The Business of Art

Narration:

In 2019, the global art market was booming. 

Art fairs drew crowds of international buyers who would fly in to make purchases, making in-person events a central part of the art buying world. And while online art auctions were becoming essential for the smaller auction houses, for the bigger players, it remained a relatively small percentage of their market.

Fast-forward to 2022, and there’s been plenty of change. 

Like many industries, art auction houses had to quickly pivot to survive the pandemic. By March 2020, auction rooms were closed. Travel and event restrictions ground the art fair market to a halt. Suddenly, the relationships that assist in success in the world of high-net-worth art sales, were harder to maintain.

But with challenges comes the opportunity for innovation. By mid-2021, online purchases had now grown to account for 33 percent of sales, opening to new markets. And interest in the purchase of Non-Fungible Tokens (NFTs) is re-monetising the creative industries online. 

Welcome to ‘The Business of Art’ an episode in ‘The Business of…’ podcast brought to you by the Australian Graduate School of Management at UNSW Business School.

In this episode, we ask Coralie Stow, CEO at Menzies Fine Art Auctioneers for her insights on how the art auction industry has changed. What does the future hold for the art auction industry? What changes and developments does she expect to stay around, and how has the buyer market shifted over her time working in the Australian art market.

We also hear from Dr Eric Lim, a Senior Lecturer at the UNSW Business School. Eric is the founder of the UNSW Crypto Clinic and is working with industry partners to understand how to leverage cryptocurrencies, fintech, blockchain and NFTs. Dr Lim shares insight into how NFT technology is being implemented to reactivate the creative industries and provide protection from online replicas of artwork being distributed online. 

First up, it’s Nick Wailes in conversation with Coralie Stow.

Nick Wailes:

Hi, my name's Nick Wailes, and I'm the director of AGSM. And it's my pleasure to welcome you to the latest of the Business of Podcast series. And this time we're looking at the Business of Art, a really fascinating area to look into. And my guest in today's discussion is Coralie Stow. Coralie is the CEO of Menzies Fine Art Auctioneers based in Melbourne. Coralie, fantastic to have you here.

Coralie Stow:

Yeah it's lovely to be here, thanks Nick.

Nick Wailes:

Coralie, we're going to explore the Business of Art. And I think a lot of us will a bit like art appreciation, we know what we like, but we don't quite know. There's that old saying and I think with the business of art, we don't really understand what goes on behind the scenes. Maybe I could start just by getting you to talk a little bit about your career and how you ended up in this role and what was your journey to where you are now?

Coralie Stow:

Sure. Well, I started off as an interior designer actually. I studied interior design at RMIT, but I did also have a great love for art. I studied at school, and I guess that might have been my second choice of career. I ended up working in Hong Kong for a number of years as an interior designer. At the end of that time, I decided to explore something different.

So I went to London, and I studied fine art at Sotheby's Institute. And that was a course that was very focused on the art market and working in the art market with art as objects that are bought and sold. So came back to Australia, ended up getting a job at Deutsche-Menzies, as it was called then, as an administrator. And I've been basically stuck with it, worked my way up and two years ago or just under two years ago I was appointed CEO. 

I did executive MBA at UNSW, which was a fantastic experience. And I learned so much from that, it's been really really helpful.

Nick Wailes:

Great. And maybe you could talk about the Menzies business, how it's structured and what you look like.

Coralie Stow:

Yes. So we specialise in fine art. So, there are auction houses that sell the full gamut of furniture and decorative arts, jewellery and so forth. We don't do that. We specialise just in fine art, which is defined as paintings, sculptures, original prints, original editioned prints, lithographs, et cetera, and drawings. And we have two galleries, one in Melbourne, in South Yarra and one in Sydney in Kensington.

We're quite a small business, we have around 10 employees and we do have consultants other people helping us. And we work with predominantly private collectors. We do work a little bit with trade, so art dealers, art galleries, but most of our focus is on servicing private collectors who buy and sell art.

Nick Wailes:

I'd like to unpack that because I think it's quite interesting for people looking in on the structure and the shape of the industry. For someone ignorant like me, if I'm an artist practicing now, what's the typical or the traditional way that I would get to market and sell my products and how does that work?

