizing.
Third, organbuilding is a business. The firm is subject to business realities and must conduct its affairs in accordance with them. These include balance sheet and income statement guidelines and property and contract requirements. Unfortunately, some builders, perhaps those with what one prominent executive described as a "cavalier" attitude, sometimes don't pay careful attention to these realities. We also assert that organbuilding is subject to broad economic forces which include wage rates in local labor markets and overall market determined prices for materials and components. In addition, organbuilding is critically influenced by the general economic climate of depression and inflation as history so forcefully demonstrates.
Fourth, in economic parlance, the structure of the industry is a quixotic example of two types of competition. Organbuilding is and always has been a highly competitive industry. When measured by the number of firms and ease of entry it is similar to textbook examples of pure and perfect competition. In a survey I made for a paper years ago entitled "The Place of the Small Builder in the American Organ Industry," one builder, Fritz Noack, reported that his capital cost for entering the trade was $200.00.2 Theoretically, any builder can build the same stoplist, pipe scales and casework. In practice, however, sharp differences exist between builders and instruments. Therefore, in the nature of the product, a specification good in which no two instruments are alike, organbuilding is more like a product differentiated oligopoly. Competition reflects many factors: price, windchest action, level of workmanship, prior installations, reputation, endorsements and status seeking by the organist and the buyer.
Fifth, the concept of market segments is useful. Churches, educational institutions, theaters, private dwellings, lodge halls, and funeral homes have been identifiable markets for pipe organs over the years. Each of these markets has its own demand determinants. Membership and giving would be key determinants for the church market. For concert halls and art museums, major private gifts would be all important. The builder has no direct influence on these demand determinants which critically shape the outlook for his business.
Sixth, we acknowledge that some builders don't recognize themselves as part of an industry insofar as there are interests and concerns common to all participants. Macroeconomic demand determinants don't interest them. Nor is the idea of competition, in a broad sense, viewed as particularly relevant to their enterprise. Their clientele wants their instrument, not just an organ. In an analogy, people don't go to a piano recital, they go to hear Andre Watts. This builder's clientele is perhaps most often a individual, not a committee, and quite likely a prominent academic who will make the choice of builder. Most important, funding is taken for granted. It is presumed that the buyer is authorized to pay whatever price is required to obtain the chosen instrument.
This phenomenon reflects the close symbiotic relationship between the instrument, the performer, and his employer. The instrument is what accords status to the organist's church or school and himself, and is the way he obtains recognition among his peers. It is his ego alter. This has always been true and always will be. It was, no doubt, the case with the Hooks, certainly so with Roosevelt, Skinner, Aeolian Skinner and Holtkamp. The role of brand preference among competitively sensitive and socially conscious pipe organ buyers was supremely illustrated with WurliTzer in the theater market and Aeolian in the mansions of the wealthy. Those familiar with my articles in The Diapason know that I have developed and continue to reiterate the theme of invidious comparison and competitive emulation (Thorstein Veblen) as a very real phenomenon in the organ marketplace.
Economics
The salient factor in organbuilding and the one that distinguishes it as an industry from all others is the labor intensive nature of the product. This overriding factor largely explains the postwar history of the industry and will determine its future. We would argue that 80 percent of the value added in building a pipe organ is labor. Value added by manufacture is the difference between the cost of of inputs--raw materials, semifinished components and labor (including fringe benefits)--and the sale price. Industries with sixty percent or more value added by labor are considered labor intensive. Among them are products of the so-called "needle trades"--for example, robes and dressing gowns, 64 percent labor and curtains and draperies, 68 percent labor. For leather gloves and mittens the value added by labor is 84 percent. Aircraft and shipbuilding are other obvious examples of very high labor input.3
In contrast, capital intensive and technologically advanced industries, enjoy low labor costs even with high wages and benefits. Examples of low labor cost are: Primary Copper, 18 percent; Electronic Computers, 27 percent; and Household Appliances, 25 percent.4 The implication of high productivity, high wage industries for organbuilding is that they determine the wage structure of the national as well as the local economy. In a full-employment economy such as ours, organbuilders face enormous pressures to pay competitive wages or face high turnover with the resulting disruptions, delays and cost overruns. The high cost of organbuilding mirrors the labor input and wage rate; when wages go up, costs go up in lock step. The wage pressures of a full employment economy are a direct threat to cost containment in organbuilding.
