Issue #229  12/28/2016
Part 2: New Observations on the Ever-Changing Photography Market (What Keeps Me up at Night)

By Alex Novak

Last newsletter I talked about Paris Photo and made a few comments about the market relating to the show and recent events. Here's a lot more depth on how I view things for Photography going forward, including some of my ideas on photography collecting's economics and where you may see some serious changes in collecting habits and why.

1. Online Auctions: Hazards Ahead

Pushing the enter key is only the first step of a potentially expensive process in an online auction.
Pushing the enter key is only the first step of a potentially expensive process in an online auction.

Not all photos are equal in this changing scenario, and online auctions are often one of the big negative influences. The photo market is splintering into multiple markets with potential winners and losers. While rarity—both real and manufactured—has always been a strength, it is now more vital than ever. Online auctions--merging and multiplying rapidly--are driving prices for the more readily available photo images (and other art multiples) down and destroying much of the small traditional and entry-level contemporary photo market as well—at least what is still left of those markets after the 2008-2010 mega-recession. That's not particularly great for the future of the art multiples market, like most photography. A market is only as strong long term as its ability to add viable new blood.

There are simply too many online auctions dumping too many mediocre lots onto the market for the relatively small number of tech-savvy buyers for those items. The buffer of dealer inventory and patience is being eliminated, and the flood of material coming out this way will continue to dilute the prices for many commonplace images under $10,000 that have no true rarity or wide market. This doesn't mean that all photos under this amount will go down, but to succeed they will have to be images that have true rarity and interest, as well as appeal to specific collector markets, such as 19th-century photography, which, while hurt by the recession and low inflation, managed to survive most of the online auction onslaught.

Unlike galleries and dealers, online auctions are mere machines designed to sell quickly without regard to long-term relationships or value building for artists. Unfortunately, they are designed badly, and the percentage of buy-ins are very high, and appear to be going up, while prices for some lower-end material have been going down. EBay had some similar initial impact when early on the market for post-mortem daguerreotypes dropped precipitously after so many of them started showing up on the web site, indicating that their rarity was somewhat overestimated. Now multiply this effect across whole sectors of the photo market with dozens of major online auction sites being launched over just the last few years.

Even when relatively decent material in this range is offered in this manner (think estate sales), the images just won't sell this way, except at fire sale levels—and then mostly to dealers with time on their hands, rather than to serious collectors who rarely have that time, nor the ability to sit and bid online. I know several major collectors who still barely know—or care--how to get and send email, let alone find Internet auctions and bid online at the proper time. Heck, I don't have the time to protect from a last minute snipe, so I rarely bid this way myself.

Often these images have serious condition issues, many of which are not noted in condition reports—when there are any such reports to begin with. Often it is difficult if not impossible to view the material in person. Packing and shipping charges often outstrip the cost of the images themselves. I was recently told that it would cost me about $2,400 to ship and pack a dozen or so relatively small photos from a major NYC auction house to my home north of Philadelphia that I had bought in their regular auction and online sales. This was deemed to be "an inexpensive shipping quote" by the staff there. The initial estimate was $7,000 until I complained bitterly about it. I wound up driving into New York twice (the first time the photos were sent to their warehouse in Brooklyn by mistake) to pick them up instead.

I have heard many dozens of similar complaints from collectors and fellow dealers who tried to buy from the larger auction houses via their online sales. The larger auction houses just don't recognize the different market that online auctions address. Online buyers are used to a different set of rules: cheap packing and shipping, ability to return items, good personal communications and customer service, and clear, accurate, detailed descriptions. These were much the same issues that doomed Sotheby's brief and tragic flirtation with eBay back in the late 90s. It doesn't look like many of those lessons have been learned, and these issues will continue to put a brake on auction action online for the mega auction houses.

Likewise the newer online-only auction houses are finding it difficult to build a profitable model with one-off sales and no customer loyalty. The mergers and blood baths have already begun for some. And the printed-later images that were duplicated in the hundreds (some in the thousands), as well as the contemporary pieces by little known photographers without a strong following will undoubtedly suffer as a consequence. Of course, decorators who only want a less expensive piece for their wall may benefit if they are willing to spend the time online and later trying to get their print packed and delivered. But I never liked businesses that don't have the ability to develop long-term customers and a strong personal relationship.

