Why the Art industry still lives in the 1950s

The hammer hit. The auction closed and “Love is in the Bin” had a new owner. However, it only took a few seconds for the original Banksy artwork to partially self-destruct. A shredder had been built into the frame, unbeknownst to the auctioneers and the purchaser who had just spent $1.4million on it.

Counterintuitively though, the shredding of the painting doubled the value to a rumoured $2.8million. The attention and press coverage the self-destruction had attracted made this piece more valuable than it had ever been as an intact painting. Most other goods would have had their value destroyed, but art has always thrived off these moments.

Narrative storytelling is one of the drivers of value in the art world. It is unlikely to disappear. How high-end works of art are purchased is also something that has not changed for a long time. Non-fungible Tokens (NFTs), Etsy and social media platforms are all new innovations helping artists make money. But very few high profile artists closely associated with high-end art have been seen dabbling in these innovations.

High-end artists still depend largely on prestigious art galleries and auction houses such as Sotheby’s and Christie’s to find buyers. Despite the advent of the internet and ecommerce, not much has changed in the way high-end art is bought and sold. The last major change to the way pricey art is sold was pioneered over 60 years ago in London.

A look back through history: The moment the art world froze in time

Sotheby’s 1958 Goldschmidt Collection Auction ushered in the first modern art auction. The organisers combined pricey artwork with glitz and glamour to create a high society event that has endured to this day. Artists, art gallery owners, deep-pocketed buyers and celebrities come together for the spectacle.

The reason why high-end art world is still largely stuck in the 1950s is not because one company or institution has snuffed out potentially disruptive startup competition. The network of its stakeholders and the vested interests that link to them each other is the reason why this industry has remained largely unchanged. A whole cabal of auction houses, museums, art galleries and artists exists that feed off each other, are dependent on each other and are incentivised to keep the status quo going. Any would-be disruptor has had to compete against this network of institutions spread across most of the Western world.

What’s the size of the art pie?

The global art market has transacted between $50bn and $70bn annually over the last decade. High-end art regularly hits the headlines for fetching record prices. Millions of dollars, euros and pounds change hands for a piece of canvas or sculpture. Unsurprisingly, a very small number of artworks at the high-end make the bulk of the value. 48% of the value is generated by just 0.5% of actual transactions. That’s roughly $25-$35bn for the high-end art market.

High-end art is mostly bought via galleries or auctions that charge high commissions. Galleries charge 10-70% depending on services offered. Sotheby’s Auctions charges a 10% commission on the transaction price that can cost anything from several thousands to millions. That is a high take rate given the massive dollar amounts of those purchases. The incentives are clearly there for disruptors to attempt to make a move.

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“Your margin is my opportunity” is one of Jeff Bezos’ favourite aphorisms. In “The Everything Store” Brad Stone told why Bezos priced the Amazon Web Services products so competitively: It was in order to dissuade competitors from entering the space.

So if the margin is high enough to attract disruptors into the space, how come no one has cracked the high-end art transaction model that has persisted for so long? Wouldn’t art buyers be happy about buying artwork from a disruptor with lower transaction fees? Yet it seems their incentives currently lie elsewhere.

The reason why buyers, sellers, artists, and everyone else wants to keep the status quo

The high-end art industry is more akin to a cartel. It consists of a network of highly reputable galleries, prestigious institutions and well-regarded artists who feed off each other's statuses. It is practically impossible to disrupt an industry where the whole value chain (artists all the way to most buyers of high-end art) has a vested interest in keeping the status quo.

Many buyers with means are locked out of the market until prices for up-and-coming high-end artists reach stratospheric levels. High-end galleries play the long game by excluding these wealthy buyers to favour ‘taste-makers’ (usually individuals but can also institutions) who are given discounts and preferential access to works of art. These purchases in turn help elevate the status of the burgeoning high-end artist.

High-end fashion and luxury brands operate similarly. Designers and celebrities piggy back off each other to strengthen their respective brand image. Although the art world goes a step further in excluding certain buyers from purchasing.

For up-and-coming artists in the high-end space, sales are often conducted via galleries. The price tags and sales prices are largely kept hidden and buyers of these works are often discouraged from re-selling artwork unless it’s done via the gallery they bought from. If buyers don’t abide by these rules they are often refused access to new artists in the future.

When works of art hit auction houses (which happens after the artist has accumulated sufficient status), galleries often help bid for the works despite no intention of buying. In financial markets, this would be known as ‘spoofing’ which is an illegal tactic to manipulate the market into thinking there’s more demand in an asset than there actually is. Other buyers who engage in this practise are people with significant holdings of the artist’s other work. They may also benefit from driving up the price to increase the value of their existing collection.

