Will Getty Continue to Grow?

August 22, 2005

More and more investment analysts are calling to ask my opinions on where Getty's is headed. What's the company's potential? I think Getty has some difficult challenges ahead. Here's why.

The foundation point for my arguments is that the market for stock photos is growing only slightly, if at all (See Story 603). I believe the market has been flat for some time. Getty Images CEO Jonathan Klein strongly disagrees and continually says in his public statements that usage of stock photography is growing.

If I am wrong on this point (and Klein is right) then a substantial portion of the rest of my analysis may be invalid.

There is a lot of empirical data that the demand for commercial stock photos is not growing, but the strongest evidence in terms of hard numbers comes from Getty. In my estimation Getty currently controls in the range of 40% of the market overall and on the "Creative" side of the market (non-editorial) they control a much higher percentage of total sales. If anyone should be seeing growth in units sold it should be Getty, but in fact over the two years from Q1 2003 through Q1 2005 they showed very modest growth of 4% (Q1 2003 - 352,799 images licensed and in Q1 2005 - 368,062). The trends quarter to quarter have been up and down slightly, but basically relatively flat (See the charts in Story 720 and Story 633). If we go all the way back to Q3 2002 we discover that there were 377,492 images licensed in that quarter

Getty had spectacular growth in image use, in Q2 2005. But, I believe this may be an anomaly, due partly to the acquisition of Digital Vision, and to increased RF usage in Europe rather than customers buying the more expensive RM images. This will level out once RF use in Europe hits it natural level of about 75% of usage. While Getty may show some increased usage for a while it probably will not increase revenue as the cheaper RF replaces more expensive RM images.

All this has occurred while the general business climate has been improving (a factor that was supposed to lead to more image use), and Getty has been adding many more images and a much greater variety of images to its site.

Taking market share isn't a bad business strategy as long as you can continue to take market share, but at some point in a flat market there may be no more share for a company with Getty's dominance to take. I think Getty is very close to that point and can only start losing market share to aggressive competitors.

In November 2004 I did a count of the images on the Creative side of the Getty site. The figure was 686,507 and the gross annual revenue for the previous four quarters from this part of Getty's operation was $452,580,000 (See Story 689). This works out to an average return of $659.25 per image. But Getty has added a huge number of images in just the last seven months. By July 2005 there was a 34% increase in the number of images on the site compared with November 2004. The site now has 1,043,053 images. If we look back over the last 4 quarters we find that the gross revenue for the Creative side of their business (Stock Photos) has been $542,510,000. So while there was a large jump in revenue the average return per images of is down to $520.12.

Granted, in neither case did they have the total number of images on site for the whole year so the actual averages if we could calculate them on a daily basis would actually be higher. But the important thing here is not the specific numbers, but the downward trend in return-per-image. And it will be worse in November. The per-image figure for 2003 was $731.87.

While there was about a 13% organic growth in the number of images licensed (18% if you count the Digital Vision acquisition) compared to Q2 2004 it is much smaller than the percent of images added. The increased number of images gives customers the greater choice they constantly ask for, but it doesn't translate into significantly more units licensed.

So why isn't all this volume of new images increasing sales proportionally?

The simple answer is that Getty is already reaching all the customers for stock photography and has been for a long time. For the most part these customers do not use more images simply because more images are available. When the economy is booming the customers may produce a few more ads or brochures, but they use about the same number of pictures in each ad or brochure as they always have used, so you don't see much growth in the number of images used. When you get to the point of market penetration that Getty has reached the only way to really grow the number of units licensed is to find new customers. It is my contention that there simply aren't any more new customers for Getty to find. As Klein says, their surveys show that virtually ALL art directors already "go to Getty Images first."

As I see it there are four possible ways for Getty to grow its revenue on the Stock Photo side of the business:

Take market share from someone else,

Increase prices,

Increase margins by reducing what they pay for content, or

Acquisition.

Market Share

As I indicated earlier, until this last quarter the evidence indicates that the number of units licensed from the creative section of their site has not been growing significantly. In Q3 2002 Getty licensed rights to an approximate total of 377,492 single images. In Q1 2005, two-and-a-half years later, they licensed rights to approximately 368,062. In Q2 2005 they did have a big jump to 399,931 images licensed, but a significant part of this one-quarter increase was due to the acquisition of Digital Vision.

Throughout this period the economy has improved, Getty has added over 60 image providers and hundreds of thousands of images. Still the total number of images licensed per quarter does not improve significantly. Possibly the corollary is true - if they had fewer images it wouldn't hurt their sales - but, I don't think that's the case. I think Getty needs to continually offer new images and more variety just to stay even. I don't see this leading to increased market share.

