European auction houses are hoping online sales will solve the problems of low-priced art and antiques. Venture capitalists Andreessen Horowitz call the solution a managed marketplace.

This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)

What We Really Mean When We Talk About ‘Online’ Sales

The Art Newspaper conducted a survey of European auction houses to learn what their plans for conducting online-only auctions are. Like many, TAN holds the conventional wisdom that ‘online’ is inevitable because of the broader retail trend away from physical presence.

The problem is that art and cultural property don’t sell the way commodities do. That’s one reason Amazon and eBay haven’t been successful with art. It’s also the reason the top auction houses have taken a go-slow approach toward online recognizing the primacy of live auctions. They value of online sales as a customer acquisition tool more than a revenue booster.

At its heart, the difference between selling commodities online—where price and convenience are the killer app—and getting cultural property to sell is that cultural property is demand dependent. No one needs a vintage handbag or a drawing. One buys these objects out of passion, a belief that owning them will confer status or a sense that they are gaining value over time.

There’s an important discussion to be had about demand generation and whether that can be accomplished ‘online’ … yet. But let’s save that for another time. There’s a more pressing issue about what’s going on with art sales.

You might remember the outcry that took place two years ago when Christie’s announced the shuttering of its South Kensington sale rooms which focused on the kinds of objects that were said to be disappearing from the art market, brown furniture and antiques. This cultural property of some but not great value seems to be falling out of favor and falling in value.

Some watched the corporate move and ruefully admitted that the kind of material once sold in antiques shops was dwindling and the could never support the cost in personnel and infrastructure of selling them.

But what if it turns out that antiques shops are disappearing but not the appetite for these objects? The companies surveyed by TAN seem to admit this. The Art Newspaper spoke to Robert Ketterer, the owner and chief executive of Ketterer Kunst:

• “We were convinced that online auctions will fill the vacuum that inevitably emerges when numerous objects can no longer be offered in the auction room because of the logistics required and the high costs of catalogues.”

Catalogues are the least of the cost problem. The time it takes to vet, photograph and write up an object for sale online is a cost. If that object is only going to sell for a few hundred dollars, the buyer’s premium isn’t going to cover much of the cost of a specialists time to do that work. The specialist is only a part of the cost the auction house needs to cover with the buyer’s premium. There’s the price of getting the object into the auction house, storing it and getting it off to the eventual buyer as well as all of the administrative costs attendant upon that.

Those costs would be easier to bear if the demand was strong or if the new buyers coming in for curios would go on to purchase bigger, pricier objects. At least, that’s the operating theory at Christie’s and Sotheby’s where we’re told online sales provide a substantial number of new clients.

Smaller houses with a regional client base can’t necessarily assume that their new customers will someday be substantially wealthier than they are today. They must look at the internet not as a feeder for future growth but as a way to stay relevant.

The Art Newspaper also spoke to a Danish auctioneer about the clientele’s interest in buying electronically:

• “These are mega-trends,” says Jakob Dupont, the chief executive of Bruun Rasmussen in Copenhagen. “If we don’t understand that this threatens the normal way of running an auction house, we will end up as losers. We will see Facebook groups eating our business away beneath us.”

What Dupont is referring to there is bigger than you might think. Bruun Rasmussen discovered that much of the cultural property that used to be sold by antiques dealers or specialty shops is migrating to social media platforms where moderated groups combine their amateur expertise to do the vetting and offer pricing guidance. Sales then take place peer-to-peer, mediated by the Facebook group for Danish pottery, say.

That raises the possibility that the brown furniture and antiques trade isn’t imperiled. It’s just the shops that are too costly to compete with these distributed networks of expertise.

Bruun Rasmussen under Dupont has already begun to experiment with ways to adapt to this distributed world and provide expertise and value where they have it while reducing costs so they can make money on these cheaper items. One of the key elements for Dupont was striking a deal with the Danish Post to make it easier for buyers and sellers to transfer property without breaching the necessary anonymity.

Bruun Rasmussen provides an umbrella of trust that helps generate demand by ensuring the supply is vetted and the prices have some consensus or expertise behind them, even on the lower-priced lots.

It turns out that this isn’t actually unique to the cultural property market. The venture capital firm Andreessen Horowitz, universally referred to as a16z, recently offered some thoughts on the evolution of double-sided marketplaces. In their view, we have progressed through four phases of online selling: Listings, Unbundled Craigslist, Uber for X and Managed Marketplaces.

A16z is more interested in what comes after managed marketplaces, they’re venture capitalists after all. But this structure is illuminating for the art market’s view of online sales. The first two phases presume external demand. You need something, you look up on Craigslist or you find a shop or restaurant on Yelp. The third phase is more about providing access for service providers. You might call a car more with Uber because it is easier than getting a taxi but mostly you’re moving taxi demand onto new platform for Uber drivers.

The managed marketplace offers something uniquely valuable to the art market, a way to stabilize value and generate demand (because in art demand follows value.) The managed marketplace stabilizes value by offering secure transactions with oversight, especially on pricing and delivery. Bruun Rasmussen is building a managed marketplace. So is Sotheby’s with their new Sotheby’s Home service.

Here’s how a16z describes a managed marketplace in VC-speak (we’ve added emphasis):

• “In the last few years, we’ve seen a rise in the number of full-stack or managed marketplaces, or marketplaces that take on additional operational value-add in terms of intermediating the service delivery. While “Uber for X” models were well-suited to simple services, managed marketplaces evolved to better tackle services that were more complex, higher priced, and that required greater trust.“Managed marketplaces take on additional work of actually influencing or managing the service experience [….] Rather than just enabling customers to discover and build trust with the end provider, these marketplaces take on the work of actually creating trust.”

The VCs go on to give a few examples from their investment portfolio. The one with the most relevance to the art market is Open Door which buys homes from prospective sellers who don’t want to invest the time, money and energy in trying to maximize the sale of their home. Maximizing value involves investment and risk. Many sellers simply want to cash out and move one. The same can be said of the art and antiques market. Open Door takes the risk that they can improve the sale of a home by efficiently using their expertise. That’s also what an auction house does with authenticating, providing a description and context, and offering pricing guidance. They’re creating trust.

Why this matters for online selling in the art and antiques market is that a16z concludes, “To compensate for heavier operational costs, it’s common for managed marketplaces to […] charge a higher take rate than less-managed marketplace models.” Auction houses are searching for margin expansion, to get paid more for what they do; a higher take rate is VC-speak for margin expansion which is business-speak for making more money on each transaction.

That might lead us to a broader, more liquid market for a greater variety of art works. That can’t be a bad thing.