Soth-eBay's: What the Partnership Does (+ Doesn't) Mean for Online Art Sales
On Monday, Sotheby’s and eBay formally announced a new online partnership designed to simultaneously broaden Sotheby’s customer base and polish eBay’s image in the realm of high-end retail. Set to roll out progressively over the course of the next year, the union will begin with eBay’s hosting live streaming of Sotheby’s New York auctions in 18 unspecified sales categories–a feature that will eventually expand to include sales at the house’s other worldwide locations. The partnership’s other key component will be a set of exclusive Sotheby’s online auctions which, like the streaming service, will be hosted on a specially branded, now-under-construction subsection of eBay’s main site.
The relationship is in fact the sequel to an earlier affair between the two entities in 2002. That original union was more Fatal Attraction than From Here to Eternity. Despite being planned as a three-year partnership, heavy losses resulted in the joint venture’s going the way of the bunny after its first year. Nevertheless, twelve years of growth in the online fine art and luxury goods sales space has convinced the star-crossed lovers to try again.
I would be interested in this partnership regardless, but I’m particularly intrigued by it because, at first glance, it appears to unzip and unleash right in the face of everything I predicted in my most recent Average Is Over installment last week. The beating heart of that post was that blue chip contemporary galleries seeking to expand their e-commerce presence in the future would be much more likely to build their own vertically integrated digital sales platforms than to subcontract to an existing online middleman like eBay or Amazon Art.
Sotheby’s, one major player in what is essentially a two player sector of the art market, apparently sees the landscape differently–not only from me, but from their arch-rival, as well. The eBay partnership runs contrary to Christie’s new online strategy, a $50M attempt to ‘roid up its online presence while keeping the infrastructure completely self-managed. And while the substance of Christie’s approach–a fresh slate of digital-only auctions and a redesigned website scheduled to launch in October–isn’t terribly distinct from Sotheby’s, it could make all the difference from a branding standpoint that Christie’s is keeping their e-commerce wholly in house while Sotheby’s entrusts a chunk of it to a third party.
But since I already covered the how and why of that discussion in the aforementioned piece, I want to rotate the camera a bit for this post. Because even though it might seem at first like Sotheby’s is a 1:1 stand-in for the blue chip galleries that were my focus there, the house actually presents some key differences. Those differences not only account for why Sotheby’s has incentives to partner with eBay, but just as importantly, why those same incentives do not translate to the elite tier of contemporary dealers.
The widest chasm between Sotheby’s and a blue chip gallery is their objectives. Carol Vogel and Mike Isaac report in the NYT piece that Sotheby’s rebooted this partnership because they discovered they were coming up unnecessarily short in the middle of the art market. The house's internal research apparently shows that 50% of all lots sold at auction in 2013 fell into the $5,000-$100,000 range. Sotheby’s hope is that some meaningful percentage of eBay’s vast clientele (allegedly 145 million strong) will be interested in buying into that price range and thus dramatically increasing Sotheby’s middle-market share.
And there is some cause to believe that will indeed be the case. eBay has spent the last several years climbing out of the 'Beanie Babies and Furbies’ basement to host sales for increasingly more luxurious items. Vogel and Isaac identify “$100,000 shiny red Ferraris, designer clothes, and yachts” as three such examples; personally, I’m more interested in this list, which includes seven-figure sales for items like lunch with Warren Buffett and the deed to New York state’s Atlas F missile base (now converted into an “underground survival luxury complex” available for rent). The financial resources are there. On paper then, it seems like we may indeed have a match.
Yet that possibility begs the question: How valuable a match is it? I’ve written before about how the limited data we have on the industry suggests that the middle of the art market has been contracting for at least the last five years and, furthermore, that this trend shows no signs of reversing course. It seems strange then that Sotheby’s internal research would return to base camp with such different data, doesn’t it?
The simple answer is “no”–not if one hawk-eyes the specific language Sotheby’s fed Vogel and Isaac for the NYT piece. The story states that the house’s target in the eBay partnership is the “50% ofall lots sold at auction last year.” The retail term for that data set is 'sales by volume’: the quantity of items that changed hands. It’s an entirely different metric than 'sales by value,’ which expresses how much revenue those transactions generated.
Sales by value, not sales by volume, is the crucial figure in determining the relative health of any sector of the industry. Comparing one metric to the other in the auction market clarifies the diagnosis considerably. And as usual, we stand to learn the most by following the money trail.