The availability of low-wage labor explains why the Möller Company in Hagerstown, Maryland was able to operate for decades as America's largest builder. With 350-400 factory workers, Möller shipped at least one complete instrument every working day in the 1920s and again in the 1950s. Hagerstown, out on a shelf in western Maryland, was bypassed by prosperity and suffered for years from relatively high unemployment. Möller, therefore, could obtain all the workers it required at comparatively low wages. Conversely, no organbuilder could have operated in Detroit or Pittsburgh, because they could never have paid the union wages of auto workers and steel workers and remained competitive.
Organbuilding is similar to the performing arts in the preponderance of labor cost to total cost and the absence of productivity increases. A widely-acclaimed study, Performing Arts: The Economic Dilemma, disclosed that the share of salaries of artistic personnel to total expenditures was 64% for major U.S. orchestras and 72% for the London Symphony Orchestra.5 The principal conclusion of this authoritative work, commissioned by the Twentieth Century Fund and written by Professors Baumol and Bowen of Princeton University, was that the arts operate within the framework of a complex economy. This coupled with the inability to achieve a sustained increase in productivity makes even higher costs an inevitable characteristic of live performance. So it is with organbuilding.
The predominant role of labor input in organbuilding is illustrated in Table 1 where we compare the number of man-hours necessary to fabricate representative components of a pipe organ with those required to manufacture an automobile. For pipe organs, four key components: an 8' Diapason, 61 pipes, voiced, an 8' Trumpet, 61 pipes voiced, a 16' Bourdon, 32 pipes, voiced, and a pitman action windchest of five stops are portrayed. The contrast is indeed striking.
Rising Cost
The second dominant characteristic of organbuilding is the persistent rise in cost over time. This is illustrated for the key components over the last twenty years in Table 2. More important, when we compare the rise in cost of organ components to the producer price index for the whole economy, the increase is greater for organbuilding as shown in Table 3. This argues that in the event inflation reappears in the US economy, the cost of organbuilding will increase at a higher rate than reflected in the producer price indexes.
What are the implications of rising costs for organbuilding? Fifty years ago, in 1948, you could buy a three-rank Möller Artiste for $2975. Today, you could scarcely buy one set of pipes below 4' pitch for this amount of money. Using the church market as a point of reference, will there be a pipe organ industry ten years from now, or twenty years down the road? To answer this question we hark back to our major premise that when church giving is rising in proportion (or greater) to the increase in income generated by a growing economy, the market scarcely blinks at rising pipe organ costs. This relationship underscores the ongoing fact that it isn't the price of an organ that is the primary determinant of demand, but income, i.e., having the funds to buy them.
In 1900 the price of a Hinners tracker organ was about $125 per stop. Recall that with a force of 90 workmen in Pekin, Illinois, Hinners was building three instruments a week. Remember also that per capita real income in agriculture between the Panics of 1897 and 1907 was the highest in history. Farmers paid less for what they bought and got more for what they sold. With their short-term living standard satisfied, they pumped rivers of cash and pledges into the churches who bought Hinners, Barckhoff, Felgemaker and Estey organs. These were four builders who, with standard specifications, capitalized on this huge rural market, what we have called the commodity segment of the market. By the end of the Hinners era, ostensibly the tracker era, this firm counted over three thousand instruments in more than 40 states and in several foreign countries.6
The Electronic Organ
The critical confluence of cost and revenue in the demand for pipe organs is illustrated in the recent history of the electronic organ. Another major premise in this discussion is that the electronic church organ is a substitute for the pipe organ. To verify this hypothesis we obtained the annual sales of the Allen Organ Company for the last twenty years and plotted them against the cost of our key pipe organ components as shown in Figure 1. The results are astounding! An almost perfect fit, a statistician's dream; you could scarcely ask for a closer correlation. The demand for the electronic church organ as a function of the price of a pipe organ illustrates the economist's concept of cross-elasticity of demand. The higher the price of a pipe organ the greater the demand for the electronic substitute. Furthermore, based upon these correlations, we could write a regression equation that says if this relationship holds, for every dollar increase in the price of a pipe organ there will be a certain increase in the demand for the electronic church instrument.
