68ALTERNATIVE STRATEGY FOR SUBSCRIPTION
October 24, 2005
A21 has acquired Ingram, a UK-based provider with a file of approximately 100,000 images that are offered for licensing by subscription, as CD-ROM or as single-image RF.
For the company's outstanding stock the shareholders received $965,039 in cash, $1,448,000 in the form of preferred stock of a21 which is convertible into shares of a21 common stock at a minimum price of $0.50 per share, and 3,620,000 shares of a21 common stock. Final adjustments will be made to the purchase price after finalization of Ingram's closing balance sheet. In addition, a21 repaid a $1,548,071 credit facility of Ingram and other Ingram debt and transactions costs of $286,890. Ingram had no other material liabilities at closing other than ordinary course accounts payable and accrued expenses. The amount of consideration was determined by an arms length negotiation.
Most subscription sellers believe that every image they offer at the low subscription rates must be wholly owned so they don't have to pay out any portion of the fees charged. However, in Ingram's case only a very small percentage of the images in their subscription offering are wholly owned and they must pay a royalty share of each license.
Traditionally, photographers have received a percentage of the fee charged for using an image, but with subscription products it is impossible to determine which images are actually used. To get around this problem Ingram has based its method for calculating royalties on single-image downloads, or the total number of images on a CD, rather than images used.
Essentially, the contributor receives his agreed percentage of the overall paid revenue according to the proportion of his images downloaded in each quarter. So for example if the overall revenue to Ingram in the first quarter is $1,000,000, and there are 100,000 downloads of which 5,000 (5% of the total) belonged to a given contributor, then assuming a royalty of 20% the contributor's payment would be $10,000.
Ingram photographers can go on the site at any time and see what is in their account, however because their figure is always based on their percentage of the total images downloaded the number could fluctuate up or down throughout the quarter. (If early in the quarter a high percentage of one photographer's images were downloaded by one or a few clients the photographer's total revenue might be higher until the purchases made by other customers during the quarter began to kick in and affect the averages up until the date of actual payout. The photographer is always concerned about the proportion of his images that are downloaded relative to those of all other photographers.)
Things To Consider
It might also be possible for a photographer to game this system by buying a subscription and then downloading the total number of his images allowed (and no images from any of the other photographers). However, it is unclear whether such gaming would really present much of a financial benefit and it would probably be easy for Ingram to spot.
Obviously, the way to make money in this system is to have a significant portion of the total images in the file. What is unclear is how many images a photographer would probably need to have in file in order to generate 5% or so of the downloads in a quarter. In any given quarter every photographer earns exactly the same per download regardless of the production values built into the image. Possibly, images with greater production values might be downloaded more frequently, but it would seem that most photographers would want to focus on keeping their cost per image low and getting a volume accepted.
Because this calculation is based on the total images licensed by all customers and not on the specific images used by each licensee there is another possible point of inequity. For example one group of customers (Group A) may pays $800 for a license and each download 8 images per quarter from one, or very few, photographers. Another group of licensees (Group B) might download an average of 300 images per $800 license fee in the quarter, and none of those images belong to the photographers in Group A. Because the two groups are lumped together for the purpose of determining the average royalty to be paid out, the photographers in Group A will receive significantly less than if the royalty were calculated on the specific images used by each licensee.
One of the benefits of the pay-for-download strategy for distributors is that they can earn significant revenue without the huge cost in ownership of the images. Consequently, if the business model is accepted by enough photographers some of those distributors who are now going to extraordinary extents to own images may decide that it is better to pay royalties, particularly once they own a quantity of the high demand subject matter.