All players within the high-end art world, whether artists, galleries or institutions (who generate interest in their collections) benefit from this. The incumbents throughout the high-end art value chain have little economic interest in parting with these benefits to help a disruptor. The economic interests are too strong. To the detriment of the rest of the art world.

When all stakeholders have a vested interest in keeping the status quo, would-be disruptors have to climb a very steep mountain to gain a foothold in the high-end world.

The uniqueness of art is also an impediment to disruption

Over the last two decades other creative industries have been disrupted. Film and Music have undergone change on the distribution side by Youtube and Netflix for video as well as Spotify for audio. Publishing companies have been disrupted by self publishing giant Amazon. Print media’s distribution model has also largely shifted online which has levelled the playing field for many startup competitors: Buzzfeed, Huffington Post and other more niche players have appeared.

These industries have moved digital and benefited from virtually zero marginal distribution costs: Once a film or music track has been produced, there is virtually no difference in costs between one person or one million people consuming it.

This is something that is possible for physical art. Most works of art are created by individuals or small teams whose aim is not to scale but to create unique productions. In fact, to some extent the value of art is in the rarity of an individual piece and the amount of painstaking work that goes into it. However, due to a lack of comparables, pieces of art are often harder to value and is also likely one of the reasons volatility in art prices is apparent. Unlike a limited edition handbag created by a luxury label, there are few comparables to Jeff Koons’ “Rabbit”.

Furthermore, a significant portion of value assigned to a piece of art is determined by the story and the brand of the artist. This in turn is derived from where it has been exhibited and who else owns artwork from the artist which makes it difficult to value. How do you come to an objective value for a piece of art that has been owned by a renowned ‘tastemaker’? Two otherwise very similar pieces of art may have magnitudes of difference in their values if they have been created by different artists and held by different collectors.

Disruption could come from the low-end and mid-end art world

Since disrupting the high-end art world is too hard a task when all stakeholders have an interest in seeing a disruptor fail, we can investigate how a disruptor might tackle the art world via the low or mid-end.

The late HBS professor Clayton Christensen demonstrated that disruption often occurs in segments of the market that are not attractive enough for incumbents to service. In his book “The Innovator’s Dilemma” he described a myriad of industries where disruptor companies come up with innovative solutions to displace incumbents. But importantly, these innovators avoid direct confrontation versus incumbents and tackle the low-end of the market that is not attractive enough for incumbents to service.

This topic is one that we could explain and discuss for hours. But we can simplify the concept by arguing that disruptors focussing on areas of the market that incumbents find unattractive will have a much easier time. And so the disruptor gets a foothold in the market and works their way up the value chain, developing their product to adapt to more lucrative mid to high-end niches. Semiconductors, diggers and many more industries have seen this happen in the past. The same thing could happen in the art world.

Prestigious high-end galleries and auction houses currently ignore the mid and low-ends of the art market as there isn’t enough money to be made. Their business models focus on their own high-end network of art market participants. So how are potential disruptors tackling the low-end?

Social media and ecommerce are changing the way low and mid-end art is transacted. Successful artists outside the high-end network are gaining large followings which is helping them sell their art. If this trend continues, Etsy, Instagram, DePop and other social commerce platforms could start to move up the value chain. If a situation occurs where low and mid-end artists start making more money on these platforms compared to high-end artists, it could spell the end of the high-end art network. Artists could be better off building their audience outside of the network rather than paying large commissions to auction houses or prestigious art galleries.

In a way one of the pioneers is Banksy, the Bristol based street artist who created the shredded piece of art and who built up a cult following outside of the high-end world. Although a lot of his artwork is still sold through galleries and auction houses, he also used to sell prints (signed and unsigned) via his Direct-to-Consumer offering, Pictures on Walls, circumventing galleries that may have sold his artwork to buyers.

The high-end art network’s days may be numbered

The high-end art world has been one of the most enduring and unchanged industries of the past century. Because the uniqueness of art is not compatible with mass production and commoditisation, it has avoided the fate of many other creative industries which have seen massive change in the last two decades. Furthermore, the strength of incentives for all participants of the high-end art world has helped it endure against competition. However, it could prove vulnerable to encroaching social commerce platforms who enable a bigger reach and more money to artists than they could get via galleries and auction houses. This could lure many artists away from the high-end network with the promise of profits.