RF Metamorphosis

559

June 7, 2003

The RF industry is facing some interesting challenges as it tries to move ahead. The
road to growth may not be as easy as it has been in the past, or as some would hope.

Speakers on RF at the recent CEPIC Congress in Portugal generally agreed that
selling images on CD-ROM discs is an interim bridge technology on the road to full
internet search and delivery, and that the usefulness of CD's is nearing an end.

The buying trend is toward single images and away from discs. There are some big
variations market to market, but in general disc sales are in rapid decline compared
to a year or so ago. About 80% of Getty's RF revenue comes from single image sales.
Other distributors indicate that their ratio of single image to disc sales is in the
same ballpark. And since disc prices are about four times the average single image
price that means that something in the range of 95% of the RF units sold are single
images. Disc purchasers tend to be volume users of images whose aim is to build a
library of images as a way of reducing future image costs. Subscription and online
library models may satisfy the needs of many of these buyers in the future.

In the past year the average price per single image has been pushed up resulting in
increased gross revenue for many suppliers, despite a poor economy. As prices have
risen many distributors have seen a DROP in the number of single images licensed -
(a 13.5% decline for the gettyimages.com site). In a bad economy buyers are supposed
to use more RF than RM because it is cheaper. Someone forgot to tell Getty's
customers how they are supposed to act. Given the dominance of Getty's platform,
probably in excess of 50% of all RF sales are made through the Getty site and thus
their trends may be indicative of where the industry is headed.

The decline in the number of images licensed at Getty is all the more remarkable
because it occurred during a period when they added Digital Vision's high quality,
high priced images to its site. Sources tell us the DV material sold very well
representing in excess of 20% of Getty's RF revenue in the last 12 months. David
Moffly of Creatas and James West of Alamy say both revenue and units licensed are
growing on their sites, but that may be because both companies are relatively new to
the RF space and are adding many new RF suppliers to their offering.

Issues

There are a number of issue RF producers will have to deal with in the near future
and none of the answers are clear cut or easy. They include:

• Making pricing more complex and thus increasing the "Hassle" factor
  
• Unauthorized Uses.
  
• Drive for better quality vs. the greater expense to get there.
  
• Subscription and Library models.

Pricing

Determining how to price "Royalty Free" products and still keep the transaction
simple and hassle free is becoming a major dilemma for producers. To make the
transaction simple most RF sellers started out offering three different prices based
for different file sizes. Initially the prices were very close to what PhotoDisc was
charging so the buyer had a reasonable idea of what the costs and terms of use might
be if they purchased a RF image. But in a effort to find a more profitable model a
variety of price systems have developed from offering more file sizes, to
sub-dividing a brand (PhotoDisc model), to Flat Rate, to Subscription, Library and
Virtual CD's. A "Time Based License" model is also being discussed. The end result
for the buyer is confusion. All RF is not priced equally. If the buyer is looking
for the best bargain for their particular needs they must do a lot of research on
the various options offered by different RF brands and the rights vary.

As portals increasingly represent many different brands - and each brand develops
its own pricing - it has become harder for the customer to anticipate what the price
of an RF image might be as they begin a search. Only after the customer has selected
an image can he determine the price for that image. Thus the price is no more
transparent while searching than it is with an RM image. This is particularly a
problem for the low end user who only plans to make a single small use of the images
they intend to purchase. Often an RF image will be the most expensive option
depending on the image the buyer picks and how they intend to use it.

Tom Christiansen of Lute.no and FontShop, and other distributors, say that RF single
image prices now exceed RM prices for many uses. But, as volumes decline sellers
need to raise prices to maintain a stable (and hopefully rising) revenue stream.
Many distributors think the only way to increase volume is to reduce (or at least
not raise) prices. Faced with rising RF prices some low end customers look for
alternatives such as the library and subscription models.

Even in the major markets the RF prices sometimes exceeds what major buyers are
willing to pay. Consider that most customers do not buy the smallest file size
designed primarily for online use. Instead they buy the file size that is around 10
to 15 MB which is good for most 1/4 page uses. At Getty that file size costs
$149.99 and at DV $249. The 28MB file costs 209.99 and at DV $269. Many book
publishers in the U.S. want to pay $125 for an image of any size for unlimited use
in a particular product. At that price RF exceeds their budget. Prices in many
countries around the world are even less. I suspect Getty negotiates bulk deals with
many of these publishers to give them the RF images at the price they want. My point
here is not to say whether Getty should, or should not, negotiate in these
situations, but to point out that if they are negotiating then much of the purported
"convenience factor" of RF is lost. If they don't negotiate then they are likely to
lose sales.

