Cirque du Soleil - assignment PDF

Preview

Summary

assignment...

Description

THE TUCK SCHOOL OF BUSINESS AT DARTMOUTH

Cirque du Soleil Beyond Blue Oceans: Scaling Cirque du Soleil and the Evolution of the Business Morimura, Weiss, Guillen, Marinho, Nakayama, Rodrigues Nov. 2011

Entrepreneurship and Innovation Strategy

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

Beyond Blue Oceans: Scaling Cirque du Soleil and the Evolution of the Business

1

Introduction

Cirque du Soleil, or Circus of the Sun in English, was founded in 1984 by two street performers Guy Laliberté and Daniel Gauthier in Montreal, Quebec. Their vision was to break away from the traditional circus of animal acts while maintaining the cachet of its travelling Big Top and spectacular acrobatics. Cirque’s first production Le Grand Tour du Cirque du Soleil toured successfully from 1984 to 1987 with the help of a $1.5 million government grant as part of the 450th anniversary celebrations of Jacques Cartier's discovery of Canada. In 1987, Cirque bet on its fate by participating in the Los Angeles Arts Festival with literally just enough money for a one-way trip from their hometown. Their international debut turned out to be a resounding success. At its humble beginnings, 73 people worked for the local entertainment group, but by 2007, they had grown dramatically to employ 4,000 people from 40 nationalities and generate $700 million in annual revenue; putting the enterprise value at just under $2 billion. Currently, Cirque du Soleil presents 12 resident shows and 12 touring shows scattered across the United States, Canada, and diverse countries in South America, Europe and Asia (Exhibit 1). Exhibit 1 – Cirque du Soleil’s presence around the globe

1

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

Each Cirque du Soleil show is a synthesis of entertainment from around the world, with its own central theme and storyline. They “reinvented” the circus by mixing street performances with creative arts, live music, and theatre. The new value they have created allowed for a very attractive and highly successful business model. Cirque’s revenue generation model is significantly different from the traditional circus and other shows which take place in civic arenas and sports stadiums. The show derives the great majority of revenues from ticket sales, though sponsor partners and concession sales also contribute to profit margins. By providing sophisticated entertainment,

Cirque du Soleil is able to sell their tickets at

a substantially higher price, in line with major theatre or opera tickets. While the audience for the traditional circus performances was almost all families with free or discounted tickets for children, seats for Soleil shows are generally sold at face value. For example, Vegas-based “O” sells the most expensive seats at $110, but remains one of the hardest tickets to get. Shows are regularly sold out and have the highest seat occupancy rate consistently at 85-95%.

2

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

2

Ecosystem

The Cirque du Soleil ecosystem, as shown in Exhibit 2, consists of a series of players that begins with the show itself and terminates with the audience that watches it. Exhibit 2 – Cirque du Soleil’s ecosystem

Cirque du Soleil is an organization that is unwilling to compromise quality or artistic integrity, therefore, the company does not outsource any activity regarding the creation and development of a particular show. They are responsible for funding, designing, creating costumes, recruiting and training performers. These artists are drawn to Cirque du Soleil without the promise of having their own show, but with the possibility to be part of a multicultural, high quality and big scale production where they can set a career and have artistic guidance. In order to get the resulting show to the audience, Cirque has to consider two different paths: through Event Promoters or through Partnerships. Event Promoters function as the intermediaries that help to put on scene the 12 touring shows on the road today. Cirque du Soleil has two different ways to negotiate the deals with a concert promoter, and thus, the costs and risks taken by the promoters vary between these two options.

3

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

The simplest is the fixed show fee formula, in which the partner assumes responsibility for all costs and revenues and pays Cirque a pre-established, fixed amount for the show. This option eliminates all the demand risk for Cirque. In this scenario, the concert promoter is fully responsible for obtaining the venue, all the logistics issues, pricing of the event or tour and securing proper sponsorship and advertisement for the show. The most common formula used, however, is the “Rock & Roll” model, under which the profits are shared, with a percentage going to the artist (i.e., Cirque) and the remainder going to the promoter. Typically, a percentage of box office revenue and merchandise sales is also paid to the artist in the form of royalties1. The costs incurred by each party are deducted from the remaining gross sales and the profits are divided as per the agreement signed between the two parties2. Another relevant cost for the event promoters is the opportunity cost of their time and money to fund an event or tour from the Cirque du Soleil instead of another show or concert. Also, in both options, risks for event promoters rely on the probability of having revenues higher than costs, or profits, which are largely determined by the success or audience attendance to the shows. On the other hand, the benefits for the event promoters are the potential profits of the event or tour and long-term relationship with Cirque du Soleil. Because Cirque has proven to produce profitable and highattendance events worldwide, it has become a highly demanded event for promoters; therefore, if a concert promoter complies accordingly with the requirements and helps for the event or tour success they could increase the chance to secure promotion of further shows. Between the event promoters and the audience there are still three important players in the Cirque du Soleil ecosystem. These are the venues owners, the ticket sellers and the event sponsors. All these three players are usually contacted by the event promoters and have their costs, risks and benefits of having an event from the Cirque du Soleil similar to those costs, risks and benefits of having a different event such as music concert, theatrical play or other entertainment event of the same magnitude (considering both regular theatre and arena shows made possible through a partnership with Live Nation). These players don’t face any exceptional risk and don’t benefit from unique opportunities by

1 2

Royalties can range from 0 to 25%. In the entertainment industry, a 10% royalty is typically negotiated. Generally speaking, the artist receives a higher percentage than the promoter.