That doesn't mean that the online action is a complete dud for these major auctions. Online bidding has been an important factor in live auctions, but there it is merely one more bidding stream and a way for those far away to engage personally and view the room to avoid some of the more dubious, albeit legal, auction practices that often dupe telephone bidders into thinking there are multiple contenders for a lot that they are bidding on, when in fact they are simply bidding against a reserve.

2. Inflationary Impacts and Trump Administration

Inflationary pressures will boost photo market and prices.
Inflationary pressures will boost photo market and prices.

Inflation, which has been virtually non-existent over the last few years (2015 was actually a deflationary year, and art and photo sales were down--at least slightly), is expected to rise sharply, and the Fed has predicted three more rate increases in 2017. The incoming Trump administration plans to boost infrastructure spending and cut taxes to foster a faster pace of economic growth. If they accomplish this, the fiscal stimulus, however, will come at a time when the economy is expected to be at full employment. "Inflation is warming up and there will only be more price pressures if Trump and his advisors can pump up the volume on economic growth," according to Chris Rupkey, chief economist at MUFG Union Bank in New York. Eventually there may also be a negative effect on the U.S.'s debt load, but that might have an inflationary effect too, as the Fed Central Bank is forced into printing more dollars to pay down that debt.

The art/photo market has usually responded well under more inflationary scenarios, since it has often been used as a hedge against inflation. Photography has in the past led this charge, as prices for photos have greatly exceeded inflation when it was viewed as undervalued. While much of the photo market has certainly not looked undervalued for a while, it will participate in any general art market advance.

But, as I noted above, only the part of the market with true rarity and a good past track record may profit from these inflationary impacts. I'm already seeing many prices increases from well-known artists in just the last few months. It may be too early though to see if these become a trend or even hold up. Some of these same artists are ones that produce boatloads of work, flooding the market. Many of these same images can be grabbed from online auctions for a fraction of the cost of the new higher prices, although often the prints on offer aren't the most popular. Many of the artists are simply pushing up the appraisal value of their work, anticipating estate-planning issues. Many had to hold off on price increases for many years now. But their timing could be off a bit.

3. A Changing Gallery Model

The gallery model will change. Over the last few years and, ironically, in particular over the last few months, more and more photo (and art) galleries have gone private, downsized or gone out of business entirely. That's not to say that there are less physical galleries, but that the churn seems to be moving faster as rents go up more quickly and higher than photo prices to maintain those spaces have, particularly in metro areas such as New York, San Francisco and LA. It is harder than ever to start a photo business, since it costs much more and requires much more expertise and knowledge than previously. Failures are easier to come by.

As most of the auction houses have revised their approach to how they think of dealers from customer to competitor, the pressure from this additional competition adds to that gallery/dealer burden. "Cutting out the middle man" seems a natural progression, until you understand that the photography market is quite a bit more complex and nuanced than a commodities market. Auctions are not a "photography exchange," and never will or can be, despite their desires.

Some houses have recognized this and have been boosting up their private sales divisions and even buying galleries; or in other words, turning into the very thing that they have been competing with, but using their larger customer database. But knowing who the customers are and having the right relationship are two very different things. Galleries faced with ever-higher costs, especially in major urban centers where most serious photography galleries are located, will certainly be challenged though.

Many galleries have sought out clients and sales at art and photo shows, and collectors and curators have responded by attending some of these, particularly the largest ones or the local ones. But will the occasional touching base at shows be enough? I think the smarter players will do a lot more to keep the relationship with their top clients a priority.

4. Market for Shows Reaches Saturation Point

The Art and Photography Fair market may have nearly reached its saturation point. The bigger fairs have been getting bigger and bigger. Both Paris Photo and AIPAD's The Photography Show have recently expanded their number of gallery/dealer booths. Some of the smaller shows have become satellite shows for small dealers or less successful or new galleries. But the latter have had difficulty in bringing in the same buyers and numbers as the main shows.

Shows like Paris Photo and AIPAD expand as others have a difficult time.
Shows like Paris Photo and AIPAD expand as others have a difficult time.