Coralie Stow:

Sure. So an artist, we would always recommend, approaches a gallery, finds a gallery to represent them. And some artists are now breaking that mould and they're going directly to their collectors and using Instagram and other social media to sell their work. But traditionally, artists would find representation with the gallery. They would hold an exhibition of their work maybe once a year, maybe every two years. If they became a big name, they might find another gallery to represent them in a different state or even internationally. And they would work in their studio. They would produce a collection of work and that would be sold periodically through the gallery system. Buyers would come and collect those works. And then eventually, some of those works would come onto what's called the secondary markets. So, we operate in the secondary market. So, we are selling works that previously were bought privately, probably through a gallery and maybe several times over have gone through several sets of hands before they end up in our auction.

So, that's really the art market. It's a pretty traditional sort of market. I know we're going to talk about digital art and so forth in this discussion, but mostly we are talking about objects that are originally sold through galleries and then passed down through people's families or through other means and then eventually come onto the art auction market and are sold again and have another life.

Nick Wailes:

That makes sense. You buy something, you like it, you want to keep it in your family. So, I think it'd be interesting to just explore that difference between art as a possession and art as an investment. And we might get onto that a little bit. So, you play a really important broker role, really. So, you are between private collectors who are looking to sell their works and private collectors who are looking to build up a collection or acquire the role. In lots of other industries, the intermediaries like you have disappeared a little bit, but what is it that means that you are still so important in the transaction and still play a really important role in the market?

Coralie Stow:

Yes, I would put it down to relationships and expertise. So, art is still something that has a bit of mystique about it. It's something that people feel there's a certain degree of knowledge that you have to have to be able to buy and sell confidently. So trusted relationships with art specialists who have depth of knowledge going back decades, access to records and information that the general public don't have. That's really important when you're talking about buying and selling pictures of high value.

And I think that's why we are still here, as you say, a lot of industries, they've compressed between the buyer and the seller and so forth. And people feel like they can find out enough information about what they're doing without needing to have an intermediary, but in our area, there's so much specialised knowledge that goes into producing our catalogues. For example, the research into the provenance, the research into the artist's career, the research into supporting documentation and artworks that all tell a story of why a picture should be worth what we are saying it is worth.

Nick Wailes:

So you've got 10 employees, but I presume a number of those employees are then not just sweeping the floors and doing those things. So what type of people have you got working in the business?

Coralie Stow:

Apart from myself, CEO, we have three art specialists. So, we have a head of art, Brett Ballard. We have two senior art specialist, Catherine Baxendale, another art specialist, Esther Cameron. So, we have two other art specialists. We have a consulting arts specialist, Tim Abdallah. We have other consultants who assist us at times too with valuations. And then we have administration staff who do things like general admin, client services, and transport and display work for our business. So, the core of our business really, the key people are our art specialists and they're the ones that our clients come to us for their expertise.

Nick Wailes:

I think in most auction settings, you represent the seller and you're trying to maximise the returns to the seller, but it does seem that you also need to educate and build a relationship with the buyers. And how much do you think your role is actually educating people about a particular artist or those type of things?

Coralie Stow:

I think it's absolutely crucial and I'm sometimes surprised that some of our clients don't make more use of our expertise. So, it's really interesting that you can come to an auction house, the staff will greet you and anything you want to know about a picture, they'll freely tell you, they'll freely share that information with you, and they've got a wealth of information to share. So, I think it's a great resource for people.

Coralie Stow:

And even if you don't end up buying it, and of course, each picture finds only one buyer, but we might have several people interested in it. That knowledge is going to inform you and help you with your next acquisition. So, yes, we are very keen to share knowledge both through our online catalogue, through our printed catalogue, all the social media that we do and just talking face to face with clients.

Nick Wailes:

Because there are lots of transactions where you don't really get that opportunity to build up your knowledge. And I can remember you saying that there's a bit of a demographic shift going on who's selling and who's buying. So, can you talk about how who's selling is changing and who's buying changing and how that's changing the industry a little bit?

