Dan Heller's Photography Business Blog Industry analysis from www.danheller.com

The photography world -- the business, the culture, the art, the politics, the technology.

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Saturday, August 13, 2005

Data Analysis and the Pro Photo Industry

The challenge of science is to be skeptical and always in search of truth. Indeed, this is a difficult task, because truth is more likely to be a very wide spectrum of grey than the black-and-white that people are more comfortable with. As it pertains to the internet's impact on the photo industry, "the truth" also shifts with time as the transition to digital/internet technologies continues to permeate other industries that use photographs. Regarding what the impact is of non-professional photographers on the photo industry is important, because it has a great effect on what role the photographer can play, and how to play it. If it were the case that non-pros have a more influential role than once thought, it could (and should) change how professionals do everything, from manage their own careers, to how they engage cooperatively or competitively with other pros.

This can be a difficult and painful prospect for most pros, especially those who have a vested interest in seeing things remain "as they are." As such, no one actually does data-gathering on the general population for its photo-related activities (as opposed to only photographers and agencies), because no one has a vested interest in seeing such data. Therefore, it is only possible to speculate what the consumer's impact is based on indirect data, which many of my other articles cover.

Indeed, the purpose of my blog is to present a more thorough analysis of a topic that it seems no one (in the photo industry) even considers as a possibility. Most skepticism, while understandable, is mostly based on traditional models that were indeed true for most of the history of this business. Yet, as I pointed out in another posting, such assumptions can be dangerous, especially in times when major changes are taking place. Very large companies have been brought down because of similar errors in judgement.

I wouldn't be bothered so much by skepticism if it were based on other data, rather than just a disbelief in the data I present. Note, it's not "my" data--I didn't do the data gathering. I am merely mining existing data from sources that current photo industry analysts don't look at because they don't think there is a correlation. I do see the correlation, and because of that, I can see some very interesting trends that are compelling in what they suggest. And, it seems, the more data I gather, the more it points to the same conclusions.

Yet, it seems my biggest hurdle is still within the community itself. Presenting this sort of material is the audience; it's as though I'm talking to the auto worker's union on the value of free-market enterprise. They don't want to hear it. They just want to hear how they can embolden their base to garner more concessions from management. If I were talking to a union, they'd be right. But photographers aren't a union, nor do they have the kind of clout that unions have.

To that end, you hear a lot about unionizing and forming cooperatives from photographers and industry groups. (Well, not so much about unionizing anymore--the Supreme Court put the kabash on that in the 1970s.) But the spirit remains alive. And, if photographers could ever effectively form cooperatives, there would be data that hints at such effectiveness. And, in fact, I have! For example, in 1982, the Federal Trade Commission stopped the ASMP from publishing price lists that members should charge their clients because it was deemed to be Restraint of Trade. What more compelling reason do you need to show how powerful a trade organization can be!

But that data was almost 25 years ago! Back when the industry was more insulated, when the barrier to entry (into the photography profession) was higher, the number of players was smaller, and the sources for imagery was more limited and tightly controlled. It was very clear that such groups could, in fact, act in unison and work in their collective interests. One could find all sorts of news and other data sources that supported the notion that such cooperative efforts were effective. But as the internet grew and others got more involved, such reports grew fewer and fewer, with each "win" becoming less and less advantageous to photographers.

So consider how the FTC would rule today if the ASMP tried to do the same thing. Back in 1982, 95% of all media photographers were members of either ASMP or sister organizations, and close to 100% of all newspaper and magazine photographs were obtained either through such photographers or agencies that used them. No wonder the FTC ruled as they did. Today? The FTC wouldn't even notice, let alone lift a finger to stop them. (And if the ASMP did publish their price lists, it would probably have a worse impact on photographers, because it would probably cause them to lose more business that would just be passed onto semi-pros or others who are more business-savvy.)

Sadly, the industry trade groups don't know that--they still look upon the 1982 ruling with bitter-sweet memories. The bitter part is that their claws were taken away. The sweet part was that they had claws. While there are still isolated incidents of gains here and there by their various industry-focused efforts, there are more reports of media and other sources going "outside" of the traditional photo markets for their material. To wit, there is this article about how the BBC website is going to start using reader photos:


Speaking of consumers, if there's any doubt about their ability to produce publication-quality photos en masse, consider this news report about how people are producing photos so good, that WalMart is not sure which are consumer prints, and which are professional:


At the end of the day, I am a photographer, and I care about the industry and how people perform within it. However, I am not a blind advocate that just waves the industry flag and supports whatever the conventional thinking is or has been.

