David Hall's Comments: The art and antique markets are by far the biggest of all collectibles markets with combined annual sales estimated in the $8 to $10 billion range. Until recently these two markets had been thoroughly dominated by two companies; Christie's, the world's oldest collectibles auction company, and Sotheby's, in my opinion the most powerful brand name in the entire collectibles market. Now a new player, Phillips, has entered the market with vengeance. And with Sotheby's and Christie's still dealing with the huge problems caused by their price fixing arrangement on commissions during the 1990s, all out war has broken out between what are now the three large art auction houses.
Selling art, antiques, and jewelry through auction is big business. Every year Sotheby's and Christie's sell about $2 billion each, and the majority of their sales are art, antiques, and jewelry. Until recently, these two firms had a hammerlock on the ultra high-end art and antiques market, especially the market for super expensive paintings. If a Picasso or Renoir sold for $20 million, it sold in a Sotheby's or Christie's auction.
But two very significant events have changed the art and antiques auction market dramatically. First, Sotheby's and Christie's have been involved in a price-fixing scandal that has dire legal and financial consequences for both firms. Second, Phillips is emerging as a strong third player in the high-end art, antique, and jewelry auction market.
Most of you are probably aware of the Sotheby's/Christie's price fixing problem, but we'll review the facts briefly. The government has charged both auction houses with conspiring to fix commission fees charged to more than 130,000 customers during most of the 1990s.
The former Sotheby's Chairman and the largest shareholder, Alfred Taubman, will go on trial this fall in federal court for his role in the commission rigging conspiracy. Taubman does not deny the fact that the conspiracy existed, but is denying that he was part of it. Former Sotheby's CEO, Diana Brooks, has already pleaded guilty to one count of conspiracy to violate anti-trust laws, and has implicated Taubman.
Both Sotheby's and Christie's are trying to settle with the government and with civil class action suits. The ultimate settlement cost will be $300 million to $500 million each. Interestingly, Alfred Taubman has agreed to personally pay a significant portion of the Sotheby's settlement costs.
Christie's counterpart to Taubman, Sir Anthony Tennant, has also been indicted, but as a British citizen, he will probably not be tried, as he cannot be extradited for price fixing under English law.
The second major development in the art auction wars is the emergence of a strong third competitor, Phillips. Originally founded in 1796, Phillips was basically a second tier auction house until 1999, when it was purchased by LVMH Moet Hennessy Louis Vuitton. LVMH is the largest luxury goods company in the world, with annual revenues in excess of $12 billion.
Phillips now has very deep pockets and they are going after the high-end art, antique, and jewelry auction markets. They have already succeeded in capturing market share and they have already poached key employees from both Sotheby's and Christie's.
Phillips has been treated pretty shabbily by the press. They are actually doing a lot better than the media would have you believe. An example of the slanted coverage given Phillips is what Forbes.com recently said about the most recent Phillips Impressionist and Modern Art sale. Here's what Forbes said...
"In Phillips' May 7 sale, only 26 of 41 works on the block sold, and its
overhyped top lot fetched just $38.5 million against a $35 million to $45
million estimate."
The actual truth is that Phillips should be tickled pink about the sale. I know I would be. They are a new entry into the ultra high-end art market, almost like a start-up. And they are battling two firmly entrenched competitors who have dominant brands and great track records. A sell thru-rate of 63% (26 sold of 41 offered), given their current "start-up" position and the weakness in the high-end art market, is great. And selling a painting for $38 million...in any market condition...is a major accomplishment! They sold the painting and it sold within the pre-sale estimate. The bottom line is that they got the job done for the consignor.
Phillips has been having some decent sales and they are going to get better. Memos surfacing in the government's investigation of Sotheby's and Christie's indicate that the two firms, besides colluding to fix commissions, agreed not to poach each others employees. Phillips doesn't have those restraints.
Phillips has recently hired away the two top people in Sotheby's jewelry division. In fact, the head of Sotheby's jewelry division, John Block, has been named head of Phillips' entire operation. This is a major blow to Sotheby's as the right experts, with their years experience and contacts and the confidence and respect of the major buyers and sellers, can make all the difference in the world. The two top people in Christie's 20th Century Decorative Arts department, Nancy McCelland and Lars Rachen, have just left Christie's and the rumor is they too will be soon gathering consignments and running sales for Phillips.