Coralie Stow:

Yes. So, we are seeing the older generation, I guess the baby boomer generation, is moving into smaller homes or different homes or they’re inheriting works from their grandparents or parents that they don't feel fit with their lifestyle anymore. So, we're now seeing these works coming back onto the market and being reevaluated. So, I think we're seeing a broadening out a bit of the market. Younger collectors are getting interested in works from all different periods of art. So traditional 19th century works, 20th century, modern work, contemporary work. All of those areas are getting attention from collectors.

And we are seeing a new generation of collectors coming in. So, it's quite exciting to see a new generation of collectors coming in and some very good collections coming onto the market because that older generation is moving on in their life and often doesn't want to retain these collections for their estate.

Nick Wailes:

I'm thinking about the new collectors, the tech entrepreneurs and those people. It's good to see that they're putting their money into old-fashioned technology, but are they collecting in a different way? Are they focusing on particular things, or are they quite broad in the way that they're approaching things?

Coralie Stow:

Quite broad. I've been really interested to see people buy very eclectic collections. Sometimes what you find is, people will, they buy a property and then they need to put art in it. So, they'll buy until they've filled it up. And then they're not buying so much anymore. And houses in Australia, we have traditional houses that have had modern extensions. So, you might have a Victorian cottage that's got an extension on the back. You want some traditional paintings for your front rooms, and you want some contemporary for your back rooms.

So yes, people are collecting across the whole spectrum. And that's quite encouraging to see I think because rather than being very narrow in your interests, I think it's great to be interested in both cutting-edge, contemporary art and appreciating everything that's been done in the past.

Nick Wailes:

That is interesting. And what's the market like? So, we know through COVID, there were some industries that had a challenging time. But how did the art market fair during COVID and what are you seeing in the next couple of years in the market?

Coralie Stow:

The art market fared well. We were very unsure what was going to happen in March of 2020 like most industries. And what really did happen was that, I guess because people couldn't travel, and they were restricted in a lot of the leisure activities they would normally do. It seemed like art became an activity that people said, well, I can buy some art, I can renovate my home perhaps or I can buy some art. I've got this cash sitting around that I can't spend on an overseas holiday. I'd like to do something life enhancing with it.

So, we did see new buyers coming into the market and I'm hoping that those people are going to stick around. I'm hoping they really enjoyed the experience of what they did, and we won't see them disappear. But the art market was very steady over the last two years and unexpectedly so. Our auctions were very healthy and that was gratifying. It was also, of course, I saw a lot of industries struggling so that was unfortunate. But from our perspective, the last two years have been very good.

Nick Wailes:

But I presume you needed to think differently about how to engage with your customers during that period because traditionally, you'd have a viewing and you'd be able to see your work and those sort of things. But you were having to change, and people were having to think about buying without necessarily seeing which must have been quite a big shift.

Coralie Stow:

Indeed, and that had already been happening before. So, we'd already been seeing more emphasis on digital catalogues, online catalogues, but we put even more effort into photographing works, photographing the backs of works, photographing them in their frames so that we felt we could send the clients all the information and images that they might require. We did still have physical viewings in between various lockdowns and so on and physical auctions. And that still remained important in our business. I think this year, we're hoping that we won't have to sort of juggle that again.

So, yes, people are moving a lot of their activities online. They are viewing things online and using the online marketplace to cut out a little bit of friction around travel or having to be in a certain place at a certain time. But they also still do, if they can, they do want to view the physical artwork and that remains our intention to make that possible.

Nick Wailes:

That makes sense. If you're going to live with something or make a significant investment and you do actually want to see it and the way it was meant to be seen. Tell me, we're mainly talking about wealthy individuals that are collecting and putting collections together or selling them through an auction house. But it sounds to me very much like, these are on the whole people who are collecting because of the love of art or wanting to live with and display these works.

But I presume there are also people in the market that are thinking of these as assets and investments. And maybe you could talk a little bit about that and what type of ... is art a good investment? And how are people that are thinking about it as assets, how have they fared over the years?