In conclusion, the "facts" (I'd rather call them "data points", since all data is ephemeral at best, and subject to interpretation at worst) are already compelling: pro photographers are not in control of how their own industry operates, and there is nothing they can do as a cooperative to change it. In fact, those who try will find themselves worse off than those who use free-market strategies where competition is the path to success. The data today is even more compelling than what I had found 7-8 years ago, when I wrote my first article on the subject for EP mailing list. That was the truisms article I pointed to before:


Although I've bolstered the content of that article with more up to date and varied datapoints today, the conclusions I came to were the same. To succeed, photographers have to change their perceptions about the market, who's in it, the competition, how to market oneself, and most of all, how to price competitively. Indeed, that article generated the same controversy as my articles do here today. But to read the responses back then, you'd shake your head in disbelief. For it was in those days when I said that the web would be the new landscape for stock photography, and the then-golden-boy of the EP group literally said, "there is no future in photography on the Web--you'll lose everything because people will just steal your images."

Friday, August 12, 2005

The "potential size" of the photo market galaxy

The premise of a market-driven business model is one that assumes that to succeed, one must compete with others in the same marketplace. This, as opposed to the "cooperative" model, where the number of suppliers (or buyers) is small enough, that the sellers can act together to sustain prices (and/or other working conditions). There are clearly cases for both models, but the great question in the photo industry, is whether the number of suppliers (photographers and/or their agents) is such that it is possible (and feasible) to act cooperatively.

The question is a hot one today because, as would be argued by few, that the photo industry was, historically, a tight market, where content and distribution of product was controlled by a few, mostly due to reasonable barriers of entry into the marketplace. Indeed, price stability (and professional livelihood) was enjoyed by those lucky enough to enter into the profession. However, with the advent of the internet and digital photography, the question is now whether the barriers to entry for the market have come down to the point where there are too many non-cooperative players. Has the number of non-professional photographers impacted the economic balance and caused prices to fall. If so, by how much? Can we measure this? What are the ramifications for pros?

Collecting data isn't hard--it's knowing what data to collect, and then analyzing it properly. The first question is, "what data is relevant to our question?" Historically, such data was only from surveys of photo agencies, photographers, studios, schools, and any other source that had some established business connection to traditional photo buyers. At one time, these were the only ones taking part in the supply chain and the distribution channel, so no other data was relevant. But, do those surveys reflect current economic activity? If not, one might suspect the validity of the data. So, one must examine two factors: who's doing the survey data? And, does that data meet with statistically viable sampling sizes and methods that reflect today's conditions?

If stock photo agencies are doing this research, they are not likely going to survey people who are buying and selling from non-agency sources. Why should they, if the results might suggest that their own business models may not be sustainable? Sure, they may have accurate data within some segments of the industry, but it may not be complete data that represents the entire industry. Surveys are deemed reliable if the people being surveyed are representative of what the data claims they represent. For example, if you ask what percentage of women voted for a particular candidate, you can't just ask "white women," you have to get your sampling from a reliable source that represents the entire population of women. If the photo market has grown to include enough people that the survey methods currently don't recognize as viable members of the study group, then statisticians would say the data tells us nothing.

For our purposes, the only data we have is from photo industry surveys, and because they have a vested interested in a certain outcome (here, serving the interests of its constituents), one must look upon their data with caution. (E.g., one doesn't look to cigarette companies for reliable data on the number of people who get lung cancer.) So, what we're really looking for is determining what that "representative population size" is of photo buyers and sellers. My specific hypothesis is that the majority of buyers and sellers are no longer associated with the industry as it has been traditionally defined, leaving the traditional photo agencies, and even pro photographers themselves, minor players in the overall economic activity of photo sales. (That doesn't mean they don't have business opportunity; it just means the methods of achieving it are different than they used to be.)

We can test whether this hypothesis has legs by looking at other industry data. For example, a report on the sales of digital cameras from Digital Photography Review, (http://www.dpreview.com/news/0407/04073002camerasales.asp) indicates that 22.8 million digital cameras will be sold in between 2005 and 2006, a 42 percent jump from 2003. If one of those non-professional amateurs (who isn't currently part of "industry survey data") sells an image to someone, he may not be counted in the survey. But if a million of these people do it only once a year, that could account of hundreds of millions of dollars of economic activity that traditional surveys don't take into account. Taken a step even further, a report on CNBC states that over the course of five years, over 100 million digital cameras of at least eight megapixels or higher will be sold. If only one percent of those buyers sells $1000 worth of photography per year, that's $1 BILLION of sales that isn't accounted for in current survey data. This, because "the industry" doesn't recognize amateurs in their surveying methodologies.

