Average Is Over VIII: Full Stacks On Deck
Welcome back to my speculative economics odyssey. As a refresher, I spent the previous leg of this journey explaining my long-term pessimism about online middlemen such as artnet, Artsy, and Amazon Art, all of which simply offer a third party e-commerce platform to established gallerists or dealers rather than enabling artists to sell directly to collectors–a role filled by makers’ emporiums like Saatchi Art, which I’m generally more bullish on.
The argument in favor of the online middlemen is as simple as it is flawed. In theory, their status as well-known, easily accessible hubs for the (allegedly) art hungry world at large increases their partner galleries’ odds of being serendipitously discovered by a broad tranche of new collectors. Acquisitions by these new collectors, in turn, are supposed to boost the partner galleries’ revenues beyond the limits attainable if the galleries were to operate their own lower visibility, independent e-commerce arms instead.
But this business plan falls apart like a budget space shuttle once it tries blasting its way up to the market’s highest altitudes. Why? Because the early stage clientele most likely to “discover” art on a quasi-encyclopedic, mass-market platform like Artsy is unlikely to live in the high to ultra-high net worth tax bracket that sustains a blue chip gallerist’s operation.
Instead, the plutocrats either already know which sellers to go to for blue chip art, or else they’ll quickly find out through their own network of like minds and like funds. What they won’t do is jump online and naively start browsing Amazon Art alongside the plebes hoping to find legitimate quality in a superstore environment. That means an online middleman’s core customer base has no real value to elite sellers.
Even worse for the online middlemen, top tier galleries risk severely diluting their brand cache–arguably their most crucial asset in an image-based industry–by joining forces with what could be perceived as a gauche third-party platform. The fallout would be serious, possibly even irreparable, damage to the galleries’ vital relationships with existing high-level clients who largely define their taste in terms of exclusivity.
Rather than team with the online middlemen then, my conclusion was that the savvier and more lucrative move would be for each blue chip seller to establish its own in-house e-commerce apparatus. This strategy would safeguard each gallery’s reputation while allowing it to more efficiently serve its upper echelon, repeat collectors–the buyers responsible for the bulk of its profits.
That tidy little summary is the negative argument for elite galleries to vertically integrate their online sales: the equivalent of saying, “I think X will happen because the alternative is eating two scoops of mayonnaise served in an ice cream cone.” What I want to cover this time around is the positive argument, i.e. the reasons that taking what software developers would call a “full stack” approach to e-commerce gels with, and even enhances, the business of high-end art sales.
From there, I’ll proceed (in the next two chapters) to the macro and micro ripple effects that gallery-specific, vertically integrated e-commerce would have on the industry. Rather than being a simple add-on that would re-stabilize the market’s current structure, my read is that this development will accelerate the industry-wide continental drift already underway. And the currents at both a single business level and a gallery sector level are pulling in the same direction: toward consolidation.
For a blue chip gallery, handling e-commerce in house fits a consolidation agenda by definition. And it’s all the more likely to happen because a full stack strategy is already the default for practically every other aspect of an elite gallery’s business model.
I detailed some of the many and varied roles that gallerists play for their artists all the way back in Part I, so I won’t roll up a dollar bill and blow my way down the line again here. The critical point is that a gallery representation deal is, and has historically always been, an all-encompassing one. And as I stated early on in this series, the ability to automate a considerable amount of sales online should filter the gallerist ranks down to the Leo Castelli types, or those most interested in supporting and nurturing artists rather than just closing deals–in other words, people who would welcome the opportunity to manage a full slate of responsibilities on their talent’s behalf.
The closest analogy in the other for-profit arts and culture sectors may be what’s known in the music industry as a 360 (or multi-rights) deal. Though by no means the standard way of doing business, a multi-rights deal fuses a major record label or promoter with an artist across every square inch of that artist’s earnings potential: merchandise, touring, sponsorships, et al. From a business standpoint, it’s as if both parties slathered themselves in Krazy Glue and then spooned.
In theory, at least, the relationship is symbiotic. The artist’s representative–say, Live Nation, who inked multimillion dollar multi-rights pacts with the likes of Jay Z, Justin Timberlake, and Madonna in recent years– doesn’t just pick all of the talent’s pockets in succession. It actively works to try to maximize their profits in every revenue stream.
So the representative siphons off a richer percentage of the profits. But it hypothetically earns that reward in exchange for doing a lot more work on the artist’s behalf in a lot more areas. Everybody involved wins (or loses) in every dimension of the business together.