This also raises the point of how Getty will go about getting new images and the role image partners will play in the future. I will discuss this in more detail later, but currently 42% of the images on the Creative section of the site belong to image partners.

Raise Prices

If unit sales aren't increasing why does revenue keep steadily increasing? Because prices keep increasing. In the last two years the average price of a Royalty Free image has steadily increased and is now 68% higher. The average price of a Rights Managed image has fluctuated but is up only 2% over the same two years period. It seems very difficult to raise prices on the RM side of the business (approximately 66% of the revenue). One question is how much more can they raise RF prices? Klein has said that he sees no ceiling on how much they can raise the price of RF. But the bigger question is what impact will the continued escalation of RF prices and a better selection of RF subject matter have on the number of RM images licensed. The RM side of the business, in general, that represents 2/3rds of the revenue?

Increase margins by reducing what the company pays for content.

In the last three years Getty has developed a way to drastically cut their costs of acquiring new imagery by getting most of it from 3rd Party suppliers ("Image Partners") and forcing these suppliers to absorb virtually all of the cost of getting the images ready for market. In addition, on the Stock Photo side of the business, they have convinced partners (over 60 at last count) to take a lesser percentage than that of Getty's contract photographers. Thus, Getty gets to keep more of the revenue generated by the image partner sales than if the image licensed had been created by one of their photographers.

Last fall Klein said that sales of image partner images represented just under $100 million of the company's total revenue. Even with Digital Vision being converted from an image partner to an owned property, and taking into consideration all the new images that have been added, I would estimate that by the end of 2005 something in the range of $125 to $150 million of Getty's revenue will come from partners. These companies will have increasing leverage and I would think that Getty would find it difficult to do without many of them. But there are cracks in those relationships that I will examine in more detail later.

Acquisition

They can acquire companies, but the last two acquisitions (the biggest two companies remaining in the industry outside of Corbis and JupiterImages) are expected to add very little revenue to their bottom line. Before acquiring Digital Vision and Photonica for in excess of $200 million they expected to have gross sales in 2005 of $705 to $715 million. Now with these two assets, one which will bring over six months revenue to the company in 2005and the other almost nine months revenue they only expect to generate between $728 and $735 million.

The primary reason for buying these companies was not to grow revenue, but to keep their competition from having them. Given Getty's size there is nothing left that could significantly add to Getty's revenue. The likelihood is that if Getty were to buy some of the smaller companies available the uses made of their images would simply cannibalize uses from properties Getty already owns. Also, as we look at the list of companies left that Getty might acquire there are very slim picking. Most are too small to add a significant amount to Getty's bottom line.

On the other hand they are right to try to keep their competitors from getting such companies because these smaller companies could add immeasurably to the offering of Corbis or Jupitermedia and strengthen the position of either of these companies in the market. Thus, Getty is faced with having to spend capital just to stay even, and with little expectation of growth. The biggest threat to Getty is growth of either Corbis or Jupiter.

Once they acquire a company like Digital Vision Getty also adds the expense of paying for the production of new imagery if they intend to maintain Digital Vision's position as the premier RF brand in the industry. When DV was an Image Partner it paid all the production costs out of its share. Now those costs fall to Getty.

Getty's two most recent acquisitions were clearly defensive. The rumors are that for more than two years DV was trying to sell to Getty but Getty continually turned a blind eye to them. They didn't need to spend their cash for DV because they were already getting a significant portion of the revenue DV's images could generate.

But when it looked like Jupiter might acquire them Getty moved in and bid up the price to make sure that DV didn't go to Jupiter.

Getty's has some major strengths such as (1) dominance of its existing platform, (2) its sales and marketing staff and (3) the current quality of its content, but there are also a number of areas of concern

1 - Dominance of existing platform

Clearly, Getty Images has a superior web site for search and delivery of imagery. It is generally conceded that most customers tend to go to Getty Images first to look for images. But, in the stock photography business it is not enough to have good images - or even great images - if the images don't fit the specific need of the customer that day. Consequently, it appears that if all customers go to Getty first, many of them leave the Getty site and end up going someplace else to find the "right" image for their project.

2 - Sales & Marketing Staff

Worldwide Getty has about 700 people out of a total staff of about 1800 in sales related positions such as: customer service, research, account executives and account manager. Personal contact is still very important in this industry, particularly on the RM side, and with the possible exception of Corbis, Getty has such a dominant position that it becomes very difficult for other portals to become known in a significant way.

3 - Best Content

It is generally accepted that Getty Images has very high quality imagery, but other things related to content should be considered. As Getty has loosened its previous editing standards and added more and more images from image partners many photographers and some buyers have complained that the overall quality of the imagery on the site is deteriorating.

