Burning Down the House
Nothing Risked Nothing Gained
Time to Wake Up the Audience!
Did you know that people pay money to watch top gamers play video games? Conceptually that’s how far live auction house need to go. But we are far from there today.
So far live auction houses going online using a traditional online platform has not been a winning strategy. Most of what has been offered and/or sold to date is low value stuff. While RM did manage to recently sell some high value Ferraris, those were outliers. And only Bonhams has stepped up their game a bit by going to a ‘live online’ auction for Monterey.
On that, next up are RM’s traditional online auction for Monterey and Bonhams ‘Quail Motorcar Auction’. RM’s online affair starts August 10 ending August 14/15 – which seems anticlimactic unless there is live YouTube ‘sports commentary’ on each lot – but didn’t see that advertised. Bonhams Quail auction is a live online event starting at 11am PST on August 14, but not at the production level we think auction houses need aspire to make a real connection to the traditional live auction platform. Both of these auctions have attracted some high value cars which is good … but let’s see. We are particularly curious about how Bonhams fares. Unfortunately, there are no Porsches we would report on.
So a quick live auction primer.
If the pre-auction interest is strong houses ideally try to start the bidding at around 50% of what they hope to get. If the pre-auction interest is weak they will throw out a number to start which is low enough to get the bidding going. Most typically the auction will open at around 45% of the low estimate giving the house a margin of safety that they will at least hit the low estimate. In any case the objective is to create lively starting action with many quick bids – as the more intense the initial action the higher the final winning bid. In recent history we have seen a lot of misestimation of the opening bid and the backtracking to a lower number to get things going. In truth, the ‘suggested opening bid’ is a meaningless pre-calculated guesstimate. Reserve, if any, is usually around low estimate plus 40%.
Once the auction is underway the house, and the seller, hope for frenzied competitive bidding. But while the bidding at a live auction usually lasts for a few minutes, bidding in an online auction can go on for days. It is the opposite of the live auction experience.
Now to the meat of it.
There are two key elements that live auctions thrive on that need to be addressed to make the platform transition to online.
The first element occurs before the auction even starts. Buyers who have interest in a high value lot will usually have looked the car, maybe have done some typical PPI stuff, and will have reviewed provided documentation. This gives buyers confidence in what they are buying and its’ value, as sellers are notorious for, and we will be kind here, providing ‘incomplete information’ at live auctions. But more important to the auction house looking over the car gets a buyer excited about the car. Cars are visceral … and as any good car salesman will advise you ‘ … make them touch it, feel it, smell it, get them excited … because when they’re excited they pay more!’
Although this critical process can be prearranged, this is typically done ‘onsite’ at the auction – within days of the live action. Normally making a separate trip, or sending your surrogate, to look at a car you are going to see in person in a few weeks is a PITA and unnecessary. And with time passed the excitement of touching, feeling and smelling the car fades – the effect may only last for a few days. Absent all of this a prospective bidder probably won’t bid or will bid to win only if it’s a no-lose steal. In fact, auction interest for high value cars drops off dramatically when there is no recent in person pre-auction ‘arousal’ and, more rationally, if there is added risk due to incomplete information.
The second element takes effect once the bidding starts. The ‘winners curse’. The winners curse is the overwhelming bidder emotion that live auctioneers rely on to justify their existence – wherein the winner overpays for purely emotional reasons. Assuming educated buyers (notwithstanding the most previous paragraphs), an auction lot is worth roughly the same to all bidders and bids are distinguished only by a bidder’s willingness to extend their estimate of value. And often the winner is the bidder willing to extend the utility of the purchase (the value to them) beyond the intrinsic value of the car, whether due to an attraction to the car or just plain old ego satisfaction. If, simply put, we assume that the average bid is accurate and rational then the highest bidder has paid the most for the lot’s non-intrinsic value and has overpaid for the car. Online there is little to no winners curse and if there is it is muted.
Finally, the two elements combine with a price depressing effect. The severity of the winner’s curse increases with the number of bidders – because the more bidders, the more likely it is that more of them have overestimated the lot’s non-intrinsic value. But lack of (particularly recent) access to the vehicle reduces the number of bidders who might do so.
And so we find that to date the vast bulk of the cars offered and the cars sold at online auctions by live auction houses have been low value, lower risk propositions selling at low prices. In recent stories, auction houses say they are sustaining similar activity levels as to their live auctions – we don’t see that (and any sustained unit volume sales can be mostly be attributed to not allowing the same percentage of ‘reserves’ on higher value cars as in the past). And if you think unit sales volume is down … dollar sales are down much further.
In order recapture their glory in the times of CD19 live auction houses will need to develop new production methods such as requiring bidders (or their surrogates) to be broadcast live on Zoom – like a live poker game. With CD19 not going anywhere soon … it’s certainly time to for them to step it up. And the first live auction house that figures it out will be the winner – after all it’s entertainment folks!
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