THE TUCK SCHOOL OF BUSINESS AT DARTMOUTH. Cirque du Soleil. Beyond Blue Oceans: Scaling Cirque du Soleil and the Evolution of the Business

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1 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 Entrepreneurship and Innovation Strategy

2 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 450 th 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

3 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

4 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

5 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 royalties 1. 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 parties 2. 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 Royalties can range from 0 to 25%. In the entertainment industry, a 10% royalty is typically negotiated. 2 Generally speaking, the artist receives a higher percentage than the promoter. 4

6 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 parameters 3? 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

7 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 Q Earnings Conference Call. 6

8 3 Growth and Scaling of Cirque s Business Model Cirque du Soleil started out with individual touring spectacles 5 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 ; La Magie Continue in 1986 and We Reinvent the Circus from

9 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

10 (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 Shows per year: 375 Capacity per show: 2,500 Utilization: 80-90% Ticket prices: $40-90 Capital investment: $50M Margins: Lower Yearly revenues: $52M per show Arena Shows Shows per year: Capacity per show: 8,000-12,000 Utilization: N/A Ticket prices: $ Capital investment: $50M+ Margins: Lower Yearly revenues: $N/A Resident Shows Shows per year: 480 Capacity per show: 1,800 Utilization: 90-95% Ticket prices: $ Capital investment: $15M Margins: Higher 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 instance with the MGM Mirage in Las Vegas, Cirque du Soleil designed the following deal: 9

11 MGM invests $150M in the construction of the theater and show equipment MGM pays half of the production cost ($15M out of $30M) MGM collects $12M rent and Theater and show operations are covered at cost (total of $45M) Cirque du Soleil receives a $13M creative royalty The operating profit (around $30M) is split among Cirque du Soleil and MGM. Cirque du Soleil also tried to extend its concept, unsuccessfully to the real estate market. The idea was to have real estate developers develop mix-used complexes with a Cirque du Soleil show and Cirque du Soleil inspired restaurants, spas, museums and nightclubs. However, given Cirque s lack of experience in that field, it turned out to be too hard a sell and eventually they refrained from further pursuing the opportunity. After being bruised with the attempt to decentralize operations by geography, the company has not again tried to move away from a central organization. In our assessment, since the three models (touring, arena and resident) require different kinds of skills, it would make sense to separate the organization into two: one business unit taking care of touring and arena shows and the other taking care of resident shows globally. Common competencies to all three models, like market assessment, advertising and spectacle creation would serve as shared services to the two business units. In terms of future growth Cirque du Soleil needs to explore further growth options. Based on the number of tourists and the average spending, we recommend that they seek expansion in London, NY, Sydney, Dubai, Macau (Las Vegas of the East) and LA. 10

12 Exhibit 5 Tourism activity and spending # Tourists Avg. Spending London 15,3M 804 New York 7,6M 638 Sydney 1,9M 610 Berlin 2,6M 296 Dubai 6,5M 500 Macau 3,9M 513 Los Angeles Tokyo Paris 2,7M 2,4M 8,8M Cirque should run a test to better understand the economics of having resident shows in hotels without casinos. We think it might make sense to develop such a model in cooperation with the Atlantis Palm in Dubai, due to its integrated entertainment concept. Exhibit 6 Non-gambling partnership opportunities Develop Non-gambling Partnership Model Target: Atlantis Palm in Dubai London New York Sydney (1) Have touring show at Atlantis Palm in Dubai (2) Measure the financial impact (3) Structure the deal Facilities: - Rooms: 1,539 - Restaurants: 17 - Rates: $500-$5,500 11

13 Cirque du Soleil should first have a touring show in Dubai and subsequently measure the financial impact on the hotel to gain better insights into how to best structure a win-win deal. This would then serve as a template for future expansions of resident shows outside of casinos worldwide. 12

14 4 Strategy Profile Cirque du Soleil s resident and touring/arena shows have different value chains, and as such, different risks that should be evaluated separately. Both types of venues also share a set of common risks. Resident shows: Cirque du Soleil leverages on partnerships to reduce risks and investments. It seeks out mutually beneficial partnerships with travel agencies, entertainment companies and hotels. Cirque s partnership with MGM Mirage resorts in Las Vegas increases hotel utilization by around 20% and consequently increases spending in the hotel as new guests spend on food, drinks and gambling. For Cirque, this partnership helps reduce the risks of setting-up new shows and lowers its capital investment. In terms of ticket sales, Cirque du Soleil is more similar to Broadway shows or Rock concerts than to traditional circuses. Tickets are sold several months in advance through online merchants such as Ticketmaster and Live Nation, travel agencies, and also through concierges at hotels. Touring and arena shows: to be successful with touring performances, Cirque du Soleil needs to manage different risks due to the itinerant characteristic of the production. One important risk lies in marketing and in selling tickets in advance, especially in new markets. For instance, in Brazil, tickets are sold in advance through local partnerships with American Express Brazil. The partnership provides incentives for local partners to sell out every show and for Cirque du Soleil this means it does not have to worry about adapting its marketing strategy and its own distribution channel to make sales. Another issue with the touring model is the education of the children of the casting and the general staff. To overcome this challenge, Cirque du Soleil provides private teachers that travel with each production to guarantee a good education for the children in the troupe. Some other pieces of the Cirque s strategy are common across touring and resident shows. Quality and consistency: An important point that makes Cirque du Soleil unique is the quality, the consistency and the fact that each show is unique. The fact that each production is unique, rather than a copy of one single show, makes it possible for Las Vegas to host 8 resident shows simultaneously and it allows Cirque s customers to return multiple times. 13