It is not clear whether this has resulted in proportionally fewer sales of the images that some are defining as "lesser quality" and even if there has been a decline I believe that the overall Getty's site still has more top quality images than any other site.

But all agencies need to constantly balance the need to have the right image for every customer's requirements with the tendency to allow the site to balloon to the point that it becomes difficult to use. Getty used to focus on very tight editing and only selected images that it expected would be in high demand. Recently the company seems to be loosening its editing standard in favor of adding a lot more variety and in some cases images that probably will only be of interest to a few specific customers. Its major competitors already have that offer greater variety. All in all, there are many sites that have very good quality content as judged by different editors. I think in the long run variety and volume are much more important than having a tightly edited group of images that a select group of editors would define as great.

But one of the problems with adding variety is that it entails costs. If the images come from image partners then those costs are minimized, but there is a risk of giving up some control.

It is also important to recognize that it is not enough to say, "we represent many of the world's best photographers." Getty does not have exclusive contracts with its photographers. The images a photographer gives to Getty are exclusive, but the photographer has the right to submit other images to other agencies and many of Getty's best photographers submit a lot of their imagery to other sources including Corbis and Jupitermedia brands.

Despite its strengths there are also a number of risks that Getty Images faces.

1 - Competitors Are Getting Stronger

Corbis has a worldwide staff of about 1,000 (compared to Getty's 1,800) and a sales staff of about 400 and is in a position to take market share from Getty. Corbis has always had a stronger offering to the editorial customer than Getty and in my estimation earned more in 2004 than Getty's approximate $72 million from the editorial segment of its business. Corbis has recently added to that segment of its business with its partnerships with the European Pressphoto Agency (EPA) and several of its affiliated agencies such as EFE, the world's premier Spanish-language news agency, DPA of Germany, ANSA of Italy, PAP of Poland and APA of Austria.

Corbis has always been much weaker than Getty on the Creative side of the business, but has recently added significantly to this side of its offering with the acquisition of Zefa and the expansion of its RF offering. I think Corbis is well positioned to begin taking additional share from Getty.

I estimate that of the approximate $1.6 billion in annual sales in the stock industry about $700 million is for editorial use and $900 million on the creative/commercial side of the business. Getty may have a lock on the creative side of the market, but sales to the editorial side are still very fragmented with a lot of small to medium sized players. Getty has strengths in hard news, sports and entertainment, but is not particularly well positioned to attack other more specialized areas for specialist publications and books.
Corbis and even Alamy have a much broader file of the type of imagery needed by this segment of the market.

There are at least two things working against Getty growing the editorial side of its business. First their focus on wholly owning their content and hiring staff photographers to provide the majority of their coverage limits their ability to collect specialized material, as the costs of production would be too great to justify hiring people with specialized knowledge to cover all the very specific areas of interest. This would drive their costs up relative to the revenue they could generate.

Secondly, Getty has focused on getting very high margins from its editorial offering. If, in order to get editorial content they bring on a lot of Image Partners and pay them 50% of revenue, as they are doing now, that will greatly reduce their margin. Even more costly would be dealing with a lot of individual photographers and having the management overhead plus keywording in order to get their imagery to market.

Corbis, on the other hand, years ago obtained a lot of the imagery they are now selling and at that time paid a premium to scan and keyword it. But all those costs have been absorbed, and now Corbis is positioned to reap the revenue. In my opinion Getty can't get into the same position without spending significant revenue that will either kill margins or profits.

Jupitermedia is the new kid on the block, but growing very rapidly and making lots of acquisitions. Jupiter is certainly dominant in the subscription side of the business even though this will likely always be the smallest segment of the market by far. On the other hand, Jupiter is also growing its regular royalty free business and it has a foothold in the rights managed side of the business.

Jupiter has developed a very successful internet marketing strategy which is likely to give its offering a lot of exposure to the buyers. Jupiter still has to deal with the integration of its more recent acquisitions and this could present problems. It is too early to tell how well Jupiter is likely to do in the area of RF single image sales, and whether they will move aggressively into the RM side of the business which is where most of the revenue is still being generated. But, to the degree that Jupiter is successful it is likely to hurt Getty's sales and Getty's chance to grow.

Finally, we have Adobe Stock Photos. While this company sells Getty's images, they are unlikely to be of much help to Getty's revenue because any time they sell one of Getty's images it is likely to be just one fewer that Getty will sell directly, and Getty must pay a percentage of revenue to Adobe when Adobe makes the sale. The big questions here are how well Adobe will do in selling the images of other RF companies and if and when they start selling RM images from other companies. Adobe may end up being only a minor player, but the company has excellent access and contacts with the buyers and the resources to build this segment of their business if it chooses to do so. If Adobe becomes a threat to Getty it will probably be several years down the road while the Jupiter and Corbis threats are more immediate.

