Sunday 14 June 2020

And Who's Gonna Pay for That?

This post will say something about the economic relationship between a commercial gallery and an artist and more specifically about how the material costs of artworks relate to the relationship and the revenue split between the artist and the gallery.

Let me first say that the scope of this post is limited to a situation where a gallery and an artist act as if they're interacting solely for the duration of a single exhibition. There are one or more works of the artist for sale during a single exhibition at the gallery with a set time span. In this way the gallery functions more like a storefront than an agent that actively represents the long-term business interests of the artist. Based on my own experience and anecdotal evidence, this is quite commonly the case even if the relationship between an artist and a gallery is legally often presumed to be an agent-principal relationship.
The ideal terms of actual long-term relationships between galleries and artists are heavily dependent on many different factors that should be determined on a case-by-case basis and therefore this general observation doesn't easily translate to those relationships. Museums and other institutions' financial interests rarely have any direct relationship to those of the artist and are thus also not taken into account.

The first thing to consider is that there is an innate notion of fairness in situations where some amount of money has to be divided between two parties. One of the clearest examples of this is what is known as the ultimatum game. This game is an experiment where A receives a certain amount of money of which he has to offer a certain part to B. If B accepts A's offer, they both get to keep their respective parts that A decided, but if B rejects the offer, neither of them gets anything. From a purely rational perspective, B should always accept A's offer as long as it is not zero. After all, both A and B will gain something if B accepts, while if B rejects, neither gets anything. However, experience shows that this is not the case and B is likely to reject any offer that is perceived as unfair. Subsequently most of A's offers tend to gravitate towards what is seen as an even, or fair, split between A and B.
You could argue that this is only so because B has some amount of power over A in this scenario. If A wants to receive anything as well, he needs to make sure that B will not reject his offer. Yet there is a variant of this experiment which is called the dictator game. In the dictator game A again has to divide a certain sum between himself and B, but this time B has no influence over, or even knowledge of, this decision. Contrary to what is purely rational, it is very rare that A in this case chooses not to share anything with B. Without going into the causes and repercussions of these findings, they at the very least show that fairness is an important factor in this kind of division between two parties.

When a gallery sells an artwork for an artist, it receives a commission of a certain percentage of the work's sale price. Of course, creating an artwork costs the artist money, so there is an open question how those costs factor into that equation.
A common solution to this problem is that the artist receives an absolute (as opposed to relative) compensation for these material costs, independent of the commission. Which sounds reasonable, right? The artists have incurred these costs to make the artwork, so it stands to reason that if this artwork is sold these costs first get compensated independently of profit margins.

The first and very obvious objection to this principle is that the material costs for artworks are both highly changeable and difficult to determine. Is the artist's overhead included in those material costs, for example? Or, if an artist needed to buy a new tool to make that one work, but subsequently used that tool for other works that are not in the exhibition, do you include the cost of that tool in the material costs of the artwork or not? Maybe a work has been shown at other venues and this has increased the value of the work, should costs incurred by the artist for those other exhibitions be included? How do deferred costs factor into this? It is not uncommon for a work to sell years, even decades, after it was first made and there are costs involved in storing an artwork, as well as considerations of inflation, changing markets, cost of living and so forth.
These costs can also change from one work to another. For a painter the costs may be quite constant, so perhaps an average cost per m² can be calculated with relative ease, but for some artists one work may cost € 10 to make, while another costs € 1000, even if they possibly have exactly the same sale price. These are but few of the many questions that arise in the supposition that an artist is directly compensated for their material costs, all of which have to be (implicitly) agreed upon between the gallery and the artist.
It is also difficult, for both parties, to prove the costs of a work. Very often works go through many iterations before finding their final form. Some costs are even shared between iterations. Even if the artists kept detailed records for all the incurred costs, it will be rare that the exact costs stipulated on those statements will end up in the final work without any waste or reusable leftovers. Whether or not those costs should be included and how they should be proven is a question without a clear-cut answer.
Including these costs in the calculation of a fair division thus greatly increases the possibility of conflict between the two parties, given the sheer amount of variables that they can disagree upon and that may even change from work to work.

