November 2001 Selling Stock

Buyers are sometimes frustrated by too many images on a particular subject, but it seems that
the best solution in these cases is for the agency to offer custom research and custom light
boxes, rather than very tight initial editing. Not all portals agrees with this strategy, but
there is good evidence that it is currently the most successful way to approach the U.S.
buyers.

Portal Models

There are two portals in the U.S. that have some track record and experience. They are
PictureQuest.com and Workbookstock.com. PictureQuest has been operating since the mid-90's,
and has approximately 357,000 images and over 175,000 registered users. They get their images
from approximately 50 agencies and have both Rights Protected and a Royalty Free sections on
their site.

Workbookstock.com has several years experience in operating a portal. They have always focused
entirely on Rights Protected with no Royalty Free. They accept work from individual
photographers as well as stock agencies and have recently revamped their site to focus on very
high end, contemporary imagery. They have about 23,000 images on the site and 46,000
registered users.

Other portals of interest are Alamy.com, Photononstop.com and Stockmedia.net. For more about
Alamy.com see (Story 424) and Photononstop.com (Story 435). Stockmedia's technology is
currently used by SolusImages.com, Sportschromeonline.com, and globalphoto.com. Expect to see
additional announcements of other agencies adopting Stockmedia's technology in the near
future.

"5 star restaurant" or a "one-stop hamburger chain"?

One stock agent operating outside the U.S. recently asked, "If you're going to sell online in
the U.S. don't you have to be with either Getty or Corbis?" To illustrate his point he used
the following metaphor, "Isn't a 5 star restaurant better then a one-stop hamburger chain?"

The key to this question is in the use of the word "chain". Owners of McDonald's franchises
earn good revenue even though they are all small restaurants. Among the reasons are shared
advertising and promotion, and brand identity. They also serve their local communities and
understand the needs of their customers.

Stock photo customers don't care if your the biggest, or if you have a reputation for
representing the work of the best photographers. They only care if you have the right image,
at the moment they need it. Getty, in particular, has rejected a lot of images customers want
to use. U.S. customers want alternatives to Getty and Corbis. They will use the small
suppliers as long as they know where to find them.

It is also not necessary to be the biggest to be profitable. (In fact, neither Getty or Corbis
are profitable.) Smaller operators can generate more profits, if they do a few things right.
They must:

• Join together on portal sites so they can share the costs of operation and promotion.
  

  
  

• Find less expensive ways than traditional print catalogs to promote the existence of
  their portal, and show their images.
  

  
  

• Maintain reasonable prices through negotiation.
  

  
  

• Provide a service of researching their online database for their customers. This is
  particularly necessary if the site offers a broad cross section of imagery. (Custom research
  may not be as important when there are only a few images in every category.) It may also be an
  advantage if the seller has an analog file to back up the online offering, and provide more
  depth when needed. Researcher who understand the subjects they are researching are also
  important.
  

  
  There are strong indications that customers don't have the time to do all of their own
  research. They prefer to call someone (an agent), outline their general needs, and have that
  agent prepare a custom lightbox for their consideration. Part of the success of portals will
  hinge on the quality of this research and how the service is promoted.
  

  
  

• Get more images online where they can be seen. Masterfile has discovered that when they
  put general file images onto their web site these images began to sell. Many of these images
  were in the files for years and never sold. This would indicate that the normal print catalog
  selection process is too tight for what buyers want and need and that somehow, in the old
  research process, these images never made it to where the buyers could see them. Now when they
  are available to the buyers (on the web) they sell.
  

  
  

• Get their images into a variety of outlets that promote in different ways and reach
  different segments of the market.

The marketing strategies of portals vary. Some buyers prefer to use one portal and some
another. Thus, from a marketing point of view it is often best to have images on several
portals rather than just one.

As more and more images become available online customers in the U.S. are rediscovering the
value of the smaller agency that knows their customers and goes the extra mile to provide
service. Look for these customers to head back to these smaller agencies as Getty and Corbis
cut staff in an effort to try to get profitable.