Church Giving
If we accept the premise that the electronic church instrument is a substitute for the pipe organ, we perhaps can argue that the real culprit is the failure of church giving to keep pace with pipe organ costs in recent decades unlike earlier periods. Statistics compiled by empty tomb inc. for 27 Protestant denominations for the period 1968-95 and published in "The State of Church Giving," reveal that church giving has "fallen" dramatically.7 To be sure, in a growing economy per capita personal disposable income has increased as have contributions for congregational finances. However, the percentage of income contributed has declined steadily and the increase in dollar giving is nowhere near the year to year increase in income. Whether measured by the percent of income given in 1968 or the yearly income increase, the amount given for congregational finances would have been $2.5 billion more in 1995 if these percentages had held. Two and a half billion dollars would buy a lot of pipe organs. If we view church giving within the household budget as a concept of market share, we see that the collection plate has taken a back seat to other expenditures: sporting goods, toys, pizza, and travel, among others. John and Sylvia Ronsvalle of empty tomb point out that in 1992, church giving was only 23 percent of total leisure spending. They attribute this to the pervasive hedonistic consumer-driven culture of our time.8
The implications for the church market from the giving levels we have just illustrated would appear to be ominous. If we assume costs will rise and we couple this with the diminishing rate of church giving, we will then reach a point at which, theoretically, the price per stop for a pipe organ will cause the demand to drop off sharply, if not virtually disappear. What is this point? We don't know, but we could be getting close to it. Can we say there is no demand at $30,000 per stop; perhaps not even at $25,000 or $20,000?
Not all builders believe the figures for church giving are relevant to the demand for pipe organs or that projected increases in price per stop will spell the end of the industry. They view the King of Instruments not as a utilitarian device to accompany church services but as an art form akin to a fine painting. Thus a "high end" market will continue to exist because sophisticated, discriminating--and wealthy--individuals will always select the instrument of the ages, in the same spirit in which they build their art collections--without regard to cost. These builders hold that the industry, now numbering many small shops in addition to the few larger builders, has adjusted and stabilized to this level of output, as evidenced by the demise of Möller, a builder for the commodity market which has now been almost totally preempted by the electronic instrument. A good illustration of this new paradigm is the firm of Taylor and Boody in Staunton, Virginia who by choice build only thirty to thirty-five stops per year.9
Pipe Organ Imports
Imported instruments have been a significant part of the American pipe organ scene since WWII. Large instruments by Rieger, Flentrop and Von Beckerath plus smaller ones from a host of other European builders were the cornerstone of the tracker revival in this country. They were often viewed as a status symbol by the organist profession who proclaimed "if it's foreign it's finer." The principal source of offshore instruments today is our northern neighbor Canada. The sensitive issue of Canadian imports, based primarily on the insurmountable cost advantage afforded the Canadian builder by the exchange rate, is not a new one. In February, 1931, Major Fred Oliver, veteran of the Canadian Expeditionary Force in WWI and husband of Marie Casavant, acknowledged before the US Tariff Commission that Canadian-built organs were less expensive than American instruments. He argued that clients bought them because they liked them better than the domestic product. Could they have liked them better because they were less expensive?
For many years organ imports, including those from Canada, were not a problem. American builders were busy with healthy backlogs and the Canadian share of the market was unobtrusive and not growing. Nonetheless the threat was lurking and today, in the author's judgment, it is a major one. Based upon the dollar value and the number of instruments imported from Canada in the past two decades, I, as an economist, view the Canadian competition as a significant threat to the American organ industry. I also feel strongly that the US buyer should be apprised of the implications of a decision to buy a Canadian-built organ.
Foreign trade statistics published by the Bureau of the Census, US Department of Commerce show that in the 1980s Canadian builders exported an average of 43 instruments per year to the US, their primary market, valued at $3.8 million per year and representing two-thirds of total imports. For the eight year period 1990-97, Canadian imports averaged 19 instruments per year valued at $4.2 million per year. In the most recent years the numbers are: 1995, 21 instruments, value $5.2 million, 76 percent of total imports; 1996, 24 instruments, $4.5 million value, 75 percent of all imports; and 1997, 22 instruments, $5.1 million total value representing 70 percent of total foreign-built organs. Table 4 portrays the value of Canadian imports in US dollars, as declared at the point of entry, for the years 1975-97 and the percent of dollar imports accounted for by Canada and Netherlands-Germany. The dollar figure is a better indicator of the import threat than the number of instruments for the same reason that the number of voiced stops is more representative that the number of instruments in that it more accurately reflects industry activity. One instrument of 100 stops is in terms of output larger than eight instruments of ten stops each. These figures understate the impact of Canadian imports which significantly influence the price structure of the organ market, making it difficult for domestic builders to compete, especially for the larger and more prestigious contracts.
