Integration

495

August 3, 2002

One of the big problems in building a business by acquisition is that eventually
integration of the smaller entities is necessary. In the stock photo industry many
of the companies that have grown by acquiring lots of smaller companies are now
confronting the problem of getting all these companies operating in a unified way.

Such problems are not unique to the stock photo industry. Managers of companies in
other industries -- both acquiring companies and those that were acquired -- report
that there are almost always serious problems with integration. It never goes
smoothly.

In the stock photo industry there are lots of levels of integration. There are new
editors and new contact people for the photographers. There is a reorganization of
sales positions and customers discovering that they are either assigned a new sales
person, or that a team of people is handling their account and they never know who
to talk to. Often the personal service that customers received from smaller
companies is lost.

There are accounting problems. Getty Images has been trying for more than a year to
integrate the accounting of approximately 20 different brands, each with its own
unique accounting system into one unified system called Alliant. It still hasn't got
all the bugs out. One might think that with computers this shouldn't be that hard,
but that appears not to be the case.

In theory, there is income from licensing an image. Each image is owned by a
photographer and a percentage of the sale should be paid to that photographer. Seems
simple.

But each company has a different way of recording information. Each company may have
a different way of numbering and tracking images. In transferring the data from one
piece of software with a column called "Sales" to another piece of software with a
new column called "Gross Sale" often something tends to awry.

Some clients are billed for every sale, others are billed monthly. Some get volume
discounts that have to be figured separately. The larger and more sophisticated the
sales staff the more variations they develop on the standard deal. This adds
additional levels of complexity for the accounting department.

Percentages may vary from photographer to photographer. In some cases one
photographer may have more than one percentage arrangement for different pictures,
or different productions. Some photographers use pseudonym's so the name on the
account is not who the check should be written to. There are different methods of
payment. Some photographers get checks, other get direct transfers to their bank
accounts.

We also hear from some customers of the larger agencies that they don't get billed
in a timely manner for the images they purchase. These customers want to pay their
bills so they can close their books on the particular project but sometimes, despite
applying a lot of pressure, they can't get invoiced.

At most agencies the person doing the accounting has been there for years and
understands the exceptions and how they need to be handled. One thing that seems to
have happened is that after an acquisition many of the accounting staff from the
company that was acquired either leave or are let go because their jobs seemed to be
redundant. Often "institutional memory" of the intricacies of how certain types of
sales should be handled are lost when these people disappear.

It also appears that in some cases when people leave they don't explain, or
document, all the intricacies of how the old system worked. Problems can go
unnoticed for a long time if careful and detailed audits are not carried out with
each new change in the system.

Where Does This Leave Photographers?

Photographers may not be getting paid all they are owed, but they have almost no way
to determine what the correct amount might be.
Even when problems can be identified, a fix is not always quick or easy.
Photographers make future production decisions based on the revenue they receive. If
that figure is inaccurate or undependable the photographer is left to make false
decisions.

Getty Payment Problems

Getty has been struggling to get their photographer payment systems organized since
the middle of 2001 when they introduced their Alliant software that was supposed to
unify more than 20 different accounting systems. In some cases photographers are
receiving two and three checks a month as Getty tries to get the systems
straightened out. This is particularly true for photographers with the former VCG
brands who seem to be having the most problems. In many cases Getty has frankly
admitted that they don't know how much the owe the photographers. In desperation
some of the top producing photographers have negotiated a fixed monthly draw based
on what they were earning a couple years while Getty tries to figure out what they
are really owed.

Photographers with the Stone brand are probably experiencing few if any problems
because Alliant is based on the old Stone system and the idea is to conform the
systems of all the other brands to what Stone was doing.

Recently, photographers who produced images for EyeWire have received huge checks as
a result of an internal audit. These checks indicate that the photographers have
been grossly underpaid for many months, if not years. This presents major problems
for the photographers on several levels. First, income has been withheld that the
photographers needed and were entitled to. Their new production was restricted for
lack of capital to plow into it. In addition, in this case, the photographers made
decisions about the viability of the RF market, based on declining revenue they were
seeing in their monthly checks. It appears now that these decision were invalid and
that the photographers should have been producing more aggressively, but now a year
or two of productivity has been lost.