September 25, 2001 (Story 429) - A recent Corbis Stock Market survey determined that
the majority of art buyers and graphic designers in the U.S. go to the internet first when
looking for images.

The survey showed that catalogs are an important tool still used for searching and brain
storming, but customers prefer frequent smaller catalogs that are easier to store, simpler to
browse and more user friendly than the larger, occasional ones. Stock image users are
impressed by catalogs that offer fresh, innovative imagery and inspire them with new layouts
and presentations.

One question for photographers who pay to have their images in such catalogs is will these
catalogs increase sales for the specific images shown, or just the brand? Under the new Corbis
agreement photographers will not pay any catalog fees, but under the old Stock Market
agreements photographers are still charged catalog fees. It is unclear whether TSM
photographers will be charged catalog fees, if they haven't signed the new Corbis agreement.

October 24, 2001 (Story 437) -- Getty Images, Inc. has announced its financial results
for the 3rd quarter ended September 30, 2001. Total revenue for the quarter was $107.5
million. Revenue was down 12.4 percent from the 3rd quarter of 2000, excluding Art.com, which
was closed in May 2001. On a currency neutral basis, revenue for the quarter was $112.1
million, down 9 percent from the year-ago quarter, excluding Art.com.

The company expects to report revenue of between $95 million and $105 million for the 4th
quarter of 2001. If they make the top number their gross sales for the year will be about
$454.1 million, down a little more than 6% for the year. When asked by analysts for an
estimate of how much industry sales are off overall, Getty Images CEO, Jonathan Klein, would
not provide a figure. Selling Stock estimates that sales in North America for 2001 may be down
as much as 15% to 20%. Sales in Europe may not be suffering as much. This would indicate that
despite the downturn Getty is still doing much better than the rest of the industry.

E-commerce

E-commerce revenue in the quarter was $51.5 million, or 48 percent of total revenue, up from
35 percent of revenue in the 3rd quarter of 2000. This does not include disc sales. It is
worth noting that total e-commerce revenue was down slightly from $52.9 million in the 2nd
quarter. With the October launch of their new gettyimages.com that offers search in German,
French, and UK English as well as American English, it is expected that they will see a big
jump in e-commerce sales in the 4th quarter and easily break the 50% barrier for total
e-commerce sales.

Klein indicated in the conference call to investment analysts that Getty Images expects to end
the practice of sending analog images to clients by the middle of 2002. This says a lot about
client readiness to accept digital files. Based on their creeping growth of e-commerce sales
as a percentage of total sales, it is hard to see how they plan to deal with the other 52% of
sales when they go to full digital delivery.

The first thing to recognize is that e-commerce sales don't include RF disc sales, or
situations where a digital file, rather than film, is delivered on a custom CD-ROM shipped by
traditional means to the customer. These numbers were not revealed, but it seems likely that
this type of digital delivery already accounts for a large percentage of Getty's total
delivery. Otherwise, they would not anticipate eliminating analog delivery by the middle of
2002. With this type of delivery there is still a lot of work in getting the image to the
customer, but it certainly eliminates any return or re-filing costs, and it eliminates the
need for dupe sets of images.

Royalty Free

Klein said Royalty Free represents about 1/3 of Getty's total revenue or approximately $35
million in the 3rd quarter. This percentage on a full year's sales would put Getty's RF
revenue at between $140 and $150 million. Their RF brands include PhotoDisc, EyeWire and
Artville.

Back in May 2000 when sales for the 1st quarter 2000 were $104.8 million we were able to make
some estimates about sales of each brand (See Story 310 online). At that time we estimated
sales of PhotoDisc, EyeWire and Artville at $27 million. Thus, if we were off on the low side
then, and if Klein's 1/3 is really not quite 1/3, it still appears that Getty's RF sales have
continued to grow steadily in the past 18 months, as a percent of total revenue.

