This auction season, one of the most anticipated in a decade as the stakes for the art market go higher with each sales cycle, Christie’s opened the week with a new event. The $705 million “Looking Forward to the Past” sale was promoted to the media as an exercise in broadening the tastes of contemporary art collectors. But it was really a way to satisfy the growing demand from new collectors—many of whom have only shown up on the auction house’s radar in the last few seasons—for the very best works.
From its interactions with these new buyers, who hailed from all across the globe and the United States, Christie’s knew it had access to deep pockets–ones with plenty of money ear-marked for art from the best names with the best provenances. To get that mad money spent inside Christie’s auction room, the specialists, led by Christie’s chairman Brett Gorvy, could not wait for collectors to decide the time was finally right to sell their most valuable works.
Instead, Christie’s went on a shopping spree using direct and third-party guarantees to persuade the owners to sell their exceptional works of art. Half of the 35 lots in the May 11 sale were guaranteed, accounting for 69% of the pre-sale value, according to The Art Newspaper. The proportion of the post-sale value was surely higher simply because the star lot of the evening, the guaranteed Les Femmes d’Alger (Version O) by Picasso, sold for $179 million or 28% more than originally calculated.
In part through its fearless use of guarantees, Christie’s has gone from engaging Sotheby’s in an up-one-season-down-the-next wrestling match for market share in contemporary art, to its current market dominance, which has the firm on track to sell more than $1.5 billion of art in a single week. Christie’s robust spending has been a bone of contention between the firms. Its aggressiveness forced Sotheby’s new CEO, Tad Smith, to announce on his first earnings call—which coincidentally took place the same day as the “Looking Forward” sale—that he was pulling his firm back from the guaranteed arms race: “We will not roll dice in the auction room with shareholders’ money,” Smith declared on the analysts’ call as he committed to “making every effort to hedge these risks through partners to ensure that our shareholders’ money is well deployed to generate a return. Strategy, opportunity, judgment, and sensible risk management will guide our use of these guarantees.”
Conventional wisdom has it that guarantees distort the free workings of the market, where a willing buyer and a willing seller meet to agree on a fair price. To the trade, guarantees—which everyone agrees have been the essential ingredient in rising auction house totals—are a heavy thumb on the market scale.
In one sense, that is true. Most art collectors are not in need of more money. Their art is a personal passion, a status symbol or a piece of cultural currency. On occasion, auction houses can count on the fabled three “D”s of Death, Divorce and Debt to force work into the market. But today’s growing ranks of new collectors who are impatient to own anything but the best works has created a new business model for the auction houses, a business model that Christie’s is accused of over-exploiting.
Christie’s is buying market share from Sotheby’s and dealers by using aggressive financial guarantees. Dealers have every reason to be sore. Guarantees effectively squeeze dealers, who lack the balance sheet of a multi-billion dollar company, out of the market and onto the sidelines.
Christie’s is buying market share from Sotheby’s and dealers by using aggressive financial guarantees. Since 2012, the guarantees have been like steroids pumping up Christie’s intimidating sales totals. When Christie’s CEO Steven Murphy was fired last December, many rushed to declare it was for his over-spending ways. Today, that prediction is laughable. Tomorrow it may seem quaint.
What if the use of guarantees is not an aberration? What if Christie’s is merely following the path of other culture industries as they adjust to today’s dominant winner-take-all markets?
Though art may be different from other cultural industries like books, movies, and music, it does bear some important similarities. The fading old guard of the art market may still rail against guarantees but upon closer examination, they seem no different from the risk-transferring practices of the film and television industries.
Take this story, for example:
“At the beginning of the season,” Christie’s Brett Gorvy wrote on Instagram, “my colleague Loic Gouzer and I sought out what we felt was the perfect Picasso. We flew on a client’s plane to the West Coast with only a poor photo reproduction in hand, and walked into the room where “Buste de Femme”, 1938, was pride of place on the collector’s wall. We couldn’t believe the intensity and electricity of the colors in person and we shook hands on the spot to conclude the deal.”
At the beginning of the season, my colleague Loic Gouzer and I sought out what we felt was the perfect Picasso. We flew on a client's plane to the West Coast with only a poor photo reproduction in hand, and walked into the room where "Buste de Femme", 1938, was pride of place on the collector's wall. We couldn't believe the intensity and electricity of the colors in person and we shook hands on the spot to conclude the deal. Painted in Paris in January 1938, at the height of Picasso's tumultuous relationship with photographer Dora Maar, Picasso called Dora his "weeping muse", especially for his "Guernica", 1937, and "The Weeping Woman", 1937, now in the Tate Gallery Collection. Here he paints his lover with the fiery red of passion – she is resplendent – an equal to Picasso in intellect and bite. This is no "suffering machine" as he sometimes called Dora. Gone is the softness of the former lover Marie-Therese – hot Spanish nights instead. @loicgouzer #lookingforwardtothepast
It has since been revealed that the owner of that particular Picasso was casino magnate Steven Wynn, an active buyer and seller of art. Gorvy’s story, especially the details about the “poor photo reproduction” and the fact that Wynn sent his plane instead of having the auction house spring for business-class seats, suggests that Wynn was courting Christie’s as much as Christie’s courted him. The deal they shook hands on was a guarantee for the painting most likely in the region of the $55-million-dollar estimate.