Assuming that the whole thing gets straightened out after further audits, and all
back payments, plus interest, are paid that really doesn't make up for the
disruption in people's lives and businesses that the integration has caused.

There is no indication that any of this was intentional on Getty's part, but so far
all the errors have worked to Getty's advantage by allowing them to retain cash
longer. There have been no indications to date that any of the audits have uncovered
situation where Getty has overpaid the photographers.

The problems at Getty may be more transparent because of the information they are
required to disclose as a publicly traded company. At least everyone involved has
some idea of Getty's gross revenues, and can gage their individual returns against
that standard.

Corbis

With Corbis there are strong reasons to be suspicious about their accounting as
well, particularly with Corbis Stock Market, but there is no publicly available
figures that might shed any light on these speculations.

Sales for Corbis Stock Market have dropped dramatically since Corbis took over The
Stock Market in late 2000. Some photographers report their sales are down 70% to 80%
from their previous levels. Others are down only 40%. No CSM photographer that we
have encountered is earning anywhere near what they were earning when Richard
Steedman was operating the company.

Meanwhile, photographers who have had contracts with Corbis for five year or more,
and who deal with the parent company report that their sales are rising.

Sources at Corbis insist that their overall sales are still strong and that they
have not seen the sales decline that has affected so many other U.S. companies in
the industry. Yet, when Corbis took over TSM in late 2000 we believe that the TSM
sales represented approximately 30% of their business. Given the royalties that are
currently being paid to TSM (CSM) photographers it is hard to imagine that the
revenues from the rest of Corbis' business have increased enough to make up this
difference.

Add to this that CSM has had three different accounting managers in the last 14
months. Photographers receive statements and checks where the check numbers and
amounts don't match. The closing dates for the monthly accounts keep changing. All
these factors are indicative of problems with the accounting systems.

There are non-accounting factors that could explain some of the falloff in CSM
sales. There has been less promotion of the CSM brand than there was before. There
were problems when customers were assigned to new sales representatives. Corbis
stopped doing the kind of file research that was done before. And Corbis staff is
quick to blame the CSM photographers for not supplying enough new images.

But then as one CSM photographer who is represented by a number of other agencies
points out, none of his other agencies are showing the kind of decrease in sales
that CSM has shown.

Meanwhile the situation for many photographers is desperate. They can't afford to do
new expensive productions when their income is falling so dramatically. Some major
producers have left Corbis and others are considering it. One major producer used to
have a staff of 9. He is now down to three and may have to let some of them go.
Another is considering selling his studio. A third has sold his home and moved to
Brazil where he can live less expensively on the meager income he receives from
Corbis.

Audit

Some photographers are talking Audit, but to force an audit from the outside seems
unlikely to happen, and probably not very useful. While the photographer's contacts
allow them to audit, a simple review of all the records that are connected to any
given photographer's account will not be enough to uncover the problems.

The majority of errors probably occur at the point where a portion of the gross
revenue of a particular image is assigned to a particular photographer's account. If
for some reason it is not assigned correctly there will be no evidence in the
photographer reporting system that such a sale was ever made. The auditor must to go
back to the records created when images were originally licensed and track the
process through for each record to make sure that the portion owed the photographer
was credited and paid to someone, and that this was properly credited. What appears
to have happened in the EyeWire situation with Getty is that in some cases the
information gets credited properly and in other cases it doesn't. No one has
explained how that could happen. Such bugs or glitches are common in software and
the more complex the transaction the more likely they are to occur.

If there are major errors it will not be because sales were never reported, or
collected, but that somehow the software did not apportion the monies properly.

An audit for one or two photographers is useless, because it is unlikely to uncover
anything. The audit needs to be system wide. The cost, and the time involved in
doing such an audit is huge, but it is the only way to get satisfactory results. It
is easy to understand why Corbis, or any company, might be reluctant to dig in and
start such a process. But, if they don't photographers represented by a large
company with a complex accounting system have little chance of ever knowing if they
are being paid all they are entitled.