The general principle is the same for gallerists. The execution is just far less formally defined. (I know, I’ll give you a moment to pick yourselves up off the floor after the fainting spell.) From providing exhibition space to promoting their roster in the museum realm to managing ownership transfer logistics after sale, the many responsibilities that gallerists juggle beyond strict deal-closing are the primary justification for their industry-standard 50 percent sales commission on an artist’s new work. That figure is still outrageous to me, but at least I understand the argument.
Since high level galleries are already functioning not only as all-purpose utilities for their artists, but as all-purpose utilities whose main function is still sales, adding e-commerce to their menu of responsibilities becomes a logical extension of the precedents already in place. And if an in-house online sales platform can be created relatively efficiently and inexpensively–which is already true today, and will only become more so as technology’s user-friendliness increases and the number of capable programmers and designers swells–the counter-arguments against it grow even more brittle.
A few elite galleries are already pursuing this path, most notably Gagosian. For some time, a level of e-commerce has been built into their website, where the ’Private’ link in the toolbar provides clients username-and-password-controlled access to privileged info, such as images and pricing for newly available works curated to their specific tastes. It’s the digital equivalent of the VIP “back room” treatment they would receive if they visited the physical gallery.
I can’t say for certain whether Gagosian’s online private lairs currently include an actual point of purchase option. I’m neither wealthy enough to have an account myself (again, I’ll give you a moment to recover from the shock) nor well-connected enough to confirm with someone who is (at least, not in the time it’s taken me to write this post).
But even if the capability doesn’t exist at this moment, clearly the potential for it is there. And to me, integrating actual e-commerce borders on no-brainer status for a gallery at Gagosian’s level, making the feature either a present-day reality or, at worst, no more than a matter of time.
The only quasi-legitimate obstacle I can imagine would be building in online security diesel enough to ease the minds of the high and ultra-high net worth individuals who would be linking their financial data to the site for payment. Yet there’s nothing inherently riskier about this process in the fine art realm than in any other. And while there are undoubtedly a few multimillionaire gold bugs who have chosen to avoid online banking, online bill pay, and all other e-commerce connections for fear Anonymous will dox them as punishment for whatever ethical violations support their fortunes, these people would still very much be the exception, not the rule.
Put more simply: I just can’t realistically imagine a scenario where the über-wealthy are so paranoid of e-commerce, even for high value assets like blue chip art, that galleries abandon the attempt to privately sell it online. Especially because what little data we have so far indicates that at least some collectors are already spending big money for works over the Internet.
For example, the Hiscox Online Art Trade Report 2014 showed a small but quantifiable percentage of assets selling for over 50,000 GBP (~$81,000) via multiple online middlemen in 2013. And in the auction sector, the current price apex for an online art sale clocks in at an impressive $1.7M (for Zao Wou-Ki's 09.05.61) through Christie’s e-commerce service, Christie’s LIVE, last year.
Admittedly, those numbers are still amateur relative to the ongoing highlight reel of off-line fine art commerce. Top tier collectors regularly spend six figures and up for work in major private galleries and art fairs, and a $1.7M winning bid for a Zao Wou-Ki still pales in comparison to, say, the record $58.4M paid for Jeff Koons's Balloon Dog (Orange)inside the hallowed halls of Christie’s New York flagship last November.
Nevertheless, we have to keep in mind that online art sales as a whole have barely learned to crawl at this point. Given their early developmental stage, it would be a mistake to focus on the (comparative) modesty of the raw numbers. The trends are vastly more important, and so far those trends are all on the upswing–as reflected in figures from the Hiscox report, the TEFAF Art Market Repor 2014, and even roundups of venture capital funding to art startups.
Back to Gagosian, though. In terms of full stack e-commerce prospects, it’s also worth mentioning that The House That Larry Built qualifies as one of a handful of blue chip galleries which has developed its own mobile app. (Sprüth Magers is another, but in my experience its effort currently contains more bugs than the beds at an hourly rate truck stop motel.) It doesn’t seem that Gagosian’s private pages are accessible through the app yet, but that addition too seems inevitable to me. And in the interim, the sheer choice to create a standalone app–essentially, a means of going directly to the gallery’s online space without even having to use the digital middleman of a browser–signals elite gallerists’ continued commitment to vertical integration in the age of information.
Aside from general behavioral consistency, though, there’s another powerful positive reason for future gallerists to maintain their own e-commerce platforms.
Successfully automating fine art sales in the future will mean something more nuanced than outsourcing the responsibility to the technology itself. It will mean partnering with the technology in a way that enhances the flesh and blood gallerist’s effectiveness at the task.