The Canadian import threat exists, primarily perhaps, for the larger firms in non-mechanical action and in situations where a price sensitive committee, as opposed to an individual, often makes the decision. Conversely, some builders, chiefly smaller firms with a guild versus business mentality, do not view Canadian competition as a threat. To them price advantage is not a pivotal factor in choice of builder in situations where the instrument and the builder are highly individualized in the unique and incomparable nature of their work.
The problem results from coupling the 80 percent labor cost of organbuilding with the Canadian dollar which has hovered around 70 cents in recent years and fell to 63.7 cents in August, 1998. If we assume that a representative wage in organbuilding in the US today is $12.00 per hour, for an American builder to compete with the 70 cent Canadian dollar his workers would have to take a pay cut to $8.40 per hour. When committees elect to purchase a Canadian-built organ this is precisely what they are asking the hapless American workers to do. Perhaps committees should ask themselves whether they would be willing to work for $12 an hour, let alone $8.40? Furthermore, it is unethical and patently unfair for a committee to accept an offer from an American builder to spend hundreds of dollars flying them across the country to see installations, only to lose the contract to a Canadian builder solely on the basis of price.
Keep in mind also that the Canadian market is hermetically sealed against the American builder. Except for one project by Schoenstein, it has been impossible for an American builder to get work in Canada. This is attributed to the cultural protection issue. Canadians are paranoid about the "invasion" of their culture by American media and have taken steps to block American magazine sales and satellite TV programming in direct violation of the rules of the World Trade Organization. One government official hysterically compared stores selling satellite dishes to dope pushers.10 Perhaps if the Canadians are so touchy about their culture we should return the favor and talk about protecting our rich culture in pipe organ building; the legacy of Hilbourne Roosevelt, Ernest Skinner, Donald Harrison and Walter Holtkamp!
The author is not alone in his analysis of the present and future impact of Canadian competition on the outlook for American organbuilding. Erik Olbeter, project director of the prestigious Economic Strategy Institute in Washington, D. C. agrees that US firms cannot indefinitely absorb the exchange rate differential in the labor cost basis of organbuilding. He adds that since no US builders have been able to sell into the Canadian market, this is a powerful argument in support of the domestic firm.11
There are, of course, two sides to every question. Canadian builders enjoy a positive image, a distinguished history and can point to many fine instruments in this country. Therefore, if the client elects to recognize these factors in choosing a builder and to disregard the implications for American builders, that is their business. But at least they ought to be aware of what they are doing!
Predictions
In conclusion, let me turn to my crystal ball, cloudy though it is, and make some observations and predictions about pipe organ building in America in the coming years. Remember that economists can't resist the temptation to forecast; it's a congenital defect in the profession. You are free to disagree with me and I acknowledge that many of you will elect to do so.
First, pipe organs will always be built, and organbuilding activity, in its many forms, will continue indefinitely. The level of output and the composition of the industry is impossible to predict and I wouldn't hazard a guess. Long-established major builders have previous instruments to rebuild, update and relocate. Small tracker shops may build one instrument a year. Builders of all sizes may move into service work to maintain cash flow while awaiting an order for a new instrument or a rebuilding project. If the industry is defined by total employment this will include suppliers and service firms.
Second, it is clear to me as an economist that a reversal of the persistent decline in church giving is critical to the outlook for the industry. As the King of Instruments, the pipe organ must be recognized as a symbol of the broader dimensions of culture throughout the ages, bridging nations and generations, an essential component of religious symbolism vital to the experience of corporate worship, and the object of sacrificial devotion by churchgoers who stand in opposition to the hedonistic consumer-driven culture of our time. Forbes Magazine, highlighting the resurgence of popularity of mechanical watches over quartz watches pointed out: "An unscientific survey of several dozen watch experts produced one common thread: mechanical watches have soul, have workmanship, have intrinsic value that cannot be found in quartz timepieces. It is this fact, and not a Luddite, reactionary longing for the old days, that makes these watches so popular."12 So it is with the pipe organ. Like a diamond, the high cost of a pipe organ is what makes it so distinctive and so valuable.
