2GETTY'S EDITORIAL OPPORTUNITY
March 8, 2005
In 2004 and in setting their goals for 2005, Getty Images has emphasized the potential for growing the Editorial side of their business. Investment analyst Christopher Rowen of SunTrust Robinson Humphrey and his team have surveyed a number of newspapers to determine their use of Getty Images photos and as a result has become more cautious in his company's estimates for the future. STRH has downgraded its recommendation for the stock from Buy to Neutral. The results of Rowen's survey are as follows:
We conducted a survey of photo editors at 29 newspapers to gauge penetration and purchase intentions for GYI's editorial images. The newspapers ranged in circulation from 20 thousand to over 1MM. After talking to half a dozen of the smaller papers, we concluded that GYI's addressable market is primarily among papers with circulation of at least 100K.
We believe there are approximately 1400 daily circulation newspapers in the
U.S. According to the Audit Bureau of Circulations (ABC), there are 114 papers with a peak day circulation of at least 100K. However, based on the newspapers we talked to, weekday circulation is roughly 23% below reported peak day circulation, on average. Therefore, we calculate that there are 94 newspapers in the country with weekday circulation above 100K (excluding WSJ and IBD which are not photo centric). In addition to the six smaller papers, we surveyed 23 larger papers, or roughly one quarter of the newspapers with circulation above
We asked the photo editors if they use GYI editorial images in their newspaper.
Among the 23 larger papers we surveyed, seven subscribe to the GYI service, 12 periodically buy pictures on an a la carte basis and four do not use GYI at all. When we layer in the six smaller papers, we find one additional a la carte customer and five that do not use GYI at all.
We asked the 19 larger papers that use GYI how long they have been doing so.
Ten have been using GYI for more than two years and the other none have been using GYI for one to two years. Among our sample, there were no papers that began using GYI within the last year.
We asked the larger papers to estimate the mix of image sources: papers get an average of 59% of their photos from staff photographers, 6% from free-lancers, 27% from AP, 4% from other wire services and 4% from GYI. Among the seven papers that are GYI subscribers, six said GYI accounted for 10% of their images and the other estimates 4% of its images come from GYI.
We then asked the photo editors how they expected the mix to change over the next two years. Twelve of the 23 large papers do not expect any significant shift in mix. Among those that do foresee a mix shift, eight expect to increase the use of staff photos. A recurring theme we heard from the photo editors is that encroachment from television and new media is driving the newspapers to focus on more local content as a means of differentiation. Just one of the papers expects its mix to shift toward more use of GYI images.
Few Signs that GYI Will Add Many Newspapers in the Near Term
Among the 29 papers we surveyed, nine do not use GYI at all and another 13 use it only on an a la carte basis. We asked the non-users if they planned to start using GYI in the future and we asked the a la carte users if they planned to become subscribers in the future. Among the 19 photo editors that answered this question, 15 had no plans to change their arrangement with GYI and three said they might do something in the next two years. Just one respondent planned to up their arrangement with GYI within the next year, and none plan to within the next six months.
When we asked these same 19 photo editors why they did not use/subscribe to GYI, seven cited budget constraints and another said that they got all they needed from AP. Two cited their papers local focus and two cited ethical conflicts, stemming from GYI s commercial business, which we explain in more detail below.
Budget Constraints, AP Dominance and Ethical Perceptions Limit GYI Opportunities
We asked all 29 photo editors if there were any significant obstacles to GYI gaining increased traction in the newspaper industry. The primary obstacle for GYI appears to a combination of tight budgets and the dominance of AP. All the papers we talked to get feeds from AP. Furthermore, because AP is a cooperative, it can provide photos from virtually all local markets. Many of the photo editors cited an inability to justify more than one subscription, so AP with its broader content is always going to be the default in that situation. We heard many comments from editors indicating that GYI s greatest competitive advantage is the quality of its images. Nevertheless, that incremental quality is often not enough to justify a second subscription, even for medium sized and larger papers. Moreover, the photo editors indicated that budgets have been getting tighter, despite the rising economy, due to the pressure from other media outlets.