This aids Getty's cash and profit position because they get to keep a larger percentage of the
total monies collected from RF sales than from Rights Protected sales.

What's Happening To Rights Protected

Given the good news on the RF front, what's happening to Rights Protected sales (including the
film division)? In the past we have estimated film division sales at about $40 million
annually. If we assume that is holding at a no-growth level through 2001, and we also deduct
the lowest RF estimate of $140 million for 2001, Getty's estimated Rights Protected income for
still photos for the entire year will be about $275 million. The 3rd quarter share of this
income would have been about $62 million.

Again, it is instructive to look at our 1st quarter 2000 breakdown (Story 310 online) by
brand. Our estimates for an income stream that was about the same as in 3rd quarter 2001 were:
Stone, $35 million; TIB, $12.1 million; and VCG, $3.7 million for a total of $50.8 million.
(In that quarter VCG was only part of Getty for 9 days. Even with all of VCG's problems since
Getty acquired them, a full quarter of sales should be much higher.) VCG's revenues when Getty
acquired them were about $90 million annually. If we assume those revenues have dropped to
half that amount VCG should still have generated about $11 million in sales in 3rd quarter
2001.

Klein indicated that in the most recent quarter TIB was seeing "double digit growth" (at least
10% over the previous quarter). This may be up from a lower number because sales at TIB fell
off for a while after they were acquired until all the other images were re-scanned and
uploaded on the new gettyone.com web site. TIB photographers have indicated that their sales
have started to return to normal levels in the last few months. Given how well the brand is
doing it is also interesting to note that Getty has turned TIB into their "classic stock"
brand.

To complete our analysis of Getty's Rights Protected images we must also account for the
historical and editorial brands: Hulton Getty, Archive, Allsport, Liaison and Newsmakers. For
the 1st quarter 2000 we estimated that total revenue for these brands was $14.2 million.

When asked to give some indications as to how the various brands were doing Klein indicated
that the news segment of their business had a substantial increase in sales after September
11th, but that it represented a small part of their total sales. Their sports brand, Allsport,
was hurt by the reduction of sporting activities in September. In addition Allsport does
better in years when there are major sporting events like the Olympics and there has been
nothing like that in 2001.

Thus, putting all these numbers together and trying to reach the $62 million in sales for the
quarter we come up with the following numbers:

These numbers may be off somewhat, but it is hard to come to any conclusion that doesn't show
Stone's sales dropping significantly when compared to 1st quarter 2000, a time when gross
sales of the company were about at the same level they were in 3rd quarter 2001. In the
conference call Klein refused to supply any information about Stone's sales when Peter Appert
of Deutsche Banc Alex. Brown asked specifically about that brand.

Market Share

Klein said the company's goal is to eventually have a 50% to 60% market share of the industry.
Based on industry information provided earlier this year and reported in online Story 410 they
may already be there.

The statistics from the PACA and CEPIC surveys indicate that gross worldwide revenue from
still photography was about $1.277 billion for year 2000. But, at least $600 million and
possibly more of that, according to the survey information, is for editorial uses, an area of
the industry where Getty Images does not seriously compete. This means the commercial and
advertising side of the business is only about $677 million.

Getty acknowledges that they are aiming to sell to the high end advertising side of the
business and that they are not strong in editorial. Based on the numbers above only about 13%
of their annual sales come from the editorial side of the business. Even assuming that their
commercial brands make some sales into the editorial and publishing environment, it is hard to
see how much more than 25% of their total revenue could come from editorial users.

Thus, 75% of year 2001 sales, or an estimated $310 million of Getty's year 2001 revenue, will
be to corporate and advertising customers. This is already 45.7% of the $677 million number.
If sales for 2001 are actually 10% lower than 2000 (about $610 million) then Getty's portion
of the corporate and advertising side of the business would be 51%.