Third, the perception of an organ today in the eyes of many churchgoers exacerbates the cost problem. The instrument has to be large and, therefore, expensive. A pipe organ must exert a commanding presence in the sanctuary as reflected in the console of a nonmechanical organ, one with three or more manuals and lots of drawknobs, and in the totality of a mechanical instrument. Above all, the sound must project power, majesty and grandeur, as evidenced by the popularity of the 32' pedal reed today.
Fourth, each builder faces a management challenge of how large an operation his market will sustain and the make-or-buy decision with every project. On an emotional level the builder must continually ask himself whether he is a businessman or an artist and how to balance these all too often conflicting interests. Above all, he must resist the temptation to cut prices to stay in business. This is the road to ruin. As they say in the ocean shipping business, those who live by the rate cut die by the rate cut. Organbuilding must live in the real world of cost and revenue; there are no "sugar daddies" out there willing to put money into a failed pipe organ business because of the romance of it.
Fifth, supplemental electronic components are here to stay, primarily because they are the only way to keep costs down. The danger, and perhaps it is a real one, particularly for small instruments, is that the electronic organ comes to define the pipe organ whereas it must be the other way around.
Sixth, the Canadian dollar will remain weak for many reasons. Canadian organ imports will perhaps grow and command a greater share of the market for new instruments. In the author's judgment, the current import levels already pose a serious threat to the future of the American industry.
Seventh, the greatest threat to organbuilding in the US, or anywhere, is inflation. I have already suggested that with current levels of church giving there is no market at $30,000 per stop. If our economy were to experience three to five years of double-digit inflation, organbuilding on a sustained basis would largely disappear. Church contributions would continue to erode as our aging populace struggled to make ends meet, the demand for social services by churches would rise, and the electronic organ would preempt the church market. Milton Friedman, the widely-quoted economist and celebrated Noble laureate told Forbes Magazine in December, 1997 that he expects a period of much higher inflation sometime in the next ten to twelve years. Let's hope Friedman is wrong.13
Notes
1. Telephone interview with George Taylor, March 15, 1998.
2. Coleberd, Robert E. Jr., "The Place of the Small Builder in the American Organ Industry," The Diapason,Vol. 57, No. 12, November, 1966, p. 45.
3. 1995 annual survey of manufactures, US Department of Commerce, Economics and Statistics, Bureau of the Census, Table 2, Statistics for Industry Groups and Industries: 1995 and 1994, pp. 1-10--1-27.
4. Ibid.
5. Baumol, William J. and William G. Bowen, Performing Arts--The Economic Dilemma, Copyright 1966, The Twentieth Century Fund, Inc., First M.I.T. Press Paperback Edition, August, 1968, Second Printing, December, 1977, p. 145.
6. Coleberd, Robert E. Jr., "Yesterday's Tracker--The Hinners Organ Story," The American Organist, Vol. 43, No. 9, September, 1960, pp. 11-14.
7. Ronsvalle, John L. and Sylvia Ronsvalle,The State of Church Giving through 1995, Champaign, Illinois, empty tomb inc., December, 1997, passim.
8. Table 18: "Combined Per Capita Purchase of Selected Items Compared to Composite Per Member Church Giving in Constant 1987 Dollars" in John L. Ronsvalle and Sylvia Ronsvalle, The State of Church Giving through 1994, p. 61.
9. Taylor, op. cit.
10. Olbeter, Erik R. "Canada's Cultural Hangup," Journal of Commerce, April 3, 1997, p. 6-A. See Also "Cultural Struggle" The Journal of Commerce, July 2, 1997, p. 8-A. Craig Turner, "Canadian Culture? Whatever It Is, They Want To Preserve It," Los Angeles Times, March 30, 1997, Section D, p. 1, 12. Joseph Weber, "Does Canadian Culture Need This Much Protection?," Business Week, June 8, 1998, p. 37.
11. Telephone interview with Erik Olbeter, Economic Strategy Institute, Washington, D.C., June 6, 1997.
12. Powell, Dennis E., "A Glance At Some Of The Timepieces That Made History," Forbes FYI, November, 1997, p. 152.
13. "Milton Friedman at 85," Forbes, December 29, 1997, pp. 52-55.