Going once, Going Twice
Paddle8 is an online auction house created in 2011 to connect buyers and sellers of fine art. Used cars purchased by private car dealers are sold at auction houses. Google and Facebook are auction platforms for advertising and marketing of services and products to potential buyers. A number of different types of auctions exist including but not limited to an English, Dutch and a Reverse auction. There are two sides in an auction, the long side and the short side. The short side is the party that has what the long side wants. A usual scenario is a buyer goes long and a seller short, but it is possible to have the roles reversed.
In 2015, the legendary rap group Wu Tang Clan sold a single copy of their album titled Once Upon A Time In Shaolin for $2,000,000 to an hedge fund investor. The album is recognized as the most expensive individual album ever sold. The sale method was done using an English style auction, whereby the album was bidded on by multiple buyers and sold to the highest bidder. A legal agreement was in place with the buyer prohibiting any commercial release of the records until the year 2103. In this scenario, Wu Tang Clan was on the short side because they had only one album to sell with a buyer market competing for the right to take ownership of the product.
Amazon began its search for a second headquarters in September 2017 with the promise to local and state governments to generate thousands of jobs for the city it decides to choose as a destination. More than 200 cities competed through detailed public funding plans that included tax provisions of $1,500,000,000, cash grants of $325,000,000 and other incentives and to win the headquarters challenge initiated by Amazon. Amazon conducted its auction through a promise of future benefits to the city, specifically the creation of jobs with an average salary of $150,000 per year. Amazon was the seller in this scenario, so it was the short side in this auction.
Auctions are initiated, in most scenarios, to obtain the highest price from a willing buyer due to information asymmetry that results in a price greater than the value of the product or service. In the context of the Wu Tang Album, the buyers lack information on the quality of the music recorded on the album, but because the buyers are more interested in the scarcity created with owning the single produced copy of the album, the risk of purchasing a poor quality album is reduced. The auction of the album provides a benefit to both the buyer and seller because the information gap is reduced as the buyer gains through ownership of one album and the seller gains through the lack of buyer knowledge with regards to the quality of the music.
Amazon, unlike the Wu Tang Album auction, was able to capture a significant chunk of the value from the auction. While the buyer of the Wu Tang album could not be determined ahead of time until the close of the auction, it was known in many circles that Amazon had a short list of viable cities, so the vetting process by cities was a way for Amazon to increase the value capture and the information asymmetry between the buyers – the cities competing for the right to claim Amazon headquarters. The city, in an attempt to win an auction contest, increased their own information gap by working independently of each other, opening up the chance for Amazon to swoop in and take the best offer it can get based on future benefits that may or may not materialize.
The two auctions are important to our understanding of value in the context of culture, business and art. These three areas, driving much of capitalism, should be traded with the understanding of who is short and who is long in a negotiation. Furthermore, all tradable ideas should be developed to create an auction for its services or products. Google and Facebook ensure that the business model is based on an auction scheme to extract the most value from the buyers, who are accessing their marketplace for eyeballs. Similarly, Wu Tang Clan understood their position as artists, by manufacturing scarcity they extracted the most value of any single album to date.
The two important questions for anyone in the culture involved in the trading of business or art, is to understand who is long and who is short. As technology changes the way we work and how distribution of ideas are disseminated especially for the artist, it is important to know the fundamental rule of trading.