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

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Wednesday, January 17, 2007

Why Corbis won't go public... yet.

Everyone keeps asking this question, but the answer is so blatantly obvious that it seems that merely asking the question shows naivety about the industry. The answer is that a company has to have a compelling story about not just how there's current profit opportunity, and not just how there is future profit opportunity, but that there is a long-term horizon for extensive year-over-year growth. This kind of growth usually entails growing the business in its current sales model, but in new areas where the company may expand. This is not a story that Corbis can tell under their existing model of selling a commodity product (stock photos) where the per-unit price continues to plummet, where there is no prospect for future growth, and where there is virtually no barrier to entry into the same market by anyone (including the common consumer).

Corbis may be a cash cow for some of their existing inventory, which they are selling at a higher rate in what some have likened to "throwing kerosene on a fire" to give the impression of higher annual growth. But, one can only do this for so long. Sooner or later, you have to have a real burning log. Corbis reports profitability and growth, but without digesting the internal reports, we don't "really" know whether these profits are the bona fide kind that investors really like to see, and whether they are the kind that have long-term sustainability in a market where the barrier to entry lowers on a daily basis. Critics of my darker analysis can easily point to established reports showing profits, but as an investor, I need to read more: there's no story to tell for how this company bodes for the future. Unless and until Corbis can figure out how to make money using their current business model in light of the current trends--there will be no public offering.

The irony is, it's easier for an individual to make money selling commodity pictures on his own, than it is for a large company to do it. The individual can do it because this is part of a larger strategy called "career development," which involves more than just pushing a commodity. And this should be the lesson for the larger company: the only way they can make money is to sell more than 'just' photographs. They can no longer look at the stock photo industry as being merely a supplier of a commodity product. They have to be a full-service organization that provides much, much more than just photos. Something, anything that can't be easily copied by the everyday consumer with his digital camera and his connection to the internet has to be part of the story.

Getty, Corbis and others say their main asset is their vast number of images. That makes as much sense as selling snow to an Eskimo. There's already plenty of it, and the fact that you have even more is next to irrelevant. In fact, it's almost more annoying to have you around. Folks, it's snowing in PhotoLand, so those of you who sell snow need to find another way to put it to use.

One reason that analysts have been careful not to dismiss Corbis entirely yet, is due to the ever-vexing question, much snow is there? That is, unless and until someone can firmly establish that the market isn't growing at huge leaps and bounds, no one wants to be too quick to "write off" Corbis so quickly. After all, if it is, in fact, a very large and growing market, and if Corbis is one of the top-two, they could be an interesting play. To that, I pose the postulate: it doesn't matter. In fact, I find it ironic that Corbis' new president Gary Shenk says "no one really knows how big the marketplace is." Ironic because this is almost a direct quote from my first book on the photo business (2004), where I say,
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 by BPA, which audits media companies. 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, photo agencies would be seeing such astronomical growth, that it would dwarf the entire US Technology sector. 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.

This excerpt from my book was taken from an article I wrote in 2000, where I was disputing claims made by industry groups that Getty was unfairly ruining the photo market by dropping prices. Getty wasn't causing the drop in photo prices, they were simply trying to meet the already-falling prices generated by their competition. Who? Getty knew back then that their main competition was the everyday photographer selling his images online, but the rest of the industry didn't pick up on that because they were in denial of it then, almost as much as it appears they are today. Getty's publicly traded stock didn't reflect this though. Instead, it went through the roof. But then, so did every other company that even whispered the buzzword, "internet."

(The astute reader may recall the day K-Tel records said they "may" sell their old records from the 1970s online, and the stock doubled in one day from 3.5 to over 7.) Getty also had a small edge on the market in that they had an existing base of buyers that essentially capitalized their money-losing, but fledgling internet efforts, so it still appeared they were more profitable than they actually were.

So, to those who are following the photo industry today and are aware of the falling stock prices and "stay the course" posturing that Corbis is announcing, they wouldn't ask why Corbis isn't going public, they'd instead state why they aren't.

Alas, there is more and more evidence of the proverbial head-in-the-sand syndrome: Corbis' stake in the online stock photo market is dwindling faster still. An example can be found on a fun little web toy, www.googlefight.com. There, you enter two keywords and a little animation shows which of the keywords get more hits. I chose "www.danheller.com" and "www.corbis.com". To see the results, click here. I also did a fight against Getty Images, which you can see here.

In both cases, I won hands down. And I'm not a public company. I'm just one guy. And I'm not even a very big guy. (And no, I have no plans on going public. At least, not anytime soon.) So, unless these guys can capitalize on their current positions at the top of the photo mountain, they're going to be smothered by the everyday consumer with a camera in no time at all. It won't be me, but lots of people like me. I mean lots. It's going to be like one of those zombie movies, where the hero's fighting the constant mass of insignificant individuals is too overwhelming to keep up. Corbis isn't going to go public unless they have an answer to this.

So, how should one interpret the state of the industry, and thereby make business decisions on how to deal with it? One word: adapt. And that's what most photographers have a hard time doing. I call to your attention to an article titled, "Five contributions to decline of stock,", as seen here. Here, the author discusses these five items:

  1. The decline of print media.
  2. An oversupply of stock photography.
  3. Super-cheap images.
  4. Google Images, Flickr, and user-generated content.
  5. Customer and contributor confusion.

