Beating the Auction Duopoly
Sotheby's and Christie's are a combined 538 years old. Can the 48-year old Heritage Auctions topple this auction house duopoly?
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Today, we are talking about the auction market duopoly (Sotheby’s, Christie’s) and how Dallas-based Heritage Auctions could beat it.
Also this week:
Best of CES
The Bitcoin ETF
…and them fire memes (including Boeing)
In the late-1990s, I was a huge fan of eBay auctions.
I scooped up some nice Air Jordan sneakers and Mitchell & Ness throwback NBA jerseys.
However, I fell for every psychological auction hack (scarcity, endowment effect, auction fever, FOMO etc.) and grossly overpaid for most items using my dad’s credit card.
The hobby didn’t last long.
Fast forward to the start of 2024: I stumbled upon an online auction for the actual clothes and props used in the filming of HBO’s Succession.
After decades of sitting on the auction sidelines, I threw in a bid for Roman Roy’s kid-sized Walmart t-shirt and Old Navy shorts from the series finale. Unfortunately, when Kieran Culkin won the award for Best TV Actor at the Golden Globes, I was instantly priced out (translation: my wife wouldn’t let me top a $1,200+ bid).
I’m telling you all of this because the auction was hosted by a fascinating Dallas-based company called Heritage Auctions (HA).
Founded in 1976, Heritage Auctions built an empire in the rare coin collecting business before expanding into other auction categories. With annual auction sales surpassing $1.8B, it is now the 3rd largest auction house in the world.
You definitely know the two leading auction houses: Sotheby’s (total auction sales of $5.3B in 2023) and Christie’s ($5B).
Both were founded in London in the mid-1700s and have a combined age of 538 years old.
Although Heritage Auctions is only 48 years old, it has found a way to challenge this centuries-old duopoly.
How? Let’s find out by exploring:
How Heritage Auctions started
The auction business model
Heritage Auctions opportunities
How Heritage Auctions started
The Heritage Auctions story began with a hobby: coins (the official term — that I was unaware of until a few years ago — is “numismatics”, which is the study and collection of currencies throughout history).
Two of the most prominent numismatists in the mid-1960s were teenagers. Steve Ivy began running ads for rare coins in national publications in 1964 at the age of 14. James Halperin launched a coin business in 1968 at the age of 16.
Ivy and Halperin were essentially the Steve Jobs and Bill Gates of the numismatics industry during the 1970s.
Remember that Jobs — along with his co-founder Steve Wozniak — initially received funds to launch Apple by skirting the law: the two sold illegal “Phone Phreaking” devices, which allowed users to make long-distance phone calls for free.
Similarly, Halperin's entrepreneurial streak started with a legally suspect mail-order advertising business at the age of 13. It ran afoul of the US Postal Service and he had to pay back $100,000 (while Halperin conceded that he may have been "a scoundrel" at the time, he denies any customers being duped).
The Gates parallel involves post-secondary education. Before Harvard incinerated its reputation, Halperin and Gates were both undergraduates at "some school in Boston" before dropping out and launching businesses.
Gates started a moderately successful technology firm you may have heard of called Microsoft.
What did Halperin do? He leaned into the coin-trading business, which boomed during the mid-1970s as commodity prices entered a bull market (and there's yet another parallel: Gates came from Washington state corporate royalty — his dad ran a leading Seattle law firm and his mom was the chair of United Way International — while Halperin's father went to Harvard Business School and hobnobbed with the Boston business elite).
Now that I've stretched the analogy as far as it can go, let me highlight a major difference: unlike Gates and Jobs, Ivy and Halperin ended up joining forces.
Here is the sequence of events that led to their partnership.
In 1979, Sotheby’s wanted to expand into the rare coin market and offered Halperin $22m for his business. Halperin was riding high and said “no”. He almost immediately regretted the decision as commodities turned sharply in the following year.
What happened? The Hunt Brothers tried to corner the silver market by buying 1/3rd of the world’s available supply of the metal. Although they were briefly able to manipulate the price of silver, the US Federal Reserve stepped in and shut it down.
The price of silver fell, pulling down the price of other metals.
Halperin effectively needed a bailout.
In a 2014 talk for the Dallas Business Club, Halperin recounted the story of Ivy calling him and making an offer to join Heritage Coin Galleries (which Ivy launched in 1976):
[Ivy said] “I think that if we join forces we could do really, really well right now and I'm so sure of that that I will sell you half of my company for a non-recourse note. You can put your auction company and your European operations into the mix and I will buy those from you at a fair price. I will pay you now and you can sell the rest of the business to your employees…the only catch is that you have to move to Dallas."