The turnover at most of these smaller venues is quite high for several reasons. One, their exhibitors tend to be newer, smaller and less established. Those are exactly the kind of dealer that goes out of business more rapidly. Two, as exhibitors get more successful they tend to gravitate to the larger, more prestigious shows, leaving the smaller ones behind. Three, there is less economic incentive to do the smaller shows, since they just have a difficult time bringing in bigger buyers. There just is so much time you have to view a show, and with the larger and larger main show, most attendees just never leave that fair at all, except for dinners (and occasionally for a lunch or an auction).

Even when the bigger show management teams strike out into new territory, success is not always secure. Paris Photo, for instance, realized this year that its LA offshoot was just not working for exhibitors. After losing many of its bigger and better known exhibitors due to high costs and low sales, they finally (and wisely, I think) decided to call it a day there.

There is also the factor of economic balance for the fairs. If they are big enough for full time staff, that staff has to be economically productive. Just one show a year simply doesn't pay those annual salaries, etc. Hence the need for a second show about six months apart. It is a struggle though to find the right model and venue to make that second one work. So far, neither Paris Photo nor AIPAD have added that successful second vehicle to its schedule. I might suggest Art Week in Miami. AIPAD had a relatively successful first year there, but didn't ultimately risk a second year after hesitating so long on its decision. But it needs to be more balanced than Paris Photo's LA venture where ironically the focus on contemporary photography didn't work.

There is still some room for more focused shows or the small table-top events when well run with strong educational programs and some kind of built-in support, such as the 19th-century Photography Show, presented by the Daguerreian Society this year. But that's a rather small market, and very limited.

5. Potential Tax and Regulatory Problems

With the Republicans taking over all segments of government, we may see a major reform of the tax laws that could have the potential for huge impacts on the art and photography market. I have been privately encouraging AIPAD board members to press for funding a lobbying effort, working in tandem with groups like the ADAA and the American Alliance of Museums. We've been clobbered in the recent past on many issues, including the way collectibles are handled as capital gains versus other "investments", such as stocks, bonds and real estate. If the tax rates were substantially reduced and the tax code was "simplified", would that mean that such capital gains treatment would be further eroded? Would it mean major changes in the way that charitable donations will handled in terms of determining value? These are—to quote our president-elect—HUGE potential impacts on this field.

Changes in tax laws can have a big effect on photography.
Changes in tax laws can have a big effect on photography.

It is rather difficult to tell at this stage what will actually happen on taxes in the U.S., but it is not comforting to see the Democrat's selection of Senator Chuck Schumer as their Senate Minority Leader. Schumer has never been a friend of the arts, only a friend of Wall Street. We can't expect that the museums will do all the heavy lifting.

There are also other major regulatory issues coming out of places like California with its new Certificate of Authenticity law, which goes into effect next month. While that sounds like something good, it is a disaster-in-process that will make dealers and galleries avoid the state and customers there like the plague. It's a record-keeping nightmare (the information has to be kept separately for seven years), and forces dealers to give up their vital private sources for vintage material that is signed. It was primarily shoved through by an irate actor who bought what he felt was some bad sports memorabilia—an area rife with forgeries. While there is an attempt to moderate the bill, it's mostly led by small bookstores, which simply want a slightly higher dollar figure exception. As some photo and art dealers wake up to its serious consequences and requirements, even for non-California dealers who do any business in the state with clients there, it will also begin to effect the photo and art fairs there. California will lose at least tens of millions of dollars in sales tax revenues, as well as local businesses will suffer as shows close down in the state. What's worse is that California has been too often a leading force in other states.

Art and photo associations need to wake up and realize that the continued existence of their members depends on those associations lobbying on behalf of its members, whether it is for favorable tax treatment issues or to prevent business-killing regulations. They better not just be show managers in this environment.

6. A Much Stronger Dollar

We have not seen such a strong dollar in many years. This provides those of us in the U.S. with a better buying position vis-a-vis other international buyers. This should continue at least through the next year with the Fed predicting regular quarterly rate increases, while the Europeans and others are fighting weaker economies. That means it is easier to buy than sell though for U.S. galleries and dealers.

These are only a few of the things that keep me up at night.