Tuesday, August 13, 2013

The Artist/CEO and the Evolving Gallery Model

Quite a lot of ink has been spilled in the last year analyzing the changing nature of the contemporary art market and the external forces and competitive tactics that are putting pressure on the traditional gallery system. Part of this discussion has centered on the plight of middle tier galleries whose most successful (and profitable) artists are being poached by larger mega-galleries. In trying to understand the nuances of these changing realities, my MBA-trained brain has been thinking about the structural similarities between being an artist and running a start-up. While this kind of thought experiment may seem anathema to the entire artistic impulse, there are many more fundamental parallels between the two endeavors than we might initially expect.

Back in business school, one the core courses required of all students was a class called Organizational Behavior, where we studied how firms are organized, how structures and team design impact performance, how roles impact decision making, and how incentives are used to drive success. If we step back and look at how an artist's activities are organized and use the parallel structure of a typical software start-up as a guide, then the artist is the both the founder/CEO and the CTO/VP Engineering; she is both the face of the "company" and the person responsible for both "product" vision and "product" execution.

At the product/technical level for a software company, this means she hires and fires members of the technical and manufacturing teams, and figures out all the technical innovations, disruptions, and new directions. For an artist, this translates into the entire art making process, the building of a studio support team, the acquisition of raw materials, tools and workspace, the use of external contractors/services (like large scale printing), and all the intangible inspiration of artistic creation. At the company level, this means she hires and fires all the executives, is responsible for overall company leadership and strategy, and in the end, is the one on the line for delivering results. For the both the software exec and the artist, one important choice is which parts of the whole effort are going to be done in house and which ones are going to be outsourced (they all have to be done one way or another), and often this gets back to a set of decisions based both on core competencies and economics, or more simply put, a choice between building and buying.

For the artist, the gallery system provides a readymade approach to outsourcing all the customer facing functions required to bring the art to market. Back in the Renaissance (and now arguably again in the case of extra big name artists like Jeff Koons and Damien Hirst), the artist was a vertically integrated operation, with all of the customer facing activities done and managed in house; this is the most expensive way to manage things, but it also offers the most fine tuned control.

In today's world, nearly all artists have opted to effectively hire a third party agent (a gallery) to manage these tasks; in fact, there really isn't much of a viable alternative to this model at the moment. From the software exec's perspective, this is the equivalent of hiring a distributor or sales rep in a far off geography (say China for a US based company). The distributor would handle all the sales and marketing activities, interact with customers of all kinds (who they already have relationships with), and handle inventory management, order processing, payment, and delivery of product. To handle such work, there would be a complex a la carte negotiation of economic terms, and the deal could take a variety of final forms, from just putting a product on a price list and taking orders, to dedicating sales teams, to co-marketing efforts, to full joint venture partnerships, all with different scales of cost sharing. There might be ratcheting sales commissions for volume, monthly retainers, co-marketing dollars, and bonuses/penalties for meeting/not meeting certain sales thresholds. Like any market, there are distributors and sales reps who are big and small, risk takers and conservative players, those with long standing reputations and those with attacker aggressiveness; the right distributor for the software company's product might be conflicted, might be too busy, or might not be the right fit for what the company really needs at any one time, so the relationships often change as products evolve.

Back in the head of our artist/CEO, she faces a very similar set of constraints. She needs someone to handle all the customer facing work to dealing with collectors, museums, and the rest of the outside world, and certainly doesn't want to build up all that expertise in house or do too many more studio visits. She wants a gallery partner to handle all the sales, all the marketing, PR, and branding efforts (including art fairs, books, exhibitions etc.), all the customer service (shipping, insurance, framing), and all the back office management (inventory and order tracking). Depending on her personality, she might also want her gallery to provide some loosely defined "product management" services, from helping to shape and edit the artist's work or to provide varying degrees of coaching, support and feedback. For all of this work, she's generally willing to share half the proceeds of the sales, although that percentage might be up for some negotiation.

What's intriguing about the gallery model is that galleries have evolved to be a hybrid combination of direct and retail selling. They both call directly on customers (important collectors, museum curators and the like) and provide a retail space for walk in sales. This space is important because it allows them to control the presentation of the art/product, often showing it in solo shows of the artist's work (its best possible presentation) rather than having it fight other competing offerings for the buyer's attention. The gallery spreads the costs of maintaining such a space, staffing it etc., by having a stable of artists who can continually fill the space with works on offer. The retail space itself is a sunk cost that is added to all the other costs of selling the art. In the new world of the Internet, the gallery also maintains a virtual selling space (its website), again taking on these costs as part of the distribution deal.

