Stock Market/Corbis Rumors

291

March 10, 2000

Rumors are rampant that The Stock Market will be acquired by Corbis.
Richard Steedman and Andrei Lloyd have, in conversations with photographers


and other stock agents, denied that they are negotiating with Corbis.

The problem with accepting such denials at face value is that in past
acquisitions the parties involved have denied that any talks were taking
place right up to the minute the deal was signed.

After watching Getty's acquisition marathon anything is possible, but prior
to first hearing these rumors I would have said Richard Steedman might buy
another company in the right circumstances, but that he would be the last
person to sell his company to someone else.

Many photographers have come to me and said, "Should I be worried? What
should I do?" Given the current stock industry climate, and general
paranoia among photographers, it is useful to examine the pluses and
minuses of such a union -- if it were to occur.

A merger of operations would offer attractive possibilities for both
parties. I have talked to lots of photographers represented by these
companies, and in some cases agents who do business with the companies.
The analysis below is my speculation as to what could be motivating the
owners of these companies based on bits and pieces of information I have
been able to collect. Admittedly, this information is so fragmentary that
my conclusions could be completely wrong.

What's In It For Corbis?

The driving force for such a deal is Corbis. It appears they have made a
decision to rapidly expand their rights protected advertising oriented
content.

Sales from Corbis' on-line archive finally started to skyrocket last year,
after years of being in the doldrums. Moreover, as a result of analyzing
requests and talking to their customers they seem to have concluded that
the stock photo customers want a choice, not a single source.

Corbis believes their main problem is that they don't have enough of a
"rights protected" choice to offer to the advertising community. They have
images from the WestLight file, but there is not anywhere near enough depth
to this part of their file.

They are convinced that if they had more depth they could be a serious
contender to Getty which is now about six times the size of Corbis in terms
of gross sales. Deutsche Banc Alex Brown in their analysis of the Getty
purchase of VCG estimated TSM annual sales at $20 million. My estimate is
that TSM's annual sales are closer to $35 million. I estimate gross sales
at Corbis between $70 and $80 million, and about $30 million of that is
Corbis Digital Stock, their royalty free division.

Corbis also recognizes that timing is very important. They need a
significant improvement in their file quickly. It is now that clients are
looking for someplace to buy images on-line other than Getty. The longer
Corbis takes to build its file the more chance they give Getty to solidify
its position.

How Does Corbis Get Images Quickly?

To get images quickly they must go to someone who already has a strong,
well edited file, with a large quantity of images drum scanned, keyworded
and ready to go up on-line immediately.

The other option would be to aggressively go after the dissatisfied
photographers at Stone, The Image Bank, FPG and The Telegraph Colour
Library. I believe Corbis will eventually do this, but this will not solve
their short term problem. It will take much too long. Each contract has
to be negotiated. Many photographers will have trouble getting their
images out of the other agency. Then the images have to be re-edited,
scanned and keyworded -- all of which takes a lot of time.

Corbis would also need to greatly expand their editing and recruiting team
with people experienced in the advertising side of the market.

The only way to get images quickly is to go after existing agencies that
have a lot of images scanned, keyworded and ready to go.

If That's What They Wanted Why Didn't They Buy VCG?

It is believed that Corbis offered somewhere between $170 and $200 million
for VCG. But given what they would have been acquiring, several at the top
echelons of Corbis considered that price way too high for the value they
would receive. VCG's gross sales were about $90 million in 1999, more than
double TSM's sales, but there are also some serious management problems
left over from the way the company has been handled in the last couple of
years.

An argument could certainly be made that it was a smart move on Corbis'
part to let Getty pay more for VCG than it was worth and force them to deal
with all the integration problems. It appears now that Getty represents
many more top photographers than they are going to be able to keep happy.
In the long run Corbis is likely to get access to a lot of this valuable
content without having to pay investors for it.

The Stock Market, has much more stable management, a stronger reputation in
the U.S., and fewer overall problems. It would be a much better buy, at
the same, or higher multiple of gross annual sales. Corbis should be able
to get TSM for half of what they would have had to pay for VCG.

TSM is unquestionably the best and most comprehensive file of any company
that has not yet been acquired, and it would be Corbis' logical first
choice. There are also strong indications that Corbis will make one, or
more, acquisitions of companies with advertising oriented images in the
near future.

Why Would Richard Want To Sell?

This is the toughest part of the equation. He doesn't need the money. I
believe he loves this business and loves what he does. I don't think he
wants to retire and play golf. I think he is excited by the challenges of
the business. I think he also feels a responsibility to his photographers
and staff and recognizes their role in getting him where he is today. In
general it is usually a good idea to discount this idea of "the
responsibility to staff" as a motivator for a leaders decisions because too
often the money seems to win out. But, I think responsibility to his staff
and to his photographers is much more important to Richard than to many
others in this industry.

