Skate’s has an interesting take on Sotheby’s earnings report and what it says about the attractions of private sales going forward for the global auction house. Skate’s suggests that—contrary to many assumptions by outsiders—the private sales business generates lower commissions than auctions. But it seems to do so at much lower costs to the auction house helping to generate higher margins for the firm.

In turn, Sotheby’s has taken care not to tip its hand to the dealing community or rivals. Take a look at Skate’s reasoning but do remember that the information is based upon six months of sales which is hardly a large enough sample to draw too many conclusions:

Sotheby’s has increasingly employed a discriminating fee structure that favors strategic clients, which, along with its promotion of private sales, guaranteed bids and other innovative forms of art dealing, has served to reduce transaction expenses. This strategy clearly helps to grow auction volumes, but Sotheby’s has been even more successful in stimulating private sales, which more than doubled to $448 mln in the first six months of the year in comparison to the same period last year. Volume and top line grow nicely, but the commission intake ratio fell as private treaty sales and purchases through guaranteed bids came with lower transaction expenses for Sotheby’s clients. According to its 10Q form, Sotheby’s made approximately $36 mln in commissions from private treaty sales in the first half of the year, which implies a transaction cost of less than 9% for buyers and sellers combined. [emphasis added]

This aggressive fee policy might help Sotheby’s exceed $1 bln in private transaction volume this year, which would make it one of the largest art dealers globally. Private sales are by far the fastest growing part of Sotheby’s operations. In an apparent attempt to avoid advertising this stealth move to clients, galleries and other dealers, Sotheby’s has developed a creative accounting policy that excludes the private sales business from the Dealer segment, which remains tiny and static in its GAAP segment disclosure. The truth is that Sotheby’s will become a $1 bln dealer in terms of trading volume this year, running about 20% of its turnover off auction and consistently eating away market share from high-end art dealers around the world

Skate’s Market Notes