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Wednesday, April 04, 2007

Innovation and stock photography

I got an email today from Stephen Shankland, who writes about, among other things, digital photography news for CNET. He felt I might be interested in his recent posting here: an interview with Bruce Livingstone, the founder of iStockPhoto. They were talking about his background and his perceptions of the future of stock photography in light of his emerging competition. Because my personal crystal ball is still at the cleaners, I am not able to foretell the future at the moment. However, my next best forecasting tool is boring old business analysis, which I employ here in my commentary on Bruce's comments:

Q: Who are your competitors today?
Livingstone: Everyone. This year I think everybody is going to enter this market. I think a lot of companies have identified this model as being successful.

There's so much more to this statement than what meets the eye, which has a great impact on everything else he said. Allow me to elaborate:

The first turning point for any business idea is actually putting it into use. The second phase is building a profitable business model around it. The third phase is where other companies perceive the model as "proven" and begin to build copycat businesses. And this is where we are today with online stock licensing.

In a way, the gold rush has started, and everyone is coming to stake their claims. To succeed at a business that's now "proven," it doesn't take innovation, it takes good management and execution skills by leaders who know how to mobilize teams of marketing, sales and engineering groups to assemble an infrastructure for mining gold ore from the ground.

But, if that were all there was so it, it'd be yet another commodity business to write about. But, there's more. Livingstone's observation that "a lot of companies have identified this model as successful" should be more disconcerting to him than he is apparently aware of, as this is the first indication that a major industry shift is imminent. Smart business thinkers know that when everyone's rushing to get all the fish out of the same lake, the real business lies in finding the next lake.

I'm sure that Livingstone is aware that, at this time during the business cycle (where a business model that was once questionable is now "proven"), it is also the time when the mad rush of competition results in a reshuffling of the deck. It's not coincidental that the leaders who start any given trend are rarely the ones who lead the pack in the future.

Even though IBM "innovated" the PC as a business/office product, it almost ruined their mainframe business, which was their real cash cow. It was the reason for their once being a target for breakup by the government. Yet, because IBM didn't appreciate and plan for the mass migration of businesses from centralized computing (mainframes) to distributed computing (PCs), they were almost the victims of their own success. Similarly, the migration from the PC as an office computer to a home device found many silicon valley high-fliers on the chopping block as well. Many of these were also copycats of a "proven" business model (as they were PC clone makers). The recording industry failed to plan for the migration of physical CDs to online music purchases, even though they had prepped the market for it by adopting digital music on CDs in the first place.

What each of these examples represents is the fourth phase of the business cycle: where the perception of the industry itself shifts. And that's where we are in the photo industry. In fact, this is what prompted my blog entry about Flickr --that they are "thinking" about licensing photos as a business model. In five years, we'll be wondering why they had to "think." Could this be the foreshadowing of another high-flier that failed to think ahead to the next paradigm shift?

While no one knows what the potential of the photo licensing market is, that's not the important part--it's only that the business model has been proven, and that everyone's entering it. The internet and digital camera together have lowered the barrier for entry for anyone and everyone to get into the business, so the future of photography includes the consumer.

We are in an era where no company in the photo business today will possibly survive the future without fully and wholly embracing the common, everyday consumer as both the buyer and seller of photos (including their roles within the workplace). This is not to say that businesses should be solely focused on the consumer. To be sure, the traditional photo market isn't going away anytime soon. It's merely cell-splitting in its growth. Consumers are the sleeping giant of the photo licensing industry--they have awoken and are soon going to want breakfast. The catering service that feeds them will be the winners. The question is whether the companies rushing to the current business model have what it takes. To answer that, we have to look at the statements from company leaders to understand how they perceive the photo industry market, and where they intend to take it.

Just as major industry film giant Kodak almost went under because they not only refused to plan for the downturn in film, but failed to prepare for the emerging digital photo market, the same can be said of many of the major photo players today and their attitudes about stock photography and the consumer. They only see the current set of buyers as large companies, media, and ad agencies; and the current suppliers as being pro photographers. Every single action, statement and expression by the top photo agencies and suppliers all talk about these buyers and sellers as though they were the only ones that matter. All of Bruce's statements in his interview clearly show that. Agencies are ignoring, or at least, discounting the emerging market. And this trickle-down effect is echoed by looking at what's discussed in photo discussion boards, what's written in industry trade journals, and what's asked by wall street analysts of company executives. Yet, the consumer's role in this emerging market segment is so obvious, that the entire line-up of agencies will be so abruptly affected, that we may see another era of dead bodies on the field. They may be today's Kodak--high-flying now, yesterday's news tomorrow.

To be clear, I'm not saying that the pro-level stock photo industry will meet the same demise as film, but that doesn't mean the parallels aren't similar. We don't know how these two markets (traditional and emerging consumer) will settle out, and I'm sure the large companies won't fade into obscurity as colorfully as I described it. But I do feel they will be so overwhelmed by the market opportunities associated with the emerging market, that if not implemented properly, their risk is higher. And the first rule of effective execution by a CEO is the simple recognition of what the market is.