Coralie Stow:

Yes. Well, we don't encourage people to buy art purely as an investment. And I guess the reasons behind that are obviously, it would be very speculative to do something like that. We really firmly believe that you buy art because you love it. You want to live with it and it's going to enhance your life. And eventually, maybe if you've acquired something, you've bought with a good eye for the future value of the work, you might get your money back or might indeed make a profit. And it's certainly not the case that every artwork goes up in value. I'd love to say it did, but I have to be honest and say that art does tend to be subject to whims of fashion. So, some artists can come into fashion, and they can go out of fashion and their prices can go up and down accordingly.

One of my colleagues says that when he's appraising collections that people have built up over a number of years, he often finds that it's one or two pictures in those collections that pay for the rest of the collection. So, one or two works have gone up considerably in value and they cover the cost of all the other pictures that maybe didn't have so much of an increase in price. So, look, they are assets, physical assets, obviously they do hold their value in a sense, but definitely, I'd be saying to people, think about what you want to live with first and then worry about the increase in value later if indeed that happens.

Nick Wailes:

So that's quite interesting because there are lots of markets where people would just regard things as assets, and they don't necessarily enjoy them but makes art a very different product. One area I wanted to explore with you is the growth of digital art. So, you must have been watching this and have a view on it and most of us would've seen things about non fungible tokens, these NFTs, and what appears to be really bizarre prices for these types of things. What's your view about the role of technologies like Bitcoin and tokenization, and some of these things in the art market and how should we be regarding those things?

Coralie Stow:

Well, I guess my view is the same as it is for, I don't want to say, normal art, 2D art, 3D art. But what does the art say? What does it have to say to the way we live now? Does it have value? Does it have meaning? Is the form and the content working together? I think NFT facilitates an artist selling digital art, I get that. But if the artist themselves has nothing to say and their works have no great interest, then I still wouldn't be recommending somebody buy it.

But it's something that we might be thinking about down the track. We've always got to be aware of future developments. And for example, last year, we sold a David Hockney iPad drawing for $171,000. Now he did the drawing on an iPad, but it was actually printed out and sold as an original one-off artwork. So, this is where innovation can happen, but it also has to fit within the traditional scope of the art market as we operate.

Nick Wailes:

That's interesting. But another technology which I'd presume is more of a backend technology, is blockchain, where you talked a lot about the importance of Provenance and needing to know that it was actually produced by an artist and how it's handled. That immutable ledger technology does potentially help provide some of that evidence around that.

Coralie Stow:

Absolutely. And I think for artists that are practicing today, I would encourage them to look at blockchain technology to help secure their market in the future. I think if you're talking about reverse engineering it for things that have been around for 10, 15, 100, 200 years, it's a little bit harder because you've still got to authenticate their work in it's original iteration, so to speak, and then set up a blockchain. So, I think certainly for artists that are practicing now, this is something they should be investing in and researching because it will give collectors confidence to buy in the future.

Nick Wailes:

But that speaks to the ongoing role of expertise in playing a role. It's always surprised me how national art markets are. Most industries and those markets have become global markets, but it seems that the art market stays very national. And you've got a bit of a view about this, about why that might be. What do you think the reason is?

Coralie Stow:

Yes, I think the Australian market, and I put Indigenous art in a different category because Indigenous art has attracted international attention. So, artists like Emily and Morai, Rover Thomas and other names that I could mention at length, those artists are recognised and collected internationally. But if you put that to one side and you talk about Australian art, it's generally primarily collected by Australians, either in Australia or ex-patriot Australians overseas. And I think a big part of that is because our landscape here in Australia is quite unique. And a lot of our art is of the Australian landscape. The light here is much harsher than it is overseas, our Flora and Fauna, of course, famously very different.

And so, I think if you haven't lived in Australia, and you haven't experienced our environment. It's quite hard to relate to a lot of Australian art, which is landscape based. I'm making big generalisations here. There are artists, of course, that have forged careers overseas, but by and large, Australian art is collected by Australians.

Nick Wailes:

That's really interesting because it means that it's not just a commodity, it's a commodity of its place and the light and those type things.

Coralie Stow:

Yes. And that comes to what I was saying about whether it be digital art or whatever medium, you have to look at the content and how it speaks to you as a person if you're going to collect it.

