Leon Black’s Phaidon Buys Artspace in Bet on Internet Sales

Aug 14, 2014 11:22 am ET

(Updates with Artspace’s management structure in 23rd paragraph.)

Aug. 14 (Bloomberg) -- Billionaire Leon Black’s publishing company Phaidon acquired Artspace.com, an Internet startup that sells works by contemporary artists, as investors struggle to figure out how to make money from art online.

Phaidon, a publisher of art and design books, agreed to buy Artspace, the companies said today in a statement without disclosing the price. The deal is the latest in a wave of mergers and partnerships shaking up the Internet art market even as profit in the nascent industry remains elusive.

“The new gold rush is online and it has been spreading into the art market,” said Alain Servais, a Belgium-based collector and independent investment banker. “The question is how to monetize the Internet.”

Demand Media Inc., a Santa Monica, California-based digital content and media company, last week paid $17 million in cash and stock for Saatchi Art, which offers works by 45,000 artists online. Sotheby’s last month said it’s forming a partnership with EBay Inc. to expand its auctions to the online marketplace’s 149 million buyers. Amazon Art was started by Amazon.com in 2013 to sell fine art from international galleries.

On Aug. 18, a group of six regional U.S. auction houses will start BidSquare, an Internet platform selling art and collectibles. It will feature a free database of more than 600,000 auction results.

Early Upstarts

Auction houses, galleries and Web-only companies sold more than 2.5 billion euros ($3.3 billion) of art online in 2013, or 5 percent of total sales in the global art market, according to a report compiled by Clare McAndrew, founder of Dublin-based consulting firm Arts Economics.

Early upstarts including Artspace, Artsy and Paddle8 have received millions of dollars from investors, including Google Inc. Chairman Eric Schmidt. Now bigger players in the art world are muscling in. Christie’s, the world’s largest auction house by revenue, has allocated $50 million for its digital platform in the past three years.

Companies can make money online by expanding their customer base or by offering more exclusive and expensive artworks, said Clayton Press, who teaches art, commerce and technology at New York University.

Mailing List

Artspace has the base: its mailing list includes 150,000 active art collectors, Catherine Levene, co-founder and chief executive officer of the Internet startup, said.

That number is significant, said New York-based art collector Peter Hort.

“If it’s 150,000 people who are collectors of contemporary art, taste makers, gallerists, critics and curators, that’s impressive,” he said.

Artspace gained access to about half of its list by acquiring the VIP Art Fair in 2013. VIP started selling art online in 2011 with 138 participants from 30 countries, including top international galleries Gagosian, David Zwirner, White Cube and Hauser & Wirth.

VIP’s list had contact information for about 75,000 people, including important clients of galleries, according to Jonas Almgren, a VIP co-founder and investor.

“That list included pretty much all the major high-end collectors at the time, people in the U.S., Russia, Europe, South America and Asia,” said Almgren. “For Artspace the database was the main appeal.”

Purchasing Power

There’s purchasing power behind the lists. NYU’s Press estimates that there are 150,000 to 200,000 collectors globally who spend more than $50,000 year on contemporary art. By comparison, Christie’s has a list of as many as 145 international collectors capable of spending $50 million or more on art, according to Brett Gorvy, Christie’s chairman and international head of postwar and contemporary art.

The auctioneer’s catalogs for the evening sales of postwar and contemporary art go out to 7,000 subscribers, of which at least 5,000 have the financial means to bid between $1 million and $5 million, Gorvy said.

At its most expensive auctions, Sotheby’s has 1,200 to 1,500 people in a salesroom and about 200 people on the phone, William Ruprecht, Sotheby’s chief executive officer, said during an Aug. 8 earnings call with investors. With the EBay pact, Sotheby’s will have access to “as much as 100 million plus people,” he said.

New Buyers

Auctionata, an online-only auctioneer based in Berlin, held merger negotiations with Artspace, but those talks fell apart last week, according to two people familiar with the matter who asked not to be named because the information was private. Auctionata said it has a list of about 100,000 registered clients ahead of its U.S. expansion in October.

The company, which sells art and collectibles ranging from wine to Soviet space memorabilia, planned to use Artspace’s client list to solicit more consignments and attract new buyers, according to a person familiar with the matter.

Auctionata had valued Artspace at just under $5 million, and offered company shares rather than cash, according to the person. Phaidon had offered an all-cash deal, this person said.

Phaidon was founded in 1923 and bought by Black in 2012. Phaidon said today in the statement that the deal will increase its access to global art collectors who are also consumers of its art and design books and multimedia products.

More Art

“It’s the perfect home for Artspace,” said Levene in a telephone interview. The company’s mission “has always been to make great art accessible to a wider audience. It’s exciting to have a partner who shares our vision.”

Levene said she will remain the CEO. Her co-founder and chairman, Christopher Vroom, will leave “to pursue other interests” after assisting with the transition, she said.

Artspace has nine employees, down from 28 in April, Levene said. The nine will stay with the company, she said.

Black, the chairman and chief executive officer of private- equity firm Apollo Global Management LLC, is a trustee of the Metropolitan Museum of Art and the Museum of Modern Art in New York. He is no stranger to investing in digital-art platforms. Last month, ArtBinder Inc., an iPad application serving more than 300 galleries, said it raised $3.17 million from investors including Black.

The biggest challenge for online art companies is not only to lure new clients but convert them into repeat buyers.

“How do you make people decide to buy art? After all, it’s a discretionary purchase,” said Almgren, whose new online venture, Artfinder, allows customers to buy art directly from little-known artists. “We all are breaking new ground. No one can say for certain what will work.”