The Strad indicated recently that Christies would follow Southeby’s lead and stop its annual instrument auction. The article indicates that all its auctions activities have shifted to private sales (presumably this means their staff as well). That was always a dream of mine, to go to a music instrument auction at Southeby’s, and now it won’t be possible.

The Strad article (and Christies) indicate that poor sales at the bottom end of the market were to blame. In addition to this, they indicated that there were problems with scale (i.e. a good profit margin on small instruments wasn’t good enough compared to a lower margin on larger amounts).

Given things at Southeby’s are a little more advanced, a little bit more research for what happened at Southeby’s is in order.

First question: How do they make money? As a note, Southeby’s has a 20% buyer’s premium (on top of the auction amount) up until 100000 USD, and then 12% on the rest. The article is a little old, but let’s go with that at the moment.

Second question: How are they organised?

  • Southeby’s musical instruments auction page.
  • Ingles and Hayday. The firm set up by the team behind Southeby’s musical instruments auctions. Am I missing something here? Going to Ingles and Hayday indicates that they have pretty much replicated the same business as Southeby’s, but privately. This indicates that perhaps it was a viable business, just not at the buyer’s premium, and for the type of instruments being auctioned (i.e. there were too many cheap instruments, say less than 50000 USD).

So it’s basically a team of two people (plus some ops staff). Let’s say they used Southeby’s marketing department, so they probably need one or two operational managers. It’s looking like a lot of work for small peanuts. Let’s keep digging.

Third question: How much did they make? Let’s just work this out on the back of the envelope.

In the midst of the crisis (in 2009), according to the Wall Street Journal, Southeby’s sold 80.6% by number or 91.8% by value. It tries to tell an upbeat story, but no total numbers.

Then I came across this: competition. Brompton’s auctions have the following news release where they say they:

  • 1812000 GBP total sales, 350 lots (i.e. a total of 346500 USD in buyer’s premiums)
  • 500000 GBP more than Southebys (i.e. a total of 1312000 GBP = ~245000 USD in buyer’s premiums)
  • 800000 GBP more than Bonhams (i.e. a total of 1012000 GBP = ~202000 USD in buyer’s premiums)

This 245000 USD has to cover profits for Southeby’s, the staff payroll, the payroll load (e.g. HR, benefits, expenses, etc.), and auction running costs, amoungst other things.

Using the team structure that Ingles and Hayday are using (which is presumably leaner than that they were used to in Southeby’s), they have one additional operational manager, i.e. a team of 3. Let’s also assume they make 50000 GBP a year, so that’s 25000 GBP per auction. That leaves 83300 USD for profit AND for running the auction (245000 USD – (3 x 25000*1.54*1.4)). Let’s say the auction room costs 20000 USD over the days for the auction and leading up to it and 20000 USD is spent on marketing and flyers. That’s 43300 USD profit for Southeby’s. At the corporate tax rate of around about 23%, that leaves about 35000 USD (or 23000 GBP) for Southebys for running the auction.

Ingles and Hayday say they organise 2 auctions a year. (By way of comparison, Brompton’s do 4 auctions a year, however they have a team of 10, intelligently with 2 dedicated to Asia.)

Conclusion: Southeby’s wasn’t interested in 43000 USD per auction. For me as a purchaser, I love musical instruments, and it sounds like auctions are a great way to buy a cheap instrument because they certainly are not a great way to sell a cheap instrument and make a lot of money!