Nick Wailes:

Predominantly, it's private collectors selling to other private collectors, but institutions do play a bit of a role in the market. But my understanding is that Australian institutions, they don't have an art gallery or something like that. They don't have big war chests of money ready to go out and acquire works as they come up. How do they add to their collections and acquire through your system?

Coralie Stow:

Usually, if they spot a work that they want and it's over a certain value they will need to fundraise. So, there have been instances where the Art Gallery of New South Wales fundraised to acquire a major Sidney Nolan through our auction. They don't have acquisition budgets. They don't have money sitting in their accounts that they can buy with. They have to generally go to their benefactors or do public appeals to raise funds. 

We seem to be very good at building buildings here in Australia. We love to put money into infrastructure. We're not quite so good at actually putting art collections together using public funds. That's really something. If anyone is interested, I'd really encourage them to look at donating works through the cultural gifts programme to our public galleries.

Nick Wailes:

Because it does seem long term, you'd want institutions to have budgets so that they could acquire great representations of Australian art over time and be able to display that into the future.

Coralie Stow:

Yes. But as I said, it's generally something at the moment that seems to be happening very much on a case-by-case basis and then fundraising follows.

Nick Wailes:

It's very interesting to find out a little more about the nitty gritty of the business and how it's changing. And thank you so much for joining us and demystifying it for us.

Coralie Stow:

Thanks, Nick. It's been really great to chat. I've really enjoyed it, thank you.

Narration:

We can see that there’s innovation happening in the art industry, which fits within the traditional scope of how that market operates.

But with the new technologies on the rise, how do they fit in within the art world? 

Dr Eric Lim is an NFT enthusiast who shares how this form of blockchain technology is transforming the art community.

Let’s hear from Dr Eric Lim.

Eric Lim:

My name is Eric Lim. I'm a senior lecturer in the school of commission systems and technology management in the UNSW Business School. I'm also the fintech director in UNOVA, which is a translational research lab, and I'm the founder and director of the UNSW crypto clinic. And by now you can probably tell that I'm some sort of a crypto enthusiast and I conduct research extensively in crypto projects as I believe it is one of the most innovative FinTech's of our time. NFTs or non-fungible tokens are actually a subset within the cryptocurrency domain. And I'm really fascinated with NFTs in how they can actually provide a solution to the domain rights management and specifically how they have in recent times actually energised the artistic community, in staking their rights to their creations and in monetizing them.

When we talk about an NFT, I think people need to understand that an NFT is actually not an asset by itself, but rather it's actually a representation of an asset. An NFT is simply a unique token that actually resides on a public infrastructure, like a blockchain. It is non-fungible and what I mean by that is that the token is one of a kind. So, there isn't another token that can actually replace it. Fundamentally, it represents ownership of an underlying asset. So, when an asset is connected to a unique token, like an NFT on blockchain, this whole process is known as tokenization. And when you tokenize an asset, its ownership actually gains several attractive properties. First, it is universally addressable in any digital application that can actually call upon it and verify the token status or its metadata.

So let me give you an example. If I were to actually buy an artwork, I could actually check the current ownership status, or I can check its ownership history and its date of creation or the number of NFTs that actually have been created. That's the property of being universally addressable. Then, by tokenizing an asset, you also gain a second property, which is that the asset's ownership is actually now programmable. So it is now possible to actually attach contractual conditions under which the token can be transacted, right, without the intervention of any intermediary, like a bank or an auction house. 

So, if I were to actually sell the artwork, I could actually make sure that it was only sold to certain addresses that the artist actually approves of or only after a specific lockup period. And another property that is gained by tokenization is that the NFT is verifiable because the blockchain is actually an open infrastructure. 

The tokenized asset is digitally secure, because its integrity is protected by cryptography and by the immutable properties of the blockchain. And the last property, is that of course any digital token is actually easily transferred because it lives on a public infrastructure, that is openly accessible to anyone. No one can be kept out of using this public infrastructure. 

Let's say for example, if I had an artwork that needs to be sold and it will have ready access to an international market without incurring any expensive overheads of engaging international intermediaries.

Narration:

So now we know an NFT is not actually the asset itself but rather a representation of an asset - 

Dr Lim shares how this can apply to both tangible and intangible assets.