From a purely logical perspective the uncertainty of the variables further can create some ridicilous situations when taken to its extremes. While I'm personally of the opinion that material costs have a greater influence on the prices of artworks than is generally presumed, even I have to recognise that there is no unequivocal correlation between the cost of an artwork and its price. So let us imagine a situation, one I have heard of happening in the past, whereby the artwork on sale cost more to produce than a gallery might be able to sell it for. If you are of the opinion that an artist should always be directly compensated for the production costs through the sale of an artwork, then in this case you will end up with some extremely adverse consequences. When this work is sold and production costs are taken into account on how the money is divided between the gallery and the artist, the gallery will definitely lose money it wouldn't have lost if the work hadn't sold. Which seems absurd and this creates the situation where the best course of action for the gallery is actively preventing the work from being sold. For the artist on the other hand, selling the work is always better then not selling the work. As the costs for the work have already been made, the only possibility is recouping some of the costs of the work and any cost is better than no cost. Perhaps this is more clear in a payoff matrix.

A, G Split Only Split - Costs
Sale -0.5, 0.5 0, -1
No Sale -1, 0 -1, 0

The gallery only gains something by not paying for any costs in the case of a sale, while for the artist it is always better to sell than not to sell. The only option where both have something to gain is when the proceeds from the sale are divided between them without taking the production into account, so that should be what they decide on.

An important factor in the differing attitudes towards the problem is that the gallery of course also has costs, albeit that they are of a different kind than the costs of the artist.
The costs of the gallery for an exhibition are generally higher than those of the artist, but are also consistent from exhibition to exhibition and thus predictable. The biggest costs are all overhead costs; rent, utilities, advertising, staff and so on. Even the more variable costs of transportation, fairs, adjustments to the exhibition rooms and such, often recur at regular intervals and are thus predictable to some degree. Yet none of these costs on their own can generate any kind of profit, so how they are able to recoup these costs depends directly on the amount of income they generate from sales of the works of artists.
For artists the overhead tends to be comparatively low, while the variable costs for production are relatively high and unpredictable.
The perceived risk for the gallery is thus higher if an artist receives compensation for their incurred costs, since the gallery is losing more money than the artist in case no artworks are sold while not gaining as much as the artist when they are sold. The negative effects for the gallery of not selling work are higher than those of the artist, since their costs of doing nothing are higher. If the gallery is then also responsible for bearing the costs of the production of the work, that risk is further compounded. How much this risk increases is also very difficult for the gallery to determine beforehand, so it must assume it is greater than is actually the case. The gallery of course wishes to mitigate this risk and it can do so by increasing its own potential for profit. There are two ways to increase this potential. The first is selling a greater quantity of work, which is not always possible due to perceived scarcity driving prices in the art market, amongst other reasons, and the other option is asking for a bigger slice of the pie. This is the reason why galleries ask, and receive, commissions on sales that are absolutely unheard of in other fields, not uncommonly hovering around the 'fair' 50% mark.

While this percentage can be somewhat justified by the higher baseline costs of the gallery, it simultaneously ignores the fact that if an artist gains popularity and their prices start to rise, the benefit to the gallery greatly increases, while the risks decrease. This is because for the gallery the costs are largely constant, while for an artist the costs are largely variable.
Let me show this by giving an example. The costs of the gallery for an exhibition are say, 1000 G. The artist's costs for the works in the gallery were 200 + 100x G, whereby the 200 is overhead and 100x are the costs per work. Say five works are sold at a price of 1000 G with a split right down the middle and the artists are compensated for the cost of each work, even including their overhead. So when calculating the division of the 5 * 1000 = 5000 G income we do 5000 * 0.5 = 2500 - (200 + (100 * 5) = 700) = 1800 G income for the gallery and 5000 - 1800 = 3200 G income for the artist. For the artist the profit is thus 3200 - 700 = 2500 G, or exactly the agreed upon 50%, and for the gallery the profit is 1800 - 1000 = 800G. So while the gallery has borne a greater cost, 1000 G versus 700 G, it has received less profits.
On the other hand, say the artist is very successful and the work is now sold at a price of 5000 G. The costs of the artist have also gone up and are now 200 + 250x G. For the gallery nothing has changed. The total income for the works sold is then 25,000 G with a profit of 12,500 G for the artists and 10,050 G for the gallery. So while the artist's profit in the first scenario was 3.125 times of that of the gallery, in the second scenario the artist's profit is 'only' 1.244 that of the gallery. That is quite a difference and seems to have little to do with fairness given that it's the artist who is succesful, while it's the gallery who reaps a greater relative benefit.