Given the way most gallery relationships are structured (meaning no up front money to the gallery to begin the relationship and no retainer), taking on an artist is like making a venture capital investment. The gallery's costs are mostly front loaded, especially the marketing and fairs, since awareness needs to be built over time, the bills piling up long before the sales start to materialize. (An exception to this general rule is the gallery that only does a series of one off consignment style shows, selling what it can and not necessarily investing in long term relationships/representation agreements with artists.) Even if a gallery has an unusually great eye for talent, there will always be a mix of those artists that muddle along and those that reach breakout velocity, with the ones that hit mopping up the costs of the ones that don't, allowing galleries to support important work that is hard to sell. This all works like magic, unless of course your one bankable, consistent seller is poached by a larger, more prominent gallery, in which case, the economic model breaks down completely, all your up-front costs already invested and no way to recoup them. This is the current conundrum of the small and medium sized galleries who are being raided by the large, deep pocketed players; just when they think it's all going great and their top line revenue is relatively predictable, the rug gets ripped out from under them and they're back to hoping the farm team has a future star. Match that with a bill from the landlord doubling the rent, and it's no wonder there are so many glum faces around.

The reality is, that just like software distributors, there are a wide range of gallery types, some designed for emerging talents and some organized around supporting a global mega brand. While there is some commonality of general tasks, the scale of the operations, the market share, and the durability of the reputations are significantly and appropriately variable. And there is an inherent logic to the artist/CEO wanting to start with a gallery who is supportive and small, and then when the success starts to come, to want to move to a larger outfit with more sales reach and better global support services. This natural transition puts loyalty and economic reality on opposite sides, and often leads to permanently broken friendships. While this isn't surprising, what is puzzling to me is how little structural innovation there has been in the way artist/gallery relationships are organized, so that this natural progression is handled more smoothly (instead of hoping it won't happen), offering both the protection to the early supportive galleries who make the initial investments and the opportunity for artists to grow with new partners without burning bridges.

I think it's time we saw some experimentation in the artist/gallery partnership, for the betterment of both sides. In this case, I'm not referring to low cost, low service collective-style operations often trotted out to replace galleries, but a more fundamental rebalancing between artist/gallery partners that reflects the new realities. Perhaps new, unknown artists need to be signed to two, three, or five year contracts, effectively locking them into a single gallery for that initial investment period, just like in minor league baseball. Or why aren't there deals where initial galleries negotiate a thin slice of royalty income even if an artist moves on to a larger gallery down the line, to ensure recouping of start-up costs? Why aren't their more clear economic break even/profitability thresholds that must be cleared before an artist can move on? There are well understood ways to paper such transactions (and their options and corner cases) in the world of start-ups, so there is no need to reinvent the wheel here; we just need to adapt these kinds of distributor deals to the specifics of the artist/gallery relationship. If we get it right, galleries should be even more willing to take on the risk of new and emerging talent, knowing that they have some downstream protection. In many ways, to my eyes, the artist/CEO is getting a pretty good deal for herself these days in terms of distribution risk sharing (assuming she has been taken on by a decent gallery in the first place), and as the competition heats up, the complexity of the relationship is going to need to increase to handle the pressure.

It seems altogether possible that we might eventually see a breakdown of the integrated physical gallery model, especially as more and more transactions move online. The artist/gallery relationship can take any number of forms, where the customer-facing agenting function (sales and marketing communications) and the retail show venue function (product marketing and distribution) could easily get separated into two different business entities, conceivably both hired separately by the artist/CEO for different slices of the sales proceeds. We're also seeing artists add their own websites to the marketing activity being done by their galleries, effectively taking part of the branding exercise (and its costs) back in house. It seems like we are now at a point where the traditional model will really being to change, with new kinds of services and relationships being tried, mostly because in its current state, the current state is often financially untenable for one side or the other.

There's an old adage that to a hammer, everything looks like a nail, and this analysis certainly reeks of a start-up guy applying an external model to a different (and complicated) market. But it feels to me like change is in the air, and both the artist/CEO and her gallery partner need to bring some creative flexibility back into the way they collaborate. If you are already a bankable artist, you have the luxury of choosing your own path; for everyone else, on both sides of the table, the competitive pressures (and the increasing rents) are squeezing all the margin for error out of the business; the cottage industry is being professionalized, like it or not. Artists and galleries need to look more carefully at other industries where product development and distribution are separated, and look for methods and best practices that might be borrowed and adapted. The mega galleries have already figured this out, and have shot the first volley across the bow by building up the infrastructure and services (including the expansion of the art fair model) required to attract the best selling artists. The small and mid sized galleries need to respond, and while I'm sure many artists will cringe (and outright rebel against) at the idea of the arrival of the MBAs, this industry is already undergoing a disruptive transformation, and those entrepreneurial artist/galleries who figure this out soon will have a better chance of not only surviving, but actually thriving. I'm not saying that the high touch, reputation based selling of fine art is going away any time soon, but that the structural framework that surrounds the existing model is going to have to change to ensure the gallery system doesn't cannibalize itself.

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