6
WILL GETTY IMAGES GROW?
July 29, 2005
Many investment analysts remain very bullish on Getty Images and expect continued growth. I'm not so sure. Recently Credit Suisse First Boston outlined the key points on which their investment thesis centers. Below each point I've given some of the reasons for my reservations.
1 - Strong secular trends toward using images to communicate messages for companies, advertising agencies, journalists, consumers, etc.
But, it hasn't seemed to translate into higher image use for Getty, except in the last quarter which may be an anomaly. Between Q1 2003 and Q1 2005 there was only a 4% growth in image use. Granted there was a big jump in RF use in Q2 of 2005, but a lot of that was because of the acquisition of Digital Vision. Much of the rest may be attributed to European buyers starting to use more RF instead of RM. RM revenue was actually down for the quarter and if buyers start replacing RM use with cheaper RF increased image use is not necessarily a good thing. Buyers are still getting a lot of the images they use from Getty's competitors, or from other sources such as: assignments, in-house staff leaning to use more automatic and foolproof digital cameras; and/or free pictures. In the last couple of years Getty has added a huge number of images to its site from a broad range of providers and it hasn't impacted image use all that much. One quarter does not make a business.
2 - Market share shift toward online advertising and communication and away from traditional channels toward the Internet will help support structurally higher growth.
The shift is there but it isn't supporting revenue growth for several reasons. First, online uses require smaller file sizes that are usually cheaper. Second, RM sellers have found it very difficult to structure online prices that are comparable to print use prices because the circulation element (normally a part of print pricing) is impossible to define. Budgets for online projects are often very low compared to print projects because there is no cost of printing and distribution involved. Thus, unlike print projects, in the online environment the relative cost of content with respect to the total cost of an online advertising campaign is huge and buyers tend to rebel at paying such fees.
Even if there is a growth in Internet advertising and it absorbs a larger portion of the advertising dollar it seems highly unlikely that there will be much growth in revenue generated by licensing stock images to this market.
3 - Faster growing international revenues are becoming an increasingly larger part of the overall revenue mix, which should create increased revenue growth for the foreseeable future.
With Getty there is a growth in international revenues, but a large portion of that results from the euro exchange rates. Also, more of the unit growth is coming from RF sales at a lower average cost per unit licensed as European buyers switch from RM to RF. Getty also faces a threat from Corbis' new rfSHOP that is likely to have as many RF images as Getty in the very near future.
4 - Ongoing cyclical tailwind in advertising budgets combined with a growing recognition by advertisers and agencies that "off the shelf" images are cheaper, faster, and easier to obtain than shooting images from scratch.
This sounds like a statement from a decade ago. There isn't any "growing recognition". By the mid-90's virtually all stock photo buyers were well aware that "'off the shelf' images are cheaper, faster, and easier to obtain than shooting images from scratch." Since then the only question has been whether buyers could find the images they need in stock. Often they can't find the right image on Getty so they end up going to another site.
5 - A compelling business model that combines double-digit sustainable revenue growth, growing visibility from the push toward subscription contracts, tremendous operating leverage, and minimal ongoing investment needs.
Given the competition coming from other major image suppliers (Corbis and Jupiter) it is questionable as to how "sustainable" that double-digit revenue growth will be. Corbis also has a tremendous push toward subscription contracts and with the new content they have been acquiring could be a much stronger competitor. Jupiter has a lock on content for the low end subscription market and it will be very tough for Getty to develop an offering that will take share from Jupiter without converting a segment of its existing RF customers to lower priced subscriptions. This is not necessarily a good thing for revenue.
It also may be difficult for Getty to maintain its existing operating leverage as image partners refuse to accept ever lower percentages of the revenue generated by their images, and, in fact, start pressuring for higher percentages. Getty's costs may increase as they are forced, as a result of their new acquisitions, to go back to creating a greater percentage of their new images themselves. If they focus on getting a greater percentage of their images from image partners they may find that they have to give the partners a larger percentage (affecting their margin) in order to keep them out of the hands of Corbis and Jupiter.
6 - Favorable competitive landscape as Getty's nearest competitor is roughly half its size, and many smaller providers derive a healthy portion of their revenue through Getty's Web site. A strong network effect, in our view, will continue to raise barriers to entry, keep competitors at bay, and drive traffic to Getty's site as the de facto standard for image content.
Given what Corbis and Jupitermedia have been doing in the last few months, I would not say it is a favorable competitive landscape. It seems to me that there are strong indications that both of these competitors are likely to grow at the expense of Getty. The small providers that "derive a healthy portion of their revenue through Getty" are very nervous about working with Getty, and aggressively looking for other options.
Finally the barriers to entry are becoming less and less for the medium sized suppliers and not only the two majors, but several others are looking like they could take market share in their regions.
7 - Experienced, strategically sound management team that has managed Getty through a phase of multiple, rapid acquisitions has positioned the company to reap the rewards of market leadership. We believe the team has far-ranging but sensible goals for the business and the brand, understands Getty's core competencies that will drive growth, and is disciplined in making acquisitions or investment to extend those competencies.
For the most part this is true, but there is a question about how "disciplined" Getty's leadership has been in making its two most recent acquisitions of Digitial Vision and Photonica/Iconica. They paid approximately $214 million for these companies that are only expected to add about $20 million to Getty's bottom line for the rest of 2005 (based on the business outlook in January and July).
In my opinion Getty is getting very little kick in revenue by acquiring these companies. In the case of DV it's because a substantial portion of DV's revenue was already being generated by Getty sales. Clearly, these acquisitions were defensive in an effort to keep the companies out of the hands of its competitors rather than bringing great additional value to Getty. And the competitors are still able to acquire important assets.
There is also a question concerning Getty's decision to pressure Image Providers by adding the following language to its contracts:
"licensor agrees that for the term of this agreement and subsequent renewals of this agreement, licensor shall not enter into or renew any agreement that will result in any affiliation with, representation or distribution of licensor's images by Corbis Corp, or any of its affiliates, successors or assigns; and Jupitermedia Corp. or any of its affiliates, successors or assigns."
Will this present problems for their competitors or will it simply force more of the partners to consider moving to the competitors as it has seems to have done so far?
8 - Current EPS estimates that we expect GYI to beat, and thus a long-term growth profile that we believe will continue to improve, driving valuation higher.
Considering all the above how long can Getty be expected to beat current EPS estimates?
9 - We expect Getty to extend its business into managing content in some ways for corporate customers. Getty recently acquired a software company {ImageNet} for this purpose; the new strategic direction will introduce Getty into a new competitive set, require different and new capabilities and perhaps increased investment with uncertain returns.
This segment of their business is so small that even 100% or 200% growth would have minimal effect on the bottom line. There is no question that regardless of the competition Getty will continue to license rights to a huge number of images. But as the competitors get stronger it may be difficult for the company to maintain the high growth in revenue and profits that it has set for itself and it might even begin to lose a little ground.
On the whole the degree of Getty's total future growth should not have any great effect on the image suppliers. More important will be the suppliers' share of total images on the site as the total images on the site tends to increase dramatically, and any changes in the percentage of gross sale the supplier receives - positive or negative - that are instituted by Getty.