Feb 1, 2024 - Business

Auction pricing is about to become a lot more transparent

Illustration of a gavel with a flashlight head on one end shining light

Illustration: Annelise Capossela/Axios

The single most annoying and opaque aspect of buying and selling items at auction is about to get a lot more pleasant and transparent — at least at Sotheby's, which unveiled a major transformation of its commission structure on Thursday.

Why it matters: Buyers and sellers alike have been frustrated for decades at the way in which the amount they end up paying (or receiving) can differ significantly from the hammer price in the auction room.

  • Those differences — effectively, the amount of the transaction that Sotheby's takes for itself — have risen steadily over the years. Now, they are going to fall to a multi-decade low after May 20.

The big picture: In theory, fully-informed bidders are aware of the buyer's premium schedule — the amount a buyer pays over and above the hammer price — before they bid and are never faced with sticker shock when they find out how much they actually owe.

  • In practice, however, auction houses have used artificially-low hammer prices as a way to encourage further bidding, which is one reason the buyer's premium tends only to go up rather than down.
  • Thursday's announcement from Sotheby's represents a major reset — and is likely to put huge pressure on Christie's to follow suit. (Christie's declined to comment to Axios on what they may or may not do.)

By the numbers: At the moment, the buyer's premium starts at 26%, for any items that hammer for less than $1 million, and falls to 13.9% for the part of the hammer price that's greater than $4.5 million.

  • Going forward, that amount will fall to 20% for anything under $6 million, and drop to 10% thereafter, causing a significant reduction in buyer's premium for all bidders.

The other side: The changes for sellers are even bigger. At the moment, Sotheby's official position is that "Sotheby's standard seller's commission is 10% of the hammer price" — that the seller generally ends up receiving only 90% of the hammer price.

  • After May 20, the 10% seller's commission caps out at $50,000 — and then it turns negative for works hammered for more than $20 million.
  • That practice of negative seller's commissions — known as "enhanced hammer" — has long been whispered about in the industry but has never officially been acknowledged by either Sotheby's or Christie's. Now, it's out in the daylight, available to anybody with a $20 million object they would like to sell.

How it works: For a work hammered at $1 million where the seller didn't know to try to get a discount on the seller's commission, the seller would currently receive $900,000, while the buyer would pay $1.26 million plus a 1% "administrative fee," bringing the total to $1.27 million. That means Sotheby's gross profit would be $370,000.

  • After May 20, the buyer will pay $1.2 million while the seller will pay $50,000, bringing Sotheby's profits down to $250,000 — a 32% reduction. (If the work hammers for more than the high estimate, Sotheby's will also take an extra 2% as a "success fee".)

What they're saying: "The reduction in the Buyer's Premium will incentivize more bidding from clients and result in higher hammer prices for sellers," said Sotheby's CEO Charles Stewart in announcing the move.

  • "The standardization of selling terms pivots away from private negotiations, prioritizing transparency and simplicity."

Flashback: The commission structure at Sotheby's and Christie's has a history full of controversy. Former Sotheby's chairman Alfred Taubman was sentenced in 2002 to a year in prison for conspiring with Christie's to fix his commission rates.

The bottom line: This is a very aggressive move from Sotheby's owner, French telecoms billionaire Patrick Drahi, and one that's aimed squarely at gaining market share. It's likely to be welcomed by collectors around the world.

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