In 1983, Halperin joined Ivy in Texas. The combined operation immediately cut back office expenses by 50% and they expanded into other business lines. Heritage Coin Galleries was primarily a coin wholesaler but Halperin wanted to democratize coin collecting the same way that Fidelity — a company he knew well from Boston — had democratized stock-ownership for retail investors.
To appeal to the retail market, Heritage aggressively acquired auction businesses across the country (often paying 2x the next highest bid) and improved the information flow (Halperin published a popular guide on coin grading which standardized the industry and increased transparency).
Heritage was also one of the first auction houses to embrace the internet. Halperin had caught wind of Amazon when he self-published a best-selling fiction novel (the plot was about a world in which people had access to a 100% accurate lie detector).
“I was trying to envision the future of e-commerce,” Halperin told the Dallas Observer in a 2018 profile. “[I was] impressed by how Amazon was doing counterintuitive things, like allowing negative reviews. I persuaded Steve to let us post a searchable history of realized prices, which was previously proprietary info.”
The website soon added a number of other features that are now e-commerce staples (e.g. want lists, notifications, extensive product details) and attracted tens of thousands of users.
By 2000, Heritage was the world’s largest coin auctioneer with nearly twice the volume of its closest competitor (auction sales reached $120m). That was also a significant year because Heritage expanded into another auction category: comic books (Halperin put up $500k worth of his own comic books and the auction sold $1m at a time when the entire comic collecting industry was worth $3.5m).
The company was renamed to Heritage Auctions with the glorious url www.HA.com and now operates in 40 categories, with annual auction sales totalling $1.8 billion.
To understand how Heritage is a threat to the Sotheby's-Christie's duopoly, let's break down how the auction market works.
The auction business model
Some quick history.
Sotheby’s was founded in 1744 by a London bookseller named Samuel Baker. The business found early success by auctioning the library collection — including rare books and manuscripts — from wealthy individuals. In 1767, Baker partnered with George Leigh. After Baker’s death in 1778, his nephew (John Sotheby) inherited part of the estate. I leave it to you to figure out how the auction house got its current name.
Christie's was established in 1766 by a Scotsman named James Christie. Based on my superficial internet research, it seems like Christie had some serious rizz and made many connections with wealthy people during his 20s while living in London. Christie's early auctions included famous artworks he obtained from his network of European aristocracy including items from Russia's Catherine the Great and England's Charles I.
Since the late 1700s, the two firms have firmly established themselves as the go-to places for fine art auctions.
Sotheby’s, Christie’s and Heritage Auctions are all private companies.
But this wasn’t always the case.
Sotheby’s was listed on the New York Stock Exchange (NYSE) from 1988 to 2019 and is currently owned by BidFair USA (a firm owned by Patrick Drahi, a French-Israeli telecoms magnate worth $5B).
Christie’s was listed on the London Stock Exchange (LSE) from 1973 to 1994 and is now owned by Groupe Artémis (a holding company for François Pinault, the $30B owner of French luxury giant Kering).
Their short tenures in the public markets is beneficial for us because I was able to read Sotheby’s 2018 10K annual report , which highlights the following key points:
What do auction houses do? They facilitate the sale of artwork and other collectibles between sellers and buyers. In 2018, Sotheby’s intermediated $6B+ of sales in two main ways: 1) running ~400 auctions with 50,000 lots sold ($5.3B or 84% of total sales facilitated); and 2) private sales brokered through its network ($1B or 16% of total sales facilitated). Private sales have been a faster-growing part of the business in recent decades as global wealth has exploded and art collecting at the highest ends requires a lot of behind-the-scenes discretion.
How does Sotheby’s make money? The matching of buyers and sellers is called “Agency” services. For its effort, Sotheby’s takes a commission on every item sold from both the buyer and the seller:
Buyer’s Premium: A charge to the buyer that is added on top of the winning bid (aka “the hammer price”). It is typically 15% to 25% of the winning bid.
Seller’s Fee: This figure is typically lower than the Buyer’s Premium and ranges from 5% to 20% of the winning bid.
Profitability: Of the $6B in auction sales facilitated by Sotheby’s — which includes its various fees — the company takes about 16% of the total amount. In 2018, Sotheby’s revenue was $1B, with 86% coming from the “Agency” segment. The remaining 14% of its revenue came from financing (lending against collateral), inventory sales (Sotheby’s selling art it owns outright) and other services.
The majority of Sotheby’s expenses are made up of salaries ($330m for its 1,700 employees) and S&GA ($170m). This is about 50% of revenue and its operating profit is $182 (~18% of revenue).