2- Lack of Support for Image Partners

A key issue for Getty is its future supply of images. Getty has continually pressured its partners to give the company a better deal (see Story 722). Recently, Getty took the position that if partners wanted to be represented by Getty they must cut all ties with Corbis and Jupitermedia. This was first floated verbally in private one-on-one meetings, but sources tell me that Getty has now added the following clause to its contracts:

"licensor agrees that for the term of this agreement and subsequent renewals of this agreement, licensor shall not enter into or renew any agreement that will result in any affiliation with, representation or distribution of licensor's images by Corbis Corp, or any of its affiliates, successors or assigns; and Jupitermedia Corp. or any of its affiliates, successors or assigns."

Some investment analysts suggest this is a good business strategy because it allows Getty to leverage its power. But, in the long run it may not work out to Getty's benefit.

For partners, the key way to grow revenue is to make more new images available for searching. RF producers have typically placed the exact same images with as many distribution channels as possible, often having 200 or more distributors. In the case of RM images it is accepted that Getty should have exclusive rights to the specific images they choose to represent, but if the partner has images of other situations that Getty refuses to accept then the partner ought to be free to try to market those images elsewhere.

It is great for a partner to be able to make images available through the Getty site, but if there are images Getty won't accept then the partner needs to make those images available through the next best option which is often Corbis or Jupiter. But Getty has eliminated that possibility. And while right now this prohibition only relates to Getty's two major competitors it seems clear that if any other portal becomes a serious competitor Getty will put them on the list.

If Getty were accepting the bulk of what the partner offered that would be another thing, but they're not. This leaves the partner with lots of images and no effective way to market them. The term "partner" here is somewhat of a misnomer. Serf, maybe, but hardly a partner.

Another thing that worries partners is that Getty has a clause in its contract that says either party can terminate the contract, without cause, on 90 days notice. Investment analysts think this is good because it gives Getty more control over its supply, but Getty has tended to use this right to constantly intimidate partners to accept a lower percentage of fees, or face having the number of new images they can add to the site reduced and/or being relegated to a much lower position in the search results reducing the chances that their images will be chosen. This has left partners at Getty's mercy and makes it difficult for them to estimate future revenue, or plan for future productions. It also presents a serious problem for any partner interested in selling his company to anyone but Getty, because the value of the contract is discounted.

This worked as long as Getty had no serious competitor, but now the landscape has changed as Corbis and Jupitermedia get more seriously into the fray. As a result most partners are looking for ways to spread their risks rather than get deeper in bed with Getty. For some, particularly those where Getty currently represents less than 50% of their revenue, the best course may be to hang on to both Getty and their other distributors as long as possible, and try to build their options, until Getty finally pushes the issue. Then the partner will look at whether Getty with its lower return-per-image, and all its uncertainties, generates more revenue for them than the aggregate of all the other portals and distributors paying higher percentages. For many this is likely to be a very close call. One of the major questions is how much more can Getty squeeze its suppliers without creating a backlash?

In general partners are very happy with the traffic Getty generates, but Getty plays such hardball that partners are under constant pressure to do more for Getty for less. They are also in constant fear that Getty will change the rules to the point that they can no longer realize a profit.

Some partners do tell us that after a few of months of taking a very hard nosed position toward its partners Getty has started to show a kinder, gentler face as it sees some partners not bowing to its intimidation tactics and looking for other options with Getty's two major competitors. But the carrot and the stick strategy makes partners nervous. They would like to see a more even handed approach. As a result of the Jupiter coup in acquiring PictureArts, one of Getty's major partners, one observer said, "maybe Getty will get some manners and start being nice to people."

On the other hand, to keep those margins high, Getty has got to keep pushing the partners for better and better deals. And the lesser the percentage of their total content that Getty wholly owns, and the more they become dependent on images produced by partners, the more they must try to reduce the royalty percentage paid to partners in order to keep their margins in check.

3 - Risk of such a large portion of their imagery coming from Image Partners

It is important to keep in mind that Getty doesn't have exclusive control over much of the work it is marketing. The fact that Getty gets such a large portion (currently about 42%) of its content from "Image Partners" puts them in a risky position if and when those partners have other options.

Now that Corbis and Jupitermedia have started acquiring companies, and in Corbis' case at least have started signing more companies in partner relationships some of these Getty partners may have other options they didn't have before.

