620% OFF AT GETTY
April 1, 2006
According to sources Getty Images is about to launch a 20% off sale during April and May on any RM and RF images on its site. (No this is not an April Fools joke.) The Sale is expected to be announced in emails to customers early next week.
It is unclear whether the 20% is off of the list price, or this 20% is on top of any previously negotiated discounts. If it is 20% off list then it may not mean much because many of Getty's best customers already get substantial discounts on list prices.
This raises a host of questions. We can only speculate on most of the answers.
There are several theories as to why the company is taking this action. First, it is possible that Getty did not meet its revenue target for Q1 2006 and wants to show the investment community that it is moving aggressively to remedy that problem. Second, they simply want to put pressure on Corbis and Jupiter and try to capture more of the market share these two now have. However, both of these theories seem less likely than the third option. Getty wants to raise cash for some acquisition.
Why does Getty need to raise cash?
They had $518 million in cash and short term investments at the end of the 2005. Isn't that enough? It probably is more than enough for any planned acquisition, but the investment community wants to see that cash position continually growing, not being depleted. When Getty spent $50 million for iStockphoto investor reacted negatively. Getty's stock is down about 16% from what it was in December 2005.
How will cutting prices help them raise cash?
There is an economic theory in retail that says, "When you want to expand and need cash put everything on sale." In theory all the customers for the products you sell will rush to your store, instead of your competitor's, buy lots of your product and your gross revenue will rise substantially more than making up for the revenue lost with the discount on any individual sale.
What will they do with the cash?
I think they will use it to buy Stockbyte. In Story 813 published on March 18th I reported a rumor that Getty was likely to buy Stockbyte at a price of over $200 million. The latest number I hear from other sources is $163 million.
It should be noted here that after I published Story 813 Jerry Kennelly, CEO and owner of Stockbyte, sent me a humorous note, but didn't exactly deny what I had said. He said,
That said, my bet is still that Getty will acquire Stockbyte. But, then what do I know, I'm the guy who bought Getty stock at $10 and sold it at $20 because I thought it was overpriced. It's now at about $73 per share.
Obviously, Getty has plenty of cash to acquire Stockbyte. But they've got to deal with those pesky investors, and for that reason they need to show the investors they are making an effort to raise more cash.
How much will they have to increase sales to net out more cash?
In Q4 2005 Getty licensed approximately 395,218 images for a total of $139.09 million. On average for a two-month period this would work out to 263,479 images licensed for $92.72 million. If the price on all images licensed drops 20% from the average then Getty would need to license rights to approximately 329,354 images (65,875 additional) in the two month period just to break even. To actually raise more cash they've got to license rights to many more images than this.
It should be noted that Getty also generated about $9 million in Q4 2005 selling CD's and virtual CD's. This is an area where some buyers will certainly purchase images in advance of when they need to use them. It would seem likely that buyers would decide that, given the discount, this is a great time to build their libraries and purchase a lot more CD's than normal. Of course that also probably means that sales of CD's will be off during the rest of the Q2 and in future quarters.
Is it likely to work as Getty hopes?
There is another theory in the stock photo business. "It's the image, stupid." It is believed that customers care a lot more about getting the right image than buying at the lowest price. Naturally, they like to get the images they need at the best possible price, but most image sellers believe that the majority of buyers will not switch to a second choice image just to save a few dollars? In the next two months Getty will certainly test this theory.
It should be possible to tell if customers looking for RM images switch to the Getty site in substantial numbers in order to get the discount because the RM images at Getty are totally different from those on other sites.
On the RF side the situation is more complicated. Most of the images available on the Getty site are also available on the sites of other distributor, but many of these distributors have a much larger selection of RF images than Getty offers. Thus, the RF customer may end up with greater variety and choice by going somewhere other than Getty. If some of these distributors who represent both choose to feature other brands -- particularly those of Jupiter and Corbis -- higher in their search results this might cut into Getty's revenue from these sources. Getty cannot afford to give these distributors a discount during this two month period because their goal is maximizing revenue. But if Jupiter and Corbis were to give the distributors a discount for a more favorable search-results-return position these could end up increasing revenue without necessarily providing much, if any, discount to the customers.
The distributors that represent the Getty brands may also have an incentive to promote other brands ahead of Getty's because Getty's discounts will undercut their ability to sell the same image (if a customer finds a Getty image they want to use on Punchstock why not then go to Getty to purchase it and get the 20% discount) as well as undercutting the distributor's relationship with its customers.
If this Image Sale works for Getty what happens in the future?
It is my contention that for the most part photo customers buy images when they are ready to use them and don't buy more images than they have specific plans to use with the exception of the small percent who buy CD's. (I estimate that less than 6% of stock photo revenue comes from the sale of CD's and given the price differential between CD's and single images the number of customers probably represents less than 2% of the buyers.) The people who buy photos are not like the housewife who buys an extra blouse to fill up her closet simply because it's on sale.
If Getty is successful in selling a lot more single images during the sale I would expect that fewer than normal images will be purchased in the following months, and that the number of images purchased for the year would even out to be about the same as were purchased in 2005.
There is one exception to be considered. Assuming that Getty purchases Stockbyte they will get a one-time jump in the number of images licensed - just like they did when they purchased Digital Vision and Photonica - because they get to start counting as units licensed all those images that are being sold by Stockbyte's distributors.
Why So Much Speculation?
Some readers may ask, "Why all this speculation. Why not just report the facts, of which there are very few in this article?"
Assuming Getty moves aggressively with this image sale, and Jupiter, Corbis and the other major distributors react in a way that seems logical, a significant number of others in the industry, not associated with any of these companies, could be negatively affected for at least two months. With the Big 3 either offering discounts or pushing their imagery to better search return positions others, not directly represented by these companies, could find that they will temporarily lose sales or be forced to discount prices.
If Getty doesn't generate a huge number of sales as a result of this strategy photographers could see a decline in their royalty checks, for at least a couple months and maybe longer, if the customers who buy excess images in April and May cut back on their purchasing for the rest of the year.
This move could impact everyone in the industry. It could make planning for the rest of the year more complex. Photographers and small agencies should manage their cash flow more carefully that usual. Everyone needs to carefully consider his/her options as early as possible.