Although Sotheby’s plan to go private may accomplish its goal of making it more competitive in attracting major consignments, it could also cut into profits: The cutthroat competition between Sotheby’s and Christie’s may devolve into a race to the bottom, if potentially costly concessions are increasingly made to lure the highest-valued property.
If the as-yet-unconsummated sale of Sotheby’s to BidFair USA (an entity owned by telecommunications mogul Patrick Drahi) goes through, Sotheby’s would no longer be required to file reports to the SEC that expose overall losses from bad bets—amounts guaranteed to some consignors that turn out to be more than bidders are willing to pay. No longer subject to the fiscal discipline imposed by the disclosure requirements for publicly traded companies, Sotheby’s would not only have greater freedom to assume such risks; it would also have more freedom to fail without public embarrassment.
Photo by Lee Rosenbaum
The history of both houses’ escalation of enticements to lure coveted consignments includes foregoing commissions from some sellers and even forking over to some sellers a portion of the fee charged to buyers. This special treatment means that a privileged consignor can pocket a sum greater than the publicly announced hammer price. I outed this phenomenon 12 years ago in Tricks of the Auction Trade, my Wall Street Journal rundown of then nascent stratagems that have become far more common in recent years.
Another such gimmick is reliance on third-party guarantees or “irrevocable bids”—backing from unidentified sources outside the auction house, such as dealers and major collectors who may have an interest in supporting the market for works related to their own holdings.
Photo by Lee Rosenbaum
When Christie’s controversially introduced the buyer’s premium to New York in 1977, it would have been deemed inappropriate, not to mention unethical, to divert to the seller a fee that had initially been rationalized as a way to give auction houses funds needed to defray their costs in providing services to buyers. Sotheby’s had at first resisted charging the buyer’s premium (which was strongly opposed by dealers), but succumbed to its profit-boosting imperatives a year and a half later.
This pattern of Sotheby’s balking at a problematic Christie’s innovation but ultimately adopting it was repeated more recently: Christie’s began allowing third-party guarantors to pay less for a work that they had guaranteed than anyone else who might have bid the same price: Part of the guarantor’s purchase price was, in effect, defrayed by the fee that the auction house paid them for backing the guarantee. As I disapprovingly observed here, this created an un-level playing field among bidders.
It remains to be seen whether Christie’s and Sotheby’s unchained (from the SEC) will escalate their self-defeating arms race, undercutting each other to the point of no return. One can imagine that Christie’s may have been playing a long game, seeking to corner more business and to cripple the competition by offering deals to consignors that Sotheby’s couldn’t match as a public company.
These archrivals can’t mutually forge an agreement to stop the carnage: That would invite charges of price-fixing. As I’ve stated repeatedly, the only mechanism for cleaning up these messy arrangements would be government regulation. It could be for their own good.
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