Fallout from the Fallen Market: Sotheby's Goes Back to Basics

Anthony Grant, Sotheby's senior specialist for contemporary art

In CultureGrrl, I commented last week on such arcane, mysteriously coded auction-house initiation rites as "irrevocable guarantees," "third-party guarantees," "interested parties" and house "ownership interests." I nostalgically asked:

Whatever happened to auctioneers' time-honored role as impartial brokers between buyers and sellers?

Sotheby's has apparently asked itself that question too: In a conference call Friday with financial analysts, the publicly traded auction house (Christie's is privately held), reacted to its guarantees-gone-bad and disadvantageous deals with sellers by announcing that it was back-to-basics time. Bill Ruprecht, Sotheby's president and CEO, announced:

The best practice for our organization right now is to hold onto our capital and be an agent rather than a principal in transactions.

He declared that Sotheby's would be "reducing our guarantee portfolio as well as any other special concessions we grant to sellers, in order to obtain a fair return for our services." Toby Usnik, Christie's head of public relations, asked by me if his firm would follow suit, responded:

As a standard business practice, we regularly review our pricing and financial terms in light of market conditions and the competitive environment. Any future change would be announced once the change has been decided.

In recent year, the seller's commission has been increasingly reduced to zero for important consignments, and in some cases, a portion of the commission paid by buyers has gone not to the auction house but to the sellers, allowing them to take home an amount greater than the hammer price.

Sotheby's just filed 10-Q quarterly report makes it clear why a strategic u-turn is urgently needed: The firm reported that it had experienced, for the first nine months of this year, a $60-million loss on guarantees (amounts promised to consignors, whether or not the bidding actually reaches that level). Losses on guarantees included $15 million on sales in Hong Kong and $10 million on last week's Impressionist/modern sales. The company is also forecasting a $17-million loss on this week's contemporary sales.

Why guarantees are so risky in this down market was make very clear by financial details revealed in the 10-Q: As of Sept. 30, the company had outstanding auction guarantees totaling $319.6 million, on property with presale estimates totaling $298.7-$403.5 million. With so many lots in recent auctions selling for considerably below their presale estimates or not at all, it seems clear that guarantees pegged above the low estimate are very dicey.

In all, the company experienced a third-quarter net loss of $46.2 million or 71 cents per diluted share, more than twice the loss of $20.9 million or 33 cents per diluted share for the same period last year. (The third quarter, with few auctions scheduled, is usually a loser.) Still, Ruprecht maintained that his firm is "highly liquid and open for business" and added that Sotheby's is "clearly the strongest organization in this business." (Usnik of Christie's declined to comment on that claim.) Sotheby's intends to institute "global cost reduction initiatives," including job cuts.

So what does this mean (aside from less job security) for auction-house specialists on the ground? At the exhibition on Sunday for tonight's contemporary evening auction, senior contemporary art specialist Anthony Grant (above) told me:

The business model will be a return to the old days....That's not to say that there are not deals to be made [with consignors], but they will be really selective.

Similarly, Ruprecht said:

As customers' confidence in the marketplace returns, ...estates may be in a position where they'll continue to be afforded some level of guarantees.

Speaking of consumer confidence, $40 will get you into the audience on Feb. 3 for a New York debate, pro and con, on the proposition, "The art market is less ethical than the stock market."

Arguing for that proposition will be dealers Richard Feigen and Michael Hue-Williams and collector Adam Lindemann. Those who think that the stock market is less ethical than the art market are artist Chuck Close, critic Jerry Saltz and Christie's deputy chairman and contemporary art specialist Amy Cappellazzo.

Maybe your view depends on which market downturn has caused you more angst---art or stocks.