4

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

dealing with a Cirque du Soleil production, for them, Cirque represents only another event to their business opportunities. Partnerships are the second path on which Cirque du Soleil relies to make its shows available to the audience. Cirque du Soleil partnerships with big entertainment corporations have helped them to have 12 resident shows currently playing around the world. In order to accept a partnership, Cirque du Soleil needs to verify that the partner and the proposed show comply with the following criteria: 

Is there a creative challenge?



Can the partnership be sustainable in the long run?



Is there a good return to be made?



Will the partner adhere to Cirque’s social responsibility parameters3?

The most important Cirque du Soleil partner is the MGM Mirage. The partnership was based on an “open book” policy, where each partner could ask to review the books of the other. Currently, this partnership controls 7 Cirque du Soleil resident shows. The costs for the MGM Mirage to take part in this partnership were the costs to construct the theaters and purchase all the equipment needed plus 50% of the production costs of each show presented in their hotels. Other costs include the show operating expenses charged by Cirque du Soleil that include artist compensation, costume and artistic supply maintenance, show management, and artistic follow-up. MGM Mirage also needs to pay box-office royalties for the creative concept to Cirque du Soleil. MGM Mirage mitigated the risk of competition by stipulating since the initial deal that they (Mirage Resorts at the time the deal was made) would remain the exclusive house of Cirque du Soleil in Las Vegas. This clause shifted some of the negotiating power away from Cirque du Soleil and brought MGM Mirage unimaginable dividends as Cirque became such a big success in the following years. However, they face the risk of having to build a fully equipped theatre customized for a particular show. Even in cases where the theatre could be used by any other show, the new show would have to adapt to the

3

HBS “Cirque du Soleil—The High-Wire Act of Building Sustainable Partnerships” Casewriters’ interview with François Macerola, Montreal, May 2008

5

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

theater’s built infrastructure unless new investment is made. Above all, the greatest risk this partner faces is the same as that faced by the event promoters: the occupancy rate of the shows. In terms of the benefits of partnering with Cirque du Soleil, as mentioned before, MGM Mirage had the exclusivity in Las Vegas, once the shows were in operation, box-office receipts, net of all show and theater expenses, were split 50/50. Also, MGM Mirage operates the theaters and, therefore, charges the cost of most technicians, box office, ushers, cleaning, general facility management, and utilities. MGM also charges a box-office rent to cover its initial investment. Another benefit is the drawing power of Cirque du Soleil and its effect on ancillary activities at the casinos as it draws not only guests from the host casino hotel, but also from other hotels who consequently increase the traffic and money left in the casino (bets, food and drinks). An example of this is the Beatle’s Love opening at The Mirage in 2006, where Bobby Baldwin (Mirage Resorts second in command) reported to Wall Street analysts in a 2005 fourth-quarter-earnings conference call that “the EBITDA impact of the show, the new Beatles show, and the expected traffic from that show would be calculated at 12.5 million for 2006 and 25 million in EBITDA impact for 2007 and beyond.”4 Other important partners include Disney (Orlando & Tokyo), Kodak Theatre (Los Angeles) and Las Vegas Sands Corporation (Macao), where Cirque du Soleil has been able to add more resident events to their portfolio, covering different geographies and securing partners for the long-term. Audience is the last player of the Cirque du Soleil ecosystem. The typical audience of this type of show is usually people with relatively high income that is willing to pay enough to see a high quality show. Their costs regarding the Cirque du Soleil are just the price of the tickets and the opportunity cost of not going to a different show. As Cirque du Soleil shows are not considerably priced higher than other high quality shows available in the surrounding areas (e.g. Las Vegas), Cirque has continuously experienced a high demand for their presentations, also caused by good impression and impact that the shows leave on the audience. Therefore, the risk for the audience is just the risk of having a bad experience with the show, or that the show did not fulfill the audience’s expectations. However, this risk is easily mitigated by looking in advance at the show and acts descriptions that can be found at Cirque du Soleil webpage. Finally the benefits for the audience are the increased amount of options of shows available and also the way in which Cirque du Soleil put the bar higher in terms of quality and creativity of shows.

4

MGM Mirage Q4 2005 Earnings Conference Call.

