Over the weekend, Seeking Alpha (SA) published an article aimed at the investment community entitled, “
Shutterstock Valuation Makes Me Shudder.” The points made in this article are well worth considering, not only for investors, but for anyone interested in earning a living in the business of stock photography.
In general I agree with the conclusion that at over $60 a share the stock is way over priced, but I disagree with some of the arguments the author makes to arrive at that conclusion.
One of the author’s first mistakes is to accept the statement in Shutterstock’s 2012 10K that the market for "pre-shot commercial digital imagery" was approximately $4 billion in 2011 and is expected to reach $6 billion by 2016. Based on my analysis, most recently in
this article, the market for still stock imagery in 2012 was around $1.324 billion and around $400 million for motion stock. Certainly the total market is under $2 billion. Moreover, revenue for the industry has not been growing for the past decade. If anything it has declined slightly. I see no evidence that it will grow significantly in the future.
There has definitely been a significant growth in demand for stock imagery since 2005-2006 and demand will probably continue to grow in the next few years, although at a much slower pace. Supply will continue to grow much faster than demand. Prices have fallen much faster than demand has increased and this has resulted in flat, if not declining, revenue overall. The price drop has resulted from the increased use of microstock and in no small measure from the success of Shutterstock’s subscription model. As subscription becomes even more successful revenue overall for the market will decline even further.
Barrier To Entry
The SA author says, “There is one attribute that I will not tolerate in a growth stock trading at astronomical valuations, and that is the lack of a significant barrier to entry which will ultimately breed future competition and compress earnings in the future.”
Actually, I believe the barrier to developing a new competitive subscription offering is much greater than SA concludes. Many of the microstock sites have either been starting new subscription offerings or expanding the subscription side of their business for some time. None of these seem to be gaining much traction. Meanwhile, Shutterstock sales continue to grow and they continue to take market share from their competitors.
Shutterstock has over 750,000 customers worldwide. I think that means is that nearly all of the significant users of stock photography have used Shutterstock at one time or another. I believe these customers are generally satisfied with what they get for what they pay. Occasionally, they may need something Shutterstock can’t deliver and are forced to go to Getty or Corbis to get something else, but they are generally happy with what they get from Shutterstock. The number of images these customers use may increase somewhat, but with the subscription model the customers gets virtually unlimited use of any image on the site for one fixed price. Thus, using more images doesn’t really cost them more money.
Growth in this market is more about taking customers away from a competitor than finding totally new users. Anyone who wants to compete with Shutterstock would not only have to offer a great collection of images, but offer better pricing or some other feature that would be significantly more attractive to the consumer. That’s going to be very difficult to do.
SA suggests that someone could offer a better royalty and draw contributors away from Shutterstock. That’s a nice theory, but some distributors have been doing that for some time and it doesn’t seem to make a whole lot of difference.
Some major image producers are very concerned about Shutterstock’s low royalties, even when they factor in the high volume of sales they receive. Yuri Arcurs, the number one producer of stock in the world, just
pulled out of Shutterstock and went exclusive with iStock because he felt that even with the high volume of sales he was receiving from Shutterstock the revenue generated would no longer cover his production costs. He will get a higher royalty at iStock, but only time will tell if the volume of sales will make up for his lost Shutterstock revenue. I don’t see a lot of people following his lead. Most can’t afford to give up the immediate Shutterstock revenue in hopes that something else will be better – even if sticking with Shutterstock eventually forces them to seek another line of business.
Getty
The SA article argues that Shutterstock’s major competitor, Getty Images, owned by Carlyle Group, has “extremely deep pockets” and could take share from Shutterstock. In one sense Getty is certainly trying, but they have made a lot of missteps. While Shutterstock was steadily growing its subscription service, Getty was focused on raising the prices of single image iStock sales. When revenue didn’t grow fast enough Getty cut contributor royalties and has angered contributors (many of whom were also customers) in many ways. As a result Shutterstock has been steadily eating iStock lunch. Many former iStock customers now get a lot of the images they need from Shutterstock. iStock had about 25 million image downloads in 2007 and 2008 but based on a
recent analysis downloads will be down to about 10 million this year.
Now Getty is trying to turn its Thinkstock.com subscription brand into a competitor to Shutterstock. They have migrated most of their iStock images to Thinkstock for subscription licensing and are moving a lot of the images that are on Gettyimages.com to Thinkstock as well. While these images from iStock and Gettyimages will also remain on their parent sites and can be licensed there (at higher prices), anyone for whom a subscription offering works will quickly figure out that they should be licensing their images through Thinkstock, rather than through the other Getty sites.
There are some contributors who have similar images on both Thinkstock and Shutterstock. In the last year we’ve been able to analyze the sales of a few of these contributors. In most cases they are making 30 or more times the sales through Shutterstock as their making through Thinkstock. It would seem that Getty/Thinkstock has a very long way to go to be a serious competitor to Shutterstock. And they have worry about cannibalizing a lot of their higher priced sales in the process as customers learn to go to Thinkstock rather than iStock or Gettyimages.com.
It is also worth noting that in 2013 it is very likely that revenue for Shutterstock will exceed $200 million and that it will be greater than all the revenue Getty will generate from the licensing of RM and RF through its gettyimages.com site.
Marketing
A significant barrier for anyone trying to take a share of the subscription market from Shutterstock is the company’s focus on online marketing. Over several years they have built a very effective online marketing strategy. In Q1 2013 23% of their revenue was spent on this type of marketing. That means that in 2013 they will probably spend over $46 million to market Shutterstock and keep customers coming back. Competitors are going to have to be willing to commit they type of money, and if they do Shutterstock will simply raise its bid price for the first position when customers use the Internet to search for stock images.
In the last quarterly conference call Thilo Semmelbauer, President and COO said, “We manage our marketing spend by balancing, testing, and optimization so we will continue to see quarter-to-quarter fluctuations as we invest in growth.”
Unless Shutterstock makes some serious missteps, they will be very difficult to unseat.
Offset
The SA author suspects “that part of the run-up in valuation is due to the hype surrounding this new platform (Offset), and its potential of further disrupt the stock image market.” I think it is highly unlikely that Offset will have much effect on the market as a whole. The images it will offer are way overpriced given what the market is willing to pay. This is not to say that the images aren’t worth what Shutterstock is asking (and maybe a lot more). It is just that very few customers will be willing to pay those prices. The “high-end” is getting so small that it is insignificant.
If the images promoted to high-end buyers are outtakes from other projects photographers have been commissioned to shoot then the photographers have very little to lose by participating on Offset. But, producing images on speculation for high-end buyers becomes almost impossible because it is so difficult to predict what the few available buyers will want to use. Most photographers will end up producing a huge number of images that never sell in order to make a modest return on the very few that are licensed.
On the other hand, even if the Offset initiative totally fails, it will have very little effect on Shutterstock revenue as a whole. The company will still be able to rely on its strong subscription sales.