In sum: an auction house has to secure high-value consignments and then attract buyers. They justify the commission (buyer’s premium, seller’s fee) by:
employing art experts
appraising the items
creating a catalog
setting up the auctions
marketing the lots
finding buyers through its networks
putting its brand and reputation on the line.
Sotheby’s says that the main driver behind the industry has been the Three Ds:
Historically, the primary reasons that prompt individuals to consign artworks to auction are the three D's: debt, death, and divorce. These circumstances frequently compel sellers to part with their art. However, other factors such as a shift in personal taste or the need to downsize may also influence the decision to sell.
Everything I’ve just written also applies to Christie’s. These two firms are the 800lb gorillas in the space and their competitive dynamic impacts everyone.
In 2000, Sotheby’s and Christie’s were sued by buyers who believed the duopoly was colluding to fix the price of auction sales. They controlled 90% of the fine art market and, honestly, it would have been more shocking if they didn’t engage in any shenanigans. Thankfully, the two firms lost a civil suit and ultimately paid $500m+ to customers affected by their scheme (the Department of Justice also added some criminal charges for good measure).
That is an example of where the duopoly hurts sellers (and the two firms still own 80%+ of fine art).
But the sellers can also harm the duopoly by playing Sotheby’s and Christie’s against each other.
Since ultra high-end fine art is a massive dick-measuring contest, consignors are aware that Sotheby’s and Christie’s are desperate to acquire the most prestigious artworks and be the first phone call for the wealthiest families.
As the art market has expanded, consignors have put pressure on Sotheby’s and Christie’s by asking them to:
waive (or reduce) the seller’s fee
or even share a portion of the buyer’s premium
Another (risky) way that auction houses secure top-tier art is by guaranteeing a minimum price for the seller. If the winning bid is higher than the minimum price, the auction house keeps the difference. If the winning bid is lower than the minimum, it must pay out the difference.
The Economist has a juicy story to make the point:
Sotheby’s has had its manicured fingers burned by a generous guarantee it gave to the heirs of its late chairman, Alfred Taubman, on the sale of his collection. Christie’s says it pushed up its offer to the Taubman family to well over $400m. So as not to lose face, Sotheby’s, which had estimated the collection’s worth at $500m, offered a guarantee of nearly $515m. On the items sold by the end of 2015, Sotheby’s reckons, it was $12m out of pocket including its marketing expenses.
These concessions that Sotheby’s and Christie’s make negatively affect their margins and create a race to the bottom (there is only so much of the commission they can give up).
With that context, let’s look at how Heritage Auctions has been able to build itself into a credible threat.
Heritage Auction opportunities
The main competitive advantage for Sotheby's and Christie's is their brand and relationships, especially in the high-end art market.
In practical terms, this means that the duopoly has access to the best art and wealthiest buyers. This matters because the fine art world — like other forms of entertainment and culture — is governed by power laws: a few players account for the vast majority of the outcomes.
Doug Shapiro did an analysis on pop culture and found huge audience skews on:
Netflix: The top 10% of originals in 2022 accounted for 75% of all global demand.
Spotify: The top 1000 songs have more combined streams than the other 80,000,000 songs on the platform.
There are similar distributions for top authors, films and athletes.
Fine art is even more concentrated.
The Sotheby's Insight Report from 2023 identified 50 people in a top category called “$1m market", artists who had multiple works sell for over $1m. Out of this group, only five artists (Alberto Giacometti, Claude Monet, Jean-Michel Basquiat, Pablo Picasso, and Andy Warhol) accounted for 80% of private sales in the first half of 2023. Although private sales make up less than 20% of auction sales, they involve the wealthiest buyers and sellers. The prices set by the top artists determine the market for the rest.
According to the New Yorker, one family owns nearly all of Warhol’s output:
…Andy Warhol [is] a “one-man Dow Jones,” because his work is seen as a bellwether for the contemporary-art market. But Tico Mugrabi and his family have effectively cornered the market on Warhol. They own about a thousand works by the artist, and are constantly buying and selling his paintings—regulating supply to keep prices high. They describe themselves, without irony, as “market-makers.”
Sotheby’s and Christie’s have built a brand over centuries that caters to people like the Mugrabis.
Beating the duopoly requires an indirect approach.
“It's hard to compete with Christie's and Sotheby's in fine arts,” Halperin said in his Dallas Business Club talk. “But we manage to go after [small] niches….that will, hopefully, eventually grow into bigger art categories.”
Heritage climbed to 3rd place in the auction market by focusing on an underserved (yet growing) niche: rare coins.
To outcompete Sotheby’s and Christie’s in the future, Heritage will have to replicate the success with other categories.