6

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

3

Growth and Scaling of Cirque’s Business Model

Cirque du Soleil started out with individual touring spectacles5 in the mid-1980s that that lasted about one year and toured selected Canadian cities. After that, they came up with their first multi-year touring show that travelled in North America and 2 European cities. In the second half of the 1980s Cirque had an average of about 270,000 spectators per year. Toward the end of the 1980s the company had several “macro options” to try to grow the business: 

Expand the duration of an average tour



Expand the number of shows in a tour



Upgrade the tour infrastructure to support more spectators



Increase prices



Add more shows



Build partnerships to share risk & investments

The two prime avenues for growth that Cirque chose for the 1990s were to add more shows and to try to expand the number of shows in a tour. This essentially meant that travel time between shows needed to be minimized. Thus, they would have touring shows travelling within the US, within Europe and within Asia. As a result of this policy, Cirque created three separate headquarters and P&Ls (North America, Europe and Asia) and decentralized management. However, management soon found out that applying the same concept across these three continents was not working well. The show in Asia, for instance, was operating at about 65% capacity, while shows in the US were at around 90% capacity. The Asian management tried to cut the pay of performers to meet its profitability targets, which lead to increasing dissatisfaction amongst artists. Ultimately, the company decided to re-centralize the headquarters back to Montreal, even though this would lessen the managerial urgency in developing overseas markets. From then onwards Cirque used a mix of all the options cited earlier to grow.

5

‘Le Cirque du Soleil’ from 1984-1985; ‘La Magie Continue’ in 1986 and ‘We Reinvent the Circus’ from 1987-1990.

7

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

Exhibit 3 – Cirque du Soleil’s growth across the decades Firm Value

2000s 1990s

1980s

• 1 touring show • 5 year tour • 270,000 spectators per year

• • • •

5 touring shows 1-2 resident shows (no travel) ~8 year tours 1-4M spectators per year

• • • • • •

6 touring shows 2 arena shows (bigger venues) 9 resident shows (no travel) 1 seasonal resident show 12 year tour 6-10M spectators per year

Time

Even during its phenomenal growth in the late 90s, Cirque deliberately chose a strategy of exclusivity, meaning that they resisted any requests for copies or duplications of its productions. They also chose not to outsource any activity, unwilling to compromise on either quality or artistic integrity. While these strategies proved to be at the heart of Cirque’s success, they also led to exponential complexity and expansion of the organization, and eventually exhaustion among the “star” players. Since its inception Cirque du Soleil relied on few “star” creators, like Franco Dragoni, who together with other important creators ended up leaving the company in the late 1990s due to the stress of their pivotal roles and increasing number of parallel productions being created. Cirque du Soleil then realized it had become overly dependent on a few key creative resources. In a successful attempt to move away from its creative “prima donnas”, Cirque formalized its creative process to ensure that creators could rotate between functions and that every new production would have the “Cirque du Soleil feel” to it, even if hundreds of creators and artists had worked on it. Cirque du Soleil had to recognize that its “touring model” had its limitations. Even if tour planning was optimized to reduce travel, a few weeks would be lost every year due to travel. Thus, Cirque du Soleil experimented with three different models in parallel: (1) touring shows, (2) arena shows that travel and 8

EIS – Cirque du Soleil Nahomi Morimura, Fabio Weiss Chaves, Rodrigo Guillen, Tulio Marinho, Heitor Nakayama, Alexandre Rodrigues

(3) resident shows that do not travel. As the exhibit below shows, resident shows are more profitable since they require less investment, and allow for more shows per year at higher ticket prices. Touring and arena shows account for about 40% of Cirque du Soleil’s revenue, while resident shows account for around 50%. The remaining 10% of revenues come from merchandise sales. Exhibit 4 – Cirque du Soleil’s revenue metrics by show type Touring Shows

Arena Shows

Resident Shows

 Shows per year: 375

 Shows per year: 270-310

 Shows per year: 480

 Capacity per show: 2,500

 Capacity per show: 8,000-12,000

 Capacity per show: 1,800

 Utilization: 80-90%

 Utilization: N/A

 Utilization: 90-95%

 Ticket prices: $40-90

 Ticket prices: $70-150

 Ticket prices: $100-150

 Capital investment: $50M

 Capital investment: $50M+

 Capital investment: $15M

 Margins: Lower

 Margins: Lower

 Margins: Higher

 Yearly revenues: $52M per show

 Yearly revenues: $N/A

 Yearly revenues: $100M per show

Some of Cirque’s key competencies permeate all three models, for instance market assessment, advertising and spectacle creation. And yet, even the market assessment differs slightly across these three models. For touring shows, the market assessment reviews whether there is sufficient demand, how the show would fit into the calendar and how much logistical complexity is added (think material movements, customs, local infrastructure, etc.). For resident shows, the market assessment also reviews whether there is sufficient demand, and more importantly how Cirque du Soleil’s impacts on partners can be leveraged in contract negotiations (in Las Vegas Cirque du Soleil shows have resulted in an increase of 20-23% in hotel attendance every time a new resident show opened). Other key competencies are not comparable across shows. For instance, touring shows and arena shows require very advanced tour planning and partnerships with locals (especially when entering new markets). Resident shows on the other hand require a more rigorous and in depth screening of potential partners (i.e. does the hotel have the long-term prospects of selling out shows for many years). More importantly, since resident shows require long-term partnerships, the partner assessment needs to go way beyond a pure financial exercise. One very effective way Cirque found to test the commitment of partners is to ask partners to fully fund the construction of new venues. For in...