Other Insights

About 56% of Getty's 3rd quarter were in North America, down from 60% in 2000. European sales
represent about 38% of gross revenue, up from 35% a year ago. The remaining 6% is mostly from
the Asia/Pacific region.

Average usage prices have remained constant throughout 2001. Klein says stock customers are
not price sensitive and price reductions would not increase demand.

Prior to September 11th, in an effort to cut costs, Getty had cut their staff by more than 300
people bringing the total staff worldwide to under 2000 people. They recognized a $3 million
savings in the 3rd quarter as a result of these reductions and expect to save approximately
$20 million on an annualized basis. Klein insists that when the economy turns around it will
not be necessary for Getty Images to staff-up in order to increase sales. We "can handle much
more revenue with no increase in costs," he said. One example of the cuts that he gave is that
VCG, and the various brands they represented, had 66 sales people when Getty acquired them.
That number is now down to 12.

Financial Information

EBITDA was $21.8 million, compared to $27.4 million in the 3rd quarter of 2000. The EBITDA
margin was 20.3 percent, which exceeded the high end of the guidance provided by the company
and compared to 21.6 percent for the 3rd quarter of 2000 and 19.5 percent in the 2nd quarter
of 2001. After-tax cash flow per share for the 3rd quarter was 34 cents, compared to 37 cents
per share in the 3rd quarter of 2000 and 31 percent above the First Call consensus estimate.

The net loss for the quarter was $18.2 million, or 35 cents per share, down 33 percent from a
net loss of $26.4 million, or 52 cents per share, for the same period in 2000. Excluding a
charge of $4.8 million, primarily related to severance costs associated with the staff
reduction in August, the net loss for the quarter was 30 cents per share and 19 percent better
than the First Call consensus estimate.

For 2002, the company expects revenue to be between $430 million and $460 million, the gross
margin to be approximately 74 percent and the EBITDA margin to be in the range of 22 to 25
percent. The company expects capital expenditures for 2002 to be about $45 million.

"We were both pleased and encouraged to meet and significantly surpass all of our third
quarter financial expectations despite a weakened global economy and the impact of September
11th's tragic events," said Jonathan Klein. "Our plan for the fourth quarter and beyond is not
only a continuation of our discipline and vigilance on the cost side of our business but also
a renewed focus on stimulating revenue by gaining more market share in this challenging
economic environment. With our new gettyimages.com Website launched earlier this month and a
comprehensive new sales initiative in place, we believe the company is well-positioned to
protect and enhance our revenue objectives and, even more importantly, to prosper when the
market's strength returns."

"Prior to September 11th, we had already taken swift and decisive action to meet the economic
challenges that we faced, reducing our worldwide staff by more than 300 people and cutting
back on expenses throughout the organization," said Liz Huebner, senior vice president and
chief financial officer of Getty Images. "We decreased selling, general and administrative
expenses by five percent over the second quarter of this year, and expect to continue to
reduce S,G&A in the fourth quarter. The combination of a strong gross margin and tight expense
controls enabled us to achieve an EBITDA margin that was a full percentage point above the
high end of the range we provided in July."

October 19, 2001 (Story 436) - Getty Images Inc. has redesigned gettyimages.com, in an
effort to increase scalability and efficiency for the company as well as provide significant
benefits to customers worldwide. The company generates nearly half its revenue on the Web, and
expects the percentage to increase steadily despite the fact that in recent quarters it has
seemed to plateau at just under 50%.

When finally completed in the middle of 2002, gettyimages.com and its accompanying back-end
systems will result in:

"With the launch of gettyimages.com, we have completed the most difficult and costly aspects
of this initiative," said Jonathan Klein, Getty Images CEO. "The integration of the largest
part of our business, rights-managed images, has been completed, along with establishing the
technology, business process, finance systems and customer interface platform for the
continued transformation of the whole of our business."

