Getty And Corbis???

511

October 17, 2002

(From Story 509 published October 10, 2002.) Sources tell us that Stephen Davis and
Tony Rojas of Corbis have been meeting this week with high level Getty Images officials


at Getty's headquarters in Seattle. Word is that the talks center around the possible
acquisition by Getty of several Corbis divisions. No official confirmation or other
details are available at this time.

What's It Mean?

One simple paragraph can get everyone in the industry talking. But, at this time there
is no other solid information -- only theories. There have been no official statements
from either Getty or Corbis. As a public company under SEC rules, Getty can not make
any statements until the deal is complete and they are ready to make a full public
announcement.

On the other hand any deal between these two companies is of tremendous interest to
everyone in the stock photo industry. Whatever they decide it is likely to have a
ripple effect on everyone in the industry. I estimate the combined gross sales of these
two companies to be close to half of the industry's worldwide sales in 2002. The next
closest competitor may have 3% of the market and the market share of the vast majority
of image sellers is way less than 1% of the worldwide market.

Thus, it may be worthwhile to begin to think about what a Getty/Corbis combination
might mean for the industry and to examine the pros and cons of such a deal. The
remainder of this article is entirely speculation.

When Is It Likely To Happen?

The fact that the co-presidents of Corbis are meeting in the Getty offices for most of
last week would indicate that they are close to completing a deal. A deal of this
magnitude in any industry would undoubtedly take a long time to negotiate. Given the
impact such a deal would have on staffs and suppliers, both parties would make every
effort to keep their discussion quiet as long as possible. Small groups would meet in
out of the way places until they were very close to agreement. The minute the Corbis
people walked into the Getty offices, and particularly when they stayed for several
days, it was almost impossible to keep that fact from becoming public knowledge.
Neither side would have made such a move until they were at a point in the negotiations
where they needed to involve a large number of Getty staff in various aspects of the
deal. Whatever is likely to happen, I believe this deal is way past the preliminary
discussion phase.

Will Getty Buy All Of Corbis?

I don't believe Getty will want to purchase all of Corbis. There are too many problem
areas, and many of then are beginning to look like they are un-fixable. Indication from
sources are that Getty is interested in "several divisions", but not everything. I
think Getty might try to buy only those divisions that have a potential to add
immediate profits to their bottom line. At this point in time it is dangerous for them
to take capital infusion and a significant amount of time to turn profitable.

Management Contract

Some sources believe Getty may take over the management of Corbis without actually
purchasing any of the assets. They point out that there is precedent in Seattle for
this type of arrangement. A few years ago one of the major Seattle newspapers wanted to
buy the other. This deal ran into problems on anti-trust grounds. At that point a deal
was struck where the paper that was to do the buying took over management of the other,
but the ownership of the papers remained separate. This arrangement avoided the
anti-trust problems, which are sure to be a major concern if the first and second
largest companies in the stock photo industry were to actually combine.

There are several advantages to this scenario.

• Getty has to put up little or no cash because they are not buying anything.
  

  
  

• Gates retains his controlling ownership rights to the content, although he must
  still pay the photographers their share of revenue. If a few years down the road his
  original vision begins to bear fruit, he still has an ownership position.
  

  
  

• It may be possible to treat the Getty relationship as a sub-agent so that Getty
  takes a percentage of sales off the top and Corbis keeps a percentage of whatever is
  paid to them. If this were to occur the suppliers would help pay for the deal.
  

  
  

• It does an end run on a possible Department of Justice examination which both
  sides would like to avoid.
  

  
  

• Getty gets access to detailed statistical data on certain types of sales (mostly
  editorial) where they do not currently have a strong presence.

There are also risks and disadvantages.

• The Corbis business model may not be one that can ever generate profits, no
  matter how brilliant the management.
  

  
  

• The deal must be structured so there is no chance that Getty will realize losses.
  Getty's investors are demanding PROFITS. If Getty's operating costs go up due to added
  costs of managing Corbis and these costs exceed the additional revenue generated, the
  investors may not be look kindly on the deal.
  

  
  

• If the deal is structured so Gates protects Getty from losses, what does Gates
  get out of it?
  

  
  

• The most obvious way for Getty to increase revenue for Corbis is to put the Stock
  Market imagery on the Gettyimages.com site as an additional brand. There is precedent
  for this type of arrangement because Getty already shows the images of several smaller
  specialized brands on its site.
  

