Sotheby’s new fee structure is a highwire act of risk and reward

Sotheby’s and Christie’s shocked the art trade back in 1975 when they introduced buyer’s fees at their auctions.

After those charges escalated from 10% to as much as 27% over the next nearly half-century, Sotheby’s sprung another surprise this February by announcing it will reduce its buyer’s premium as part of a radical overhaul of its entire fee structure.

“We’ve been feeling for some time that there was a real need for a reset between the onus on the buyer and that on the seller,” says Sebastian Fahey, Sotheby’s managing director of global fine art.

As of 20 May, buyers at Sotheby’s will pay a 20% premium on any hammer price up to $6m, plus 10% on any portion of the hammer price above that amount. The company’s contentious 1% “overhead premium” will be scrapped.

Compensating for this largesse to the buyers will be increased fees for sellers of higher-value works, who have grown accustomed to owing little, if any, commission to Sotheby’s in recent years.

For consignments finalised after 15 April, sellers of all lots with a low estimate of $5m or less will pay the house a flat fee of 10% on the hammer price, though this bill will be capped at $50,000 per work. Sotheby’s will waive its vendor’s commission on lots with a low estimate above $5m, while sellers of items estimated in the rarefied $20m-$50m bracket will also receive 40% of the buyer’s premium. Arrangements for works expected to fetch more than $50m will be bespoke.

In addition, all lots that sell in excess of their high estimates will be subject to a new “success fee” amounting to 2% of the hammer price—provided they are not guaranteed. Sotheby’s says such lots account for most of its auction business.

Terms for guaranteed consignments will continue to be negotiable, except for a new “fixed guarantee commitment fee” of 4% owed by the seller and “designed to compensate for the time and capital risk associated with a guarantee”, a Sotheby’s spokesperson says.

“A huge part of the decision to change was down to our desire to cut down on what you might call ‘distractions’ and to concentrate on things that, in our view, really matter,” Fahey says. “We believe that a simplified fee structure will bring more participants to the market, simply by making transacting easier to understand.”

Priorities and pressures

But what are the things that really matter to an international auction house like Sotheby’s, which, since 2019, has been owned by the French Israeli telecoms and media billionaire Patrick Drahi? Is it gaining an edge over its competitors Christie’s and Phillips? Is it looking after the bottom line by reducing administrative costs and increasing some sellers’ fees? Or both?

“Drahi is trying to improve profitability by stopping giving away so much to sellers through complicated negotiations on things like ‘enhanced hammer’ and reduced vendor’s commission deals. He’s got high costs. He’s got to make more money out of this business,” says Philip Hoffman, the chief executive of the Fine Art Group, which advises clients at the trade’s top end.

“This is about the middle market between $50,000 and $5m. They’ve done the maths,” adds Hoffman, a former chief financial officer at Christie’s.

Sotheby’s reported overall sales of $7.9bn last year, slightly down on the record $8bn it turned over in 2022 but well ahead of the $6.2bn achieved by its arch-rival Christie’s. (As both businesses are privately held, they are not obliged to announce annual profits or losses.) Despite this advantage, Sotheby’s owner, who is famed in the financial community for his audacious, debt-laden takeover deals, is under pressure now that interest rates have been hiked.

At the end of 2023, Drahi’s Altice telecommunications group had amassed $60bn of debt. When the telecoms magnate bought Sotheby’s in June 2019, through a personal holding company, shares in Altice USA were trading at just over $23. At the time of writing, they had slumped to just under $3.

The Financial Times reported in December that Sotheby’s had approached potential buyers, including the Qatar Investment Authority, about purchasing a minority stake in the auction house to reduce Altice’s burden of corporate debt. Yet Drahi derives considerable personal prestige from his ownership of Sotheby’s, plus an annual cash payout of more than $20m from the company for “strategic advisory and other executive-level services”, according to the FT.

Mounting challenges, falling figures

Talk of selling a minority stake has gone quiet for the moment, but Sotheby’s is still confronted by ever-increasing geopolitical turbulence and, according to recent research, an auction business in gradual decline.

A forthcoming report from the auction-results database Artprice will show that, although the total number of works of art at auction reached a record high in 2023, the value generated by these sales was slightly down, including at the top end. There were 1,550 sales of more than $1m last year, compared with 1,682 in 2022 and 1,762 in 2021.

The lower, bread-and-butter end of the auction market is showing signs of shrinkage, too. According to data from Pi-eX, the London-based auction analysis firm, the number of online-only auctions at Sotheby’s, Christie’s and Phillips fell from 472 in 2022 to 452 in 2023. Concerningly for auction house number-crunchers, the average price per lot was down too, from $16,966 in 2022 to $14,176 in 2023.

“It’s good that Sotheby’s has tried something,” says Christine Bourron, the chief executive of Pi-eX. “The market needs a shake-up.” As auction sales are now on a downward trend and unsold lots are increasing, she adds: “It’s so difficult for the auction houses to make money.”

But will the changes to Sotheby’s fee structure make it a more attractive place than its rivals to buy and sell art and collectables?

Some in the trade have their doubts. Abigail Asher, the co-founder of the top-end New York art advisers Guggenheim, Asher Associates, thinks Sotheby’s more transparent, standardised charges give an advantage to its competitors. “It’s like a card game in which you’re showing your hand to the other players. It makes it easy for the competition to undercut them. Sellers can go to the other houses to get better terms,” Asher says.

Asher also points out that Sotheby’s has been operating a Preferred Clients programme with a variety of benefits for those who consistently transact at the upper echelons. “The new fee structure specifically doesn’t recognise the special status of this group,” Asher says. “It’s going to be hard to explain to a good client who buys and sells regularly at a high level that they’re going to have to pay the same fees as everyone else. In this industry, that’s not a good thing,” she adds. “Sotheby’s could find it difficult to get [consignments].”

Popularity contest

But now that the current trading conditions have been recognised as a “buyer’s market”—that is, there are just not enough buyers around—some others think that Sotheby’s newly reduced buyer’s premiums could prove a broadly popular move.

“The decision by Sotheby’s to simplify its fee structure reveals a will to be more transparent and to stimulate sales,” says Thierry Ehrmann, the founder of Artprice. “Purchasers are now in a position of strength.” But Ehrmann adds a caveat: “If this change made by Sotheby’s sends a strong signal, one should remember that Sotheby’s had removed its buyer’s premium from online sales in 2017, before reapplying it a few months later.”

Christie’s and Phillips had given no indication as to how they might respond to Sotheby’s new fees by the time we went to press. “Sotheby’s will be a bit out on a limb if the other houses don’t follow,” Hoffman says. “My guess is that Christie’s will wait for at least a season.”

Back in 1981, when the trade still did most of the buying at auctions, the British Antique Dealers’ Association and the Society of London Art Dealers had prepared a legal action against Sotheby’s and Christie’s, contending the two auction houses had colluded to introduce the buyer’s premium at the same moment. The trade associations eventually backed down, and Sotheby’s and Christie’s promised to review their new fees. By the end of the year, Sotheby’s announced it would not only leave its buyer’s premium intact but also increase its seller’s commission.

The top auction houses may no longer face claims of collusion, and nearly all the buying is now done by wealthy individuals, but as in 1981, the bottom line looks to be the key decision-maker here.