Since it’s still the best resource we have, let’s return to the TEFAF Art Market Report 2014 (available in full here). Its data paints a somewhat different picture for the middle of the auction sector than Sotheby’s. Admittedly, the numbers get a little messy because (to almost no one’s surprise, I’m sure) the art industry maintains no standardized definition for terms like “middle market” or “high-end.” So to capture Sotheby’s $5,000 - $100,000 midlevel, we have to select from two separate price tiers in the TEFAF report: one from 3,000 - 50,000 EUR (~$4,100 - $68,000), the other from 50,000 - 200,000 EUR (~$68,000 - $271,000).
Furthermore, the TEFAF report only breaks out individual price tiers for the auction of fine art, not antiquities or any other categories of goods sold by the houses. The organization’s stated reasoning is that the data shows fine art sales comprising the overwhelming majority of the elite auctioneers’ annual sales revenue–about 70% by weighted average. (Plus, y'know, it is the Art Market Report…) As fine art goes, so goes Sotheby’s.
Still, the research only gives us a partial image, even if it’s the most meaningful part. All this means that we’ll have to indulge in a little projecting. I think the work is still worth doing, but if you disagree, you can’t say it was because I was opaque about the parameters.
OK, with all the caveats laid bare, the TEFAF team found that the 3,000 - 50,000 EUR (~$4,100 - $68,000) price range accounted for 42.1% of fine art sales by volume, with the 50,000 - 200,000 EUR (~$68,000 - $271,000) range accounting for another 5.2%. By cherry picking from those data sets, we can estimate that the TEFAF data shows roughly 40-45% of fine art auction sales by volume occurring in the “Sotheby’s middle” of $5,000 - $100,000. That equates to a 5-10% difference from the 50% Sotheby’s internal research reported. Given how crude this exercise is, it seems like we can call that an acceptable discrepancy between the two sources’ sales by volume figures. So far, so good.
However, TEFAF’s fine art sales by value numbers are far less supportive of Sotheby’s decision to target the midlevel via eBay. Our friends in Maastricht found that the 3,000 - 50,000 EUR (~$4,100 - $68,000) price range accounted for only 15.8% of fine art auction sales by value, while the 50,000 - 200,000 EUR (~$68,000 - $271,000) price ranged accounted for another 15.2%. Extrapolating once again, it seems fair to estimate that the “50% of all lots sold at auction last year” per Sotheby’s actually only account for 15-20% of fine art auction sales by value.
If you’re wondering where the rest of the activity is, the TEFAF results show fine art lots priced below 3,000 EUR (~$4,100) accounting for a measly 2% of sales by value in the auction sector. The other 80% flows from works priced above 200,000 EUR ($271,000)–the indisputable high end of the market. In other words, the most robust auction house sales revenue blasts out of the apex of the economic pyramid like those beams of light from the dollar bill’s all-seeing eye–and the Sotheby’s/eBay partnership seems to intentionally step toward the shadows.
So then why does Sotheby’s want to move forward with the relationship? Part of the reason is just basic math. Counting fine art, decorative art, and antiques this time, the TEFAF report estimated the auction industry’s total 2013 sales take at 22.5B EUR (~$30.4B). 15-20% of that sum is still a cool drink of water, even if it’s steadily evaporating.
It’s also worth noting that the terms of the partnership don’t exactly dictate cataclysmic changes to Sotheby’s operations or infrastructure. My guess is that the house would have increased their number of online sales this year anyway, especially with Christie’s planning to do the same. In that sense, aligning themselves with eBay can perhaps be viewed as a decision more about execution than fundamental strategy. If Sotheby’s would have expanded their digital sales presence regardless, an argument certainly exists that they should do so in a way that immediately grants them access to 145 million new potential customers. (For perspective, Vogel and Isaac note that Sotheby’s estimate of its present client base only “numbers at more than 100,000.”)
However, the argument for uniting with eBay brings us full circle to the difference between Sotheby’s and blue chip galleries. No matter how problematic the collaboration may be from the perspectives of branding and long-term profit potential, the reality is that a significant part of Sotheby’s business is about lower tier assets than an elite contemporary gallery’s.
The house currently subdivides into, by my count, 67 different departments. That number is a little deceiving by virtue of the fact that different eras and cultural origins of a particular good qualify as different departments, e.g. English Furniture versus French & Continental Furniture, American Indian Art versus Scottish Art. Still, the point is that blue chip contemporary galleries sell only one type of asset–blue chip contemporary art–while even the most elite auction houses are much more diversified in their offerings.