So far the discussion has been about costs that are incurred by the artist to create the artwork, but of course there are sometimes also costs that the gallery makes that are specific to the exhibition. It seems reasonable to ask the gallery to be at least partially responsible for those costs, since without the artist the gallery would not have any way to generate income. So if the walls need to be painted or something else needs to be done to the space to accommodate the work of an artist, it is reasonable to presume that the gallery is at least partially responsible for those costs.
However, things get more complex when a gallery pays for part of the artists' work, say a frame. The gallery's direct benefit for something like a frame is that the work is more likely to sell. It is thus a cost the gallery makes to increase its chance of a sale and thus of income to recoup those costs. If the work didn't sell at the end of the exhibition, the artist often wishes to keep the frame or other additions the gallery helped to finance. The artist in that case is still able to benefit from the added value of the gallery's expenses, while for the gallery the investment is already a net loss. It stands to reason that in this case the artists should reimburse the gallery to some extent for the costs it has made. The artist will otherwise enjoy the benefits of the gallery's investment without bearing any of the costs, which doesn't seem to fit the idea of fairness we established as important in these interactions. A full restitution is likewise unwarranted, since the gallery did enjoy some amount of benefit from its expenses and it may indirectly benefit from it in the future as it could advance the work of the artist.

All of this leads us to the conclusion that while it seems like a reasonable proposition that in the sale of artworks artists are directly compensated for their production costs, it might in reality be against their own interests.
As by having to reimburse the artist for their costs, the gallery is now responsible for costs it has little to no control over and is not even always able to gain insight in. At the same time, those costs, if unexpectedly high, could potentially have strong negative effects on the gallery's ability to do business. The difficulties of establishing the 'true' cost of a work thus make it the right choice for a gallery to employ an aggressive strategy in dividing the proceeds from sales where it receives a larger percentage than would be justified if only the gallery's own costs were taken into account.
Let me once again do some quick calculations to show you that there are better alternatives to this common method of dividing the costs.
We'll take the values set out in the earlier example, but this time we find an alternative to the 50:50 split that has the costs factor in. With a commission for the gallery of a still reasonable sounding 36%, we achieve the same result of a 50% and a 16% relative profit that we found in the first scenario where five works were sold for 1000 G. Instead of the gallery being responsible for the risk of the artist, the artist is now responsible for his own risk and a more uneven split is a representation of this shifted burden. Things do change when we look at the second scenario. There the artist would make a profit of 58.2% of the sale price, while the gallery's profit would have been 32%, as opposed to 50% and 42% respectively. Thus there are similar gains for both parties when the prices are lower, while the profit increases to ratio for both parties when prices go up.
Lowering the commission on the sale price would thus be a more fair solution to the artists. The added risk this brings to the artist would also be lower than the risk those exact same costs would bring to the gallery. After all, an artwork can be sold elsewhere by the artist at a later date or even directly by the artist to a buyer.

As there is great potential for conflict over the production costs due to the uncertainties involved in their calculation, it seems that it is more fruitful, both financially and mentally, for galleries and artists to bargain over revenue splits rather than production costs, with both parties likely benefiting from a lower commission for the gallery than is now commonly the case.

Rounding off our scrutiny of the subject I should remark that so far in the text I've worked under the assumption that artworks are selling, as it is difficult to speak about revenue splits without there being any revenue to divide in the first place. It is however quite often the case that a work doesn't sell, with both the artist and the gallery having incurred costs nonetheless. In this regard a gallery has less risk, as it possesses a greater amount of continuity by being able to sell the work of a different artist in the next exhibition.
As a last recommendation I thus believe it to be a good idea that it becomes a norm that artists are compensated for their time and effort in preparing for an exhibition, regardless of the potential sales outcome of this exhibition. If no work sells, then the artist is at least compensated in some way, which can be justified by the greater continuity of the gallery. Yet if works do sell, a one-time up-front compensation is likely lower than the continued compensation in production costs for each work that the gallery would otherwise be responsible for. Once again this seems like a more reasonable solution given the position of both parties. Aditionally there is the added benefit of greater transparency, as this fee can easily be based upon the artist's overhead or amount of time spent on preparing the exhibition. Both of which can be estimated more easily by the gallery, thereby lowering risk and thus lowering overall costs.