Art Auction Volatility and Seasonality
  • The art auction industry tends to be seasonal (busy in the 2nd and fourth quarters)
  • The art auction industry can be volatile
    • Art prices themselves can vary widely with the global economy and economic confidence
    • The sale of a very expensive piece of art can significantly impact the business
    • Auction houses are dependent finding sellers to sell their items - it is a purely secondary market
      • When sellers decide to sell is outside of the auction houses control

Art Auction Duopoly
  • Christie's and Southeby's make up a well-known duopoly in the business
  • However, this duopoly is fiercely competitive - the companies must cave on terms and pricing to win big deals from the other

Art Auction Mechanics
  • The buyer typically pays the commission (called the premium)
  • The premium is a % of the price and drops as the sales prince creases
    • Can range from ~25% to 10%

Art Auction Risks
  • Sometimes sellers require a minimum price guarantee (reserve minimum) and this price is not hit
  • Buyers may default on their purchase payments

Art Auction Guarantors
  • Auction houses can work with third-party guarantors who will guarantee a purchase price
  • The guarantor basically sells a put option
    • The guarantor agreed to purchase the item at a certain price
    • The price is set below what the auction house thinks it can sell for
    • The guarantor will also collect a fees for the agreement
  • Guarantors can be private investors, galleries, and/or museums

Art Auction Lending
  • Auction houses also make money lending to buyers
  • Rising rates can decrease demand in this sub-business, impacting overall revenue and profitability

Impact of 2017 Tax Cuts