So, the market may be considerably larger than what survey data currently claims, but we don't know by how much. It's sort of like how physicists know that there is more matter in the universe than what we can see by traditional means: measuring light. They can look at how much light galaxies produce and estimate the number of stars they have. This gives one measurement for the size of the galaxy, but there's a problem. If you look at the rate in which a galaxy spins, it should be flying apart. But it doesn't. Why? The only possible explanation is that there must be some additional source of gravity that accounts for the gravitational pull that isn't being accounted for. In other words, dust gas and planets, to name a few, account for a lot more gravity because there is more of them than people thought. Even though these objects do not produce light (i.e., "dark matter") they have a far more profound effect on the universe than once thought. What percent of the universe is full of this material? Estimates are that over seventy percent of the universe is full of this stuff.

Could this be what's going on in the photo industry that current data doesn't account for? We see economic activity that the current photo market surveys can't explain. To wit, the revenues agencies report is rising at a much slower rate than the number of magazines, and even less by the rate of ad revenues from those magazines. Consider this report (http://www.bpaww.com/about_bpa/industry_news/WorldOverview3.05.htm) by BPA, which audits media companies. Here, the topic is an overview of the changing world markets for media and advertising as a result of the Internet. Given those numbers, let's ask the question: if the magazines and their advertisers were obtaining images from photo agencies at (at least) the same proportion they always have been, these agencies would be seeing such astronomical growth, that it would dwarf the entire US Technology sector. Why? Because, unlike media companies, ad agencies, and magazine pages, that are distributed over thousands of various companies, there are a precious few photo agencies. And if those agencies were getting the same proportion of business from those companies that they used to, all that revenue would ad up to a huge sum of money.

So, where's the money? Photo agencies report incremental revenue growth, but only in the hundreds of thousands of dollars, to the low millions. They should be getting billions, if not hundreds of billions of dollars--three to six orders of magnitude more than what they're actually getting. This real number, while still yet unclear, is considerably large; we just don't know how large it is. Just like the total mass of a galaxy. And, like the galaxy, what we do know is that its mass is much greater than just the data (stars or industry survey numbers) that we see. For the photo industry, this size is, ultimately, the "potential market" for photographers. If the size of the market is what it is, and the photo agencies had the percentage of it they claim they do, the proverbial photo agency galaxy would be spinning apart. But, it's not. So, where's all that other revenue--or potential revenue--going to? What's out there that we can't see? All that advertising and editorial photography must be coming from someone. Whom? It can't be just independent pro photographers, because there aren't enough of them either--at least, the number isn't growing if you look at the membership numbers released by industry associations. So, again I pound my fist, who's selling (or providing in some fashion) these pictures?! :-)

Could it be that "non-pro photographers" are somehow involved? The one-off sale (or give-away) here and there by each of millions of people, derived randomly through chance from a pot of hundreds of millions of people (you know, the ones who are buying all those high-res digital cameras being reported by camera companies), could possibly fill this gap between what photo industry sales report, and what we can extrapolate the total potential market size actually is. There is no hard data to prove this, since no one surveys the general population with questions like, "have you ever sold a photograph?" But the empirical data clearly suggests something is going on, and only if the industry acknowledges this possibility and revises its survey methods to find out will we ever have a better, more accurate picture. Sadly, no one but the trade associations has any financial incentive to do these studies, so indirect data like this is all we have. But then, Copernicus had the same argument when he tried to convince the Church that the Earth wasn't in the center of the universe, and that it revolved around the Sun, not the other way around. Did we really need to fly up in a spaceship and see it for our own eyes to believe the other compelling data to support this theory?

Monday, August 08, 2005

Turning point for the photo industry: photo-finishing distribution

I was recently contacted by someone who said he had a new business where he could fulfill print orders and many other photofinishing services over the web. He directed me to his website where I could order prints for myself, or have other people I refer order prints. The statement, "others I refer," piqued my interest. Why would I refer other people to some guy's website? Seemed he was trying to market his business, but to ask me (or any single individual) to come to his site is ridiculous. To market to any appreciable degree of success, one needs to engage in more broad, wide-net marketing tactics to grab lots of fish with fewer efforts.

Anyone who makes a major investment in business certainly knows better, and if he'd done what he said he'd done, why was he foolishly doing this one-off, single-individual emailing campaigns? This bothered me so much that I had to learn more. I wasn't interested in any of these services for myself, and I have yet to ever "recommend" a service or any other business as part of my role as an industry analyst (so as to remain objective and credible in my writings). But, I took a look at his site to see how his site differed from other competitors in the marketplace to see if there's been any ground-breaking advancements in "photo-finishing services," a market segment that I feel is already overly-saturated.

To be honest, my first impressions were extremely positive. Not because the site did anything that hasn't been done, but that it was just done so darn well. And again, it wasn't even that. It's that the site was done by "some guy" who told me he just set up this business (presumably, on his own--or so I thought).

In short, his site was extraordinarily built, well-organized, and clearly featureful and functional for the target audience: the average consumer who wants to make prints from his digital camera. Indeed, he provided a huge array of photo finishing services, ranging from standard prints on photo paper, to canvas prints, to photos applied to commodities like t-shirts, mugs, you name it. If you want a picture on it, he can do it. Now, doing that kind of work as a corner shop owner is hard enough, but to set up an internet site to this degree was... Well, let's just say, I was floored. But again, with such a great site, why was he emailing me like an amateur?

