Getty's Plans For 2006

5

December 12, 2005

As part of its 2005 Analyst Day in New York City on December 8th Getty Images, Inc. announced that the company expects 2006 revenue of approximately $820 million to $840 million and earnings per diluted share in the range of $2.70 to $2.85. This compares with expected revenue of about $735 million for the full year of 2005, and estimated earning per share of $2.24.

Both revenue and earnings per diluted share guidance for 2006 include the impact of year over year currency variations. Excluding this impact, or on a currency-neutral basis, revenue is expected to grow 14 to 17 percent and earnings per diluted share are expected to grow 25 to 32 percent in 2006.

Due to the strengthening U.S.$ the anticipated currency effect has lowered the company's 2006 revenue estimate by $21 million and its earnings per diluted share by $0.10. The earnings per diluted share guidance for 2006 also excludes share-based compensation expense of approximately $0.14 to $0.20.

CEO Jonathan Klein said that 2005 has been the most successful in the company's ten-year history. He added, "More importantly, we are focused on the future. In an ever more visual world, Getty Images is well positioned to benefit from the growing value and impact of imagery, as well as its increasingly dominant role in the communications mix. Our superb performance this year and our very positive guidance for 2006 are indicative of this strong position."

CFO Huebner To Retire

One day earlier it was also announced that the company's Senior Vice President and Chief Financial Officer Liz Huebner would be retiring sometime in 2006. Ms. Huebner has served the since October 2000. She will remain actively involved in the management of the company until her successor is appointed. She said, "I am very proud of what we have all accomplished together over the past five years. Serving as CFO for Getty Images has been an honor, and my decision to retire has not been an easy one. I am grateful to Jonathan Klein for his great leadership and for the terrific personal and professional growth opportunities I enjoyed at Getty Images. Though my day-to-day involvement with Getty Images will diminish over time, I will always remain passionate about the company, and excited about its prospects for continued success."

Analysts Day Presentation

During the five hour presentation Klein moderated a very informative session entitled "Recipe for Growth" that provided an in depth look at plans and directions for the next twelve months and beyond. Participating in this session were the senior executive team of Nick Evans-Lombe, Patrick Flynn, Bo Olofsson, Jack Sansolo and Michael Teaster who responded to questions from Klein. This hour-and-a-half segment outlined the major goals and gave a real sense of some of the thinking and plans behind these goals. It is well worth a listen and is available via webcast at: http://corporate.gettyimages.com/source/investors/index.aspx?pageID=webcasts&shPage=MediaRegister.cfm&Mediap=1233. The senior management team presented a compelling long-term story of unit growth, pricing leverage and margin. In the rest of this report I'll summarize some of the key points.

International Expansion

One of the key focuses for 2006 will be the acceleration of expansion into non-English speaking markets. Getty dominates the stock photo market in most English speaking countries, but where the company seems to be weakest is in countries where English is not the first language. There are two major reasons for this. First, it is difficult for buyers to search when all the keywords are in English and second the vast majority of the imagery available on gettyimages.com has tended to be created by photographers in the western world and in the major western countries. While some western photographers travel and create imagery throughout the world, they tend to do it with an eye to what will be of interest in the major western markets, and often with little understanding of the local culture and needs of the local markets.

Getty's focus for 2006 is to change these two dynamics. The company believes that its major expansion opportunity is in countries where up to now they have had little or no presence. To attack this problems Getty will launch a totally new web site with multi-language search (more about this later), seek out more locally produced content, and use more narrowly focused targeted marketing.

Expect Getty to focus a disproportionate share of their efforts and resources in 2006 in countries:

• where they have little of no presence, particularly those presently being served by its master delegate network,
  
• where some of the products and services the company offers are not currently available, and
  
• where all of Getty's products and services are being offered, but currently have very low penetration levels.

The goal in the countries where there are master delegates is to build the market to the point that Getty can justify setting up its own wholly owned office and dealing directly with the customers. Examples of markets that are on track for that to happen are: Italy, Poland, South Africa and Portugal.

Content Acquisition

It appears the emphasis will be on getting additional content from local sources by either buying small agencies will positioned in certain markets, or working with local photographers who understand the culture and speak the language. This is particularly true on the editorial side of the business and in developing countries.

In the past year or two Getty has started working more with local photographers in Japan, China, Spain and in a minor way in India. It can be expected that a large percentage of its available resources will be focused on expanding this strategy into other non-English speaking countries.

