3MARGINS OR PROFITS?
February 22, 2006
Which is more important to investors, Margins or Profits? I put that question to a group of investment analysts all of whom follow Getty Images and/or Jupitermedia. All but one who responded said PROFITS.
Of course, in a perfect world everyone would like to have both. As one analysts put it, "It is hard to look at them in isolation, as investors look at the sustainability of margins as an indication as to the sustainability of profits."
The reason for my question is that I believe the leading companies in the stock photo industry are rapidly approaching a point where in order to grow revenue and profits they will need to be willing to allow average margins to decline slightly. Then the questions are:
1 - Will any of them have the courage to make this move?
2 - Will they be able to explain the logic of such a move to their investors?
3 - Will investors sell their stock if average margins decline?
To understand why margins may need to decline from the 70% to 75% range that investors think successful stock photo industry companies should be generating, we must first accept that the industry is not growing and shows little likelihood of future growth. If you doubt this take a look at my Stories 603, 790 and 792.
Subject Matter Types
Next, consider the general types of subject matter that are needed by stock photo buyers. I classify photography subject matter into three broad categories:
Category 1 - Generic images of subjects that are in very high demand and will sell very frequently. Such images can be used to illustrate general concepts that are appropriate to a broad spectrum of industries. (To get an idea of what these high demand subjects are see Story 544, but keep in mind that the images in each of these categories need to be generic.) On the Creative side of the business the images must also be fully model and property released in order to be available for the broadest possible use. On the Editorial side they don't have to be model release, but they must be of major news or sports events or of major entertainment personalities.
Category 2 - Images where the demand is not as great as those above, but the Creative images are still very generic and the Editorial images are of secondary interest, but related to events. Nearly all RF fits into Categories 1 or 2.
Category 3 - Images that fulfill niche needs. Such images are of interest to specialists within a particular industry or location and have little or no broad generic application. Given the unique characteristics of such images it is unlikely that there will ever be a high demand for such subjects. (See stories 790 and 792 to get an idea of the kinds of specifics within general categories that I refer to here.) Such images are used extensively in education, book publishing and for small, specialized marketing pieces to customers or suppliers within specific industries.
Often Category 3 images are not model released, but the images can still be used for editorial purposes, and in some cases for promotion, because the people in the images were involved in positive activities and seeking promotion of the activity or event in which they were involved. (A good example of an image that can probably be safely used without a model release is a travel image shot in a non-English speaking country, where the people being photographed make their living in the tourism industry and want to support anything that promotes tourism to their country.) Such images probably need to be licensed as RM so there is some control over how they will be used, as opposed to RF where there is no control.
Category 3 Revenue
I believe the overall world market for stock photography is $1.6 to $1.7 billion annually. About $300 million is for Category 1 sales. Category 2 sales are about $1 billion leaving $300,000 to $400,000 for Category 3.
At the moment the industry leader are making very little effort to acquire the type of images that Category 3 buyers need. Of the big three, Corbis tends to have the best collection of imagery that fits this market mostly because of their image acquisition strategies in the early 90's. However, in recent years Corbis has moved away from accepting as much specialist imagery as it once did as they focus more attention on the high demand subjects necessary to better compete with Getty.
As a result the big three are not addressing a $1.7 billion market, but one that is about $1.3 billion. Between the three of them their gross revenue for still image sales in 2005 was almost $1 billion. The fact that they already control so much of the market leaves them with the choice of trying to steal market share from each other, or going after some of that $300 to $400 million that is currently being gobbled up by much smaller, weaker competitors.
Several of the brands Getty has acquired used to have significant collections of specialist imagery, but Getty has systematically dumped this imagery over the years in favor of focusing on the high demand content. Following the lead of the other two, Jupiter has also focused on the higher demand category 1 and 2 subjects.
(In making these generalities it should be noted that there is no perfect way to determine in advance which images will be Category 1, 2 or 3 and often an image that an editor thinks will be a great seller turns out to not do that well. Sometimes an image rejected by one editor will turn into a big seller for someone else. Nevertheless, it is possible and advisable to make judgments of this type when making determinations as to how to invest in new production or acquisitions.)
Getty and Jupiter in particular are interested in owning a significant part of their collections. This makes excellent sense for Category 1 images and to a certain degree for Category 2 if they can get the collections at a reasonable price.
But when we get to Category 3 where it is often necessary to have a large number of images for every one actually licensed. The cost of producing such images, or buying them outright, can seldom be justified on the basis of stock sales alone. Most people who produce Category 3 images do so because they have another way of earning revenue from the images and the income from stock is simply add-on revenue.
Thus Getty and Jupiter will find that it doesn't make good sense to purchase such collections and the only economic way to obtain such imagery is to accept it in on consignment and pay a royalty. Given the relative infrequency that such images are licensed, to keep the suppliers interested, and given their cost of production, the royalty will need to be significantly higher than 30%. That will lower margins.
Where Do Customers Get Category 3 Images Now?
As is seen in Story 790 customers have a better chance of finding Category 3 images on Alamy or Google because there is much greater choice. They also go to small specialist agencies. While the gross revenue generated by any particular agency is small in the aggregate it is significant.
The challenge for the majors is whether they will do more to try to get a cut of this revenue, or will they simply ignore it.
Getty's recent purchase of iStockphoto and Jupiter's investment in Stockxpert may get them some imagery from specialists that they wouldn't normally have had access to given their current acquisition strategies. Virtually any supplier can post images on these sites. But at the price of $1 per usage not many Category 3 producers are likely to make much use of these sites.
A factor to be considered is the additional cost to generate these extra sales. But it seems to me this line of business could be structured so the additional cost would be relatively minor. Suppliers would be required to provide digital files and full metadata ready for distribution. Existing search engines could be modified to handle the additional image. There would be some additional cost for file storage, but little or no additional marketing costs because the customers already buying the high end imagery from these major companies are the same people who occasionally need Category 3 images.
The company that decides to go after this Category 3 market also gets a more loyal customer base because at that point they will be able to service the overall needs of their customers, not just their high end needs.
Why Should You Care?
This newsletter is primarily for photographers. Why should any of them care if investors make money, or if Getty or Jupiter make money? They are interested in what they can earn, not the profits certain companies pile up.
Whether or not these companies make money will impact on which images they accept for marketing. If they decide to move more aggressively to represent niche and specialist imagery it could open up new markets for many small players. On the other hand it may negatively impact the existing markets where these small players are already earning revenue.
If instead Getty and Jupiter choose to battle it out for the Creative side of the business and ignore the niche business that leaves opportunities for small agencies, portals like Alamy and maybe other new small portals. One way or another, the niche suppliers may have to make some important decisions in the very near future.
Those photographers focused on producing Category 1 and 2 images also need to recognize that there may be trouble ahead for them. As more and more images of the high demand subjects are put into distribution, while the number of such images being purchased remains flat the average annual return for any given image will decline. We are definitely seeing the beginnings of that trend and the decline is likely to increase.