As Getty becomes more dominant it is likely that TSM will find it more and
more difficult to compete on its own, despite their existing position in
the industry, and the recognized high quality of their imagery.

There are indications that TSM's sales have fallen off in the last half of
1999, particularly in the U.S. market. This is certainly the first time in
years, maybe ever, that TSM has seen a fall off in sales. I believe this
drop is due almost totally to the increasing use of RF imagery. Sales
outside of the U.S. are still climbing for TSM.

A great deal of Richard's decision will hinge on how he perceives this
problem and what he thinks he can do about it.

Strengthening the RF line of his business may not be the answer. I would
classify TSM's RF offering as weak when compared to PhotoDisc or Digital
Stock, but the industry may have arrived at a point in the development of
RF lines of business that no matter how much money a company throws at it
they will be unable to take significant market share from the industry
leaders.

TSM is not the only major agency experiencing a fall off in sales. We
receive information from photographers with many of the major agencies and
it seems that there is an across the board falloff in rights protected
sales. In Getty's report to the SEC in connection with their acquisition
of VCG they reported that overall VCG had basically no growth in 1999. But
sales in North America (where RF gets a large piece of the market) were
down 7% and in the UK they were down 23%. Growth for VCG was in Europe and
Asia where so far RF has made little penetration. It is my understanding
that TSM's sales are still strong and growing in Europe and Asia. The
falloff is in the U.S.

Is there something about the nature of the business in Europe and Asia that
will make it much more difficult for RF to penetrate than it has in the
U.S.? Or has the "rights protected" side of the business reached its peak
and is now on a downward slope?

If Richard's assessment tells him that the industry, as a whole, is on a
downward slope then there is no better time to sell than now. If he thinks
he can produce a better RF option than the competition, or get higher
prices for RF images, or that more and better print catalogs will produce
increased sales and result in less RF use by buyers; then he may decide to
continue to operate TSM without a major infusion of cash.

How Will This Affect TSM Photographers?

It could be good -- depending on how the deal is structured?
The ideal deal, in my opinion, would be for Richard, Sally and Andrei to
retain partial ownership, and for TSM to continue to operate basically as
it has in the past.

The major change in the way TSM would be operated is that in addition to
having their own on-line TSM site, Stock Market images would also be
available on-line through the Corbis site. Sales made through Corbis then
become add-on sales.

TSM's international operations would continue to be operated in exactly
the same way as they are now. In some countries these TSM sub-agents
might also license rights to the Corbis images.

The TSM staff would continue to edit, and maintain its successful editing
philosophy developed over the years. This team might also be charged with
recruiting new advertising and corporate shooters for Corbis, and editing
the work. Having TSM as part of their stable would greatly enhance Corbis'
ability to recruit unhappy Getty photographers, because these photographers
trust Richard Steedman and TSM much more than they trust Corbis.

TSM would continue to use its existing strategies to market its general
file of analog images.

TSM could direct their clients to Corbis' RF offerings, making that
material available on the TSM site as well as the Corbis site. This would
relieve the pressure on TSM to build a separate RF division.

The combined Corbis/TSM files would probably end up with fewer
photographers than Getty currently has under its wing, but with many more
than the two companies presently handle.

If TSM were allied with Corbis in this manner, both companies would be in a
much better position to compete with Getty, than to continue to operate on
their own.

If TSM Is For Sale Why Wouldn't Getty Bid More For It?

Money is not the major factor. Richard has more money now than he can
spend in the rest of his lifetime. Control and involvement are much more
important factors and Getty could never give him the control he wants.
Corbis might.

Downside Risk

The big risk for photographers is that Corbis would handle the acquisition
much like they handled the acquisition of WestLight.
The two situations are very different so there is no reason to think that
might happen, but it is a justifiable concern.

Eighteen months after the acquisition many WestLight photographers have
seen their sales drop substantially. For some their 1999 royalties are
half of what they were in 1998. Clearly, on-line sales have gone up. But,
given the way Corbis handled the integration, analog sales -- which were an
important part of WestLight's operations -- have virtually disappeared.

(The interesting thing here is that many Corbis photographers who were
signed directly by Corbis, and whose work is mostly editorial, report
dramatic increases in their sales in the past year. It would appear that
Corbis is doing great selling editorial, but is having trouble selling the
kinds of advertising images produced by WestLight photographers -- at least
at the same volume levels those photographers were receiving before the
acquisition. It is unclear whether the WestLight images are just not what
the clients need, or whether there are some other issues.)

WestLight photographers report that when they try to explain their needs to
management they get excuses instead of solutions. The photographers have
the sense -- rightly or wrongly -- that top management either doesn't
understand their needs, or simply doesn't care.

The sales and research relationships that WestLight had built up with
clients over many years were totally destroyed when Corbis set up regional
sales offices.