This fact is doubly significant when we consider how much of the fine art auction market’s horsepower is provided by contemporary art alone. The TEFAF report found that 46% of fine art auction sales by value in 2013 came from Post-War & Contemporary Art–easily the largest single market force. Modern artworks accounted for 29% of sales by value, followed by 13% from Impressionist & Post-Impressionist pieces, 10% from Old Master works, and 2% from the rest of the riffraff.
What does all this mean? It means that galleries and dealers operating at the high end of the contemporary art market are consistently and exclusively trafficking in higher priced, more prestigious assets than Sotheby’s. Even the other genres of fine art that the house offers are, on average, far less valuable than what regularly comes through David Zwirner’s hallowed halls of commerce.
To help orient everyone to the scale of the difference, it helps to look at how many of Sotheby’s different fine art departments belong in the “Other” slice that TEFAF credited with a mere 2% of fine art auction sales by value. I did a deliberately over-conservative count and still tallied 40, or nearly two-thirds of the house’s total departments.
We can find even more context by surveying Sotheby’s non-art categories like Books & Manuscripts, Clocks & Barometers, Postage Stamps, Rugs & Carpets, Watches, and Wine. Now, all of these departments still contain legitimately valuable objects from the viewpoint of the average consumer. It’s not as if you’re going to find a $30 Timex on the block in a Sotheby’s Watch sale. But even the most sought-after assets in these non-art classes don’t compare to the profit potential of contemporary art.
A specific example is instructive. Sotheby’s 2013 wine sales report shows that the priciest bottle of the year sold for $167,508, and the department’s total year-end sales revenue was $57.9M. Meanwhile, the house’s record for a single Post-War & Contemporary Art lot is Andy Warhol's Silver Car Crash (DoubleDisaster), offeredlast November. The price? $105.4M.
In this context then, it becomes fairly clear why Sotheby’s is using “sales by volume” as motivation to collaborate with eBay on seducing the $5,000 - $100,000 tier: In comparison to blue chip fine art, the rank and file of what they sell simply isn’t that expensive. Accessing a far broader but, on average, far less moneyed client base thus stands to benefit their business model in a way that would not translate to an elite-level gallerist’s.
Pursuing Sotheby’s larger identity in this way begins to make them look a lot more like an up-market department store than a strictly high-end specialist. Josh Baer, eBay’s in-house adviser on their fine art expansion, only pours Miracle-Gro onto this idea by saying in the NYT piece that, “Besides being able to sell the Renoirs and Picassos, Sotheby’s will also be able to have a platform to dispose of grandma’s silver and china to a huge audience.” If you ever hear Larry Gagosian utter a sound byte like that, run for cover, because it means you’re actually talking to some kind of unholy beast wearing his skin as a jumpsuit.
There’s a final lesson in that hypothetical demon I just conjured: optics matter. And they matter to Sotheby’s in a qualitatively different way than to either Christie’s or the world’s blue chip galleries. Why? Because Sotheby’s is a public company. It has shareholders to try to please. Announcing a partnership with a major online retailer boasting a 145 million-strong customer base is, in theory, the type of signal event that could pump up a share price that’s down (as of my writing) a ghastly -8.74% over the past year–during which time Christie’s has been kicking its ass like it caught Sotheby’s stealing from the collection plate.
But if improving the house’s perception in the financial markets was the goal, then the early returns suggest it would’ve been better to hold off on announcing the eBay partnership until winter so at least some of New York’s homeless could warm themselves over the resultant garbage can fire. Aside from a brief, minor spike to $40.35 on Monday, Sotheby’s share price has more or less drunkenly plummeted down a flight of stairs since. As of this moment, it’s dropped -4.2% overall this week.
By no means am I suggesting that we should let the NYSE be the ultimate judge on the wisdom or foolishness of Sotheby’s new partnership with eBay. No one knows yet if it will work. The online sales market is far more robust than it was the first time the two companies shacked up, and given the diversity and relative value of Sotheby’s overall offerings, there are sensible financial reasons for them to try again.
Nevertheless, we should also be careful not to view the collaboration as a test case for online fine art sales as a whole, especially at the high end of the market. There will undoubtedly be some meaningful crossover, but the core of what Sotheby’s stands to gain or lose here just isn’t that relevant to an elite-level dealer. The middle is simply more valuable to the house than to the galleries.
Maybe Sotheby’s, with eBay’s help, will succeed in single-handedly reversing the negative trend eating away at the center price tier of the art market. And, in the process, maybe they’ll reshape the incentives for blue chip galleries to court the midlevel. Until that happens, though, my long-term prognosis for online fine art middlemen like eBay remains grim. And if I’m right, Sotheby’s partnership with them will do little more than offer a live window onto some of the main reasons why.