PWC-See You at Fanatics!

Welcome to this week's?Alts & Ends, your lively guide to collectible market happenings. In this edition, we explore another major acquisition for Fanatics, a landmark copyright ruling in art markets, and an informative weekend in music memorabilia sales.

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PWC-See You At Fanatics

Fanatics making an acquisition isn't shocking. It's more shocking when significant time passes?without?a Fanatics acquisition.?

Fanatics acquiring PWCC? Also not?really?sending jaws to the floor in surprise.

Fanatics acquiring PWCC in part because the latter was allegedly closing in on insolvency? Okay,?now?you have our attention.?

While there isn't yet clarity on how much Fanatics paid for PWCC or just how dire the situation was, rumors swirled earlier in the week about PWCC's financial instability.?Darren Rovell reported?PWCC would not have survived much longer without being bought, sentiments which were seemingly supported by a large recent wave of employee terminations.?

How did such a large and bustling auction and marketplace business run into such trouble?

Many have been quick to point to the company's card lending program as a significant culprit.?

PWCC had been advertising its lending capabilities since the early height of the card boom in 2021. Using their cards held in the PWCC Vault as collateral, customers could receive loans amounting to some percentage of the cards' market value.?In September of last year, PWCC announced that it had expanded the program, establishing a $175 million asset-based credit facility led by Whitehawk Capital Partners to pursue the lending opportunity with greater firepower.

Alas, over the past year, in this very newsletter, we've highlighted numerous failed flips of modern cards at PWCC....six-figure losses crystallized in mere months. Why, oh why, would the seller ever take the card to market in such choppy times, when a massive loss was all but assured? There was conjecture that it was the result of borrowing gone bad. Now, the suggestion is that it could perhaps more accurately be described as lending gone bad.

With the swirling speculation about PWCC's tenuous financial position, there are some reports that borrowers willingly defaulted on their loans as the card market went south. Effectively, borrowers would fail to repay their loaned funds, keeping those funds and instead saddling PWCC with the rapidly depreciating card collateral. If PWCC's liquidity position was indeed challenged, it makes sense that they would then turn to the market and sell those cards as quickly as possible to raise whatever funds they could.?

Whether the lending program and its failures were large enough on their own to sink PWCC is another question altogether. The company had been aggressive in investing for growth over the last few years, and the combination of that investment, the market's rapid and severe decline, the lending program troubles, and rising rates may have eliminated any margin of safety in terms of ongoing liquidity.?

With Fanatics at the wheel, there will no longer be immediate pressure to foist the defaulted card collateral into the market for whatever proceeds may be available. The company, instead, will be able to return its focus to operating an active and popular marketplace and auction business, backed by what is - in relative terms - a quite technologically-advanced platform.

At face value,?the acquisition is a natural and logical step for a Fanatics Collectibles business eager to offer a full end-to-end suite of products and services to collectors. The PWCC acquisition will bolster the company's vertical integration, engaging collectors from the time they purchase a card at retail until they sell it on secondary markets and start the process all over again. The ability to reach the customer at every step of that process is powerful, and Fanatics will surely benefit from the flywheel effect of an effectively closed loop of Fanatics card commerce.

When cards and collectibles never really?leave?the Fanatics ecosystem, the opportunities to generate revenue on them multiply. This is an opportunity recognized by the various companies who put significant marketing push behind vaulting, PWCC included. That opportunity expands considerably when a product can go straight from retail purchase to vault.?

The most notable competitor in the vaulting and marketplace business is Collectors (with Goldin in the fold). With the PWCC acquisition, Fanatics moves into more direct competition with Collectors, though it leaves one glaring void in the company's growing arsenal: grading.

Whether or not that's a business Fanatics will pursue to compete with PSA and further close off its ecosystem is unclear; there is something awkward about a company that manufactures cards owning a business that grades - among other things - the production quality of those cards. PWCC has partnerships to streamline grading with Beckett, CSG, SGC, and MBA, and perhaps those will be considered sufficient for the moment.??