At the very least Getty may find it more difficult to enforce exclusive agreements with partners. If Corbis and Jupiter are also offering higher percentages it may make it tougher for Getty to continually lower the percentage the partner gets in order for Getty to increase its margins. Potential partners may start having second thoughts about getting involved with Getty as other more partner-friendly options appear to be opening up. Existing partners may decide that they can earn as much, or more, by working with several companies rather than placing all their hopes on Getty.

3 - Risk in trying to force suppliers not to deal with competitors.

Alan Meckler of Jupiterimages.com has said that he didn't want to develop a large distribution network, but Getty forced him into it by offering his brands (Comstock and Thinkstock) such a low percentage of sales. (It's my understanding that the royalty was only 20%.) Whether that's true or not, Meckler is certainly moving aggressively to build a distribution network, and to acquire content and companies that control content. To the degree that he is successful it will only hurt Getty as Jupiter takes market share from Getty.

As a result of Jupiter's recent acquisition of Picture Arts Klein has a very difficult decision to make. Will he dump Picture Arts' 36,000 images that have been generating about $30 million in revenue annually on gettyimages.com. If he does, he's got to bet that the gettyimages customers who have been purchasing Picture Arts images will purchase whatever alternative Getty offers. He also has to bet that Jupiter won't do an aggressive job of letting these customers (because everyone knows who the customers are) know of the new location where they can find the imagery they were using before.

4 - Ease for Search Engine Competitors to Enter the Market.

Digital search and delivery is finally maturing to the point where it is much easier for smaller companies to develop very efficient search engines at a relatively low cost. When Getty first set up their online search and delivery it was hugely expensive and only a company of Getty's size could afford to do what they did. Now many smaller companies, particularly in the editorial field have learned from Getty's successes and mistakes and are able to establish very efficient systems for a fraction of what it cost Getty.

Of course Getty still has that huge sales and service arm of their staff (about 700 people), but some of the remaining medium sized companies have sales and service too, and they have built reputations with their customer base over many years. Many of these companies are now positioned to hold onto their market share, and in some cases take share from Getty.

5- Narrow focus of Getty's Business

Eighty percent of Getty's revenue or almost $600 million comes from the Creative/Commercial segment of stock photography that I believe generates about $900 million in revenue annually. Both Corbis and Jupitermedia have more diversified businesses than Getty. Based on figures at the end of Q2 2005 Jupiter's stock revenue represented about 54% of total revenue and while that percentage will likely be higher by the end of the year as a result of Jupiter's acquisition of PictureArts the company will still have a more diversified business than Getty. A major part of Jupiter's business is non-photo related, but supports in many ways the photographic side of their business.

While Getty has a huge storehouse of cash (about $419 million) they seem to be making no effort to diversify into another line of business that might have more opportunities for growth, but instead remained focused on increasing their overall share of the stock photo market.

In my opinion Corbis is even more diversified than Getty given the strong editorial side of its business and its relatively new rights clearance business that functions somewhat independently, but also supports the company's major line of business.

Summary

All this negativism doesn't mean that I think Getty is likely to collapse. It will always be a strong brand and have a strong position in the market. Worse case it might have a little fall off in revenue, but not a substantial amount. But, I think it will be difficult for the company to sustain the growth rate and margins it has promised investors. And the stock market is likely to punish the company if it can't continue to grow revenue at better than the 10% annual rate it has promised, keep margins high and continue to grow profits.

There is no single big factor that is likely to bring about a shift in Getty's fortunes. Rather, if change occurs it will be due to developments in a combination of the factors outlined above. Some things to watch that might be indicators of problems ahead are:

1 - If for any reason Getty does not make one of its quarterly projections.

2 - If more of its Image Partners are purchased by Jupitermedia or Corbis.

3 - How aggressive Jupiter gets in its efforts to build a broad base of RM content and to expand its focus beyond the RF side of the business. This is up to Jupiter and a factor over which Getty has little control.

4 - The success of Corbis' rfShop with its new greatly expanded offering. The first indications of this will come from individual brands that are represented by Corbis.

5 - How much more market share will RF take from RM, particularly in Europe, as a greater variety of RF is offered. This could be serious since RM is still the biggest revenue generator.

6 - How Getty's subscription offering develops and to what extent it takes share from higher priced RF, or is it truly a totally separate market as many contend?

7 - Whether Corbis or Jupitermedia make any missteps or fail to capitalize on current advantages. Corbis in particular has struggled with integration in the past and not realized the full potential of some of the properties they have acquired.

8 - Whether Getty will use its cash to diversify into other lines of business that have more potential for growth? (Klein says they won't.)