One of the most troubling art market trends of the last decade has been the stratospheric rise of ultra-expensive artwork while low to mid-priced works languish in obscurity. A great example of this phenomenon was the November 2017 Christie’s auction of the recently rediscovered Leonardo Da Vinci painting, Salvator Mundi. This work by that most celebrated of the Old Masters sold for an eye-watering $450.3 million, making it the world’s most expensive piece of art to date.
The bidding for the famous painting started at $100 million and rapidly rose in frenzied competition before finally settling at $400 million almost 20 minutes later. Now you might well be wondering, if the hammer price for the work was $400, then where did the $450.3 million final price come from? The answer to that, my friend, is the ultimate topic of this article.
The difference between the hammer price and the final price in an auction is called the buyer’s premium. The buyer’s premium is effectively a commission paid by the winning bidder to the auction house for its services. In the case of Leonardo Da Vinci’s Salvator Mundi, the buyer’s premium was a hefty $50.3 million.
Can you imagine it? Getting paid over $50 million for auctioning a single artwork? It must be nice work, if you can get it. And the world’s two major art auction houses, Christie’s and Sotheby’s, get a lot of it.
Of course, Christie’s did incur certain expenses associated with auctioning the Renaissance masterpiece. They had to pay for insurance, security, photography, authentication and marketing, in addition to the auction itself. But even so, I’m certain Christie’s made a substantial profit on this particular transaction. And this really encapsulates the prevailing business strategy of the world’s largest auction houses – conduct sales of the world’s most expensive artworks, charge a hefty buyer’s premium and then profit.
It didn’t used to be this way. Back in the 1980s and 1990s, both Christie’s and Sotheby’s had divisions dedicated to auctioning art at the lower end of the market. Christie’s affordable art subsidiary was known as Christie’s East, while Sotheby’s contender was called Sotheby’s Arcade.
Now when I use the term “lower end art” in this context, I am referring to works primarily priced between $1,000 and $5,000. But I understand if you chafe at the thought that spending several thousand dollars on art is considered “low end”, especially when you can buy some really compelling works for just a few hundred dollars or less.
These “low price” divisions were an attempt by the two largest auction houses to compete for first-time art buyers, interior decorators and amateur art collectors. These types of people were not lucrative, big-spending customers. But the auction houses hoped they could one day be cultivated into dedicated art lovers – with budgets to match.
Unfortunately, this enlightened philosophy went out the window when the global economic storm clouds moved in. Repeated financial crises in 2001 and 2008 hurt the middle class, damaging their ability and willingness to buy art. Instead of toughing out these poor business conditions for the sake of building long-term relationships, the major auction houses cut and ran. Christie’s closed its Christie’s East division in 2001, while Sotheby’s quietly wound down its Sotheby’s Arcade operations later on. Neither company currently accepts any consignment that is estimated to be worth less than $5,000.
But that wasn’t the only move the big auction houses made to distance themselves from the low and mid range of the art market. They have also engaged in an extensive series of buyer’s premium increases meant to discourage art collectors of more modest means. These fee increases occurred in 2008, 2011, 2013, 2016 and 2017 for both major auction houses. Right now, Christie’s and Sotheby’s levy an outrageous 25% buyer’s premium on purchases below $250,000 and $300,000, respectively.
If it seems suspicious to you that Christie’s and Sotheby’s tend to raise their prices in lockstep, you’re not alone. Both companies were accused of price-fixing by U.S. regulators in the 1990s and ultimately agreed to pay a $512 million fine to settle the allegations.
It is clear that the largest auction houses do not want to be bothered with anything less than the very best and, by extension, most expensive artworks. I believe there are a few major reasons for this.
First, the capital markets have become incredibly short sighted over the past 20 years. Corporate CEOs are expected to produce immediate financial results regardless of the business environment. CEOs who cannot or will not take the steps necessary to create prompt and robust profit growth are quickly ushered from their posts. This ironclad law of modern business management has been ruthlessly applied to the world of auction houses, even though it is slowly gutting the industry from within.
Next, although the buyer’s premium (expressed as a percentage) declines as the value of an artwork sold at the major auction houses increases, the absolute value of commissions on high priced works is too lucrative to ignore. The Leonardo Da Vinci Salvator Mundi painting mentioned earlier in the article is a prime example of this situation. Christie’s and Sotheby’s would much rather make a billion dollars in sales by auctioning a hundred different $10 million paintings than by selling ten thousand paintings at only $100,000 each.
Finally, the increasing economic bifurcation between the middle class and the extravagantly wealthy has meant that the money is in the high end of the art market. In fact, it is really in the ultra-high end of the market. Generally, only the very best pieces by the most renowned artists, mostly in the post-World War II and contemporary space, have flourished in this environment.
While I feel that the worm will one day turn on this trend, for now it is inescapable. The super-rich are buying more outrageously priced (and unconscionably ugly) art these days than ever before. And it means that, for now at least, the major auction houses are content to ride the wave, even though I suspect they will come to regret their snubbing of the middle class one day.
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