Random Thoughts 56

517

November 21, 2002

Digital Vision Sales

Digital Vision has recently released their financial statements for the year ending 31 December
2001. Their gross sales were 11,507,840 pounds (approximately $16,686,000) up 23% from 9,334,778
pounds for the year 2000. However, due to a significant increase in distribution costs and
administrative expenses their profit for 2001 declined 15%. (The profit on ordinary activities
after taxation for 2001 was 1,370,609 pounds (approximately $2 million) and 1,621,346 pounds for
2000.)

The analysis of Digital Vision's revenue by geographical market was:

The share of sales for the United States and the United Kingdom were up slightly year on year
and the sales in the Rest of the World were down about 4% when compared with 2000.

What's The Future of RF CD-ROM's

Does operating in a "Customer Driven" environment mean that it is necessary to always give the
customer everything he wants?

Some RF producers argue that they will always have to supply images on CD-ROM discs because some
customers will always want them. Since the RF industry is "Customer Driven" it will always have
to give the customers what they want.

Others point out that the production, packaging and distribution of CD's is much more costly
than delivering images online. Depending on the volume of CD's sold there will likely come a
point where there are so few customers interested in purchasing CD's that it no longer pays to
produce them. These people are asking if they can convince customers to "want" something
different than what they have wanted during the past decade.

As more customers get fast internet connections there may be less demand for discs. Some
producers say that as much as 40% of the units and over 50% of their revenue still comes from
selling discs.
Others say that less than 10% of their revenue comes from disc sales today.

Some producers are currently making it possible for customers to purchase a bundle of images on
a theme for online delivery. These images are made available for download at any time in the
future, as needed. The customer gets all the benefits that CD-ROM discs provide without having
to store the discs. The producer saves because he doesn't have to deliver a physical product.

Comstock Flat Fee Pricing

In an effort to offer customers some additional options in the way they purchase RF images,
Comstock has instituted a flat fee pricing model.

The customer gets a 75MB file and unlimited use for one user for a fee of $399. The end user
must be designated. The images offered in this manner are only available at the Flat Fee price.
If the customer only wants to use the image for a web site and only needs a 500K file the price
is still $399.

Other images from the same shoot, but not similars, may be made available at regular RF prices.
One of the goals of the strategy is to prevent ad agencies or design firms from using the image
they purchase for many different end users.

Royalty Free Pricing

Expect to see most RF suppliers raise single image prices early next year. One supplier believes
that the average single image price will be $135 per image by the end of 2003. The average price
now is about $100 per images with Getty's price for the third quarter being $104. The source who
provided the $135 number says the average price of RF in 2000 was about $81 per image.

There is near unanimous agreement among RF producers that raising prices will have no negative
effect on their sales volumes. They argue that even at much higher prices the images would still
be cheap compared to RM images.

It is worth considering the impact such a rise in prices might have on overall industry revenue.
Since Getty's figures are the only accurate ones we have I will use them as a basis. In Q3 2002
I estimate that 80% of Getty's RF revenue came from single images and that was $26.5 million. If
they sold the same number of units at $135 per image their revenue would be about $35 million an
$8.5 million increase. Increased usage would make that even higher.

However, as RF usage rises RM usage may continue to fall. If the number of RM sales decline by
10% over the next 5 quarters (they dropped 8% in the last quarter alone) Getty's RM revenue
could be $7 million less than in Q3 2002, assuming the average price per image remains the same.

In addition, as the number of RM sales fall it becomes harder for this segment of the industry
to offset the costs of supplying the alternative images that buyers want which are not supplied
as RF.

Royalty-Free vs. Negotiated-Use

Trend Watch (TWGA) reports that as a result of a survey of all design and production firms in
the Summer of 2002 47% plan to buy royalty-free images in the future and only 33% plan to invest
in negotiated-use fee images.

Image Source Clarification

In Random Thoughts 55 , I
reported that imageshop and the vmi-group entered into an exclusive
partnership with Image Source Ltd. imageshop is the exclusive distributor of Image Source images
in certain relevant territories, but Image Source continues to have a network of distributors
representing their images in other territories.

Getty Moves to New York Stock Exchange

On November 5th Getty Images transferred its listing to the New York Stock Exchange (NYSE) under
the new ticker symbol "GYI."

The company co-founders, Mark Getty, Executive Chairman and Jonathan Klein, CEO, rang the
opening bell at 9:30 a.m. To commemorate the event outside the Exchange, Getty Images
constructed a photo booth in which Getty Images photographers captured portraits of passersby.