Remember, one of Tyler Cowen’s core claims in Average Is Over is that in the new world of work, the top performers in every field will be (and increasingly, already are) the people who figure out how to augment their own strengths with those of machines. The same phenomenon is manifesting itself in everything from Cowen’s favorite example, freestyle chess, to Obama’s synergistic data-and-grassroots 2012 re-election campaign.
If, like me, you buy into Cowen’s theory, then it naturally follows that the elite-level gallerists in future generations will excel at using technology to amp up their sales prowess, even as e-commerce also allows them to spend less time with their boots on the ground of the traditional sales floor.
What exactly would a technology-enhanced sales strategy look like? In general, the idea would be to combine what computers do better than human gallerists with what human gallerists do better than computers. And there are ways to leverage that combination in everything from honing the optimal set of works to present to existing clients to making more analytically informed decisions about margins.
So on the one hand, algorithms could be designed to break down clients’ past acquisitions by a variety of aesthetic categories (as Artsy's Art Genome Project seeks to do) in order to offer laser-guided suggestions for what other pieces are most likely to appeal to their tastes (as Netflix or Amazon’s recommendation engines try to do).
Complex calculations could also be made to help a gallerist determine the right time to elevate one of her artist’s prices, and by how much, based on historical data–or to determine what the right fabrication cost split would be when working with a particular artist to develop a new series of works for an upcoming exhibition.
But the real evolution will be merging these products of machine learning with the personal touch of a savvy gallerist–someone who knows collector A is building a grand new vacation house with certain spaces ripe for private commissions, or collector B has recently expressed an interest in more daring work than she’s traditionally bought in the past, or collector C is more concerned about building a portfolio based on high-upside acquisitions than a guiding creative vision.
The key takeaway is that, on their own, machine learning and human knowledge are only so valuable. But together, they can reap rewards for blue chip galleries that legitimately eclipse what either one could achieve solo.
Running e-commerce in house therefore seems hugely advantageous to gallerists. Why? Because it would hypothetically allow them greater control and freedom to experiment with how to use the technology to maximize their sales ceilings. And even Castelli types who enter the profession for the love of the game would still be interested in that goal, since more profits mean more resources to help their talent make more great art–a mantra Jim Henson lived by during his historic run, as Elizabeth Hyde Stevens details in her excellent book on the subject.
Of course, no matter how much I enjoy the image of Larry Gagosian hunched over a glowing monitor interrogating lines of code at 3am (preferably wearing a set of old-timey sleeve garters and one of those translucent green accountant’s visors), this wouldn’t necessarily mean that the gallerists themselves will be the ones crunching numbers and tinkering with algorithms. But it does mean that staffing one or more people who can would be a potential competitive asset, if not an outright necessity.
True, there’s no reason online middlemen couldn’t offer this level of service remotely. But again, service isn’t the blue chip gallerist’s problem with the middleman option. Her problem is that outsourcing e-commerce to a less exclusive third party is like serving her brand a bowl of Ambien and a jug of moonshine for dinner.
Besides, human nature (and my personal experience in the gallery sector) suggests that keeping staff on payroll to pursue e-commerce nirvana creates an extra level of pressure and control beyond what a gallerist would receive in even the most responsive outsourcing arrangement. I just don’t believe that being able to call a customer service rep in Bangladesh 24/7 will ever be as effective as being able to do the same to a salaried technician who’s hoping for a raise or a nice end of year bonus.
In-house e-commerce would entice high-end gallerists with one last incentive, too: the opportunity to leverage their data while keeping it safely sequestered. Online middlemen or separate analytics firms could offer number-crunching services to top tier galleries, but accepting those offers would mean handing over servers full of information about client behavior and business operations that the typical elite gallerist would rather wear an active hornet’s nest as a helmet than surrender.
Is it possible that the industry’s prevailing attitude toward data-hoarding and the Three S’s changes in a more tech-dependent future? Sure. But unlike the aforementioned trends in online sales activity, I know of zero current evidence that such a seismic shift is taking place. Betting that it will requires a level of…let’s call it “utopian thinking” that I simply can’t co-sign.
So for these reasons, vertical integration looks to me like the obvious solution to any top-tier gallery’s e-commerce needs in an online sales-heavy future. The shortcomings of the online middlemen may hand the proverbial ball over to the blue chip gallerists, but what will motivate them to run with it is a combination of strategic habits within the industry and the possibility of man-machine sales enhancement.
But as I mentioned earlier, the full stack approach to online selling will only be one aspect of the art market’s consolidation trend. The big picture it helps create will be both just as much of an evolution and just as natural a continuation of what we’re already seeing in the industry today. I’ll delve into the details of the macro level next time.