15 Pricing and positioning: The quality and reputation of all Cirque du Soleil productions rewarded them with the possibility to charge a premium price for their tickets. Attractions are positioned for an upscale public that is less price sensitive. Casting and staff: Cirque du Soleil has a no star policy aimed at mitigating the risk of losing well known star performers or becoming vulnerable to churn or to very high salaries. Another key point on the strategy of Cirque du Soleil is to maintain a broad diversity of the people working for each production. The combination of all these factors results in a beneficial self-reinforcing cycle that is hard to break by other players in the industry. Exhibit 7 Self reinforcing cycle of Cirque du Soleil s success Premium Prices & Margins Creativity, Talent, Partners High End Customers Custom Productions Unique Experience 14

16 Circus demand EIS Cirque du Soleil 5 S-Curves and Pricing The traditional circus business is about 200 years old and has not changed much over time. Traditional circuses have been losing market share over time to newer leisure options such as movies, television, ballet, operas, sport events etc. At the same time the demand for a Cirque du Soleil type of circus, that incorporates elements of ballet and opera, has been growing. Exhibit 8 Cirque du Soleil vs traditional circus demand S-curves Cirque du Soleil Traditional Circus Current stage Time In other words, Cirque s demand S curve peaks at a higher level than that of traditional circuses, among other things, this translates into a price premium for Cirque du Soleil performances and very high profit margins. To illustrate this fact, consider this: in 1997 there were approximately 90 travelling circuses in the US, with the majority earning between US$ 50,000 and US$ 1,000,000 a year 6. In comparison, a single Cirque du Soleil resident show in Las Vegas is estimated to earn $28M in profits per year. Because of the surge in demand created by Cirque du Soleil in this new, unexplored territory, many new competitors started to copy Cirque s business model, but so far they have not been able to fully compete with the brand that Cirque established nor with their capacity to create new and innovative performances and recruit the best artists. Several new circuses started to operate with the goal of 6 US Economic Census 15

17 Production quality EIS Cirque du Soleil delivering a similar experience but, even though they have not been as successful as Cirque du Soleil, they are surfing the wave created by the Canadian group. For instance, the Australian Cirque Oz tried to prevent Cirque du Soleil from getting a license to operate in their country. Later, after Cirque du Soleil entered the market, Cirque Oz benefited from an increase in demand created by Cirque s popularity being spilled over to the entire category. Comments by Cirque du Soleil management give us a hint about how close the company is to the plateau of their technology S curve: some managers were afraid of Cirque losing its competitive creative edge as it kept on increasing the number of performances. It was becoming increasingly difficult to both recruit new artists and come up with new performances. These comments also point out the challenge of keeping up with the expected value that their shows must deliver in terms of entertainment quality, which will ultimately drive the price of tickets, occupancy rates and sales of merchandise and DVDs. Exhibit 9 Cirque du Soleil vs traditional circus technology S-curves Cirque du Soleil Traditional Circus Current stage Time 16

18 6 Conclusion One of the most important issues regarding the future growth of Cirque du Soleil is whether it can expand and adapt its resident show model outside of the hotel & casino realm (specially Las Vegas), where it has been extremely successful. How would incentives and contract terms need to change if Cirque du Soleil was to partner with a hotel without a casino? If the company manages to overcome this challenge and is able to get it right again as it did when it first went to Las Vegas; there are many destinations that could become home to a resident Cirque du Soleil production; and in this scenario, the future of the company looks very promising. If the Cirque s resident show model doesn t thrive outside of the hotel & casino realm, there is a much more limited market left for Cirque to explore and the company will have to focus its growth on the less profitable and less stable touring performance model. Another big uncertainty is for how long can Cirque du Soleil continue to innovate. The most recent idea they brought to market, to license big names of music (The Beatles, Elvis Presley and Michael Jackson), create shows themed on these personalities and use their music was another home-run. But what comes next? It has gotten increasingly difficult to find new talent. Technical wonders, such as water stages, visual and sound effects, that Cirque has astonished millions of people with, will eventually become old news. And the audience expectations will continue to rise as a consequence of everything Cirque du Soleil has done to change this industry. There is no doubt that Cirque can overcome these challenges, but this means that it will be more difficult every time. Finally, there s competition. This is not a winner-take-all industry. Without a doubt, even if no other company is up for the challenge yet, there is definitely room for a contestant in the market. And many are trying. Competing hotels in Las Vegas that don t have access to Cirque s productions, former employees that have an insider s perspective on how the magic is created and independent companies such as the Australian Oz are certainly on Cirque s tail. Given their established brand, their proven expertise, their long-standing relationships and their solid balance sheet, Cirque du Soleil is definitely the best-prepared company to lead this industry in the next years and push its growth. But the company will face a much tougher environment and will have to prove itself again and again if it is to continue on its path of unparalleled success in the future. 17