According to Nick Evans-Lombe the company will continue to decentralize its creative operation with teams in Sydney, Sal Paulo, Beijing and Tokyo to supplement its principal creative operations in Seattle, London, New York and Los Angeles. More of the shoots will be conceptualized in the local markets and will increasingly use local talent. It is interesting that company wide the creative department numbers about 150 people with about 15 figuring out what needs to be shot.

While the following was not said, I got the strong sense that while there would be greater opportunities for photographers who understand the culture and speak the language in the developing world, there would be some down playing in the need for content from western photographers is the English speaking world.

Western photographers should recognize that the whole market is being inundated with western business and lifestyle images. Getty has no trouble in getting all of this type of imagery they want. They are unlikely to be swayed in the near future by complaints from U.S. and Western European photographers that their average return-per-image is going down while their costs (fees for putting images in Photographer's Choice RM and RF) have not been reduced.

Evans-Lombe also made the point that there has been an emergence of pure stock photography production companies that will produce images on a contract basis and sell all rights. This makes content acquisition much easier for Getty than dealing with thousands of individual photographers to whom they must pay royalty percentages. This is another factor that photographers need to fully recognize.

Revolutionize Gettyimages.com

In 2006 Getty will make a staged launch of a new Gettyimages.com that will dramatically improve the functionality when compared to the existing site. This launch will actually be a progressive series of beta launches over a period of time in order to manage the risk of problems that might develop with a major introduction of new technology. Analysts were assured that the existing site would not be turned off, thus providing an option for existing customers in the event that problems develop with the new site .

Some of the key elements of the new site will include:

• the ability to access the entire catalog of imagery - creative, editorial and film - with a single search. Getty sees this as being particularly important for marketing to the creative side of the business because many creative customers would use editorial images but never think to look on the editorial section of the site.
  
• serving non-English speaking customers better by offering a complete search in six different languages and a limited search of segments of the site in 13 languages.
  
• editorial localization of the search returns delivered depending on where the customer is located. For example if the keyword is "football" and the customer is in the U.S. NFL football will come up first. If the customer is in the UK or Spain pictures of local soccer will come up first.
  The vision is that in breaking news, local or regional content will come up before international content. In lifestyles, images produced locally, or regionally will come up before content produced in other parts of the world.
  
• a system that will handle different and multiple spellings of certain names and words.
  
• the dis-ambiguration of certain words such as the question of whether a search for the keyword "kindness" means that the user wants something that shows "sharing" or "caring"?
  
• the ability to learn much more about the behavior of specific customers in order to more efficiently deliver the kind of image search results that would be of greatest interest to the specific customer.

While this new platform is expected to provide increased incentive for many more image buyers to use the site Getty is not counting on it to provide any revenue growth in 2006.

Dominate Editorial Market

Getty's goal is to dominate the editorial market, but this may be a very difficult challenge for the company. During the question period one of the analysts said that in an effort to try to determine the potential for growth his research staff had talked to a number of editorial users and all responded that either "they already use Getty, or they can't afford Getty." Klein contended that this may be an American centric view but that it has not been the company's experience. He said that often when customers say Getty is too expensive, they then turn around the next month and start buying pictures because Getty has the images they need.

With its staff of 670 sales people and researchers talking to customers daily Getty should have a very good sense of what the customers want and there is every indication that there are systems in place to question the customers about their needs and feed that information to the top levels of management.

Nevertheless, it seems to me that growing this segment of the market will be a problem not easily solved. There is no question that Getty Images has a very strong offering of hard news images and that they a competing favorably with AP and Reuters - at least in the English speaking world. It is not clear how much of their editorial revenue comes from the non-English speaking world and it is certainly possible that they can expand their sales to news organizations in such regions with the introduction of their new web site and local language search. Klein has also acknowledged that the company'sr entertainment offering is weak and the efforts they are making to improve that should help.

But news, sports and entertainment are only part of the editorial business - maybe 1/3rd the total. The rest is made up of special interest publications and books. This segment of the market is a rich opportunity, but Getty is not well positioned to sell to it because the company doesn't have the right kind of images.

This goes back to an earlier strategy -- probably correct at the time -- to focus on the creative side of the business and dump a lot of the feature and specialized subject content that Stone, FPG and TIB had when Getty acquired these companies. As a result Getty has returned literally tons of images to thousands of photographers and these images are no longer available to Getty. Now, the company could use a significant part of that content, but I don't see much of a way for them to get the images back.

