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Thursday, January 18, 2007

Follow-up (correction) to Corbis posting

A few people point out to me an error in my article on Corbis where I stated, "...if they're even profitable--we don't know." Clearly, a poor edit on my part. When I was composing that blog entry, my original text alluded to their statements of profitability, but I also added, "without having a detailed analysis of internal records, we don't really know whether those profits are genuine, or the type you produce when you're trying to look profitable." I removed all that because I didn't want to (a) complicate the story, and (b) then have to go into detail (and provided references) to how this is done. I ended up with a single line that wasn't entirely accurate. So, let me explain.

One particular email I got asking if I was possibly referring to a technique called, "channel stuffing." This is where a supplier pushes a lot of products through their distribution channel in order to make it appear that sales occur, even though real end-user sales haven't actually occurred. There's nothing illegal about this, and in fact, it's often necessary in order to make sure the channel has enough inventory in anticipation of a strong holiday season, for example. Obviously, this otherwise legitimate form of accounting can be used to fluff up numbers in what management may think could be a short-term hiccup in an otherwise strong market. Companies looking to go public also try to create numbers that look more attractive. It's done all the time, and most of the time, it's a normal part of doing business, and not illegal or unethical. The emailer asked, "Could Corbis be doing the same sort of thing using different mechanisms?" Obviously, I don't know, and that's basically what I was hoping to express when I said "we don't know." Alas, I didn't do that well, for which I apologize.

Corbis is reporting profits that, at last reporting, was around 11% from the previous period. What constitutes this profit, how it is measured, and what business units are growing at what rates, we don't know. I have no basis for disbelieving anything. Accordingly, I revised my blog entry by removing the "we don't know" because of its inaccuracy.

But I till fully stand by the much stronger and more important point that they don't have a compelling strategy for how they plan on producing year-over-year growth using a business model that relies on a larger percentage of those sales coming from a commodity product that can be produced and distributed by anyone, anywhere, with very little talent or expertise. The barrier to entry is so low, that I have a hard time believing this company can continue to grow so long as they "stay the course."