Gross Margin and Real Profit

Posted on 9/21/2010 by Jim Pickerell | Printable Version | Comments (7)

iStockphoto COO Kelly Thompson says the company cannot keep growing profit at the old royalty rates, so they have to reduce what they are paying suppliers. The problem is not that the company does not have substantial profits. Rather, it is Getty Images’ arbitrary standard for what the gross profit margin in the stock photo industry should be that causes the problem.

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Comments

Bill Bachmann Posted Sep 22, 2010
Good article, Jim! Getty wants it all.... that is who they are.... quite simple really. Most photographers should AVOID them and maybe they would see they have NOTHING without photographer's images. They forget that daily!

www.billbachmann.com

John Harris Posted Sep 22, 2010
Very interesting. Clearly there is a divergence in the economic interests of the producer and the requirements of the company. This self destructive tendency is evident across the economy however rational it seems to managers of individual companies.

Jim, forgive me if I am missing something here but as I understand it the "efficiency of markets", competition between capitals, should result in prices falling further- so why, as a recession turns into a depression, are prices at the bottom going up?

Gerard Fritz Posted Sep 22, 2010
The recession is over and growth is happening all over the world...slowly. This is why prices are rising at the bottom.

Leslie Hughes Posted Sep 22, 2010
Jim, I am not here to defend Getty however the issue for them is maintaining gross margin and growing the business profitably. This is something that we ALL need to do. Photographers included. And watching this is the job of the company. The issue then is twofold: is it reasonable to maintain a gross margin at the 70 - 80% levels and, what goes in to cost of goods sold (COGS)? If COGS go up then you have to reduce below the line costs to maintain your net profit levels - even if revenue is going up or you must find new ways of getting your product for less (reducing COGS).

RF became popular as a business in great part because of the high gross margins and ability to operate at low costs. In '07 Getty's cost of revenue was 27% according to financials (or their Gross profit was 73%). iStock helped to maintain or improve this for a while as it became a larger and larger part of Getty's business (with higher Gross profit levels). However as iStock is now slowing in growth as a percentage of the overall business, Getty, it seems is having difficulty maintaining the improvement in margin and probably the level of margin itself. It would help to know what they include in COGS and what the levels of cost associated to each of the lines of business are. For example, Getty was spending a lot on production for a while - this would have increased overall COGS on one level but potentially reduced COGS in the form of royalties paid. It probably did the first (increased COGS) but not the last because they did not reap the reduction in royalties paid out. So now they will have to evaluate if and how to maintain gross margins.

FInally - one comment about the issue of paying for product wholesale. A product is a commodity in great part because it is the same. If I sell the product, I estimate what I will sell and buy the inventory I need. So, the producer that can create the product for the lower amount can get more business and price is driven down. This is true for things like sugar, paper, gold.. and the issue becomes simply supply and demand.

This is not really true for Images - they aren't truly a commodity but can act like one. Meaning if clients accept that there are many images that would work for a use, then the image is "replace-able." If it is easy to replace an image, then the price will fall to the lowest level where a client can get what they need for the price they want. Some uses like online, change quickly and need lots of low priced images that can frankly be replaced often by a cheaper image. So time and other factors become important. Many clients I know say they don't like going to Getty and yet they do. Why? because of the huge selection, ease of search and purchase. They can get in and out quickly.

In this day, a business must look at its costs structure. I work with photographers now to help them understand their cash needs, their, cost issues and to explore how to build out a distribution model that will hopefully reap the best return. In looking at Getty or anyone else as a distributor, a photographer must look at the potential for sales, the costs of getting the content to the distributor as well as the royalty paid.

Bill Bachmann Posted Sep 23, 2010
To the comment above... Leslie, all that is words--- bottom line, Getty wants it all and there are other agencies not nearly as greedy as they are. They treat both clients & photographers poorly, yet they push their weight around. Photographers should look ELSEWHERE for representation, PERIOD!

www.billbachmann.com

John Harris Posted Sep 23, 2010
"The Recession is over"? Not by any objective measure I'm afraid Gerard. In fact there is some doubt as to what the fix is going to be this time...

Leslie Hughes Posted Sep 24, 2010
Bill - Like I said, I am not defending Getty. I have worked with Getty photographers and understand well the frustrations. My point was that the issue is not that they want to protect their margins, they have to and for all constituents. (Being greedy is a different issue.) Gross margins are incredibly high in stock. For Photographers, it can be and often is the opposite - margins are low (cost of creating content is high in relation to the majority of their revenues). And that is a huge problem if a photographer is going to make a living from his or her craft. Getty is like a drug for many. And why shouldn’t they be, they control a huge majority part of the market. And some feel they have no choice but to go with Getty. My position is just that as a photographer, one needs to look at their own business/cost structure and focus. How do you get your revenues up and keep COGS lower? Their are lots of things to consider - one being distribution. I applaud Jim for raising the issue and just wanted to speak to the other side of it which I think is even tougher since Getty will do what Getty wants.

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