Andrew Locke of MSNBC made a couple of interesting point relative to these issues during his presentation at the conference. He said that MSNBC looks at about 30,000 news images per week and purchases about 350 per day. He said that about 1/3 come from AP, 1/3 from Reuters and something less than 1/3 come from Getty. He also said that 35% to 40% of the images they buy come from Getty or AFP (which Getty distributes). Klein likes to say that Getty's images are better than those of the competitors, and the above figures might provide slight credibility to that argument. However, in general I think the quality of the photographers at all three of the major news suppliers are about equal. A photographer from one of the companies will get a great image one day and the next day it will be a photographer from one of the other companies. They all cover the same events and none of the organizations will consistently stand out above the other. Getty has done well to achieve such a significant percentage of the business so quickly, but I don't expect to see them take much more in the way of market share from AP and Reuters.

Locke was also asked about Corbis, and he said Corbis wasn't a player because they don't seem to cover the hard news, or do it very well. He called Corbis a "boutique agency that doesn't show up at news events." I suspect that if this question had been asked of a news organization in Europe the answer might have been different. More of Corbis' editorial shooters are in Europe and they have a much stronger history of supplying news content to the European market than to the U.S. On the other hand, assuming that Locke's assessment is true worldwide where does Corbis sell its editorial content?

I believe Corbis' gross revenue from selling to editorial buyers will be in the range of $100 million in 2005. Being generous on the amount that Getty probably sells to editorial buyers out of the Creative side of its site and adding that to its Editorial revenue, I think Getty's total revenue from editorial customers could be in the range of $130 million. But Getty is more than three times the size of Corbis. So how does Corbis generate such a high percentage of editorial sales?

I believe it is because Corbis has a different type of editorial content that is more likely to meet the needs of the other two-thirds of the editorial market. Getty will have difficulty in addressing this segment of the market not for lack of marketing, but because Getty doesn't have the right content. Corbis got a lot of the imagery that books and special interest publications need way back when the company started in the early 90's. Much of this imagery is of a type of subject matter that doesn't go out of date. A lot came from National Geographic shooters, and photographers producing similar high quality material in other specialized areas. All this occurred at the same time as Getty was dumping shooters with similar skills from Stone, FPG and TIB. Corbis was focusing on editorial while Getty was focusing on Creative. Corbis spent a bundle of money scanning and keywording these editorial images. They are also paying a slightly high royalty. But Corbis doesn't have to update its collection quite as frequently and in recent years sales of these images are starting to pay off.

Innovate New Products And Services

In 2006 Getty management will be looking to the web and other new platforms for potential growth opportunities. Klein believes that broadband and the proliferation of other platforms is creating an increasing appetite for creative imagery. As a percentage of a company's 2006 advertising budget online spending is expected to approximate 19%.

About 10% of the RM creative images licensed are currently being used on the web. This is up significantly from a year ago. The company suspects that a larger percentage of RF images purchased are being used on the web, but has no way of quantifying that number because RF buyers are not required to report how they use the image.

There is significant expectation that broadband will drive increases in image usage. Proponents argue that:

• People are using more imagery.
  
• Images on small screens tend to supply more information than text.
  
• On a cell phone it is easier to look at news pictures than to read.

But it is far from clear that such increased interest and use will result in increased revenue.

• Will people tend to get more of the images they use on these devices from free sources?
  
• Will people be willing to pay enough for images on their cell phones or PDA's to result in a significant new market?
  
• Will distributors be able to charge as much for uses in this market as they have been able to charge for print uses with a similar circulation?
  
• Will the phone companies get the bulk of the revenue?
  
• If people get more of their information on PDA's will they get less from newspapers and magazines resulting in declining sales to these markets?
  
• Will it ever be possible to track circulation of these uses?
  
• Will the fees for the creators be so small that they will be discouraged from supplying images for this purpose?
  
• Will there tend to be more stealing because small uses are harder to track and enforcement of rights is impractical?
  
• Will print and web site uses simply end up getting more rights for little or no additional money because usage is so unpredictable?
  
• Will much of the new uses go to video rather than stills?

Sales And Marketing

Getty's marketing efforts for 2006 will put more emphasis on identifying local and specific markets and tailoring the message to each specific group rather than a more top down form of advertising. More effort will be made to understand the business of each customer and the challenges he or she faces. Management is confident that all buyers are well aware of the Getty Images brand. The challenge now is to use the massive amounts of data that the company has been collecting about their customers to identify various special interest group and focus on the specific needs and motivators for each group of customers. In this regard Getty has a tremendous advantage over its competitors given the data at its fingertips.

