Adapting to Changing Business Models

Posted on 12/17/2009 by Jim Pickerell | Printable Version | Comments (0)

Should a photographer license his work as royalty-free (RF) for a 20% royalty or rights-managed (RM) for a 40% to 50% royalty? The answer seems simple, but maybe not.

In a previous article I pointed out that there is absolutely no justification for a distributor paying only a royalty of only 20% when an images is licensed as RF and 40% when it is licensed as RM. It doesn't cost the distributor any more to license an image as RF than as RM. In fact, if anything, because negotiating time is involved in making some RM sales it may actually cost the distributor more to license rights to an RM image than to an RF one. Thus, if we were basing the royalty share solely on the relative contributions of the distributor and the creator to the sale, the RF royalty should be higher, not lower, than the royalty for RM. (I hesitate to point this out because now some distributors will probably try to argue that because RM costs them more they should only be paying 10% on RM sales.)

Distributors don't base their royalty rates on operating costs, but on how much they believe they can extract from suppliers without decreasing supply.



In commenting on my earlier article Chris Ferrone pointed out that despite low royalty rates, "Plenty of photographers are clamoring to put their RF material with Getty for a low commission because they know Getty can deliver enough volume to make it worthwhile... [and they] find it financially expedient to accept the deal as is."

He is absolutely right that many photographers have been able to earn more money selling RF at 20% than they could earn making the same images available as RM at 50% or 65%. How is this possible? Volume is also a factor.



Here are a few of the reasons why photographers may earn more by accepting lower royalty rates.

    (1) Given that RF is nonexclusive, it is possible to have an image represented by more distributors than is the case with RM. The more viewers, the better chance of licensing.

    (2) There is strong customer demand for RF images; on average, they sell twice as frequently as RM.



    (3) Due to RF price increases, RF is often more expensive than RM. Not all RM sales are for huge amounts. Getty's average price has been about $500 for an RM image, compared with $250 for RF. Thus, if you made twice as many RF sales as RM, gross revenue generated would be about the same.

    (4) Volume producers have been able to get more images accepted from a given shoot by offering them as RF rather than RM.

There will continue to be more suppliers willing to provide images for 20% royalties than there is demand. Given that, efforts to get photographers to withhold images are more likely to damage creators by limiting their options rather than hurt distributors.

The above was true of RF in the past, but may not be true tomorrow, due to the tremendous pressure microstock is putting on traditional RF. The following chart should be sobering for both RF and RM shooters.

Getty Images Revenue and Estimates (in millions)
 

2007

2008

2012

Creative Stills

$560.94

$461

$348

Editorial

$138.34

$180

$289

iStockphoto

$72

$122

$262

Footage & multimedia

$42.88

$47

$83

Other

$43.44

$77

$159

B2B music  

$14

$46

       
Total

$857.60

$901

$1,187

The projections for 2008 and 2012, based on Getty's internal figures, were included in a November 28, 2007 report prepared by Goldman Sachs in connection with the Getty Images sale to Hellman & Friedman.

Note the decline in Creative Stills (RM and traditional RF) revenue in the next five years. In 2007, RM was $305.26 and RF was $255.68. RF will take the biggest hit in the next five years, but both will lose significant revenue if marketing strategies remain as is.

Bill Bachmann said, "I do not sell RF and won't." Licensing images as RM has worked very well for him. But dramatic changes in the market are developing. We're seeing a steady decline in the use of RM images for big budget print projects, while photographers pump an increasing number of images into RM.

Tim McGuire points out are "plenty of new distribution outlets offering 50+% for RF licensing." But unit sales through these outlets are so comparatively low that even with their higher percentages, they don't produce the gross revenue for photographers that the lower percent operations do.

Photographers used to selling at traditional prices don't like to hear it, but the market is headed toward lower priced uses, not higher. When developing a business plan it is no longer advisable to focus just on price and royalty percentage. Potential volume also needs to be considered.

In discussing what it takes to be successful in a changing marketplace, David Liddle, of U.S. Venture Partners, said, "To a large degree, it's the willingness to move on and abandon something. It's the ability to let something go and move on to the next big thing."


Copyright © 2009 Jim Pickerell. The above article may not be copied, reproduced, excerpted or distributed in any manner without written permission from the author. All requests should be submitted to Selling Stock at 10319 Westlake Drive, Suite 162, Bethesda, MD 20817, phone 301-461-7627, e-mail: wvz@fpcubgbf.pbz

Jim Pickerell is founder of www.selling-stock.com, an online newsletter that publishes daily. He is also available for personal telephone consultations on pricing and other matters related to stock photography. He occasionally acts as an expert witness on matters related to stock photography. For his current curriculum vitae go to: http://www.jimpickerell.com/Curriculum-Vitae.aspx.  

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