In early February 2000 Christie’s announced it was raising its buyer’s penalty to 17.5 percent and reducing the sellers’ commissions for high volume sellers. Everyone waited for Sotheby’s to do the same. In the past, Sotheby’s announcement that it was changing its rates to match those of Christie’s would have come within twenty-four hours. This time Sotheby’s was surprisingly silent. There is a reason why.
The buyer’s penalty, touted as a buyer’s premium by the auction houses that charge it, is a fee added to the hammer price of an object sold at auction. Buyers have to pay for the privilege of buying. Forget 17.5 percent for the moment. At 10 percent, the fee is onerous.
The buyer’s penalty provides a level of protection for the auction house. It is a minimum guarantee of the amount of money the auction house will receive for selling the object. No matter how low the auction house negotiates the seller’s commission, it can count on income from the buyer’s penalty.
The problem is that a 15 percent or even 17.5 percent return on hammer price is insufficient to make an auction house profitable. Most try to average a minimum of 25 percent. If the object or lot price is below $500, the auction house needs to average 30 percent or more.
The auction house counts on the seller’s commission to cover the difference. During the early days of the 10 percent buyer’s penalty, some auction companies were negotiating zero percent sellers’ commissions to obtain merchandise. The large New York auction houses, Christie’s and Sotheby’s, quickly learned the folly of this approach. Instead, both developed a seller’s commission fee structure that, surprise, surprise, was identical to the other’s. I speak from experience because I negotiated with both auction houses for the sale of a client’s property in the late 1990s. At the time, I pointed out to the attorney and financial advisor that Christie’s and Sotheby’s seller’s commission cards were identical and non-negotiable. The optimist would interpret this as one company competing with the other on equal footing, e.g., the local gas station down the street raising its prices to match those just posted by its competitor. A realist might suspect price fixing. Proving it was virtually impossible. However, as circumstances have demonstrated, maybe not that impossible.
Before tackling the issue of price fixing, I want to rail against the price gouging aspect of a 17.5 percent buyer’s penalty. Christie’s exhibited a great deal of arrogance and contempt for buyers assuming they would roll over and willingly accept this new increase. Christie’s was right. There were no protests, no “Don’t Buy At Christie’s Campaigns.” Christie’s and Sotheby’s know that in the end buyers’ greed is the controlling influence. Buyers will pay anything to get what they want.
It took almost a decade for the 10 percent buyer’s penalty to work from the major auction houses to regional and local houses. Few auctions, even local ones, occur today without a buyer’s penalty. The percentage ranges from 10 to 15 percent.
It is naïve to believe that what happens at Christie’s and Sotheby’s does not influence the rest of the trade. Raising the buyer’s penalty barrier to 17.5 percent will eventually result in a rise of 2.5 to 5 percent increase in the countryside. Even the country auctioneer needs to charge a buyer’s penalty to attract quality merchandise. Sellers clearly recognize the buyer’s penalty is in their best interest. It reduces the percentage they have to pay to the auctioneer.
The auction houses argue that the buyers take the penalty into account when they bid. No, they do not. They think they do, but quickly lose sight of its impact when caught up in auction fever. No one is going to mentally calculate $100 is really $117.50, $110 is $129.25, $125 is $146.87 (or $146.88, depending on how you round it off), etc., in the heat of bidding.
Note that Christie’s raised its buyer’s penalty because it was under pressure from sellers to reduce their fees. The sliding seller fee structure of 2 to 10 percent adopted by Christie’s and Sotheby’s in 1995 was under attack. Sotheby’s dominance, especially in the New York market, rankled Christie’s. No matter what Avis says, it does not rest content with its “second best” position.
Unlike the past, Sotheby’s did not immediately match Christie’s buyer’s penalty increase and seller’s commission decrease. The reason is twofold. Britain’s Office of Fair Trading, the Australian Competition Commission, the European Commission, and the American Antitrust Division of the Department of Justice are investigating allegations of price-fixing of commission by Christie’s and Sotheby’s. The investigation originated in 1997.
On January 28, 2000, Christie’s announced that it received “conditional amnesty” from the United States government in exchange for providing information relating to the price fixing probe. Heads rolled. On Christmas Eve, 1999, Christopher Davidge, Christie’s CEO resigned. February 2000 witnessed the resignation of Diana D. Brooks, Sotheby’s CEO, and A. Alfred Taubman, Chairman of Sotheby’s Board of Directors.
I suspect many readers of this column have taken a “so what” attitude at this point. These are the International big boys. Their problems do not impact me. Please do not put the paper down. Keep reading.
What happens to Christie’s and Sotheby’s does influence all levels of the antiques and collectibles trade. Christie’s and Sotheby’s are media darlings. When they make news, it is reported throughout the media from the Wall Street Journal to National Public Radio.
If the world suddenly views Christie’s and Sotheby’s as dishonest, it will assume the entire trade is dishonest. I know it is not. You know it is not. Yet, experience has shown the general public is far more willing to believe the bad in people rather than the good. The fact that Christie’s has received “conditional amnesty” is enough. Whether you watch Law & Order or The Practice, you know prosecuting attorneys are always willing to cut a deal with one party if they will rat out the other.
The latest Sotheby’s revelation has made it vulnerable to a takeover. Sotheby’s had a working relationship with the Internet giant Amazon. Supposedly, Sotheby’s had signed up hundreds of dealers to an exclusive three-year sell through Sotheby’s on Amazon deal. Assuming Amazon comes to Sotheby’s rescue, nothing will change. However, today (February 28) the media is reporting a rumor that eBay has made a bid of 1.6 billion dollars to acquire Sotheby’s. A company formed in 1995 is positioning itself to potentially gobble up a two-hundred-year-old plus company.
eBay already owns Butterfield. If it adds Sotheby’s to its stable, the dynamics of the players within the antiques and collectibles community will change dramatically.
We live in an age of consolidation. I accept this. I do not accept the concept that bigger is necessarily better. During a recent discussion with representatives of an Internet company, I was asked the question, “how many antiques and collectibles Internet companies have decision-making, top management individuals whose experience comes from inside the trade?” It was not an easy question to answer. The vast majority are headed by entrepreneurs, either financial or technical or both, who are deciding what the trade needs as opposed to listening to what the trade needs.
The antiques and collectibles community is not always well served when outsiders dictate the manner in which it does business. The antiques and collectibles community needs not one but dozens of strong entities. At the top end, the community is far better served by five or six strong international auction houses than one or two.
Let the courts decide if there is merit to the price fixing charges. Let Christie’s and Sotheby’s conduct their daily business. Let them remain independent. In the case of Sotheby’s, the decision rests with A. Alfred Taubman. He controls 65 percent of the votes of the board.