Eric Lim:

Many people actually mistake the NFT as the asset itself. But as I alluded to earlier, in relation to the art world, the NFT is not the actual artistic creation by the artist. The NFT is just a public record on the blockchain about the provenance and the existence of the actual artistic IP as created by the artist. The IP is the actual underlying asset, that is deemed to be valuable. 

Digital arts are not the only thing that could be tokenized by NFTs. Any asset tangible or intangible could be tokenized. For instance, it is possible for us to actually tokenize as an NFT, a physical asset in a physical location.

Like for example, if you have a house in Bondi or Coogee, that could be tokenized. So that is actually a tangible asset. And of course, by extension, we can also tokenize well-known art pieces, like the Mona Lisa or David. 

It is also possible to tokenize something intangible. So, for example, it is possible for someone famous to issue an NFT that could be valuable in its own rights simply because of the societal and historical value attached to that person. 

So, if one day, if I became a Nobel Laureate, or if I wrote a song that is so famous or that goes viral. I could issue an NFT, and in this scenario, we're actually tokenizing an intangible concept such as fame or social standing of that individual.

Narration:

NFTs have the potential to radically change how art in any form is commercialised. 

What does this mean for the creative industries and the digital monetisation of online works? 

Dr Lim explains.

Eric Lim:

For a long time small time art creators have not been able to monetize their creations because they don't have the backing of big legal teams or big publishing companies to actually protect their IPs. So, piracy or the inability to actually prove provenance of their IPs and also, they're faced with predatory rent seeking behaviours by unethical publishers. 

Actually, well known problems in the whole creative industry. But the thing is that it is now possible with NFTs to actually solve the issues of piracy and prove provenance of IPs created by the artists.

While it is currently not the norm by the act of issuing an NFT that is connected to each IP whenever it is created, the artists can actually now provide an immutable seal of authenticity to their creation. The artists can now declare to the whole world, that only IPs that are accompanied by NFTs that are issued by an official ID that is owned by the artists are considered authentic.

If the IP is reproduced without an accompanying NFT with the official policy ID, it is automatically assumed to be a pirated copy. So, because the NFT is timestamped on the blockchain, it also prevents the IP creator from being accused of plagiarism once the use of NFTs becomes an industry standard.

Also, If the NFTs reside on a blockchain with actual smart contract capability, it will then be possible to clearly dictate how the artists would like to manage their property rights to prevent predatory behaviour by unethical publishers. 

So, for example, the artist can now determine with immutable contractual terms and conditions, the right of a buyer to resell the IP and to enforce royalties upon resale, or even enforce the right to create derivative commercial products out of the IP. And failure of which could actually stop the NFT from being transacted and by extension, of course, that allows the artist to better control how to monetize the underlying asset.

The main value proposition for creative businesses like arts and fashion of actually tokenizing assets as NFTs, is to allow these businesses to actually prove that the assets ownership is limited. In other words, it allows the owners of this underlying assets to exert and authenticate their sense of uniqueness. Which we know that that's what many people are willing to pay a premium for. 

The premium of a luxury fashion item, like a Hermes bag, lies in limiting its ownership, rather than on the actual cost expended in creating the bag. If Hermes were not able to limit its ownership due to the threat of piracy, and everybody is walking around with bags that are indistinguishable from the authentic ones, very soon, Hermes will not be able to charge that premium. And that premium will decrease simply because there's a decrease in demand for the real thing.

So, my predictions are that NFTs will serve as the cornerstone in the Web 3.0 Economy or in an environment like the Metaverse. Which because of its underlying digital infrastructure, will only be able to support asset ownership transactions, and general economic activities in the creative businesses, if the concept of immutable and verifiable scarcity is actually enforceable. 

So, in this particular Web3 environment, because traditional physical boundaries like geography or nation state borders are unlikely to apply, communities are likely to form around identities associated with NFTs.

Narration:

What an interesting insight into the future of the business of art. 

Blockchain technology has the potential to completely transform the creative industries, giving independent artists more opportunities to publish their works, protect their intellectual property and make art more widely accessible for a new generation of enthusiasts. 

To find out more about today’s episode, search for AGSM’s the-business-of-podcast online.

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Until next time, thank you for listening.