The marketing staff intends to work closely with the regional sales people to build on their local knowledge, identify needs and develop more personalized and relevant messages. The goal is to listen better and focus on solutions. The sales and marketing staff will be expanded to accomplish this goal and the marketing budget for 2006 has been increased by 50% over last years budget in an attempt to accelerate growth.

Of Special Interest To Photographers

One analysts looking for a way that the company might increase its margins asked, is there is room to tweek the royalty rate any further as the company has done in the past? Jonathan Klein was very emphatic in his answer and said, "We have absolutely no intention of re-negotiating royalty rates with photographers. Absolutely none. We're improving our margin there by having a stronger wholly owned mix and we are also improving our royalty rates with Image Partners as opposed to photographers by virtue of the fact we give Image Partners guarantees of a certain number of image slots as well as time to market in terms of how quickly the images are uploaded and in exchange for that we get a better royalty rate. But in terms of the 3,000 or 4,000 photographers under contract on the creative side we have no intention of changing that at all. We have many, many other ways to improve that gross margin."

This sounds great as long as you're focused entirely on royalty percentage. But he also acknowledged that they are expending the proportion of the wholly owned images in the collection. Nick Evans-Lombe said that 10% of their existing collection is wholly owned and in 2006 they plan to do 750 wholly owned shoots. (There was no definition of how long each shoot might be or how many images a shoot might produce, but clearly such shoots should generate a lot of new images for the collection. One would also expect that these images will receive favored positions in the search results.)

In the question and answer session Klein was asked if the company was going to move toward owning all imagery since this would greatly improve margins. He said that while they are creating more owned work, the company is also very aware that they will always need to work with a broad range of photographers in order to be able to offer "creative breadth" to their collection. He acknowledged that they have no idea where the correct balance is.

It is also worth noting that while the percentage is not falling, Klein didn't say anything about the charges of $75 per RM image and $40 per RF image for Photographer's Choice. If the only way to get images into play is to pay to put them on the site then that in effect is cutting into the net percent of the total gross sale price that the photographer is receiving. Photographers need to take this into consideration when they look at their total revenue received relative to what the customer paid to use the images.

It's also clear from Klein's statement that the Image Partners are getting a lesser percentage in order to get a favored position in the search results. Klein said that currently they had 1.2 million images on the creative section of the site. According to my latest count a little over 863,000 are from Getty Images brands. That leaves about 337,000 or 28% of the images that are from image partners.

Photographers may continue to get the same royalty rate they've received for several years, but they may end up making fewer sales given the increased competition and the fact that in many cases their images are lower in the search results. In the new marketing environment photographers should monitor their volume of sales, not just gross revenue and royalty percentage.

They should also ask themselves if Getty on a course that will eventually lead in the decline in the number of images they need from individual freelance suppliers and how will that suppliers overall potential to earn a living from stock photography.

Licensing Models

One of the challenges that became apparent in listening to the customer panel is the need for new licensing models. Most traditional suppliers want to charge based on each individual usage. But increasingly customers need to be able to obtain a bundle of uses to the images they acquire so they can be used across a broad range of products. Often the amount of usage in each product is unknown, or unspecified. Andrew Locke pointed out that images used on MSNBC are also being accessed on mobile devices and there is a greater move in that direction. It is hard to quantify this use. Michael Baines of Thompson Learning said professors now want their books to be available on line as well as in printed form so students can access the information anywhere they are and without carrying heavy books.

It has become necessary to provide textbooks in multiple formats and study materials on line. Thus publishers insist on more rights to use the images they purchase in a variety of ways, but are often unwilling to pay much more than normal print fees because at the time of acquisition it is often uncertain as to exactly what other uses will be made of the images. Consequently, customers can be expected to insist on more flexibility.

Many of the customers who need the flexibility are among the biggest users of images, but they tend to use relatively few from any individual photographer or smaller agency. Assuming they have images that fit the specific need of the publisher, volume sellers, like Getty, can afford to structure better deals because they have a better sense of the customer's overall needs and better tracking of image use.

While such pricing is absolutely necessary there are significant dangers for others in the industry in the process. Prices may be set low in an effort to develop new markets. Once the market is mature it may be difficult to raise prices enough to cover costs and realize a profit. Getty's volume gives them a significant advantage here given the very specific data they are able to collect and analyze. Competitors will probably find it necessary to match prices and offers in order to maintain some level of business, but lower volumes and more labor intensive processes are likely to make it impossible for competitors to maintain their businesses at these low price levels.

Other Interesting Information Bits

The following are a few other interesting numbers not yet mentioned.