It was only after I surfed around the site did I realize that this guy wasn't his own site. It was a personalized site because he was a franchise of another company. And that company is itself a smaller subdivision of a much larger company. In fact, a huge company. In this case, it's Nu Skin Enterprises, a direct-marketer of consumer products. And the subdivision is Photomax, a smaller (but big in its own right) photo-finishing company. The business models of both companies isn't unique--many direct marketers do this. And the site, Photomax.com, while well done, is also not unique from others in the same category (shutterfly.com, ofoto.com, etc.). But, it's the guy who emailed me was a franchisee!

Why is this interesting? Well, it says so much about the state of not just the photo-finishing market, but of the photo industry as a whole. To explain that, let's review some business basics:

Traditionally, a "distributor" usually has to have some degree of business experience, invest an appreciable capital outlay, and usually goes through months (or more) of specialized training before he can open his own storefront that brands the name of the parent company. Even starting your own corner McDonald's is not for the faint of heart. But no more! Yes, with Photomax,you can (like this buy) be a franchisee, or even a master distributor, have your own personalized website, and start raking in the pennies as consumers order their prints through it. Sounds easy, right? Well, it is. But that's where the first lesson of business comes up: if it were easy, everyone would do it. So, there must be something more to it.

it's not that there's anything unholy going on here. It's all above-board. It's just not clear who's going to be the winner here. I said earlier that I felt that the photo-finishing business model was a saturated market. In fact, all the players who will succeed already exist today. The question is now which of the pieces will remain on the board as the game progresses. Sure, players may come and go, but they really only do so in the form of cycles of small growth and consolidation. Early in a product growth cycle, everyone tries to get into the game. At one time, it was just Kodak, and then others (Fuji,, AGFA, etc.) Once the players are established, and consumers "adopt" the new product, the market matures to the next level where we see a broadening of the distribution channel. This is what brings down prices and widens the product pipeline. (That is, more people are out there selling product.)

Fast forward to the digital revolution and the wide acceptance of the Internet as a consumer communication platform. More people are taking more and more pictures, even to the point where consumers are touching upon opportunities historically only available to seasoned professionals. The fact that Photomax is now signing up distributors to handle an online presence for photo-finishing, clearly validates the assertion that the business model has reached a saturation point, and that the next phase is around the corner: consolidation.

Or not.

It may be that consolidation never happens. When it comes to really low-cost, easily managed businesses--like photo finishing--the question of whether consolidation will ever occur relies on one fundamental question: what's the barrier to entry? If a huge investment of capital and other resources are necessary to acquire a competitor and consolidate the market, this keeps future competitors out. But, if it's too easy for new players to come in, then the investment for acquisition is less justifiable. Photo-finishing is, in my opinion, just such a business. Anyone can do it, and with Photomax's new sign-up form that let's anyone with several hundred dollars get into the game, the question is no longer if anyone can do it, but the mere fact that the barrier to entry is so low, and it wouldn't possibly be worth it for anyone to ever get into this game at the top level.

At the bottom level, it's another story, and that's where the consumer comes in. Sure, people may get a few dollars here and there by having other consumers buy prints from their personalized Photomax websites, but the real winner here isn't going to be the franchisee, it's Photomax. And that, only if Photomax can get enough people to participate. (In some way, even that doesn't matter; their investment is mostly complete, and the profitability is so high, that they will probably survive by mere entropy.)

We've seen this before. You may recall the popular "MLM" marketing schemes in the 80s and 90s, where your friends and neighbors may say to you, "Hey, if you ever need some perfume, come to me! And if you want to make a lot of money yourself, I'll help you become a distributor like me!" These fads always go in and out, and it's not that there aren't those who do make some good money, but as a percentage of those who try, the success rate is tiny. But that also doesn't mean the perfume business is dead--it just means that the market is big enough that the major players will just grow and grow, and the little dollars trickle down to those hard-working people who sell it for them.

Let me summarize what all this means about the photo industry today:

1) The digital imaging market has so evolved away from "professionals" and into the consumer market, that even the job of "photo marketing" has trickled down to the consumer market too.

2) Because of (1), this market segment can now be defined as mature: it's well-saturated and capable of being run by the average person with little or no technical or marketing experience. When a market is that mature, competition is going to be tough. Success is certainly possible, but only time will tell which of the many players will survive.

3) The best chances for success is to be at the top of the food chain, and, as the "Opportunity" tab on the Photomax profile page(s) pretty much admit in clear detail: they get rich through 1% of the effort from 100 people, rather than 100% of their own efforts.