It is worth noting that in the past quarter during the transition to this new system sales and
many of the payment reports sent to VCG photographers have not included royalties for overseas
sales. As a result Getty found it necessary to review all the data and write additional checks
to each VCG photographer entitled to royalty payments from overseas sales. Getty expects to
catch up in the reporting on the sales made this summer's with the reports that will be dated
31 October and 30 November.

Consolidation Provides Increased Efficiencies

In addition to enabling the company to transition from multiple technology and finance systems
and platforms to one scalable Web architecture, this company-wide initiative includes the
transition to one centralized sales order processing system, one integrated accounting system
and one master customer database. This will allow the company to maximize its sales and
service resources and service its customers more effectively. The company anticipates that
this consolidation effort will result in significant operating cost and capital efficiencies
over the next year.

Klein said, "from an operational perspective, the new (site) functionality will revolutionize
the way Getty Images runs its business. From a customer perspective, gettyimages.com simply
makes it easier, faster and more hassle free for our customers to find the right images and
produce striking, provocative and meaningful communications."

New Features

Gettyimages.com, includes the fully localized gettyimages.co.uk, gettyimages.fr, and
gettyimages.de. The French and German sites will be searchable in the local languages and it
will be possible to make transactions in the local currencies. Getty expects this full
e-commerce capability to revive European sales which had been falling off in recent quarters.

Features of the new site include:

September 12, 2001 (Story 437) - Corbis has licensed one of Chuck O'Rear's commercial
images for $135,000. They refuse to disclose the name of the client, or the subject of the
image due to a confidentiality agreement, but it is believed that the image is the one used as
the opening screen on Microsoft's new Windows XP product.

If this is the picture, the bottom half is a green rolling hillside and the top half is a pale
blue sky with puffy clouds, mostly on the right hand side of screen. The windows icons overlay
on this background.

O'Rear lives in Napa Valley and this rolling countryside scene is very reminiscent of some of
the landscapes one finds as they drive north from San Francisco through Napa Valley.

The image has already started appearing in newspaper stories about the product. Microsoft is
expected to spend in excess of $1 billion on the marketing blitz to launch this product and it
is likely that the image will be featured in much of the marketing of the software. That
considered, $135,000 is a steal.

O'Rear's has one of the 40% contract's that were given to WestLight photographers when Corbis
acquired WestLight. Thus, O'Rear received $54,000 for this sale. Corbis did fly O'Rear to
Seattle to pick up the money.

We are also told that the image was originally found by the customer on the Corbis web site
without any help from a researcher. Corbis pointed out that this in no way diminishes the
value that their 70 researchers bring to the table, but points out that the web site earns its
keep as well. Since it was Microsoft doing the searching, it might be assumed that they had a
lot more incentive to use Corbis as an image source than other Corbis customers might have.

The only image I am aware of that has sold for more than this amount was Dirck Halstead's
picture of Monica and Bill Clinton hugging on the White House lawn. According to sources that
picture went for $150,000 for one year unlimited worldwide right. It seems likely that
O'Rear's picture will get even more exposure than Monica and Bill's did.

It is also interesting to note that Microsoft reported in its 2001 proxy statement that it
purchased $400,371 worth of image rights from Corbis in 2001. This reporting was required
because Bill Gates owns Corbis.

October 10, 2001 (Story 433) - The U.S. Supreme Court has rejected National
Geographic's petition to hear the case of National Geographic Society vs. Jerry and Idaz
Greenberg. The decision by the Eleventh Circuit Court of Appeals in Atlanta that NGS had
infringed Greenberg's copyrights will stand as the final decision. This is the first of four
cases pending against NGS for copyright infringements related to its various CD and DVD sets
containing every issue of National Geographic from 1888 until now.

The case now goes back to the trial court in Miami where it began for a mediation session to
determine what costs, expenses, legal fees, damages, and penalty payments the Greenberg's will
receive.

NGS is expected to continue to play hardball until the and to delay the outcome as much as
possible. Despite the Supreme Court decision an NGS spokeswoman told the press that NGS will
"...continue fighting those cases. We believe in the correctness or our legal position."

