by Don Thompson
The Whitney exhibition catalogue had a chapter on the exotic technologies involved in fabricating Koons’ work, including CT scans and structured-light scanning. For each successful sculpture in stainless steel or aluminum or granite there were many earlier failures. The translucent stainless-steel surface of Balloon Dog is so perfect that there is not a single visible seam or joint, or any suggestion of how the work was assembled.
The collectors who loaned work to the Whitney show represented a Who’s Who of the art world: Los Angeles builder Eli Broad, New York hedge-fund founder Steven Cohen, Christie’s French owner François Pinault, New York real estate developer Harry Macklowe and British artist Damien Hirst. Another interesting aspect of the Whitney show was its financing. Substantial but never-identified amounts were provided by Koons’ dealer, Larry Gagosian, as well as Christie’s and Sotheby’s. Most if not all the lenders of major works were Gagosian clients. The only gallery name to appear on the wall text was Gagosian. At the opening press conference, Whitney director Adam Weinberg lauded the dealer. “I’m deeply grateful to Larry Gagosian for his tremendous support. Thank you, Larry. There are few dealers who would come to the forefront to support at this level.”
While no one suggested that Koons was unworthy of a retrospective, the question always loomed as to whether the degree of dealer support influenced what works were shown. The perception is that dealer or auction house sponsorship affects curatorial choices. The retrospective certainly enhanced the value and potential marketability of the works shown, and of similar works in dealer inventory.
After the Popeye sale, Charles Moffett, then vice-chairman of Sotheby’s (who took the winning bid) said Wynn would display the sculpture at his Las Vegas or Macau casinos. It turned out to be the Wynn resort and casino in Las Vegas. What no one assumed Wynn was doing at that purchase-price level was speculating. But when the statue was unveiled at the casino two weeks after the auction, it bore a plaque offering the artist’s name, the title and the phrase “Price available on request.” Wynn’s asking price was reported as $60 million, more than twice the purchase amount. At time of writing, Popeye still resides at the Las Vegas casino, in a space just inside the front entrance, flanked by two football-lineman-sized guards. The Las Vegas Sun reported that there had been one offer to purchase, which Wynn rejected.
If Popeye does not sell and remains on display, Wynn could claim depreciation on the purchase price, treating the sculpture as “furnishings” for tax purposes. Exhibiting in Nevada could also take advantage of a 2004 state tax exemption that Wynn had championed. Referred to as “Show Me the Monet,” the tax change was intended to encourage public display of art. The provision substitutes a 2-percent sales tax for Nevada’s usual 7.5 percent on works of art valued at over $25,000, so long as the art is publicly exhibited in the state for at least twenty hours a week for thirty-five consecutive weeks. The tax saving to Wynn would be $1.4 million. Nevada subsidized the “for sale” exhibit of Popeye to the extent of about $40,000 a week, or $5,700 a day for thirty-five weeks. The fact that the work was listed for sale did not affect the “exhibited” provision.
CHAPTER SIX
LUDWIG’S PLAY-DOH
“Art is either plagiarism or revolution.”
—Paul Gauguin, artist
THE MOST ANTICIPATED NEW WORK AT THE MAY 2014 WHITNEY SHOW WAS the one with the most compelling backstory. Jeff Koons’ sculpture Play-Doh (1994–2014) (see photo insert) is a 10-foot-tall (3-metre) sculpture depicting a multicoloured mound of putty created by Koons’ two-year-old son.
The backstory is as follows. From the late 1980s to 1991, Koons produced a series titled Made in Heaven, which included paintings and sculptures showing him and model Ilona Staller in explicit sexual positions. The series featured penetration, both anal and vaginal, with lots of semen.
Staller is a Hungarian-born Italian, a former porn performer and member of the Italian parliament. She was known as La Cicciolina (“little dumpling”). When asked about the overt sexuality in this art, Koons was quoted as saying, “What I really like about it are the pimples on Ilona’s ass. The confidence to reveal one’s ass like that. That’s like my reference to [Gustave] Courbet’s The Origin of the World.”18
The couple married in Budapest and then spent a year in Munich, where Koons completed Made in Heaven. The paintings did not sell well. Eager collectors apparently reconsidered when they visualized a large penetration painting hanging in their bedroom. Koons was reported to have wanted to destroy some of the unsold work.
Koons and Staller had a son, Ludwig, born in October 1992 in New York. Staller then attracted publicity with an offer to have sex with Saddam Hussein in exchange for his releasing foreign hostages held in Baghdad. Two years later Staller asked that she be permitted to resume her performing career. Koons objected.
Staller then moved to Rome, taking Ludwig with her. The marriage ended soon after the move. Koons spent more than a decade trying to get his son back, without success. A small Play-Doh sculpture was the last thing Ludwig played with before being taken from his New York home. (Play-Doh is a brand name for a child’s putty-like material.)
Koons stored the child’s sculpture in a small Plexiglas cube. In 1994 Koons tried to replicate his son’s sculpture in grand scale as a way to let Ludwig know how much his father missed him and wanted him to return. That backstory, of loss, tribute and meticulous reproduction over a twenty-year period, became central to the marketing and value of Play-Doh.