A major macro trend that Heritage can take advantage of is the estimated $30T wealth transfer that millennials will receive from their parents. This demographic has a different taste from the old guard and as they look at alternative asset classes for investments, Heritage Auctions is well-placed along three dimensions:
The right niches: Top-tier fine art is never going away. But Heritage has established itself as a leader in auction categories with future growth potential: Sports Memorabilia, Hollywood Entertainment, Pop Culture, Music, Space Objects, Historical Documents, Comic Books and more.
Sotheby’s and Christie’s have the $50m+ art items on lock but their emphasis on that market has allowed Heritage (and other auction houses) to make headway in the mid-market (under $5m).
Heritage’s expansion into comic books in 2000 is instructive: Halperin put up his $500k collection and it sold out. That auction created PR for Heritage among collectors. Actor Nicholas Cage — yes, NIC CAGE! — listed his comic collection with Heritage shortly after and Halperin became very good friends with Marvel founder Stan Lee (who also consigned his comic collection with Heritage).
The Heritage Auction website has a Hall-of-Fame section for its top sales and there are a number of items in the aforementioned niche categories (that are growing and attractive to millennials). It should also be noted that the coin business has a major catalyst coming. Between 1999 and 2008, the US Mint created unique designs for the 50 states as part of an effort to get a new generation into coin collecting. Over 100m coins were minted and millions of young people were exposed to the hobby.Finally, keep an eye on Wines and Watches. These are two growth areas in the auction market which Sotheby’s and Christie’s have prioritized but Heritage is also making headway.
Internet-native: Heritage Auctions was one of the earliest to adopt the web. Even today, Halperin says that HA.com receives twice the combined traffic of Sotheby’s and Christie’s. This extra traffic means more bidders, making Heritage a more attractive destination for consignors (all things equal). Obviously, you’re not going to buy a Da Vinci through a web browser, but younger generations prefer digital-native shopping. The duopoly has improved its digital products, yet still only makes 20-30% of auction sales online (in comparison: Heritage does 60%+ of auction sales from its website). Heritage’s web-first approach also allows for more frequent auctions every year.
Transparency: Heritage Auctions — and Halperin specifically — had a maverick and Wild West reputation for decades. With the rise of the internet, everything changed. The company's decision to prioritize transparency — by providing price histories, displaying guaranteed minimums, and offering detailed online assessments of items — transformed it into a destination website and a trustworthy partner for buyers and sellers. This approach is significant for two reasons: 1) millennials and younger generations prefer conducting their own research; and 2) by bringing the inner workings of the industry to light, it generates interest and broadens the potential market (similar to how Halperin's book on grading coins opened the market to a wider audience in the 1980s).
The contrast between Heritage Auctions open approach and the duopoly’s old school tactics was perfectly encapsulated in a story from 2016. A data startup scraped 3m price listings from the Heritage Auctions website and then sold itself to Christie’s. Heritage sued and Christie’s data startup had to pay nearly a $2m fine.
An even more recent example began in courts last week: a Russian billionaire sued Sotheby’s for colluding with an art adviser to overcharge him $1B on 38 artworks.
Final Thoughts
Do I think the Sotheby’s and Christie’s duopoly can be beaten?
Let’s look at a parallel in the world of higher education.
The startup incubator Y Combinator — which launched in 2005 — has built a brand that is now more preferable for ambitious young entrepreneurs than a degree from either a Stanford or Harvard (both institutions with hundreds of years of history).
However, Y Combinator did not achieve this by creating a traditional 4-year university with a large campus, housing blocks and dozens of faculty schools (eg. sociology, classics, biology, physics, history, chemistry, business).
Instead, Y Combinator identified a niche that was attractive to ambitious young people: tech startups. In the nearly two decades since its founding, this “niche” has grown to dominate the upper echelons of corporate America.
Heritage seems to be following a similar trend in a different industry.
There are certainly other players attempting to unseat Sotheby’s and Christie’s. Phillips is another auctioneer that has a long history, founded in London in 1796. China Guardian was founded in 1993 and specializes in Chinese art, capturing wealth from the region. Artsy is an online marketplace founded in 2009 with 1m+ artworks by 100k+ artists.
However, I believe that Heritage is the best-placed among these alternatives because it combines the offline and online worlds and has leadership in growing auction categories.
Auction stats from 2023 seem to be trending in Heritage’s favour as well. According to Barron’s, auction sales at the duopoly (plus Phillips) were down 19% YoY to $11B while Heritage Auctions saw total sales increase 22% YoY to $1.8B as “newer and younger collectors may be drawn to less conventional, less expensive art”.