The photographers were encouraged to sign contracts where they get 40% of
gross sales instead of 50%. In return, they were supposed to get free
scans, free dupes and no charge for catalog placement. Photographers
complain that a year fewer duped are being produced and they are being sent
to the wrong markets. Very few images are getting scanned and the
photographers are getting almost no images in the print catalogs. On top
of that, many of the dupes that were in the WestLight system are now being
returned. Some photographers have had dupes which cost them tens of
thousands of dollars returned, and these images are no longer working for
them. The photographers are asking themselves what they got in exchange
for the 20% of gross royalties they gave up.

Another thing that concerns the WestLight photographers is that Corbis
seems to be seeking editorial agencies in foreign markets, rather than
those who have a strong background in selling commercial work. Sygma is
now handling sales for Corbis in Paris and Grazia Neri in Italy.

The View From Corbis

Leslie Hughes, Senior Vice President of Corbis and President of Corbis View,
would not discuss the rumors, but she did supply the following information
that defines and clarifies the Corbis strategy.

"Corbis' commercial business (selling to advertising agencies
and graphic designers) grew more than 200% in '99 with a significant upward
trend even higher at the end of the year. Overall growth of our licensing
business was 40%. The reason for our strong commercial growth is, in part,
due to the foundation that Westlight and its photographers brought to
Corbis. It is also due to increased brand awareness and recognition by
commercial buyers that we are a provider in this space. We entered the
commercial stock business less than two years ago. Our success is also
driven by the ability to deliver digitally and quickly.



"But most importantly our growth is being driven by market recognition of the strength
of Corbis' whole collection including strong editorial content that can be
sold to the commercial marketplace. A premise of our strategy has always
been to put the power of choice into the buyers hands knowing that their
needs change with every job. We take our entire collection to their desk
tops. We want to provide a consistent experience with easy, hassle-free
access to what we think is increasingly one of the most comprehensive and
superb photography collections available.



"Regarding the performance of our artists - as you know
performance can be averaged but it is quite individual. On average,
revenues to our artists are way, way up. The Westlight photographers you
refer to are now Corbis photographers. Some of these photographers' sales
have grown dramatically and some have not. We have had new photographers
whose sales have shot up and we have editorial photographers whose sales
have shot up as well. There is a small group of photographers who have not
shared in the growth we are experiencing. Many things contribute to this,
trends in photography and increased competition to name two.



"The elimination of dupes however does not in this case. Dupes had not been
distributed internationally nor with any regularity for some time by
Westlight when we acquired them. In fact, we immediately paid for increased
distribution of the Westlight materials including Catalogs, CDs and dupes
that had been on hold. Corbis has a digital distribution system and
therefore does not dupe. Even so, sales from these photographers have
increased overall, not declined. While catalogs still drive sales in many
agencies, Corbis has driven exceptional growth without catalogs in the last
two years that has put us in the top 10 (perhaps higher) for the commercial
category.



"We launched our first commercial catalog in January to raise the
market awareness that we are a source and to be competitive, but do not
believe that catalogs are the single best marketing tool of the future in
the digital age. Our marketing includes client events, outside selling,
substantial direct mail, online email marketing, collections brochures,
topical brochures, photographers source guide on line, features sheets, a
digital to print guide, catalogs and specialty programs like the new 360's
gallery on line, to name a few.



"As always, we are trying to look into
concerns of artists who are not benefiting from the high growth. I, myself,
have talked to several about our strategy and their content. And I am very
excited to say that we have established an artist relations division to be
an a resource for artists on these and other issues.



"I have tremendous regard for photographers - their craft and
their vision. However, I will not tell photographers what I think they want
to hear. I will try to be open and honest about our approach, what we can
offer and if we believe they will benefit by being a part of Corbis. I wish
I could ensure that each photographer's sales would grow as fast as our
business but the subjective nature of the market makes it unlikely that each
artist will always benefit. This is now a market-driven environment and the
amount of photography available makes this so. In the old days you could
push content and clients would take what they could get. Not so today. I
have asked photographers to take a leap of faith with Corbis and I am happy
that most are seeing great results. For those who are not, our team will
work with them individually to see how we can make it so," said Leslie Hughes.

TSM photographers who have concerns ought to begin talking to Corbis photographers,
both those who were formerly represented by WestLight, and those who signed with
Corbis directly before or after they acquired WestLight. Find out what their
experiences have been.

If there is an acquisition the key issue for TSM photographers will be what will
happen with the analog slide of the business. Corbis, as presently structured,
is focused on the digital
side, but there is a lot of money to be earned in the analog environment for some
time to come. If Richard Steedman is retained in an active, and influential
role then there is a likelihood that proper consideration will be given to the
potential for analog sales. If Steedman is not given an important and
influential position, then the analog side is likely to fade away. From the
position of photographers who currently have material in analog marketing tract,
I question whether the digital side will grow fast enough to make up for losses
on the other side.