Quel Surprise! Auction Houses Ramp Up Prices

Today’s Wall Street Journal, in a page one story, tells how makers of high-end watches, such as Omega and Patek Phillipe, use actions to establish high price points for their wares by acting as anonymous shill bidders. Understandably, buyers who realized that the makers (ie, the sellers) were bidding against them, they were outraged:

Demand and prices for expensive watches have been surging, fed by global economic growth. But there’s another factor behind the prices: an alliance between watchmakers and a Geneva auction house called Antiquorum Auctioneers….

But now there’s ferment in the world of watch auctions. First, they’re starting to raise ethical questions, even within the industry. “A lot of the public doesn’t know that the biggest records have been made by the companies themselves,” says Georges-Henri Meylan, chief executive of Audemars Piguet SA, a high-end Swiss watchmaker. “It’s a bit dangerous.”

More unsettling, Antiquorum’s Mr. Patrizzi, who essentially founded the business of watch auctions, is under fire by the house he cofounded. Its board ousted Mr. Patrizzi as chairman and chief executive two months ago — and hired auditors to scour the books.

The business of auctions for collectibles is not a model of transparency. The identities of most bidders are known only to the auction houses. Sellers commonly have a “reserve,” or minimum, price, and when the bidding is below that, the auctioneer often will bid anonymously on the seller’s behalf…..

Through the auctions, Swiss watchmakers have found a solution to a challenge shared by makers of luxury products from jewelry to fashion: getting their wares perceived as things of extraordinary value, worth an out-of-the-ordinary price. When an Omega watch can be sold decades later for more than its original price, shoppers for new ones will be readier to pay up. “If you can get a really good auction price, it gives the illusion that this might be a good buy,” says Al Armstrong, a watch and jewelry retailer in Hartford, Conn….

Omega and Antiquorum got together at the end of 2004. The watchmaker was struggling to restore its cachet. Omega once equaled Rolex as a brand with appeal to both collectors and consumers, but in the 1980s, Omega sought to compete with cheap Asian-made electronic quartz watches by making quartz timepieces itself. Omega closed most of its production of the fine mechanical watches for which Switzerland was famed, tarnishing its image.

A decade later, Omega tried to revive its luster by reintroducing high-end mechanical models….

Mr. Patrizzi…founded Antiquorum, originally called Galerie d’Horlogerie Ancienne, in the early 1970s with a partner. At the time, auctions of used watches were rare, in part because it was hard to authenticate them. But Mr. Patrizzi knew how to examine the watches’ intricate movements and identify whether they were genuine.

At first, prominent watchmakers were wary. Mr. Patrizzi approached Philippe Stern, whose family owns one of the most illustrious brands, Patek Philippe, and proposed a “thematic auction” featuring only Pateks. The pitch: Patek would participate as a seller, helping drum up interest, and also as a buyer. A strong result would allow Patek to market its wares not just as fine watches but as auction-grade works of art.

The first Patek auction in 1989 featured 301 old and new watches, with Mr. Patrizzi’s assessments, and fetched $15 million. Mr. Stern became a top Patrizzi client, buying hundreds of Patek watches at Antiquorum auctions, sometimes at record prices. The brand’s retail prices soared. Over the next decade, the company began charging about $10,000 for relatively simple models and more than $500,000 for limited-edition pieces with elaborate functions known in the watch world as “complications.”

Patek began promoting its watches as long-term investments. “You never actually own a Patek Philippe,” ads read. “You merely look after it for the next generation.” ….

Auctions gradually became recognized as marketing tools. Brands ranging from mass-producers like Rolex and Omega to limited-production names like Audemars Piguet and Gerald Genta flocked to the auction market with Antiquorum and other houses. Cartier and Vacheron Constantin, both owned by the Cie. Financière Richemont SA luxury-goods group in Geneva, have starred in separate single-brand auctions organized by Mr. Patrizzi…

Friends describe Mr. Patrizzi as a rare intellectual in a market with many coarser types. Guido Mondani, a book publisher and watch collector who met Mr. Patrizzi two decades ago, says he was charmed by the auctioneer’s encyclopedic knowledge of watch history….

When he spoke to Omega executives at the end of 2004, Mr. Patrizzi felt that an Omega-only auction might be what the brand needed to revive its image. There was one problem. Antiquorum couldn’t vouch for the authenticity of watches that are mass-produced; since they are worn more, their watch movements have often been opened and tampered with in the course of repair. So in an unusual arrangement, Omega agreed to guarantee the authenticity of all watches sold at the auction, and refurbish those needing it beforehand. Omega supplied vintage timepieces from its own collection for the sale.

To build interest, Mr. Patrizzi and Omega officials traveled to 11 cities, hosting events such as a flashy party at the Beverly Wilshire Hotel with celebrities such as actors Charlie Sheen and Marcia Gay Harden. Antiquorum and Omega joined in publishing the huge, glossy auction catalog. When the sale, dubbed “Omegamania,” took place in April, it was shown on jumbo screens at the BaselWorld watch fair and streamed live on the Internet for online bidding.

It brought in $5.5 million. Besides the $351,000 platinum watch, Omega outbid collectors on 46 other lots, including many of the most expensive. Mr. Patrizzi estimates Omega bid on 80 lots in all, out of 300.

A Singaporean collector, told of Omega’s role, called it “heinous.” Melvyn Teillol-Foo, who bid over the Internet and bought a few pricey watches, added: “If it turns out they bid against me and got me to $8,000, I would be ticked off.”

What is surprising about this story isn’t the watch-makers’ market manipulation. It’s that the Journal seems unaware that auctioneers, even one like Sotheby’s and Christie’s, often take a hand in ramping values of the wares they auction. They have an incentive to engage in this sort of behavior, since their fees are set as a percentage of the sales price.

Both art dealers and collectors have told me that it’s common for the auction houses, when they know several items by a certain artist are coming up for sale, to schedule the auction of the least valuable (often the smallest, since smaller canvases will inevitably go for a lower price) and will exert considerable effort to get it sold at a high price. That establishes the perception that that artist is hot and sets a new benchmark for prices. And the knowledge of the pending sales is generally withheld if possible (or sellers are persuaded to hold their pieces back until the first sale goes off well).

Auctions aren’t subject to the same regulations and standards as financial markets, yet because their sales results are public and the markets are perceived to be fair and open, prospective buyers place great credence in their results. But as the Wall Street Journal story shows, that faith is often misplaced.