Starting Your Negotiations At $4 Million

5

September 26, 2006

(Editor's Note: This letter presents the writer's individual opinions, which are not necessarily the opinions of PACA'S board.)

This isn't about selling your business, oh no!! Rather, it's about the price actually quoted early in August, 2006 for a single-image global buyout of all rights, in perpetuity.

The names of the customer, photographer and PACA members involved in this remarkable price quotation must be confidential for as I write this, the deal is still under negotiation.

What is the true value of a great image? In this case, the image is an iconic stroke of genius created more than a decade ago. Imitations have been struck down by the legal system; the photographer's exclusive ownership of the image's unique intellectual property has been successfully defended on more than one occasion.

Financially, the creator's production costs were exceptional, but the investment has paid off ... the picture and its similars currently sell hundreds of times each year on a non-exclusive basis. The photographer's share of these sales nets him close to $200K per annum. If and when the proposed deal closes, the picture and its similars will stop circulating. All that ongoing revenue will suddenly cease.

At the proposed deal's $4 million price, the photographer will net roughly $1 million after cuts by two daisy-chained distributors. From a market perspective, it was determined that $1 million to the artist is more than reasonable. The figure was based on five years of sales at the image's current run rate. Accepting any less for a perpetual buyout would be a bad financial decision for the photographer and its distributors. Without closing this sale, records show the photographer will easily earn more than $1 million over the image's remaining commercial life, even after accounting for over-saturation and declining sales.

$4 million is more than 10 times more than the highest known price for a single image license. Why might a customer pay so much more?

Actually there are many reasons why a customer might elect to pay the premium. Perhaps the image will be a key element in a marketing campaign costing hundreds of millions of dollars. Perhaps the "outrageous" figure will be elevated to the CEO, who probably earns that much salary in a month. It's still chump change at that level. In any event, the outcome of this particular negotiation remains unclear.

Takeaways

In 1995, when Getty Images' seasoned financial team entered our industry, they freed a humongous amount of pent-up market forces. It's rather surprising that our cottage industry wasn't forced to enter the real world of capitalism far earlier. In recent years, we've rushed to follow one another into the prevailing downward spiral of RM prices. The end result is RM fees that are a tiny fraction of what they were just a decade ago. Some say the bottom is finally in sight, and it takes the form of $1 licenses.

But the market forces unleashed by Jonathan Klein and Mark Getty also have a huge potential upside. Those forces virtually guarantee there's market space for high-valuation images. Those images can be viewed as the Bentleys, Mercedes and Jaguars of our marketplace. However, the upside is not self-sustaining. There must be strong industry leadership to take advantage of it. In my eyes, such leadership isn't yet apparent. Collectively, we've lost sight of the high end that could be our salvation.

As the big picture from 37,000 feet comes into focus, we realize that each of our companies can directly influence how large or small the high end becomes. I firmly believe that our future is in our hands, and that we're at a pivotal moment in history. Here and now, starting today, it's up to each PACA member to make a conscious decision and commit to following it through. We're losing sight of our ability to lead and it cannot go on.

In my role as PACA president, I've been looking at that big picture a lot. I've come to believe we've been looking downward for so long that we've forgotten to look up. Here are some suggestions for beginning to turn the tide, as the negotiators of the $4 million fee have already done:

• Recognize RM's Role. Never undervalue the importance of market differentiation, and where RM fits into that scheme. For example, the automobile industry has price variations ranging from very, very high to dirt-cheap. How are images any different? The RF, subscription and micro-stock models have no room for high prices ... only RM is built to represent the high end.

• Maintain a Necessary Counterbalance. RM is the necessary, natural, market-driven counterbalance to the downward pricing forces released by the RF, subscription and micro-stock models. Therefore, it's in the industry's best interests to keep RM pricing cleanly separated from the newer models. In an effort to please customers, we needn't and shouldn't over-simplify RM pricing models, as is beginning to happen.

• Embrace PLUS. Therefore, as the only alternative on the table, we must embrace PLUS as part of the solution to maintaining a strong industry. PLUS is a unifying system that promises to restore order to the collapsing RM system.

• Just Say No. To bring RM prices back to a reasonable level, sales departments must develop extremely high levels of confidence. They must be empowered to say no. The sales team of one small PACA member includes a "no" quotient in their performance reviews. If the percentage of deals ending by saying "no" goes below 5%, bonuses decline.

• Respect the Power of No. We all know this from experience in every area of life. When you're free to say "no" and mean it, you're able to negotiate much better prices. The photographer in the $4 million deal has no trouble saying "no" because he's guaranteed comparable or larger revenue by failing to approve the buyout's price.

• Don't Seek to Always Make Customers 100% Happy. No matter how low the price goes, customers will still complain it's too high. Why should they stop...it's worked so well for the last 10 years! Remind your sales staff that a simple "no" often calls the customer's bluff. The buyer very often comes back a day or two later, willing to accept your terms.

• Don't Ever Think We're too Expensive. Even at the highest pricing levels, highest-quality pictures are still incredibly cheap compared to products with more visible cost of goods. Don't deceive yourself. Remember - a freelance photographers' costs are hidden because you have their images on consignment.

Of course, if quality doesn't matter then these assertions are irrelevant. If we can forget about quality and the evolution of new styles, then prices will spiral downward. Photo buyers may gradually forget the value of really good images because they won't see many.