These results actually relate back to Succession.
How you ask? Well, it has nothing to do with the pain of being unable to pay $1,200 for Roman Roy’s Walmart t-shirt (which has a retail price of $9). It has to do with the theme of the show: who from the younger generation will succeed the older generation.
Because the tastes of that younger generation will ultimately determine if Heritage Auctions can actually beat Sotheby’s and Christie’s.
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UPDATE (Sunday, January 14): After publishing this article, the Heritage Auctions closed the auction Succession props and clothing. **SPOILER ALERT** for those that haven’t seen the show! It sold 236 lots for a total of $627,825 and the most expensive item was won for $25,000: Roman Roy’s cue cards for the obituary speech for his father’s funeral.
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Links and Memes
The winner of CES: Las Vegas hosted the annual Consumer Electronic Show (CES). Every year, there are nearly 50k exhibitors but usually only a few ever breakout from the pack. This year’s winner was Rabbit R1, an AI-powered pocket assistant.
The ambition isn’t to replace your phone but, rather, to replace certain apps with an easy-to-use custom-AI operating system (mostly using voice commands but there’s also a screen with a scroll wheel and a rotating camera).
A few thoughts:
The cynics were out in full force roasting the product (“why would I carry two devices?” and “Apple could wipe this away with a single app update”)
The cynics aren’t necessarily wrong but the device is only $199 and has positioned itself like those Tamagotchi hardware pets from the late 1990s: think of Rabbit R1 as a toy (people spend $199 on toys all the time and the device sold out; compare that to the $699 AI Pin from Humane, which already laid off staff before shipping any units)
Rabbit’s CEO Jesse Lyu wrote a thread on the product and my takeaway is that the company went the hardware route because making hardware is hard. Thus, Rabbit can actually stand out vs. the majority of AI products which are apps. Also, the startup says that integrated hardware and software means its answers will come 10x faster than ChatGPT (I’ve seen zero verification of this claim).
My guess is that the product won’t work. There is no subscription option which doesn’t make much economic sense because the device will have ongoing API costs for every AI action. Either way, my buddy Adam Singer wrote a good article on why experimenting is important and we should applaud the Rabbit R1’s ambition: “It's not about the specs or the price tag…It's about the audacity to be different, to inject a little fun into what some would say is now simply another part of change-averse corporate America. It's a neon sign flashing: you don’t have to be a trillion dollar company to build a device. That’s cool.”
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Some other baller links:
CES Round-up: The Verge picked the best products from the event in this 9-minute YouTube video including Hyundai special wheels for parallel parking, a portable battery pack to power your home and see-through LCD screen.
Nick Saban is the greatest college football coach ever…and has just retired from his position leading Alabama. The Origins podcast has a three-part series on Saban, including interviews with him and dozens of people that have known the coach. Episode two is a deep dive on Saban's "Process" and how he psychologically prepares his teams. Saban grew up in a mining town and is all about a hardcore work ethic. His superpower seems to be knowing how to push the buttons of each athlete and keeping the team morale at a healthy baseline. When they win, he talks to them about the areas of the game where they didn't play well. When they lose, he helps them get out of a mental funk.
WhatsApp is making waves in America: Zuck’s messaging app is huge around the world but plays second-fiddle to iMessage in North America. Big Technology said that is changing and a major driver of WhatsApp growth in the US is Apple’s insistence of keeping the blue bubble / green bubble split for Android users. This move is pushing people to use WhatsApp so that all of the friends in the group chat — including Android users — have the same experience (I totally get this: I’m literally in a WhatsApp group chat called “M_______ needs an iPhone”).
…and them fire X posts:
The first application for a Bitcoin ETF was in 2013. After more than a decade — and one recent major lawsuit — the SEC approved 11 Bitcoin Spot ETFs. These ETFs will make it much easier for regular investors to get Bitcoin exposure but the major story was the absolute shitshow in the 24 hours prior to the approval.
The official SEC account on X was hacked and published a post announcing the ETF approvals. Bitcoin pumped briefly on the news then fell back after the SEC said it was compromised. To make matters more absurd, it looks like the account was hacked because the SEC didn’t have two-factor authentication turned on…which led people to dig up this perfect SEC tweet from October.
Finally, musician James Blunt has the funniest bio on X, including the line "Proof that one song is all you need" (he's obviously referring to "You're Beautiful" but I actually think "1973" is a better song).
He also drops tons of banger tweets. One time, a troll asked, "Do you think James Blunt has run out of that 'you're beautiful' money?" and Blunt responded with "HAHAHAHAHAHAH NO." Anyways, Blunt dropped another self-deprecating gem last week.