Getty Dumps Jupiter

6

June 23, 2005

On May 13th Jupitermedia announced to its shareholders that Getty Images had terminated its distributor agreements with Jupitermedia. Through its Creatas and PictureQuest divisions Jupiter had been representing Getty's PhotoDisc and Digital Vision RF brands and Getty on its www.gettyimages.com site had been representing Jupiter's Comstock and Thinkstock brands. The effective dates of these terminations are:

Getty was able to terminate these agreements this rapidly because they have included language in the distributor agreements that allows "either party to terminate the agreement without cause upon 90 days prior written notice" (120 days in the case of Comstock and 180 days with Thinkstock). In the case of the Digital Vision its contract with Creatas that had been in effect since September 1, 2003 allowed termination "immediately upon a material change in the management ownership or control of Creatas." This right was triggered when Jupitermedia acquired Creatas.

All this started in October 2004 after Jupiter had acquired Comstock and Thinkstock. At the time of acquisition I believe the contracts of these brands stipulated that Getty Images
would retain somewhere in the range of 80% of the gross revenue from sales and remit only 20% to the brands. (On the other hand I believe Creatas was giving Getty 50% of revenue collected from the licensing of Photodisc images.) In October some of Jupiter's OEM people met with several Getty employees to discuss renegotiation of the Comstock and Thinkstock contracts. According to sources I believe the Jupiter position was that something in the 30% range would be more reasonable and fair, but Getty's wanted to cut Jupiter's percentage below what it was already receiving. There was no meeting of the minds. (It should be noted that in order to keep increasing margins as Getty had promised its investors they have to continue to cut the percentages they are paying their suppliers.)

After this series of meetings it was apparent to Jupiter that they would not renew these contracts when they expired and that they needed to move aggressively to set up a distribution network to protect their position. At that point Jupiter started looking seriously at Creatas, PictureQuest and several other distributors and eventually settled on purchasing Creatas. Jupiter CEO Alan Meckler said, "Initially I had no desire or intention to become a distributor, but Getty forced me into it."

Jupiter estimates that the withdrawal of these brands from the portals will result in about a $12 to $15 million loss in revenue for Getty and a $6 to 8 million loss in revenue for Jupiter. Of course, Getty has to believe that when customers come to its site they will simply buy what is available and not go searching elsewhere for a different image. If that happens Getty's revenue loss will certainly be much lower.

On the other hand, Getty has to also believe that when customers go to the Creatas site and can no longer find DV or Photodisc images they will immediately leave Creatas and go somewhere else (probably Gettyimages.com) where they can find these brands. It will be interesting to see how the customers really react.

People at Getty often repeat the mantra, "At the end of the day its always about the customer." Evidently, in this case they believe that providing customers with greater choice and products the customers have proven they want is not in the customer's best interest.

Another interesting sidelight to all this is that when Jupitermedia got the notification that their right to sell DV products was being terminated they were sitting on over $100,000 in non-returnable CD-Rom inventory. They immediately offered these discs at deep discounts through their online marketing channels and sold hundreds of thousands of dollars worth of discs in four days.

Both companies will have customer relations problems as a result of Getty's action. Many customers will have placed images from these brands in lightboxes and are probably busy trying to get approvals to use the images in various projects. Once they get the approval and come back to purchase the image they will have to be told, "We no longer represent that image." Then the customer will have to scramble to find the image somewhere else, or switch to a different image and go through the approval process once more. Is this customer service?

Jupitermedia does not seem concerned about a potential loss of 2005 revenue and is comfortable that they will be able to meet or exceed the guidance given to investors in February of $127 million for all or 2005. Meckler points out that five days after they received the notification from Getty they acquired Goodshoot. He feels that other acquisitions already in the pipeline will enable the company to easily meet the revenue promised.

Clearly Getty wants to do everything it can to cut into Jupitermedia's revenue and may be more concerned about Jupiterimages than Corbis as a competitor. In addition to pulling their images and refusing to market Jupiter's images in the future Getty also pulled for the rest of the year $12,000 in scheduled advertising from two Jupiter magazines - Step Inside Design and Dynamic Graphics. Pulling this advertising seems more likely to harm Getty than Jupiter.

Meckler points out that he doesn't have to grow his company to anything near the size of Getty Images to be a threat, all he has to do is take some market share from them. And Meckler says, "time is on our side. It's like the story of the tortoise and the hare, and the tortoise always wins."