  
  However, while this is almost an absolute assurance of increased sales for the TSM
  brand and Corbis, giving customers the easy choice of TSM or other Getty brands may
  result in reduced sales for the Getty brands. At the level of market penetration that
  Getty has already achieved they are unlikely to pick up new customers. Being able to
  offer a broader selection of imagery does not necessarily increase total sales volume,
  it may simply give the customer greater choice and increase expenses for the supplier.
  

  
  

• It may be impossible for Corbis' editorial news operation to ever generate a
  profit in today's editorial market. The Sygma photographers can be expected to strongly
  resist the Getty strategy of the company owning the rights to the news images they
  display online, and yet that may be the only way for anyone to generate profits from
  the editorial line of business.
  

  
  To make the editorial division of Corbis profitable Getty would have to place severe
  limits on the kinds of shooting projects they fund and the number of historical images
  they go to the expense of making available online. The photographers who already have
  images in the database will do well. The ones who are hoping to get some of their old
  imagery integrated onto the site are likely to be disappointed.

Why Would Gates Want To Sell?

I think Gates is tired of losing money, and maybe more importantly, having to devote
any of his time to considering what it might take to turn this company around. We
reported almost two years ago that there were strong rumors that Gates had told the
senior Corbis managers that he would put an additional $15 million in operating capital
into the company in 2001 and $5 million in 2002, but by the end of 2002 Corbis had to
be cash positive or he was ready to dump it. When the economy turned sour many
observers said, "He'll give them more time. That small amount of money doesn't mean
anything to him." If looks like he is sticking to his word.

We need to remember that back in 1989 Gates developed his long term vision for
acquiring content. He asked for 20 year contracts with suppliers because he expected it
to take a long time to develop a profitable business model. He has been at it for 13
years. Everything has seemed to cost more than expected and take longer than expected
to generate profits. Insiders at Corbis estimate that Gates has spent close to $1
billion and the company is still probably a long way from generating any profit.

In addition Gates doesn't like to be number two at anything in which he is involved.
Clearly Corbis doesn't ever have a chance of being number 1 in the stock photo
business.

What Corbis Assets Would Improve Getty's Position In The Market?

If Getty is going to purchase anything, the most obvious division for them to buy is The Stock
Market. This brand is a perfect fit for Getty with its focus on the advertising side of
the business. Estimates are that sales of the TSM content were at about a $40 million
annual level when Corbis bought it. Based on the royalties being paid photographers, it
is estimated that the TSM content will generate no more than $15 million in 2002. No
other company in the industry with such a strong file of Right Managed images has seen
such a precipitous drop in sales in such a short period of time -- even in this down
economy. Corbis management has destroyed this brand, which was one of the leaders in
the industry three or four years ago. TSM should be available at a bargain basement price.

The situation is so bad for most TSM photographers that many are on the verge of
leaving Corbis if there aren't dramatic changes soon.
This will further depress the brands future potential. Given the degree of their
depression, most photographers would be happy to sign new contracts with Getty Images,
on almost any terms the company proposed. Anything to get away from Corbis.

What About Sygma, Saba And The Other Editorial Brands Focused On News?

Some observers think Getty is interested in these editorial brands because of their
strong brand identity in an area where Getty's overall offering is weak. I think it is
unlikely that Getty would offer to purchase the editorial side of Corbis given its
problems.

In its ramp up, Getty has been cautious in its approach to editorial content. Their
philosophy concerning editorial is dramatically different from that of Corbis. Getty
has set up an operation that is focused on owning editorial content, not paying
royalties. They pay the photographers to work more-or-less as staff without many of the
perks of being on staff. They pay a fixed day rate for shooting and want all rights to
the images. Many photographers are opposed to this method of working, but Getty has not
had much trouble in finding enough photographers to produce the images they need.

For most photographers there is no guarantee as to the number of days they will get.
This is similar to the way news photography is produced at Associated Press and
Reuters. The photographers take the risks and the company gets the upside. It's a good
business model for Getty, but not so good for the photographers. Nevertheless, the
Getty byline is appearing more frequently and they are seeing revenue growth in this
segment of their business.

It is not clear how profitable this segment is likely to be for Getty. Their costs in
this sector have undoubtedly risen dramatically, compared to when the photographers
were paying all the production costs. Nevertheless it is certainly a more profitable
approach than the Sygma operation where photographers get a percentage of sales.
Indications are that Sygma is the biggest money loser in Corbis.

I don't think Getty is that concerned about expanding their editorial sales. They want
a presence in this segment of the market, and they want photo credits in magazines
which helps convince the advertising community that they are a powerhouse. But I think
they still firmly believe that most of the profits will come from sales to the
advertising sector of the business. In the long run presence and promotion are not
useful unless they bring revenue to the bottom line.