The only other significant recurring theme voiced by the photo editors centered on editorial integrity. There is a perception that GYI has conflicts of interest, especially in sports. These perceptions stem from GYI's relationships with sports leagues and equipment manufacturers. For instance if GYI were to have a relationship with Taylor Made golf clubs, the editors fear that GYI s editorial pictures from the US Open might just happen to capture the golfer s swing as the Taylor Made logo comes into view. GYI has made significant efforts to separate its corporate work from its pure editorial assignments, but the perception nevertheless persists.
The same issue arose when we asked the photo editors how GYI could improve its service. In addition to clearly separating editorial from commercial, editors also suggested expanded geographic coverage. Budget issues again surfaced in response to this question, with several of the smaller papers suggesting that GYI find a way to make subscriptions affordable to smaller papers.
Editorial Can Grow Without Strong Newspaper Growth
Based on the results of our survey, we do not believe that newspapers will be a significant revenue growth driver for GYI. Among the papers we surveyed, we saw very little evidence of an increase in usage near term. Furthermore, when the discussions turned to pricing, the photo-editors suggested that a GYI subscription for a mid-tier paper might cost between $1,000 and $2,500 per month. 70% of the larger papers we surveyed are not GYI subscribers. If we assume this percentage holds for all 94 papers with over 100K circulation, that would yield 65 papers. Even if GYI were to coax all 65 to subscribe at $2,500 per month, it would yield just $2MM incremental revenue to GYI annually.
When we discussed some of our preliminary findings with GYI management, we came away with the belief that editorial subscriptions account for no more than half of GYI's News, Sports, Entertainment and Archive revenue. Furthermore, that half is split roughly evenly between newspapers and magazines. Beyond newspapers and magazines, the revenue in this line item is driven largely by commercial contracts with sports leagues, equipment manufacturers and other corporate partners. This business is more like contract photography, where
GYI's images are used for advertising, annual reports and other corporate purposes. GYI management indicates that commercial is growing faster than editorial subscriptions, and that within editorial subscriptions, magazines are growing faster than newspapers. Therefore, despite the lukewarm outlook within the newspaper segment, we are not overly concerned about GYI's ability to achieve our projection of 19% top line growth in its News, Sports,
Entertainment and Archive segment.
The insights into the Editorial market that this survey provides are very enlightening, but one weakness in the analysis is that it tends to define editorial as newspapers and magazines. In my definition the market for editorial images is much broader than that including books, newsletters, and some web and commercial uses.
The survey does point out how difficult - maybe impossible is a better word - it will be for Getty to topple AP. AP provides a much more in-depth service covering many secondary or local stories that newspapers must have. Given Getty's strategy and focus they will do an excellent job of covering major stories, but they will not add the staff necessary to go after the lesser stories and provide a truly competitive service to AP. To do so would be too costly compared to the extra revenue generated and negatively affect their gross margins.
In the editorial area (when we include books and special interest publications) Getty does have another very strong competitor and that is Corbis. In 2005 Getty generated $72 million from its editorial division. I also estimate that they may have another $30 to $40 million of commercial imagery into the Editorial space.
But based on figures provided at Corbis' annual meeting, I estimate that they sold $97 million of Editorial imagery. Corbis may not have as much hard news editorial imagery as Getty, but they have a much more diverse collection of the kind of images Editorial users want. They also have a very strong personalities collection. All this will make it much more difficult for Getty to grow the editorial segment of its business.
Upside For Getty
Even with his concern about the growth of the Editorial side of the business, Rowan does point out that other "upside opportunities" do exist in the business and revenue could possibly be as much as 3% higher than the current $695 to $710 million. But, he points out that Getty's 2004 revenue came in 8% above the initial model for that year and said, "Because GYI has demonstrated such a consistent ability to beat estimates and raise guidance, we believe investors may have become conditioned to expect that kind of performance on an ongoing basis. As such, we believe that even if GYI does meet our upside scerario, it may already be largely reflected in the stock. Conversely, should the streak of outperformance and guidance increases be interrupted, we believe that shares could be vulnerable."
Getty may be a victim of its own success and the pressure from the market to always do better and better.