The massive risk of selling a $157M Modigliani

Sotheby’s reported quarterly earnings this week, and the results showed a somewhat alarming trend in the art world: big pieces are starting to make or break auction houses.

Not the sellers. The sellers are doing fine. But the auction houses – Christie’s and Sotheby’s – are walking a fine line between massive gains as prices spiral ever higher, and massive losses as sale prices are guaranteed. Those guarantees become a massive liability as pieces reach well into the nine-figures.

Sotheby’s plummeted this week after the company said that auction commission margins missed expectations – that is, they took a smaller cut from sales than expected.

But what made this interesting was that this was driven almost entirely by the sales of two pieces (the company didn’t say which pieces they were, but some suspect it these mystery paintings were the Modigliani that sold in New York for $157M and the Picasso that sold in London for $36M)

The two pieces were guaranteed by Sotheby’s, who had to pay a fixed price to the sellers no matter what they went for at auction. This means that one or two underwhelming sales can throw an entire quarter’s results askew. 

This is sort of a warning about inequality for auction houses. The prices of the superstar pieces that come to the market have surged far ahead of bottom 99.9% of the market. This means the auction houses can reap massive rewards, if they price it right. But if they price it wrong? That hurts. A lot. Especially since the auction houses are becoming so reliant on these pieces with giant expected price tags.

Auction houses are always going to encounter a certain level of volatility. Results are going to be skewed higher or lower by what is on sale, who is buying at that moment, what is happening in other asset classes at the moment, and a million other factors.

But unless auction houses can figure out less volatile revenue streams – like private sales and less volatile middle-market sales – it will only be harder and harder to escape the risks of that growing inequality in the art market.

Bid: $1.7M [eyes emoji]

Sotheby’s is actually trying to get out beyond just the big auction market. The company is letting buyers bid in live auctions through its mobile app, and also increasing the number of online auctions. And just as Amazon and Netflix use machine learning and AI to make recommendations for you, so are the auction houses.

If the auction houses want to reduce their reliance on the whims of the 100 richest people on the face of the planet, they’ll have to do a few things.

First, to reach a bigger audience. Sotheby’s has been going down-market and building out a digital presence (rumor is Millennials will only buy pricey art from their phone). That’s the easier part.

The second, harder part? They’ll have to kick the crutch of relying on fewer, bigger sales. That model completely relies on a buoyant economy and stock markets. And more than ever, it relies on growth in markets outside the US, like China, which is facing its own issues around economic growth and faces crackdowns on wealth exiting the country.

The only problem is that inequality in the art market mirrors inequality in the economy. The wealth of the 1% – or, more relevant here, the 0.0001% – has skyrocketed in recent years compared to the rest of us 99%ers. 

And that divergence is only going to continue. So are we sure we want to pin an entire model on an increasingly narrow set of buyers coupled with strong, global economic growth?

Maybe, especially if art just continues to be treated as a store of value. But that only points to a volatile and unpredictable future.

Cover photo: Wikimedia Commons

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