Perverse Economic Incentives

Perverse Economic Incentives.  That, I believe, is the driver of this tale of woe. It has been quite a journey writing this series of blog posts about the Omega fiasco. Even as I wrote the first piece, laying out the strange events around the journey of this watch, none of it made sense.  That led me to have a more detailed look at the events in the second post of this series. This merely opened a new can of worms, all the unanswered questions.  Here I run through a few of them and look at the anomalies. It all seems to come down to money and, in particular, perverse economic incentives. 

I Have A Theory

The more I read about the Omega Frankenstein watch and think about the incentives of the various players I become increasingly disillusioned by the world of historic watch collecting.  It seems these participants are merely trying to manipulate the market to entice fans to pay too much for historical watches of dubious provenance.  Unfortunately, their incentive is to get the highest price for anything, regardless of what it is. 

Let us not beat around the bush. If a similar set of circumstances occurred with shares of a public company rather than a watch of implied historical importance, people would be looking at jail time.  In this episode, very clear lines of professional decency have been crossed. Whatever way you cut it, Omega was not acting in the best interests of its customers, even if it did end up the victim of some rogue employees.  Perhaps that was just karma?

Let us look at the most obvious questions that beg to be answered from this sordid tale.

Why, in the press release from Omega following the auction, did Omega not announce they purchased the watch? 

This, to me, is a red flag that indicates Omega’s involvement from the beginning. The senior management must have known that the heritage department was authorized to pay at least CHF 3.2 million for this watch. One has to imagine there was a discussion internally that approved a ceiling on the bidding. There must have been some checks and balances internally so that the person who was doing the bidding had the authority to commit the company to the price at the auction.  Finally, someone at the company had to transfer the funds to the auction house to purchase the watch.  I don’t see how Omega can plead ignorance.  

Yet, that is not the only issue.  The reserve on this watch was around CHF100,000.  That, if the watch had not been fraudulently altered, would have been a reasonable price for the watch as described.  Why, with all the resources and historical knowledge of Speedmasters at auction, did Omega authorize someone at the company to pay almost 30 times more than any other comparable watch had ever sold for?  

Finally, when the world-beating price had been paid for this watch, Omega made a press release to laud the landmark.  Why were they silent on the fact Omega had purchased the watch for their collection?  Why did they leave the market thinking that a Chinese buyer was the new owner?  At the very least, this is disingenuous and, at worst manipulative of the market.  What was their incentive to omit this key information – a perverse economic incentive, perhaps?

Just More Questions 

The original question merely throws up more questions. What this indicates to me is that all we can do at this stage is ask questions.  The cloud of questions led me to the unfortunate conclusion that Omega was not honest and transparent with the market.  That begs the next question. What was Omega trying to hide? Alternatively,  what impression were they trying to broadcast to the market? Just more questions.

What is Authentic?

Regardless of their actions in the auction, Omega is also authenticating this watch.  The certificates of authenticity provided by Omega provide immediately, and before this episode,  irrefutable provenance for any watch. But what does a certificate of authenticity mean?

The screenshot above shows what an Omega certificate of authenticity attests to.  It is important to understand what it does not mean. The one thing a certificate of authenticity does not mean is that the watch has the same components as it did when it left the factory. What it does mean is that the watch that the certificate has been issued for is consistent with watches manufactured at that time.  Theoretically, two watches can be combined to make a third watch and still be certified original, provided all the parts are consistent.

Original and Original?

When I sit and think about this, it is reasonable.  When these watches were manufactured, the ability to track each piece with serial numbers would be very limited.  Provided the movement serial number and the case number match up, how would anyone be expected to tell the difference?  If non-Omega parts were used in repairs, that should be evident, although I would imagine quite difficult to spot.   

This is likely why very few brands are willing to authenticate their vintage watches. Very few brands offer such a service. Certainly, the likes of Rolex and Patek Philippe do not offer such services. Omega has been an exception to this since 2019.  And as you can see from the screenshot above, as of the date of this post, the service has been suspended.

Not Original

There are two significant reasons why this watch should never have received its authentication certificate.  First, the bridge was not an authentic Omega piece.  But also, and more significantly, the movement was not consistent with a 1957 model watch.  The heritage department at Omega should have easily spotted these inconsistencies.  Why not?

I think it is clear that bad actors were working within Omega. The big question is, how much of this was known internally? How much was management turning a blind eye?  Was it simply collusion by individuals to defraud the company, as Omega asserts?  Or was Omega going to get something out of it too?  What one could term a perverse economic incentive.

Auction Tactics 101

In an auction, no one is there to help the collector.  Every, except the collector purchasing the watch, is there to extract as much money as possible from the buyer.  The auction houses are the most obvious ones who are set to gain the most when the price goes as high as possible.  They not only get higher buyer premiums, but it makes great headlines.  These headlines then attract other sellers who are looking for similar results, and so the process perpetuates itself.

The watch manufacturers have no interest in putting a brake on the secondary market and ever-higher prices. Good auction results are great advertising.  Remember the first thing Omega did after the auction results?  Yes, they released a press release that was ominous by what it did not say.  Could we say this was a deception by omission?

Just A Nagging Question

One thought keeps coming back to me on this auction result. Why was Omega willing to pay so much at auction? 

Three months later, the collaboration between Omega and SWATCH was released. Was it not handy that when people searched Speedmaster during the release, they would have read about a record-breaking historic watch?  Who could argue that the Speedmaster was not a historic watch if someone paid over CHF 3 million for one of the first?

I wonder how much advertising CHF3 million would buy? I wonder about the marketing impact of a very successful auction price versus merely advertising spend.  Does anyone out there know how to analyze this? Perhaps another perverse economic incentive?  

The Sleuth(s) 

At this point, I would like to acknowledge the great work of Jose Pereztroika of the watch blog and Andrea Martel of NZZ. They were the ones who did the hard work and called out the fraud.  One thing for sure is this story is not over, and I hope that they keep up the good work.  

Not Only Omega?

I have spent some time discussing the implications of this with several collectors. The overwhelming response has been that they are surprised that no one was caught sooner. His point was not about creating Frankenstein watches but about large brands secretly participating in auctions to increase prices.  The heritage collections of renowned watchmakers are large, and so there is a vested interest to keep the prices up and ensure the aura is maintained.  All the brands are incentivized to keep the dance going.

One thing I do know for certain is that it will not be a problem at SNGLRTY.  Well, for a few years yet!

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