Many of us believe that brilliant images are actually very important. This stems from yet another trick of typical market forces: the artist that owns his or her creations will always go the extra mile, and that will show in the form of quality and creativity. Photographers who own their work are more likely to find comfort outside the envelope of conformity. They see and feel the long-term benefits of creating new and unique rather than bland and uninspired imagery. When they take pride in their work, more creativity naturally flows through them and the resulting images usually sell better.

To me, this concept is fact rather than conjecture. I know it first hand, because I was a full time photographer until 1995. I see it in other photographers, and they confirm it when discussing their creative processes, especially when you ask the right questions.

Please forgive my pontifications and overly simplistic, pseudo-academic assertions. I hope my style doesn't get in the way of the message. I hope we can all spend more time reconsidering where we are and where we can go. Through my eyes, the future is exceptionally bright!

After reading the above article I wrote the following to Roger Ressmeyer.

You make some good points about trying to hold out for the best price, but the downside to your thesis is what is a "great" image. I've been reviewing my career and my creativity lately and it's rather depressing. I don't think I've ever produced a "great" image. I've made a lot of money from my photos and have had a few big sales, but every one of the big sales were flukes, because the customer was looking for particular subject matter and had a large use planned for what they were producing. In almost none of the cases were the images what I considered to be my best.

I think your story will encourage photographers and agents to hold on to the RM strategy longer than is wise, even when it is no longer making any sense for them.

The big problem with the RM strategy is knowing at the time of production which images will be "great" and holding them aside. Which images will be Picasso's "Nude on a Black Armchair" ($45.1 million), "Garcon a la pipe" ($104 million) or "Dora Maar au Chat" ($95.2 million)? I don't think there is any way to know until a willing buyer says, "That image has value."

Typically photographers have two problems. (1) They think every frame that comes out of their camera is great. And (2) Because they have no idea which one a willing buyer will pay a lot of money to use they hold tightly to all of them and license individual RM uses. For the vast majority this will be disaster because images that could be earning them some revenue will be locked up and earning them nothing.

Despite the high fees all the evidence is that the average RM image is earning less than the average RF, although after being significantly ahead for a couple of years the average return for RF is coming closer to RM due to the huge addition of RF content. But both are going down at a staggering rate as more images are added to the offering. According to my calculations of Getty Images sales since the fall of 2003 by dividing the total RM and RF images into the total revenue generated in the previous four quarters in each category I get the figures below.

This first chart shows the Average Gross Annual Return-Per-Image of all the images in the file. I got this number by dividing the total images in the file by the gross revenue reported for the previous four quarters.

This chart shows the total number of images in the Getty Images file in the months indicated. In September 2006 I counted RM and RR
separately and then combined the RR into the total.

In the first three years I did my calculation in November and the calculation for 2006 is as of today. In 2006 I have given two numbers, one for just the RM section of the site and one for RM plus RR since the Rights Ready images were recently removed from RM in order to create RR.

If this is happening at Getty what is happening everywhere else?

Roger responded.

With regards to what makes a "great" image, I believe it IS possible to at least generally judge at time of production if an image is worthy of holding back for RM status. It's possible to know if an image has a commercially reasonable chance of being successful. The definition of "reasonable" probably means being right at least 10 or 20% of the time. Most editors have scores that are lower.

Here are the factors that guide me, leaning towards the editorial side but including commercial images as well:

• Exclusivity of Access - If it took special effort to get access to the subject of the photograph, some or all of the resulting images can't be mass-replicated by professional amateurs or production stock shooters. This includes access provided by high-level editorial media publishers, such as shooters working on major stories for Time, Newsweek, Smithsonian, National Geographic, NY Times, MSNBC.com, etc. Much of my work fell into that category, as does the work of Ed Darack and Peter Ginter (see sciencefaction.net).

• Quality of Subject Matter - The longer a good photographer is out there in the market, the more salable his/her assignment images will be. I started shooting for the Berkeley Barb for $15/photo (including prints and film) in 1975. As I got better, I worked for better and better publications and over time, they gave me access to more and more cover and major-feature stories. Getting this kind of highly re-salable work takes persistence on the photographer's part, and a tough skin because there's very little positive, "your doing good" feedback in our industry, and it's never real-time.

• Cost and Skill Requirements - Images that require time, money, and expertise to produce can't be easily replicated. Time exposures at exotic locations at night, embedded journalists in a war, Louie Psihoyos' famous "500 TVs" and "1,000 TVs", etc. This is a bit under attack by the ease of creating virtual sets in Photoshop.

• Proven Style - A photographer that works hard to express his true inner vision really can't be copied. An example is the work of Chip Simons (see sciencefaction.net). Once a style is known, consistently applied and found to be appealing to buyers, it's a safe bet it will continue to be so.

• Specialty coming from Passion - Specialists usually do better than general photographers in certain situations. A specialized photographer who's chosen his/her specialty based on personal interest, will work harder to make truly unique images.

• Serendipity & Great Editing - There's too many great images with an intriguing twist that "just happen" and are unfortunately overlooked by editors. You make a great point about photographers and editing their own work. I see a huge opportunity there. There needs to be rigorous training in editing one's own work, and the work of others, to separate the work of pros from the work of amateurs. I believe the photographer must pre-edit the images before they go to any stock agency editor or art director. The tighter and more successful the edit, the more successful that photographer will be.

It really comes down to rarity and that means exclusivity. A top-quality photographer needs to always stay 2, 3, 4 or more years ahead of other pros in their area; and even farther ahead of the professional amateurs and mass market.