Sotheby’s New Fee Structure is a Big Gamble

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Editor’s Note: This story originally appeared in On Balance, the ARTnews newsletter about the art market and beyond. Sign up here to receive it every Wednesday.

Auction math has long been as much alchemy as calculus. So, when Sotheby’s announced a new fee structure set to go into effect after this May’s sale season, the art market’s rumor mill went into overdrive.

To recap, the restructure will decrease the buyer’s premium—essentially, a commission paid by lot winners that Sotheby’s and Christie’s introduced in 1975—from 26 percent of the hammer price to 20 percent, for works up to $6 million. For works above that lavish threshold, the premium falls to 10 percent. The seller’s commission rate has also been reduced, among other fees.

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The auction house’s move away from a “bespoke pricing structure,” Sotheby’s CEO Charles Stewart said at the time, to something more permanent, and transparent, had been in the works for a “long, long time.”

(The announcement’s timing, just two days after Sotheby’s was cleared of aiding and abetting fraud in a federal case where the plaintiff hinged their legal argument on auction house opacity, seemed too fortuitous to be random. However, Stewart said the two had nothing to do with one another.)

Multiple auction house cognoscenti, who asked to remain anonymous so they could speak candidly, told ARTnews that the auction house deserved applause for the move. For years, buyer’s premiums have crept up, especially since the 2008 market crash—Christie’s once upped theirs three times in less than three years—the result of which, one expert told ARTnews, was that buyers were often more concerned with the fees attached to their bid as opposed to the work they wanted to own.

“Think about it this way,” the expert said, “very active buyers were looking more at the amount of their bid … than the work they wanted to own because the fee was so substantial. If your bid is at $100,000, when the estimate is $100,000 to $150,000, it’s already $126,000, and you’re at the median of the estimate with a low-estimate bid. And that’s before taxes.”

The Sotheby’s strategy appears to be about making buyers happy. Happy buyers are motivated buyers and that, in turn, means happy sellers. But will that strategy pan out as expected? It’s debatable.

Finding consignors is arguably the most difficult part of the auction business. Many in the trade told ARTnews that the new fee structure, which standardizes the seller’s commission rate at 10 percent of the first $500,000 per lot, may off scare some prospective clients. (For the record, once a lot reaches a $5 million low estimate, that fee is waived; for lots between $20 million and $50 million, consignors get 40 percent of the buyer’s premium on top of the hammer price.) Sotheby’s seems to think that’s a good deal, and it may well be. But the art-selling business is built on long-term relationships. Until now, the seller’s commission rate was the most negotiable part of any transaction with an auction house. In many cases, especially for marquee lots and large collections, it was negotiated down to zero.

“Selling art is always a war,” art adviser Ralph Deluca told ARTnews. “It’s always a war of guarantees and the amount of press someone’s going to do to get a spectacular piece or spectacular estate. And not being able to offer zero percent commission, Sotheby’s really pulled an arrow out of their quiver.”

Multiple sources said that specialists at Sotheby’s aren’t happy about the impending disappearance of perhaps their most powerful negotiating tool in landing big commissions.

When asked if there was any pushback against the change, Sebastian Fahey, Sotheby’s London-based managing director of global fine art, told ARTnews that there was “an overwhelming agreement that things needed to change and that a reduced and simplified buyer’s premium is a good thing for the health of the market.”

If Fahey is talking about competition, he’s right. Between exhibitions and secondary-market sales, auction houses and art dealers are increasingly occupying the same space. Some dealers even think the new structure will tilt the market in their favor.

“Sotheby’s increased fee structure on all price levels was roundly celebrated by galleries who compete with the auction houses for secondary market consignments,” Eric Gleason, head of sales at Kasmin, told ARTnews. “Historically, galleries have always had an advantage over auction houses in terms of offering works with discretion, and the absence of a public record for unsold works. But it’s now clear that galleries have much more flexibility with commission percentages as well.”

Then, of course, there is the elephant in the room: Christie’s. The auction house has yet to say if it will restructure its own fees in response to Sotheby’s, but it’s not a bad bet. It’s common knowledge that the two auction giants chased each other in upping buyer’s premiums over the last decade. When asked about such a fee restructure, a Christie’s spokesperson said simply, “we have no comment to make.”

For now, it seems, consignors longing for those zero percent consignment fees will have to go to Christie’s after the May sales.

“The art world rejects change like a donor kidney. People want their deals to be deals,” one market expert told ARTnews.

Still there are those who see Sotheby’s as taking a bold step forward, if perhaps blindly. “I like the fact that Sotheby’s has put a stake in the ground and started pushing for change,” another market expert told ARTnews. “It’s been a race to the bottom for a long time. Deals just get richer and richer and more competitive, and auction house costs aren’t going down. In fact, costs are going up.”

One wrinkle to consider: while journalists and market watchers often focus on marquee lots and billion-dollar estate sales, Sotheby’s sold 67,000 lots last year, the majority of them for less than $100,000. That’s a lot of objects that need to be loaded, unloaded, evaluated, perhaps framed, and then displayed. It is the fees that pay for all that.

Ultimately, the restructure is Sotheby’s way of saying “this is what we are worth,” the same expert said, “but how do you prove it? It will be hard to prove whether this works or not. The market has a problem that needs solving, I’m just not sure that this is the way or who really benefits from this move in the end.”

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