Conceptual works like 'Bett,' by Joseph Beuys, tend to sell better at galleries. Sotheby's
LONDON—The debut of the new S2 contemporary-art space here this month had all the trappings of a high-end gallery opening: young, chic women with iPads checked in guests at the door while suited waiters served flutes of Champagne to art-world insiders eager to see works by German conceptual artist Joseph Beuys.
The only difference was that the gallery's backers weren't wealthy London dealers, but Sotheby's BID -0.19% Sotheby's U.S.: NYSE $51.80 -0.10-0.19% Oct 21, 2013 11:06 am Volume (Delayed 15m) : 80,348 P/E Ratio 34.61 Market Cap $3.55 Billion Dividend Yield N/A Rev. per Employee $510,458 52.2052.0051.8051.6010a11a12p1p2p3p 10/20/13 Auction Houses Muscle In on Ar... 10/17/13 Sotheby's London Sale Produces... 10/10/13 Sotheby's, Christie's Square O... More quote details and news » BID in Your Value Your Change Short position , which along with rival auction house Christie's is elbowing its way into the high-end gallery world, shaking up the clubby international art scene. Just the previous night, Christie's had opened its own nearby gallery, Christie's Mayfair.
For decades, the art business thrived on a symbiosis between galleries and auction houses. Galleries and the dealers who ran them traditionally made long-term investments in discovering and developing young artists, placing their artworks with influential collectors whose patronage would further an artist's reputation and ultimately increase his selling prices.
Auction houses, for their part, provided a lucrative secondary market for the most enduring of those artworks, but rarely handled trendy new artists.
market and margin pressures in the auction business are changing all that. Those forces are prompting the houses to experiment with new ways of auctioning art and to arrange more private sales of contemporary works outside the auction room, where profits are richer.
Increasingly Sotheby's and Christie's are catering to a new breed of art buyers from the hedge-fund world and emerging economies who prefer to quickly acquire big-name pieces of art instead of building relationships with galleries where they might buy the art more cheaply.
Last year, private-contract sales of fine art accounted for $1 billion of Christie's $6.27 billion of revenue and $906.5 million of Sotheby's $5.4 billion. That's a big jump from before the global financial crisis: In 2006, Christie's sold $256 million of art in private sales, while Sotheby's sold $328 million.
Meanwhile, the global auction market for contemporary art—generally defined as art created after 1945—ballooned to $6.2 billion in 2012 from $1.9 billion in 2009, according to data from research group Art Economics.
The continuing battle between Sotheby's and its largest shareholder, Daniel Loeb, underscores the pressure auction houses face to deliver fatter profits. Mr. Loeb has publicly blamed Chief Executive Bill Ruprecht for allowing privately held Christie's to pull ahead in both auctions and private sales of contemporary art and called for his resignation.
Sotheby's has called the accusations "baseless" and has adopted a shareholder rights plan, also known as a poison pill, to keep Mr. Loeb at bay.
The word "gallery" is "just nomenclature" in today's market, says Christie's Chief Executive Steven Murphy. "I always think it's better to talk about the art instead of the marketing," he says.
That kind of talk worries old-school art dealers, who are concerned that the houses' expansion into art dealing could skew the art market and has already created bubbles around the works of buzzy artists like Wade Guyton and Christopher Wool.
'Tier und Sonne' (Animal and Sun) was one of the Joseph Beuys drawings offered at the Sotheby's London show for about $113,200 to $323,300. Sotheby's
The auction houses focus mainly on obtaining the highest possible price for an artwork. Dealers, by contrast, say they typically sell coveted works only to buyers whom they trust won't try to resell them without their approval and in this way can control their artists' resale prices and owners.
"I've had my fair share of collectors shouting me down on the phone," says London dealer Thomas Dane. "Simply having the money and wanting to buy a work does not mean I will sell it to you," says Mr. Dane, who adds that the auction prices of his painter Hurvin Anderson have spiked due to market speculation and an uptick in privately negotiated sales via auction houses.
Galleries rely on traditional auctions to establish solid prices for artists, which in turn can boost their primary market, works sold through galleries.
But in what galleries regard as another potentially threatening development for their business, the houses have started to experiment with their auction rules. Last week in central London, Christie's held an auction that broke with the decades-old practice of setting a minimum bid, or reserve, for each work and assigning it an estimated value.
Dealers say removing those controls will create a much more volatile market and make auctions riskier for artists, particularly emerging ones, who could have the value of all of their work plummet after a poor auction showing.
In the past, the sale of highly experimental works like those Christie's sold last week—so gargantuan in size that they had to be displayed in a nearby gutted factory space—are typically handled privately and slowly.
"The most responsible thing we did was not to tell the market what the values of those works were," said Christie's specialist Francis Outred, when asked why there were no estimates given for them.
The works in the Christie's sale were all consigned by Charles Saatchi, a London dealer well-known for buying low and then using auction sales to "flip" works by up-and-coming artists including Mr. Anderson, Mr. Dane's painter, whose deeply colored paintings subtly refer to immigration and multiculturalism.
London dealer Simon Lee says he participated in Christie's pre-sale marketing to help one of his artists, Toby Ziegler, who had never been sold at auction before. Mr. Ziegler's massive cardboard dog statues "The Liberals" brought in just $24,200, a disappointing figure.
Representatives for Mr. Saatchi didn't respond to requests for comment.
Despite the inroads they have made into art dealing, it's far from clear that auction houses will succeed as art dealers. Christie's now is staging a show of British pop art, which private dealers have long said is an underpriced niche market. Christie's threw thousands of dollars and around 40 employees into the project and has commissioned a museum-style catalog.
Sotheby's plans to use its new London gallery space, S2, to hold a steady stream of shows to sell contemporary art. The auction house opened the first S2 in New York in 2011. The gallery's first London show is dedicated to works by the late Mr. Beuys, who typically has been a tough sell at auctions, while garnering higher prices in galleries.
Austrian dealer Thaddaeus Ropac is the leading Beuys dealer in Europe, having sold two major works by the artist last year for around $2.7 million each. By contrast, Mr. Beuys's best auction price is $1 million.
Mr. Ropac says his gallery's strength lies in its close ties to the Beuys estate to acquire top works and his gallery's reputation as a specialized institution. "We are not just a selling machine. Auction houses are drilled in this mentality," he said, adding that Sotheby's even approached him about buying some of the work in its sale.
Mr. Ropac sees the auction house's encroachment as unavoidable. "What can we do? We need them to build up prices for our artists."
Write to Mary M. Lane at mary.lane@wsj.com