Sellers started out by trying to maintain one price worldwide for each of their
discs and for each file size they offered. Some still do, but others are discovering
that as they raise prices for single images they price themselves out of some
markets. Some RF suppliers have adopted the strategy of adjusting their rates in
various countries and offering their discs and single images at lower prices based
on what the market will bear. Others are trying to hold the line and keep their
offering at the same price throughout the world. This is getting harder to do.

I know of at least one case where a South African agent refused to represent one RF
brand because they believed the products were too expensive for their market. This
brand's pricing is in the middle range of RF pricing, not the extreme high end. On
the other hand, in South Africa (and many other countries) the majority of uses are
small in size and circulation, and RM images with pricing based on usage are cheaper
than RF.

RF sellers who reject this price cutting strategy fear that multi-national companies
will do their buying in the country where the image is least expensive. RF has a
major problem that RM doesn't face. When a customer buys and RF image they can use
the image any way they want, but if they buy an RM image the allowed uses are
clearly defined in the license. RF has "seat licenses" that place some limits on how
large companies with many offices or art directors can use the RF images they
purchase. But, if you think RM licensing is complicated try to figure out the rules
for seat licensing for the various brands. The end result is that offering an RF
image at different prices in different countries is much more risky than doing the
same thing with an RM image.

Those who are willing to adjust price to the market argue that cross-market buying
is not a significant problem. But the RM market provides some precedents to
consider. For years major U.S. book publisher (huge users of images) have purchased
many of the images they use through offices in the United Kingdom because UK fees
are much less than those in the U.S. Most major publishers are multi-national
companies and can adjust the location where they purchase, if there is a significant
economic benefit.

Another thing that may be hurting RF is that a lot of RM images are now available
online for immediate search and download and there are convenient price calculators
that allow customers to determine the price for a particular usage without the
necessity of negotiation. Buying an RM image is becoming more convenient while there
is increased hassle when buying and RF image.

Multi-Level Offerings

Some sellers have suggested that the solution is to divide the collection into
multi-levels based on quality, or costs of producing the image. Each level would be
priced differently. This is moving closer to the RM method of pricing. But selecting
images for such categories can be very difficult, and most often wrong. Some buyers
are willing to pay more for an image assigned to the lowest level given their
intended use and others will need one of the high quality images, but only be able
to afford a low price. The beauty of the RM strategy is that it is possible to sell
any image at many different price points depending on the needs of a particular
customer.

Unauthorized Uses

There is no consistency in RF licenses. As a result customers are often not sure
what they are allowed to do with the image. Customers have been told for years that,
"You can use the image anyway you want." In fact, there are restrictions on most RF
licenses, but since there is no consistency and often the licenses are not easy to
read or understand the restrictions are mostly ignored. There is a great deal of
unauthorized, unpaid use of RF images.

Some producers would like to see the industry move toward a standard license and
more enforcement, but most are afraid to inject a greater degree of "hassle" into
the transaction or do anything that might discourage RF purchasers. Consequently,
it is doubtful that anything will happen on this front. Meanwhile the Rights
Managed sellers roll along with very precise licenses for specific, clearly defined
uses.

Image Quality

If the number of images licensed is actually dropping, raising prices is difficult,
and producers are required to continually spend more to raise the level of quality;
will this begin to cut into profits of the RF producers?

There is a strong drive to improve RF quality despite the fact that most observers
would have to agree that the quality is currently equal to RM. There are more
elaborate productions, more and more images being shot, and higher standards for
what is acceptable in order to produce a prime selection for a single disc. In a
recent promotion Digital Vision says they only accepted 1.2% of the images they
reviewed in 2002, and in many cases the photographers had already done a tight edit
before showing the images to DV. In the past a photographer could produce all the
images for a disc in a day or two of shooting. Now it is not uncommon to have
several photographers shooting over a period of weeks to produce images for a single
title. This raises costs. Will all this work lead to an increased volume of sales,
or is there a limit to what the market can absorb?

There is also discussion of editing out older images of lesser quality and
re-mastering discs. But, sometimes the older image, or an image produced from one of
those quick and dirty one-day shoots is exactly what the buyer needs. The image that
someone else has defined as "better" won't necessarily satisfy the buyer's needs.

Release Status

Rights status is another factor that concerns some in the industry. Some say there
are images being sold as RF that don't have complete and comprehensive releases, and
there are uses being made of some images that might not be covered by good releases
anyway. This has limited some of the images that producers are willing to accept for
RF distribution. For example, I recently heard from a photographer who had a set of
images of classic cars that one of the major RF producers was considering. The
photographer had solid releases from the owners of the cars, but could not obtain
releases from original manufacturer (Packard) because that company no longer exists.
The fact that this other release was not available prevented the RF company from
accepting the image. Another photographer was asked for a release of a wide angle
shot of a ticker-tape parade in New York. Who can provide such a release? Producers
are justifiably nervous about some of the uses that might be made of non-released
images and the potential cost of litigation, but as the fear increases it is likely
to put severe limitations on what can be offered as Royalty Free.