There's another element of potential awkwardness at play. It's often the case that manufacturers of coveted products with active secondary markets like to keep those secondary markets at arms length, enjoying the retail demand they create but effectively ignoring them or pretending the to be blissfully ignorant to the huge profits generated when their products are resold. With a major secondary marketplace now under its ownership though, it'll be interesting to see if Fanatics maintains or softens the same stance.

Would a manufacturer be so bold as to?explicitly?acknowledge the cards it produces can fluctuate considerably in value, both immediately after purchase and over time? Will it market those data points, or does it invite too much scrutiny and too much legal expense?

Expect the arms-length treatment to continue in the near term, before PWCC is gradually eased more directly into the fold over time, but don't hold us to that.....we can't even promise Fanatics won't have acquired three more assets by the time you read this.

Court or critic?

"It’s a great day for photographers and other artists who make a living by licensing their art."

With the Supreme Court delivering a 7-2 vote in favor of Goldsmith, Andy Warhol’s rendition of ‘Orange Prince’ was deemed a fair use violation, and the results will reverberate beyond the art world.?

For the Warhol estate, the Supreme Court’s decision signals a shift for an artist who established a legacy through portrayals of trademarked soup cans and Brillo boxes. The controversy began in 1981, when Goldsmith, working on behalf of?Newsweek,?took?a photo of Prince. The image was then protected by a copyright, and three years later, Goldsmith gave?Vanity Fair?the right to?license the portrait. The agreement allowed Andy Warhol to design a single silkscreen illustration to be used in a 1984 printing of magazine and in return, Goldsmith was paid $400. All was good and everyone was properly cited and paid... until Mr. Warhol decided to not stop at just one copy.

Between 1984-1987 though, Warhol would curate 16 variants of the photo, most notably one showcasing the music icon against a vivid orange and red backdrop. Following the musician's death in 2016,?Vanity Fair?once again used one of Warhol's Prince portrayals, paying the Warhol Foundation more than $10,000, although this time, Goldsmith and her copyright were ignored.

Over the next six years, the case made its way through the legal system, with a district court in New York siding with the Warhol Foundation in 2019 before the state’s second circuit reversed the decision. The conflicting verdicts pushed the litigation to Capital Hill where Justice Sonia Sotomayor penned for the majority:

“The use of a copyrighted work may nevertheless be fair if, among other things, the use has a purpose and character that is sufficiently distinct from the original. In this case, however, Goldsmith's original photograph of Prince, and AWF's copying use of that photograph in an image licensed to a special edition magazine devoted to Prince, share substantially the same purpose, and the use is of a commercial nature.”?

Not everyone is celebrating the high court’s decision though.

Harvard Law professor Rebecca Tushnet cited her concerns that the Supreme Court was stepping beyond their jobs as America’s superior judges and into the role of art critic. In a letter challenging the court and its entrance into the art market, Tushnet stated that "disavowing any judicial ability to opine on art, the majority actually sets itself up as an art critic, deciding that Warhol image is essentially the same as a photo because it's just a picture of Prince."

Additionally, Justice?Elena Kagan authored the dissent, emphasizing concerns over how far copyright laws can extend and how frequently that extension could potentially stifle creativity.?

The criticism raises questions regarding just how similar an artwork can be to the original in order for it to violate principles of fair use. While experts analyzed, compared, and testified to the similarities found within pairs of Prince portraits, the ruling does not provide precise parameters on what constitutes a copy. If an artwork is 80% identical to an original, is it in violation? What if a portrait is 95% similar but casts the subject in front of a different background and uses a unique color scheme?

As is frequently the case in these court rulings, plenty of questions remain, and there are sure to be a plethora of interpretations levied in the future as artists scramble to ensure their projects are not infringing...or being infringed on.

While this particular case revolved around art and photographs, the ruling establishes precedent for additional relevant markets. Paul Lesko, an attorney and (un)official legalese interpreter for the hobby, detailed the potential implications the court’s announcement could have on the sports card industry.?

In a?Twitter?thread, Lesko highlighted the court's emphasis on fair use violations as it pertains to works that are considered commercial and copies that share the same or similar purpose as the original. This factor was one of the key articles of separation in the Warhol case, as the court noted his works that mimicked Campbell's Soup would not fall under the same treatment due the the differences in purpose and market. For sports card art though, manufacturers, photographers, and independent card artists often clash over copyright laws due to each piece of player-related art pertaining to the same purpose - to create and sell pieces of cardboard with images of athletes on them.