As well as the aluminum Play-Doh, Koons’ Celebration series about Ludwig involved his sculpture of a giant stainless-steel gold Hanging Heart suspended by stainless-steel ribbons (first mentioned in Chapter 2). This was the subject of one of the better art-flipping-for-profit stories. In 2006, collector and later dealer Adam Lindemann purchased a version of Hanging Heart (Magenta/Gold) (1994–2006) from dealer Larry Gagosian for what was reported at the time as $4 million. Lindemann later said in an interview that the purchase price was $1.6 million. In 2007, a year later, he sold Hanging Heart at Sotheby’s for the then record-for-a-living-artist-at-auction hammer price of $23.6 million, yielding a profit in excess of $19 million. Gagosian repurchased it at the auction, for a client announced in the art press either as Los Angeles collector Eli Broad or as an eastern European oligarch. Based on that sale, Lindemann was quoted as saying, “the price of every ‘Celebration’ piece … jumped almost 20 times in value.”19
Back with the Play-Doh sculpture, Koons first intended to construct it from polyethylene but decided it had to be made of cast aluminum to produce a realistic surface. Fabricating a sculpture like that in aluminum was something no artist had done before. Koons tried three or four different techniques before finding one that met his standards. He was adamant about the need to use aluminum: “Look how sensual these forms are. When you rip Play-Doh apart and stretch it, you get these lines. It’s like a Rodin sculpture.”20 Production of the sculpture required a half-dozen outside specialist companies. The Polich Tallix foundry in Rock Tavern, NY, did the fabrication. A Connecticut vintage-car restorer spray-painted the colours.
Koons’ perfectionism has resulted in his losing money on early works that were pre-sold. Sometimes his dealer agreed to finance the new work, and lost money. Beginning with the series that included Play-Doh, dealer Larry Gagosian pre-sold sculptures to collectors Peter Brant, Dakis Joannou and Eli Broad, and to dealers Jeffrey Deitch, Anthony d’Offay and Max Hetzler. Koons would produce a terracotta model of a proposed sculpture and suggest an edition of three to five. Production began after down payments were received.
For later sculpture series the financing contracts were more detailed. When there were cost overruns (or for any other reason), Gagosian could return to purchasers and request additional capital. Purchasers had the option of agreeing to the new higher price, or offering the option for resale, or asking Gagosian to refund amounts already paid. For some Koons sculptures as many as three additional contributions were requested. Most buyers
agreed to the higher price, rather than the resale or refund options, because current value was judged on the bidding for a Koons sculpture at a recent auction. If a customer requested repayment, Gagosian could seek a new collector to purchase the option at a higher price. In a Guardian article, Felix Salmon quoted a Koons collector as having offered to pay double the original asking price if Koons agreed to never come back and ask for more. Koons declined.
What the purchaser of a future Koons sculpture actually received was a security, a right-to-purchase option that included the “call for additional capital” provision. The security had minimal downside price risk; Koons’ work had always increased in value. There was profit upside so long as the delivery option could be resold to a third party. There was a downside only if the market for Koons’ work crashed and Gagosian or his estate refused to honour the repurchase commitment.
For his more recent work, Koons has restricted this “profit without taking possession” possibility with a contract provision that the option could only be resold to Gagosian, and only at the level of “funds already paid in.” There was also a requirement that 70 percent of any profit Gagosian received on resale of a contract over the first two-year period be transferred to Koons.
The 70-percent clause meant that it was beneficial for Koons to make additional capital calls during the two years. He could cover unanticipated production costs, or force sale of the collector’s option and profit from resale of the option.
Play-Doh is an extreme example of how long Koons’ production cycle can be. An option on the sculpture was purchased in 1994 by Los Angeles television producer Bill Bell. Bell agreed to three price increases over a twenty-year period. His final purchase price was between $12 million and $15 million, with delivery taking place in 2014.
Koons works with Gagosian and two other über galleries, David Zwirner and Sonnabend. His retail prices are confidential; his secondary market resale prices are spectacular. In 2012–13 three works brought a combined $120.4 million. There was the $58.4 million for Balloon Dog (Orange), $33.8 million for the stainless-steel Jim Beam—J.B. Turner Train (1986) (see photo insert) and $28.2 million for the stainless steel Popeye.
Given the size of his studio, Koons’ output is limited. He has said, “We average 6.75 paintings and 15 to 20 sculptures a year.”21 That output is sufficient to support the studio, to pay his employees and outside fabricators, to provide commissions to his dealers and to make Koons wealthy.
What we see with Balloon Dog, Three Studies, Apocalypse Now, Popeye and Play-Doh is the huge sums of money sloshing around the art world, much of it chasing art as an investment the way it might prime real estate. We see a great deal more financial complexity than might be anticipated. But there is also shifting of roles and functions in the marketing of art, and conflict between players. That is the subject of the next section.