I recently was in New York and visited each of the three big auction houses. I went to Phillips' new location on 57th Street. The build-out was in progress and they are apparently going to open this fall. I knocked on the locked door and the guard, a tall, young man, opened it for me. I asked where the upcoming auctions could be viewed and he directed me to the current Phillips 79th Street location. There was a picture of a Van Gogh in the window. I asked if I could see the Van Gogh at the 79th Street location and he said, "No sir, Van Gogh is an Impressionist and that sale was May 7th. The American paintings are currently on display." He was beyond helpful and he was "just" the security guard.
I went to the Phillips 79th Street gallery and checked out the American paintings. I asked if I could still buy the Impressionist and Modern Art catalog and they sold it to me at half price (think that would happen at Sotheby's or Christie's?). I have been doing business with Sotheby's and Christie's for 20 years and have bought and sold a lot of high-end stuff there (mostly 20th Century Decorative Arts, but also rare wines, autographs, and paintings), including six figure items. At both Sotheby's and Christie's, I have never been treated with as much courtesy and respect as I was at Phillips. These guys are here to stay.
The bottom line is that there are now three major auction houses. Phillips is going to be a major force. They have tremendous financial backing and they are doing everything right. On the other hand, Phillips is a "me too" business. They are not doing anything that is dramatically different than what Sotheby's and Christie's do. If you look at a Phillips catalog, you might as well be looking at a Sotheby's or Christie's catalog. Phillips has a steep hill to climb.
Here's how I think the art auction wars will play out in the coming years:
Phillips will become the third major player in the high-end art, antique, and jewelry auction market.
The competition for consignments will intensify. Commission rates will fall, and sellers will demand higher guaranteed sales prices. Phillips is already cutting these kinds of deals. This is very good for sellers, but not good for Sotheby's and Christie's, both of whom have high overhead structures that don't play well in a margin compression scenario.
High-end items will continue to attract a lot of attention, and when the economy improves, new, even higher price records will be established.
Key employee turnover will increase. There will be much higher salaries and bonuses for major experts. Perhaps there will be large "signing" bonuses for defectors. It could be like the football player salary wars between the NFL and AFL in the early 60s.
Sotheby's (a public company) and Christie's will have a hard time growing their businesses at any appreciable rate. Even before Phillips began challenging them for market share, I wondered how they could grow. What are they going to do...sell more Picassos?
Sotheby's will probably be sold. Taubman probably wants out. Who will buy it? Someone with a big ego, because that's what it takes to own a big art auction company. I think it's like owning a sports franchise. But Sotheby's is a great brand. They can sell a white canvas with a red dot in the center for $5 million... That's brand power. Somebody will step up to the plate and buy them.
Two final thoughts / questions. What about a merger and who would buy Sotheby's? While a merger is possible, I think it's unlikely. Sotheby's and Christie's have seriously discussed merging several times during the past 200 years, but never could quite get together. The gap between the two firms seems even bigger today. As for Phillips, they seem to have their own plans and they don't need the headaches.
Who would buy Sotheby's? Not eBay, they seemed to have learned their lesson with their Butterfields acquisition of two years ago, and they haven't bought any collectibles companies since. Rumor is that they looked at Sotheby's a while back and passed. Not Collectors Universe, we have other plans for the art and antique market, and we couldn't afford the acquisition anyway.
I've always thought that an entertainment company... Viacom, Vivendi, AOL Time Warner, NewsCorp, even Disney... might be a candidate to acquire high profile collectibles companies. There's definitely entertainment value in collectibles. But for Sotheby's and Christie's, with only $400 million or so in revenue versus an acquisition price of well over $1 billion, you don't get a lot for what you'd have to pay. In all likelihood, the buyer for Sotheby's will probably be an extremely wealthy individual who wants to be involved with the high profile, high status art world.
The art auction wars are fascinating to watch. I hope you've enjoyed reading my take on the battles.
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