The Need to Diversify
Most firms faced with this profit dilemma in their core business would opt to diversify—and that is how Sotheby’s is responding. Another of Loeb’s suggestions was that Sotheby’s should be competing on service quality and expertise as much as it does on price. That seems to be the thinking behind Smith’s announcement in January of this year that Sotheby’s had paid $85 million to acquire Art Agency, Partners, the art advisory firm founded by Amy Cappellazzo and Allan Schwartzman. Cappellazzo and Schwartzman then became co-heads of Sotheby’s fine arts division, ranking above the auction house chairmen worldwide. In a conference call with analysts and investors, Smith said the acquisition was part of a strategy to expand services in art consulting, private purchases, and art investment.
The AAP expansion gives Sotheby’s a fourth leg to their revenue stream: auction commissions and fees, private sales, income from financing, and now advisory fees. The assumption seems to be that the latter three will capitalize on the brand name, will be high-margin, and will compensate for the auction business, which will be the public face of the company but remain low-margin.
In the time since, private sales activities at Sotheby’s have flourished. In the third quarter of 2016, private sales topped $168 million—up from $85 million in the same period of 2015. The house continues to invest in building out its private offering. In reference to private sales, Tad Smith said in a conference call earlier this month that he wants to see Sotheby’s develop customer research so that a bidder who lost out on an item at auction could be offered something similar from the auction house “within 24 hours,” presumably via a private sale or from Sotheby’s inventory.
The house’s financial services leg is more or less flat, likely not meeting the expectations Sotheby’s had for it eighteen months ago. More art lenders have entered the market, and there seems to be a limited number of art buyers and investors who are willing to pay higher interest rates and fees to borrow against art assets alone. However, Sotheby’s recent acquisition of the Mei Moses Art Indices indicates they’re continuing to invest in other aspects of this area of the financial services side of the business.
These shifts in strategy haven’t come without churn. The art world has expressed concern about the recent exodus of long term employees from Sotheby’s due to potential impacts on the house’s ability to acquire consignments and romance potential bidders. Among the most high-profile departures were star auctioneer Tobias Meyer, 25-year company veteran and worldwide head of contemporary art Cheyenne Westphal, and her former co-head Alex Rotter. This was described as a shift from old blood to new, from a culture of art appreciation to one of selling and use of analytics.