Such images could be offered for sale as RM with the stipulation that the image is
not released. Since there is the potential to negotiate every sale with RM (even
when an automatic online pricing and delivery option is offered) it is possible to
vet the use in the RM environment and determine if there are potential problems with
the use given the release that is available.

Subscription or Library Model

One of the most intriguing trends in the RF space is the subscription, or library
model of sales. There are a number of variations, but brands like AbleStock.com,
Photos.com and Liquidlibrary.com are gaining increased traction in the market.
These models work for customers who use lots of images and have a limited budget. It
also helps if the customer is willing to design around the images that are
available, but some of these services offer some pretty good images on all the major
themes. Niall O'Driscoll of AbleStock.com says, "Our single image sales are falling
dramatically due to the appeal of membership." Graphic Design firms like the library
concept because they can pay one low monthly or annual fee and use the images for
all their customers. O'Driscoll says, "Most of our customers are not price sensitive
because they charge their clients for image use. However, they recognize the value
membership can offer because they charge the cost to one or two clients and the
income from the rest of their billable projects is pure gravy."

For $400 for 6 months or $700 a year you can subscribe to AbleStock and get
unlimited access to 16,000 images. If in a year you can find six or seven images to
use you've covered your cost of membership. Photos.com has a one-month subscription
for $100 (less than the price of many mid-sized RF images) and the subscriber has
access to 50,000 images. A year's subscription costs $500.

The LiquidLibrary strategy is an interesting option to CD's. Subscribers pay $125
per month and build their own custom library by getting a package of 150 new images
per month. They have unlimited rights to use any of the images in their library as
long as their subscription continues. (These images are LL's latest offering, not
the customer's custom selection.) In addition the subscriber has access to LL's
total online collection (over 70,000 images) at a greatly discounted fee. Any image
they is added to their library and available for future use.

There is no need for users to buy CD's to build their library or to maintain their
own database because the images are available at the LiquidLibrary site at any time.
The customer has a great incentive to continue paying the monthly fee because that
gives them continued access to the images they have purchased.

CD sales offer some of the advantages of subscriptions, but at a much higher
per-image-price. Membership also provides the subscriber with new images each month,
something they don't receive when buying discs. At the moment buyers can find more
breadth of subject matter on CD's and in the RF single image databases, but the
subscription services are adding content rapidly. The wisest search strategy for
buyers concerned about cost would be to check out the subscription services first
and see if they can find an image they can use. Then check out the regular RF
suppliers and finally go to the RM offerings.

These companies wholly own all the images they offer. Most are shot by staff
photographers, although in some cases the company buys images outright from
photographers for very low fees. Some of the traditional RF producers are providing
images to these companies, but the traditional company's brand is not identified. At
these prices it is hard to see how subscription sellers will be able to continue to
supply sufficient new content to satisfy their customers. But, I thought the same
thing about the RF industry a decade ago. Only time will tell.

Summary

What the RF CD/download model did to traditional RM stock the RF subscription and
library model may eventually do the current RF industry. It is an evolution of the
convenience proposition that the original RF model offered customers.

I don't see the entire RF market going to subscription, but it does seem that a
certain segment of the current RF buyers will find this model attractive. It seems
that all those who can make use of RF are already doing so and that the total volume
of uses is not likely to rise significantly. That would seem to indicate that the
level of existing RF sales is likely to decline as the subscription model takes a
portion of total RF sales.

In the past year many RF suppliers have been able to keep revenue stable on a lower
volume of sales by raising prices or taking market share from other RF suppliers.
But, it may be difficult to raise prices much more. It appears that RF is no longer
cannibalizing RM sales and that the two may have reached a level of equilibrium. If
RF can't take additional market share from the RM side of the business, and sales
overall don't grow, then the only thing left for the RF producers is to take market
share from each other.

To do this the winners will probably need to continually produce better and better
quality images and in so doing raise their costs.

At the CEPIC conference Patrick Donehue said that Corbis recently sold a Royalty
Free image for $22,000. It was a new image that had just gone online and the
customer wanted to restrict other use of the image. Corbis was able to scramble and
take the image out of circulation so they could supply the customer with the
exclusivity he desired. Unfortunately, such options are not going to present
themselves to most RF suppliers. They will not be able to charge more for large
uses. To grow revenue they must grow the volume of uses and keep their costs in
check. And that is likely to be a very difficult challenge as they move ahead.