Rock and Roll Never Forgets

The music hasn't stopped in rock memorabilia markets.

In fact, you could argue we're in the middle of a pretty epic guitar solo. It might not be the kind that makes Wayne Campbell and Garth Algar drop to their knees and shout "we're not worthy!", but there's some music being made.

A few weeks back, we highlighted the huge $3.9 million sale of Eddie Van Halen's guitar from the?Hot For Teacher?music video. We've noted on several occasions that trophy asset sales are not at all uncommon across categories in 2023, so while this was a standout, it didn't necessarily say a lot about the rest of the music memorabilia market.

This weekend's Music Icons event at Julien's Auctions, though, provided a broader indicator.?

The top 100 lots generated $3.3 million in sales volume. That's a far cry from 2022's $11 million, but that event featured the $4.7 million?Smells Like Teen Spirit?Kurt Cobain guitar, as well as a massive consignment of memorabilia from Rush's Alex Lifeson (more than $3.5 million in sales).?Notably, the 2023 tally was up 20% over 2021.?

Some of the sales highlights:

• Nearly $1.7 million in guitars alone, led by Kurt Cobain's smashed guitar from Nirvana's "Nevermind" era. The guitar was estimated to sell for between $60,000 and $80,000, but ultimately fetched $596,900.?
• $955k in John Lennon memorabilia sales, including $676k consigned directly from Julian Lennon. The lots included Beatles Gold Records, handwritten lyrics, sketches, instruments, animation cels and more.
• $279k in Michael Jackson memorabilia, consisting primarily of stage-worn clothing.

When we peak under the hood at some of the specific sales, we get a better sense of how the market is evolving over time. While this event had a lot of fresh-to-market material, we can still find some trends. Let's take some repeat sales for example. These are items that have sold at Julien's previously and returned to auction this past weekend.

• Back in 2015, a pair of drumsticks custom-made for Ringo Starr and used by the legend sold for $3,250. Those sticks returned eight years later to a vastly higher price of $22,100 (against an estimate of $2,000 - $4,000).
• From the OG teenage sensation (The Beatles) to a newer edition (One Direction), an acoustic guitar believed to be Niall Horan's very first used in lessons?last sold in 2015 for $6,875. It nearly doubled in value, reaching a $12,700 price at this weekend's event.
• Elvis Presley's 14K gold Crucifix ring notched a price of $3,200 at last year's event. Whether that sale was consummated or not is unclear, but the ring was up for grabs again this year, and this time the price was much steeper at $9,100.

There are also data points that don't reflect a precise repeat sale, but still give us a feel for price action.

• Back in 2016, when Abbey Road Studio Two was under construction, 210 bricks were removed, cleaned, restored, and placed in a presentation box. Number 15/210 sold back in 2020 for $3,520. At the recent sale, number 16/210 was up for bidding, and with an estimate of $300-400, it sold for $11,700.
• Olivia Newton John cleaned up at the American Music Awards in the mid 1970s. Back in 2019, the 1974 and 1975 awards for "Favorite Pop Female Vocalist" sold for $10,240 and $8,960 respectively. This weekend, the 1974 and 1975 awards for "Favorite Country Female Vocalist" sold for $13,000 and $15,875.?
• An Eddie Van Halen signed and stage-played 2004 Charvel sold for $114,300. Stage-used and signed Charvels have more commonly occupied the $40-60k range in recent years, so it appears there was a post-Sotheby's sale bump.

Music memorabilia is not an emerging category, but it does seem it's now beginning to enjoy a more proportionate share of interest and demand than it had in years past.

You'll notice, though, that - Niall excluded - much of the action is concentrated firmly in Boomer territory, with some movement across the border into Gen X.?This is of course logical given the stage of life those generations are in, but it will be incumbent upon auction houses and marketplaces to reach younger fans and consumers to forge more active markets for "active" artists.

If and when they do, Niall's first acoustic guitar might be heading in only One Direction: up.?

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