The author points out that these reasons cause the "decline" of stock. But, is it really a "decline?" Falling prices often provide a new opportunity, too. Especially to those who adapt well. (In fact, it's precisely because of changing economic conditions that old companies who can't adapt are replaced by new companies coming into the field.) Should Corbis or Getty or any average stock photographer be negatively affected by any of these five points above? I would say "no." Other industries who have been far more greatly affected by the internet (the securities industry, the phone industry, airline industry) found ways to survive--so can (and so should) stock photo companies. I don't see any of these five items as "a decline" of stock at all. I see it as merely a change of how business is run. To wit, I will address each item,

  1. The decline of print media.
    All newspapers have seen a decline in print media, but they are also overcoming these short-comings with new ideas. Many are now including video, audio, multimedia packages, distribution of product through new channels (private cable companies, TiVo, other media networks), and so on. They are also expanding how they generate revenue from advertising, including adopting new advertising models. This isn't going to be quick or easy, and some print media companies will turn over, while others flourish. This is all part of the natural part of change. It's harder for big companies to adapt to change, but individual photographers are much more adept.

  2. An oversupply of stock photography.
    As far as the individual is concerned, there's always been too much stock photography on the market. Once you cross that critical mass of "too much," it doesn't matter if there's more. In fact, I would argue that the market of buyers has grown so much so that it's easier for an individual to get noticed now than it was back when photo buyers really did "only" use established stock photo sites.

  3. Super-cheap images.
    Super-cheap also comes with super-high-volume. You can shoot more than ever before, so what you don't get in per-unit pricing can be made up for by volume sales. Here, again, is where creativity comes into play. Selling images in bulk, subscription-based services, and other methods of charging "more for the same" is a time-honored tradition in sales. The phone companies are going through the same thing: they no longer have pay-phone revenues, nor can they rely on long-distance charges. But, they make up for it by bundling in products and services together, often combined with offerings that they never even had before. Phone calls are getting "super-cheap" on a per-call basis, much like photos are, but the companies still make money by changing their business models.

  4. Google Images, Flickr, and user-generated content.
    Nothing has helped my business more than google images and other image search sites. More than 75% of my traffic (and sales) are the direct result of image searches. If you are complaining about this, you're not smart about how you can capitalize on these new tools.

  5. Customer and contributor confusion.
    Customer confusion is only the result of your having a very poor marketing and sales program. If you are confused by royalty-free or rights-managed, or you think your customers are, then it's your fault for not presenting whatever it is you offer to your clients in a way that doesn't cause confusion. I have had many clients ask me whether my images are RF or RM, or whether I would license something to them on an RF basis, and I simply have them use my price calculator to determine what the price will be for the image they want to use, and the confusion is over. Never has anyone ever been "confused" by what they get when they license images from me.

My analysis of the industry is that we are on the tail-end of a major paradigm shift of how the photo business is done. (The beginning was back in 1998, when I first wrote about how this was coming, in an article that is now found here.) The fallout from this shift will find many old players lying on the battlefield, while new and innovative companies have come in to take their places. Falling prices don't necessarily require you to drop your prices as well, unless you have a business model that could benefit from that. In my case, I haven't. In fact, I have raised prices of my stock licenses (as measured on a per pixel basis compared to my old fees) for the past several months, and my total number of license sales has grown 4-fold. I can do so because of the variables associated with how I run my business and other aspects of the industry have given me that opportunity.

So, where does that leave Corbis, or even Getty for that matter? If I were at the helm, I'd be looking at dramatically changing the fundamental business model so that revenue is drawn (and profits are realized) through means that migrate away from the commodity business model, and re-evaluate all existing legacy businesses within the organization, and look to revamp it from the bottom up. Under a very similar kind of pressure, AOL finally bit the bullet and radically changed their business model in exactly this way, as have long distance companies, equity trading firms, and just about every sector in the US economy. Even Microsoft is having to stomach changing of the times as Google and other companies are changing the way their own traditional businesses are done.

Getty and Corbis are going to have to move towards a business model that cannot be cannibalized by everyday people who can beat them at their own game. Perhaps this means doing a lot more specialized branding and advertising services, news reporting (someone to accompany the photographer), full-motion photography services, other meida and publications, consumer products, and so on. Leverage existing photographer talent pool in ways that go beyond current offerings is the primary place to start. And when they finally get it, that's when we'll start hearing a very different message from the top brass. As long as they continue to "defend" the course they're taking, they won't get any green lights from the investment bankers who want to take them public.

Of course, if things really do look dire, it could be that a public offering is the last chance for investors to get out with something. It wouldn't be the first time this happened, though I wouldn't want to be the investment banker sitting on that side of the table after the pool of shares is finally liquidated, and the shares begin to fall. Yet, in the spirit of my own pragmatic view, there's always money to be made in falling prices: I made a nice chunk of change selling short positions against Getty Images when it was in the 70s, knowing that the reality was catching up to them. I closed out those positions when the stock hit the mid-40s and almost doubled my money. There's always money to be made, even when prices are falling. In the end, money is made by adhering to these two rules:

  1. Recognizating the state the world is in, not the state you want it to be in.
  2. Not seeing conditions as "bad or good," but rather, where there's opportunity given those conditions.

These are what you have to do whether you're Gary Shenk, or the average photographer on the street.