Getty Images had been listed on the NASDAQ since the company's initial public offering of stock
on July 2, 1996 and traded at "GETY."

PACA Changes Name

At PACA's International Meeting in Miami, FL members voted unanimously to change the name of the
organization from Picture Agency Council of America to Picture Archive Council of
America .
The acronym, PACA, will remain the same.

The name change reflects general changes in the industry between suppliers and marketing
organizations. Agents represent individuals and in law there are certain fiduciary
responsibilities that are part of an agent relationship. At this time most members of PACA
represent images, not photographers, and no longer have the fiduciary responsibilities to
advance the careers of their suppliers as was believed to be the case when PACA was founded.

Delay In Royalty Payments

Selling Stock is hearing more and more reports from photographers that the agencies that
represent their work are delaying payment of their royalties due to cash flow problems.

Photographers whose royalty payments are less than in previous years, or if they have not
received any payments at all for several months, are advised to call their agent to see if they
are owed money. While this should not be necessary -- all agents have an obligation to make
timely payments -- the squeaky wheel gets the grease.

ImageState Funding

ImageState arranged new financing in October to provide the company with further working capital
to fund its continued development, pay trade creditors and reduce bank debt.

The Company agreed to enter into a debt facility of 2,350,000 pounds (approximately $3.7
million) from OVP2 Limited (a subsidiary of Pacific Investments PLC, a company ultimately
controlled by Sir John Beckwith), Mike Luckwell and Mark Johnson. Beckwith and Luckwell are both
Directors of the Company and together as the "Founders" they hold 58.1% of the Company.

Over the last 5 months ImageState has implemented a far-reaching re-organization of its
operating structure and sales operations in both the U.S. and the UK following changes made in
the senior management team. This involved integrating the Pictor collection in the UK, the
completion of the closure of the Seattle office and the transfer of the US west coast business
to the New York office.

This re-organization which is substantially complete involved significant costs and dislocation
to the business, some of which was greater than expected. Following these changes the underlying
business operations in the U.S. and the UK are now trading in aggregate at about break even.
However, after taking account of the existing central overheads and creditors, the Company
required further funding to provide working capital until cash flow break even is reached. The
purpose of the new funding is therefore to pay trade creditors, reduce bank debt and to provide
ImageState with additional working capital.

The Founders are precluded from buying any further shares by the Rules of the Panel on
Take-overs and Mergers and therefore the additional funding has been structured as a loan. The
recent share price trading range has been between .75 pence and 2.50 pence.

The annual results for the Company for the year ended 30 June 2002 were expected to be published
at the beginning of November.

Sheldon Marshall And Nonstock Create New Media Group

Sheldon Marshall has been named CEO of a new media group IDANDA.
This company will specialize in recruiting creative talent and providing a variety of creative
services.

IDANDA will comprise Janou Pakter Inc., a creative recruitment consultancy, and nonstock, whose
co-founders are Jerry Tavin and Janou Pakter.

The company will specialize in executive search and recruitment of creatives. They also supply
services such as strategic partnerships and acquisitions, career development and out placement
consulting. They place individuals with companies that need the best creative talent in web
design, art direction, marketing, etc. Many of their customers are boutique design shops and
advertising agencies who are seeking such individuals. They are currently helping companies in
the U.S., UK, Holland and Japan.

Whether a company is seeking a counterpart abroad or the right agency to help them spread their
brand into new markets, IDANDA serves as "matchmakers" in uniting companies that are the perfect
fit.

For more information about Janou Pakter see:
www.janoupakter.com and for nonstock see:
www.nonstock.com .

Size of the Market

I have estimated that stock photo revenue worldwide is approximately $1.25 billion annually and
the U.S. portion of that is about 45% of the total or $562 million. Given the reduced demand for
RM images in 2002, I believe that overall revenue is probably declining this year. For most
photographers that still seems like a lot of money, if they can only get a piece of it.

To provide a little perspective on the relative importance of our industry to the total economy,
the market for toilet paper in the United States alone is $5 billion a year. Thus Americans
spend almost ten times as much on toilet paper as they do to purchase stock photographs.

Historical Observation

Bob Roberts of H. Armstrong Roberts reports that when the company was producing catalogs in the
1930's each image was identified by a number and a single unique word. Often, the words had
little to do with the subject of the photograph.

The words were useful in a time when requests for images were being sent to the agency by
telegraph. At that time each digit in a number was charged the same as a single word. Thus, an
eight digit number used as an identifier would cost 8 times the price of sending a single word
identifier.