When someone is going to offer you $55 million for a fairly small painting, you send your plane for them. There may have been other terms to the deal but, in the end, the work sold for $67 million with the auction house fees and Christie’s probably made decent money.
There were other sharp players who sold works in the sale, including hedge-fund magnate Steven Cohen. His Dubuffet was estimated at $25 million—a clue to the guarantee he received—but sold for slightly less money. Auction house experts can be sharp deal-makers but few people ever out-trade Cohen, who has previously made good money on guarantees from Sotheby’s as well.
Hiccups and miscalculations aside, the story of Gorvy and Gouzer paying a call on Wynn reads more like two studio execs paying obeisance to a fading star who can still open a movie. The guarantee might not be a three-picture deal, but it smells like a Hollywood megastar’s multi-million-dollar guarantee with backend points, much more than a conventional art deal.
And why not? The evening auctions are marquee events that require big names to attract punters. An auction house’s competitive advantage in the marketplace rests on its knowledge of the buyers and sellers. Christie’s knows where a lot of art is because the works were bought through the house in the first place. Its specialists spend much of their time getting to know collectors to hear what they’re interested in buying but also to learn more about what they already own.
Crossing those two streams of information is the auction house’s tradecraft. But it often takes more than knowledge to facilitate a deal. Here’s another example:
The “Looking Forward to the Past” sale had only a few works by Andy Warhol, who, like Picasso, is a pillar of the art market. One was a silver Liz Taylor diptych that Christie’s had sold five years before for $18 million. Knowing the demand for these types of works, Gorvy and his crew secured the painting with a guarantee. Their hope was a bidding war would ensue. They were disappointed. Silver Liz sold at the low end of Christie’s estimate range–but still enough to have made a $10 million gain. That’s a 60% rise in five years.
The big question haunting the art market is whether the guarantees are eroding auction profits. The problem with guarantees is that the downside of a short sale is often a greater risk than the upside value when the guarantee works and the bidders engage.
Christie’s got the Picasso pricing right. It looks like it got the Warhols a little less than right. In November, Gorvy sold an orange Warhol called “Five Deaths” for $11.3 million. It is likely that his specialists noted there were a number of disappointed underbidders who did not get the painting.
So Gorvy’s team reached out to the buyer of a turquoise version of the work—Warhol did many works in assorted colors—that had sold at Sotheby’s the year before for $7.3m. They must have offered the owner $10 million because that was the hammer price of the orange version in November. Rich people are just like anyone else. Give them the opportunity to make 40% or more on their money in 18 months and they’ll take it.
In the end, the turquoise “Five Deaths” sold for less than the orange version. Together with the fees, Christie’s took in $9.7 million, probably losing a few hundred thousand on the adventure. Was it the color? Or did the previous underbidders simply move on from that type of Warhol to something else? It could have been anything. Sequels often don’t measure up.
When studios pay the top price for stars, stories and directors, the studio acquires the risk but also the reward. Over roughly the same period as the auction houses have been guaranteeing paintings, video entertainment has settled into three tiers: studio blockbusters; high-quality, imaginative entertainment underwritten by cable channels, Netflix, Showtime or HBO; and the unfettered, sink-or-swim world of You Tube.
New stars are emerging from YouTube. And the video service’s mastery of advertising has made it possible for some of those stars to be paid like, well, stars too. But, for the most part, YouTube’s success has led getting adopted by the world of corporate entertainment.
The art world increasingly resembles this structure, too. In art, there are now places like Saatchi Art where individuals can bootstrap themselves toward visibility. In this analogy, the oft-maligned gallery system is much like the world of cable channels and subscription services, where smart, in-touch programmers allocate capital to the most promising talent.
The stars of subscription service television get promoted to the studios, where they get a shot at the big budgets.
Given all of that, we shouldn’t wonder that the auction houses are behaving more like movie studios that can no longer take a risk on smart, indie films, but must search for properties that can perform like blockbusters. When a studio boss greenlights a picture, the stars and director are guaranteed their fees. They do the work with little or no risk, but benefit along with the studio if there’s an upside.
Using guarantees, the art market operates in the same manner now, too. Consignors only give up their works when the risk of failure is removed. It’s the auction house’s job to know and to cultivate the kind of demand that will push the selling price past the guarantee. If art wants to continue its upward trend, it may have to accept that the auction business is now the guarantee business.