THE ART OF MORE
CHAPTER SEVEN
SOTHEBY’S AND THIRD POINT
“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”
—Buckminster Fuller, pioneering global thinker and inventor
BEHIND THE RECORD SALES ANNOUNCEMENTS AND CONSIGNMENT COUPS at auction houses, there is ongoing conflict within the firms and with shareholders. There are dramatic differences of opinion about what to sell, what lines of business to pursue, what strategies to follow and, above all, how to increase profitability and bonuses. Sometimes the debate surfaces on the front pages of newspaper business sections.
Over an eighteen-month period beginning in 2013, five activist investors acquired major share positions in the common shares of Sotheby’s auction house, the oldest firm on the New York Stock Exchange. In August of 2013, Nelson Peltz acquired 3 percent of the stock through his Trian Fund Management. A few weeks later Mick McGuire of Marcato Capital Management acquired 6.6 percent. In September, Daniel Loeb purchased a 9.3-percent stake through New York hedge fund Third Point.
In early 2015, institutional shareholders Morgan Stanley and BlackRock investment corporation between them increased their stake to 12.2 percent of Sotheby’s shares. The five firms now controlled just over 31 percent of the stock. That is not a majority shareholding, but activist funds have disproportionate power because so many shareholders are passive. Institutional investors, pension funds and mutual funds often do not vote their shares. Given this passivity, an activist investor with the support of the other four could take effective control of Sotheby’s.
Third Point manager Daniel Loeb is such an investor. In October 2013—in the midst of the auction events mentioned in the previous chapters, he delivered a barbed letter to Sotheby’s, reminding the firm he was now its largest shareholder and calling the auction house “an old master painting in desperate need of restoration.”22
The Loeb letter questioned the competence of Sotheby’s board members, accusing them of not making proper use of the internet and of not accomplishing enough in the Chinese art market. Much of the criticism was of chief executive officer William Ruprecht. Loeb said that Ruprecht presided over an organizational culture where expenses for marketing, salaries and administration were out of control. Profit margins shrank as commissions were waived and consignors shared buyers’ premiums. There was criticism of the company’s weak operating margins and deteriorating market share relative to Christie’s.
Activist American fund managers have for years tried to create change through investments in what they considered to be underper-forming firms. Loeb’s was the first attack on an auction house. Usually funds take small stock positions, typically around 5 percent, and then submit a shopping list of demands to management. They often publicize their demands to win support from other shareholders. Demands may include representation on the board of directors, replacement of senior managers, cost-cutting, change of strategy, divestment of under-performing subsidiaries, returning cash to shareholders or suggestions of a merger partner.
Loeb’s practice has been to acquire a stake in a company, demand strategic change and then sell when the share price rises. His first move, as with Sotheby’s, is often a letter addressed to management and provided to the press. It offers embarrassing facts dug up by his analysts. Loeb was quoted in Bloomberg Markets magazine as saying, “Sometimes a town hanging is useful to establish my reputation for future dealings with unscrupulous CEOS.”23
One of Loeb’s suggestions was that Sotheby’s should be competing on service quality and expertise rather than on price. Another was that the firm should act like an art merchant bank, combining advising and financing functions and taking ownership positions in artworks—which would mean purchasing from clients and reselling at a profit. Loeb claimed that Sotheby’s market focus was on “top clients” and on high-value lots, with too little attention paid to lower-value lots. He said Christie’s had captured the lower-value end by using new technologies. The Loeb letter made one telling point; in spite of Sotheby’s purported high-end focus, the firm trailed Christie’s in market share for items over $1 million.
There was no mention that Sotheby’s stock price had increased from its 2008 market crash low of less than $7 to almost $50 at the time he wrote the letter. It had reached $57 before the crash, and had never returned to that level.
To put Loeb’s accusations in context, it is necessary to understand how major competitors Sotheby’s and Christie’s make money at evening contemporary auctions. The firms auction a few lots under $200,000, but these lots are not very profitable. Each lot requires due diligence on authenticity and provenance, and many of the same cataloguing, marketing and display costs as multi-million dollar lots that generate ten times the commission.
Sotheby’s and Christie’s offer a few lots over $10 million; as mentioned earlier, these may also not be very profitable. On these lots the consignor’s commission of 10 percent typically is waived, and the buyer’s premium may be shared with the seller as part of the consignment arrangement.
The middle market is what makes Sotheby’s and Christie’s such potentially promising companies. It has the potential to increase profit because middle-market lots have low incremental costs. Once a few trophy works have been attracted with waivers of commission or guarantees, it should be possible to offer additional middle-market works with little or no additional promotion.
The fallout from Third Point’s attack came quickly. In November 2013 and following the Loeb letter, Tobias Meyer announced that he was leaving the firm after two decades. Meyer was the firm’s chief auctioneer and head of contemporary and modern art. His final auction with Sotheby’s, nine days earlier, had totalled $381 million, a house record. Meyer had a series of employment contracts. The last expired at the end of 2013. Meyer did not “resign,” but rather announced he was not going to renew.
Meyer has never said publicly whether his departure was related to the Loeb letter and to imminent expense and compensation cuts. The auction house did not disclose his salary and bonus, but he could certainly earn far more as a private dealer. Another theory is that Meyer felt constrained by Sotheby’s extensive bureaucracy and asked for and was denied more decision-making freedom.