Five Billion Dollar Industry?

274

December 21, 1999

One of the most interesting questions to develop this fall has been the size of the

Stock Photo Industry. Many have said, "Who cares, I'm just worried about my little

part of the industry and whether I show a profit at the end of the year."

In fact, we all have good reason to be concerned, particularly as outside investors

who know nothing about the industry increasingly control the flow of money and the

directions this industry will take in the future.

As a baseline we have said that the worldwide market for stock photography is about

$1.25 billion annually, and that there has been little or no real growth in the last

few years. (This number was also used by Corbis in presentations given at the PACA

International Conference.)

Claims By Getty

In making its pitch to investors in October Getty claimed that the stock photo

industry was a $4 to $5 billion industry in annual sales.

In talking about "Getty's Market Opportunity" Morgan Stanley Dean Witter, Getty's

principal investment banker said recently, "The market for graphics products and

services is an estimated $45 billion, while the arts and collectibles market is an

estimated $20 billion. This results in a $65 billion addressable market."

Quite a variation. Who is right? Are Getty's claims all PR smoke that no one

believes?

Some investors must have believed some of it because they bid Getty stock up to almost

double its September level. During this period Getty showed no huge increase in sales

or profits, they simply said we're the number one agency in the industry, were

purchasing number three and we're poised to capitalize on this huge growing market.

So the question for investors became, is this, or is it not, a huge growing market?

Why Did Getty Need A Larger Market?

Getty didn't want to tell investors that with their acquisition of TIB they would

control almost 25% of industry sales. If that were the case investors might look a

lot harder at real growth in sales, not growth through acquisition. Better for

investors to think that Getty only controls 6% of the potential market now and that

there is a lot of room for growth.

Interestingly, in May, 1999, after Getty purchased Art.com, Mark Getty was quoted in

an Internet World article by Elizabeth Gardner as saying the stock photography market

was a $1.5 billion market. Other, high level insiders at Getty say the company uses a

figure of $1.2 to $1.4 billion for internal planning purposes.

Getty Sales

Why not focus on sales? Third quarter reported sales were $60.82 million, for a total

of $167.9 million for the first three quarters. The "street" estimate for Getty's 4th

quarter sales is $61 million. Not huge growth. Maybe they will do better than that,

but in the 2nd and 3rd quarters they just barely made their estimates.

We must also keep in mind that there are seveal additional sources of revenue in the

4th quarter that were not available previously. They include:

• 38 days of ownership of TIB which should add $6 to $7

  million to their revenues, (We know that TIB had $38.1 million in revenues for the

  first six months and now Getty is saying that the total for the year will be $70

  million which is only $31.9 million for the last six months.)

• A full quarter of EyeWire which should add $1 million to the revenue EyeWire

  provided in the 3rd quarter,

• American Royal Art, a new acquisition, is expected to provided high seasonal

  internet sales in the 4th quarter of about $1 million,

• And, seasonal sales of Art.com should be up significantly over previous

  quarters, up to an estimated $2 million.

Thus, if all their other properties had flat income for the quarter -- zero growth --

Getty's gross revenues should be up $11 million over the 3rd quarter.

Could it be that Getty's sales for their major brands are actually going down on a

year-to-year basis, if we discount acquisitions? Both VCG and TIB reported that their

sales of still images were down, year-to-year, for the first half of 1999.

Anything less than $71 million for the 4th quarter will be evidence of a downward

sales trend for Getty's major brands, and should be a wake up call for investors.

Getty would need a number in the range of $75 million to argue that they are still

experiencing internal growth.

Investor Motivation

It appears large investors, principally mutual funds, poured millions into Getty's

coffers in October with very little understanding of the business they were buying

into. They bought because of its connection to e-commerce.

Now, individual investors are jumping on the bandwagon. As I write this, the stock

jumped from $48 to $55. Pacific Crest Securities in Seattle is predicting that the

stock will go to between $75 and $100 per share.

If the company starts generating less revenue and less profits will it make a

difference to the investment community so long as Getty can demonstrate they are

reaching more eyeballs? Is anything likely to reverse investor enthusiasm for

e-commerce companies? If so, what happens then? Will the stock value drop faster

than it went up, and if it does how will that affect those of us who are interested in

producing and selling pictures?

Investment Advise In General

One other thought occurs to me. If the "professional investment advisors" are doing

this poor of a job in analyzing an industry, I know something about, how much can I

trust their advice on other industries about which I know very little?