Outline

The one editorial division Getty might like to have is Outline with its focus on
producing personality photographs. Getty might be willing to pay these photographers on
a percentage basis because the access to these personalities is often very contingent
on the relationship the photographer has with the personality. Indications are that
this is a very profitable division for Corbis.

What About Educational Editorial? Isn't The Existing Corbis Database Generating
Sales In This Market?

Yes, the existing Corbis database is generating significant sales. One of the things
that is very difficult to explain is the sales growth Corbis photographers have seen of
"feature editorial images" -- not hard news. This is particularly true for some of the
photographers who do a lot of work for National Geographic. Many of these photographers
signed with Corbis early and have thousands of images in the files. In many cases it is
these older images that are selling, and they are likely to continue to generate sales.

The thing we don't know is how much it costs to make these images available. The file
as it stands today is likely to continue to generate sales because in many of the
subject areas there is no similar depth of coverage on other online databases. Getty
has focused on working with photographers who produce a very different type of subject
matter. Many of the photographers who now have images on Corbis used to sell through
brands acquired by Getty, but when Getty took over these brands they stopped accepting
the type of imagery these photographers were producing.

As a result Getty does not have deep coverage of much of the type of imagery that
educational publishers find useful. But, there is strong reason to believe that Getty
does not want to build this type of file on a continuing basis. I believe that Getty
has looked at the cost of digitizing, keywording and making available online the
broad cross section of imagery that these editorial customers want and determined
that these costs will far exceeds the revenue these image are likely to generate.
That is the reason they have avoided this line of business and allowed Corbis to
become dominant in this area. Getty is happy to sell to these customers, but only
if the customers are willing to use the images Getty has chosen for use by their
commercial customers.

Certainly Getty would love to get the revenue from future sales of this Corbis subject matter.
Since the money to put the images online has already been spent and written off by
Corbis, it is possible to make a profit from licensing rights to them in the future.
But it is unlikely to be cost effective to continue to spend at the same levels as
Corbis has in the past to put new images online. One strategy would be to continue to
sell images from the site as it stands, but add very few, if any, new images. This
could eliminate a lot of the costs, but in the long run would lead to a decline in
sales. If Getty does take over this segment of Corbis' business, their strategy for
accepting new content will become a critical issue.

To generate future profits from selling to this segment of the market, I believe
sellers may need to engage in a combination of both digital and analog strategies.
Neither Corbis, nor Getty, wants to get involved in anything that has to do with
maintaining analog files.

What About Staffing?

By Getty's standards Corbis is way over staffed. Getty has a worldwide staff of less
than 2000 and generates about $450 million in sales a year. Latest indications are that
Corbis' staff is about 1100 and their gross annual sales are quite a bit less than $150
million. A significant number of Corbis staffers are likely to be let go.

Is Getty The Only Choice?

If Gates is looking for someone to actually buy assets I would have thought that at
least two other companies would be involved in the bidding. One is Creatas/PictureQuest
and the other is the 3i investment group in the United Kingdom.

I would think Creatas would love to take over pieces of the Corbis operation. The
pieces that would interest them are the same pieces that would interest Getty. It would
seem to be to Gates' advantage to get these two companies bidding against each other in
order to raise the price, although in the final analysis Getty would probably out bid
Creatas. The disadvantage for Gates is that if the sale is drawn out in an extended
bidding process, the value of Corbis may begin to deteriorate even more as staffers
leave, new marketing is not pursued, and customers begin to look for other sources of
imagery.

The 3i investment group in the UK would also seem to be a potential buyer. 3i was the
group that originally put capital into the Tony Stone operation and they were involved
in the Getty acquisition of TSI. 3i is now a major investor behind Zefa visual media
gmbh. Zefa also has a new arrangement with Masterfile and some sources believe that
Zefa will eventually make a move to acquire Masterfile. All of Corbis might be a lot
for Zefa to gobble up from a management point of view, but the 3i's could certainly
come up with the money if they wanted to do it. And 3i's has a lot of experience in
this industry. If 3i's were making a bid it would not be surprising to see them bring
Tony Stone back in some type of management position.

Again, Getty could probably out bid the 3i's but the acquisition could get very
expensive. Gates will never be a winner in this industry. He will never get out of it
anything close to what he has put in during the last 13 years. But, probably the more
money he can get out of it the better.

One advantage to both Creatas and 3i's is that avoids the anti-trust problems. If they
have not been contacted then the arrangement Gates is probably seeking is a management
deal, not a sale of assets. Getty has the inside track on any management deal because
of their size and they are located in Seattle.