It is interesting to note the organizations that are supporting NGS and who would prefer that
they pay little or nothing for these rights. The list of organizations that filed "amici
curiae" (friend of the court) briefs in support of NGS's petition include: Magazine Publishers
of America, Inc.; Newspaper Association of America, Inc.; Association of American Publishers,
Inc.; Advance Publications, Inc.; The Copley Press, Inc.; Dow Jones & Company, Inc.; Forbes
Inc.; Gannett Co., Inc.; Georgia Press Association; Gruner + Jahr USA Publishing; Hachette
Filipacchi Magazines, Inc.; The Hearst Corporation; Morris Communications Corporation; The New
York Times Company; New Yorker Magazine, Inc.; Playboy Enterprises; Primedia Inc.; Time Inc.
and The Tribune Company; the American Library Association; Association of Research Libraries;
American Association of Law Libraries and the Medical Library Association.

Greenberg had an "amici curiae" brief from ASMP.

October 19, 2001 (Story 435) - Photononstop (formerly Groupe DIAF/SDP), a French
company, has partnered with Envision in New York to expand the marketing of their work into
North America, and to market worldwide, the work of the photographers represented by Envision.
The new American operation will be branded Envision Stock Photography, Inc, and is a
Photononstop subsidiary.

Photononstop was created as a result of the merger of two French agencies DIAF and SDP. They
have a general non-specialized file. They currently have selling relationships with 30
different sub-agencies throughout Europe and in Australia, Japan and South America. With the
addition of Envision Stock Photography they have opened the door to marketing the work of all
their suppliers in the U.S.

Up to this time Envision had specialized in food, travel and nature, but now it will become a
general agency handling all types of subject matter.

Photononstop's new site (www.photononstop.com) has more than 90,000 images online. They have
rights to market 40,000 of those images in France, and worldwide rights to the other 50,000.
The 50,000 will be available to U.S. customers in January 2002. Currently search is only
available in French, but the English version of the search engine will be available at the
January launch.

In testing the site we found it to be very slow to bring up the home page and perform
searches, but Joachim Koutzky, President of the International Division of Photononstop, says
this is due to old server technology that will be replaced in early November.

Envision Stock Photography currently uses the 20/20 technology to display the 6,000 images on
their web site at www.envision-stock.com. Koutzky indicates that the goal of Photononstop is
to have one central Internet platform and to have all suppliers using the Photononstop
software and interface. However, there is no final decision as to how Photononstop will relate
to the 20/20 technology. The 20/20 technology is widely used by a number of small and medium
sized stock agencies in the U.S.

Each selling sub-agent will operate independently in its market. Supplying agencies are
responsible for their own scanning and keywording. There is no general procedure of keywording
enforced by Photononstop.

Envision Stock Photography will be distributing all of Photononstop's print catalogs in the
U.S. Photononstop is paying the total costs of the production of these catalogs, the dupe
sets, and the postage for mailing the catalogs. This is an unusual situation since normal
industry practice is for the selling agency to purchase print catalogs and dupe sets from the
producing agency, and pay all mailing costs.

It is unclear whether other image supplying agencies in the Photononstop network will be
expected to front all these cost if they wish to distribute their catalogs in the U.S. We also
have no information on the percentage splits between the selling and supplying agency.

Photononstop is seeking to represent the images and brands of other European agencies and to
give them an entre into the U.S. market. Koutzky says that while these arrangements may be
different from the usual agency/sub-agency model they will be able to customize different
models for different agencies.

Photononstop is jointly managed by Christian Delannoy, Gilles Taquet and Joachim Koutzky. The
DIAF-SDP Group claims to have a stock file of approximately 2.5 million images aimed at
advertising clients, and to have had a turnover of about $4.6 million (U.S.) in 2000. Sixteen
percent of their sales came from the non-French market.