The Art of the Deal

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The notion of a mere bookseller becoming a force in the fine art trade may seem like a stretch. But last year, online book merchant breezily plunked down $45 million for a share in Sotheby's and helped the venerable auction house launch an Internet presence. As it turns out, Amazon's ambitious bid to become part of the rarefied world of high art is not entirely unprecedented. Back in 1744, a London bookseller began a small business that would eventually take the name Sotheby's. Books remained the firm's staple until after World War I, when it began specializing in the paintings and antiques with which it is now chiefly associated.

It took nearly two centuries for Sotheby's to accomplish what Amazon did in five years. That accelerated timetable says much about the current state of an industry that once prided itself on being staid. The very nature of the art business is in flux, with interlopers like Amazon making inroads on the manicured turf of established firms like Christie's and Sotheby's. At the same time, the buyer's field is more crowded than ever, as newly minted tycoons vie to spend their fortunes on something more lasting than volatile stock shares. The world's two leading auction houses, Christie's and Sotheby's, might seem ideally positioned to reap the benefits of this changing landscape, just as they have proved so adept at doing in the past. Both expanded successfully into the luxury real estate market years ago and have more recently broadened the categories of goods they auction to include collectibles and memorabilia. But despite their history of savvy strategic decisions, the timing couldn't be worse for the big two, who are currently defending themselves against allegations that they engaged in collusive business practices.

Even as U.S. Justice Department officials and class action plaintiffs bear down on the industry leaders, auction houses and dealers in Europe are struggling with a different but potentially more damaging set of challenges. The cases against Christie's and Sotheby's are likely to be settled eventually, but the burdens of more stringent E.U. regulations will be harder to shake.

A study released last week by the European Fine Art Foundation (TEFAF) predicts that for the first time next year sales figures for the European art market, which as recently as 1998 was some 20% bigger than the U.S. market, will lag behind the U.S. Last year, the U.K.'s tax rate on imported art and antiques was raised to 5% to bring it into line with the rest of the E.U.--and that's just one of a number of factors likely to threaten London's unrivaled status as the capital of the European art trade. "What Europe is doing is slowly dragging down the competitiveness," says Anthony Browne, chairman of the British Art Market Federation. "It's not so much the quantum of these issues, it's that it creates a perception that there's more red tape to doing business in Europe."

Earlier this month, the British government ended years of contentious negotiations with the E.U. over another much-criticized art levy: the droit de suite, a law requiring that a royalty be paid each time a work of art is resold. The practice was introduced in France in the 1920s to help provide for the survivors of artists killed during World War I. Until recently, it was applied in only 11 E.U. countries--excluding the U.K., which is home to more than half of the E.U.'s art market. Britain tried to maintain the status quo, arguing that the levy would cost thousands of jobs, and drive art sales to New York and Geneva.

The final deal was a compromise. Britain was granted a 15-year reprieve before the law takes full effect. Works of art valued at less than $4,000 will not be taxed and no single droit de suite payment will exceed $12,500. These qualifications apply only in countries where the levy is new and not in France where, for example, the heirs to Picasso's estate have made a handsome living off droit de suite payments. Michael Tollemache, former chairman of the Society of London Art Dealers, dismisses the law, even in its diluted form, as "an outdated piece of social engineering from a period when there was no social security at all and the world of the artist eating dry bread in his garret was commonplace."

A potentially greater threat to the British art market lies just across the Channel. Late last year French lawmakers voted to abolish an antiquated monopoly system that has stifled the once mighty French market, which dominated European sales as recently as the 1950s. Under French law, the right to hold auctions has been reserved to government-licensed officials known as commissaires-priseurs, whose qualifications were often based as much on political and social connections as any actual expertise. In 1992 Sotheby's filed a complaint with the European Commission challenging the system and the French government finally opted to do away with the rule last December. But even before the historic vote, determined outsiders had devised ways to skirt the letter of the law. France's most celebrated recent auction, the $26 million sale of the contents of the Château de Groussay in 1999, was conducted by the French house L'Etude Poulain-Le Fur, but was in fact organized by Sotheby's. Still, the law's effect was to marginalize the French market.

With its growing web of alliances and allegiances, the French art market resembles a Renaissance court, and the intrigue is likely to deepen. Although headquartered in the U.K., Christie's is actually owned by Artemis, the holding company of the acquisitive French billionaire François Pinault. Perhaps hoping to even the score from his loss of last year's fierce duel over Gucci, Pinault's bitter archrival, Bernard Arnault, head of the luxury goods group LVMH, has explored the idea of acquiring Sotheby's. Even without Sotheby's, Arnault has become a major art industry player in a very short time. Just last month he triumphed over Pinault in a bidding war for L'Etude Tajan, France's largest auction house, and last year LVMH purchased Phillips, the world's third-largest auctioneer. It appears the two deep-pocketed Frenchman are once more poised to do battle, this time over the lucrative art market.

As engrossing as the personal dimension of these machinations is, their real import lies in what they say about the changing nature of the global art market. Even as the old system in France adapts to accommodate the new law, the overall market is adapting to changes spurred by the Internet. The success of online auctioneers like eBay is revolutionizing the concept of how art can be sold, prompting old-line auction houses to explore online possibilities. Sotheby's has been the most aggressive in pursuing Internet options, launching the mass market site in collaboration with Amazon last year and a second, more upscale site of its own earlier this year. The wisdom of these ventures is already being questioned, with both sites attracting only a fraction of the number of visitors to eBay. And last year eBay itself widened its scope beyond the lower end products that dominate its site by purchasing the third-largest auction house in the U.S., San Francisco-based Butterfield & Butterfield.

Although the number of would-be acquirers of artworks rises along with the stock market, supplies are not unlimited. Entire categories of art long ago disappeared into museums or permanent private collections. Baron Willem van Dedem, president of the European Fine Art Foundation, bemoans the growing dearth of Dutch and Flemish early masters. "When I started collecting there was a second level which was still freely available," he says, "but now you're down to the third level." Michael Tollemache counters that the growing scarcity of "great" artists may be a healthy development. "There are a number of great artists, and some of them just haven't been recognized in their time, haven't been recognized in our time, or have been forgotten," he says. "The current market encourages people to keep their eyes open and their guts alert." Who knows? They could discover the next Picasso.