And this leads to what I was saying about the fourth phase of business evolution for a given industry: when the vernacular used to describe the market changes as a result of emerging markets. This is the paradigm shift that will reshape what we see and hear on a regular basis. The day will come when not a word will be mentioned in any press or discussion board that Microsoft used a photo for its desktop from some grandmother in Cedar Rapids. (That should have been the case with Vista today, and I'm still astounded at the ridiculous amount of press it got.)

So, we're not there yet. And of course, I'm thinking way too far ahead. We have only just entered the transition into the third phase: that "the business model has been proven," bringing us back to the gold rush analogy I made earlier. Once the territory has been established, and the consumer/supplier marketplace settles on the details such as pricing, marketing and other tested methods, winners and losers will have separated out. That's when the consensus will emerge on how the industry itself begins to speak in terms of what the "new" market is like.

And this is what leads to to Livingstone's next quote:

Livingstone: Companies like Zooomr and Flickr--they're great innovators and I think they just might be able to figure it out...

With all due respect to Zooomr and Flickr and most all others, they are not innovators in the market. Flickr was (and still is) what we in the internet era used to jokingly call an "innocent bystander." This is when a company "happened" to be successful due to entirely unintended turn of events. For example, developers of TCP/IP for PCs made out like bandits in the early internet days even though they had no insight that the Internet was as an emerging market. They were a bunch of fun-loving techies having fun. Flickr's "intent" was not the photo industry, but more the social-networking industry. It wanted to be another site like MySpace or Facebook--getting visitors and eyeballs using photos as a common social denominator among people. Their "innovation" came in the form of using early Ajax (web 2.0 style) user-interface platforms to make a cool/sexy site. And good job too! I love Flickr. But, they're not innovators in the photo business world.

If they really were innovators, they would not "think about" whether they should get into the licensing business, that would have been part of their insightful vision of the future. We would have been hearing it from them ages ago, and bloggers would be questioning their vision. (You know, like how bloggers did with the iPod.) The funny thing is, Flickr still isn't taking bold steps towards innovation with their forward statements. I guess they're still thinking. Still, as the saying goes, "it's theirs to lose." They haven't taken it yet, but neither has anyone else.

All other photo sharing sites are similar in that they are either copying the Flickr or microstock model, all as part of the mad gold rush to claim territory in a proven business model. They regard licensing as an opportunistic offshoot of what is otherwise a social networking site. Not a bad goal at all--I've been advocating this for years. but it's not enough to just do it. You have to recognize the emerging shift in the marketplace. Otherwise, you're sure to trip up along the way. But, none of these emerging photo-sharing and licensing sites see a new paradigm--they're still working from the same paradigm fixation that everyone else does: that the "real" photo licensing model is in the hands of large companies and media outlets on the buyer side, who just happen to be ignoring the low-budget buyer. They describe themselves as "alternatives" to the big players, that they are capitalizing on the untapped market that the large agencies are ignoring. They see themselves as willing to take the risk to see if real buyers come online for images. This is not unlike a miner willing to pan for gold along with many others, simply because it's been proven that gold exists.

This may be a perfectly fine business model; plenty of early pioneers got wealthy in the gold rush. But, this is not innovation. Any business that's built on the same premise as the prevailing perception of the photo industry is not innovation.

A great quote from the 9/11 Commission Report in their assessment of how the administration got it wrong on whether Iraq had WMD: "when everyone around the table agrees, someone's got it wrong."

To Bruce's credit, iStockPhoto was "innovative" for its day because no one (in the photo industry) believed there was opportunity selling photos online. (This, at a time when pretty much every other industry was trying build online storefronts for their products. I was writing a lot about this in 1998 and 1999; I had submitted an article on the subject to Photo District News, but they rejected it saying, "we don't believe there is a market for photographers on the internet.")

He and istock succeeded (that is, cashed out nicely by selling to Getty) as a reward for his innovation. But the company is not the innovator of today. Innovators don't necessarily follow the same money trail as the rest; they're the ones who redefine what the market is. Apple innovates. Always pushing the envelope on what the consumer or buyer will want. They often succeed, but often fail too. (Newton, anyone?) I don't see any company in the photo market today as "innovating" according to that definition. I'd be hard-pressed to recognize anyone as innovative that doesn't break with the mold of the current vernacular and describe the economic future of photography as one that includes consumers. I have yet to see a formal company mission statement along those lines.

I wrote about why I think Corbis isn't going public: that they aren't making any statements about how they are going to move forward. And everything I'm talking about here addresses that: they aren't being innovative with their statements and projections about where the broader market is moving and what their strategy is to capitalize on it. Sure, they are making money, but what's their direction? Until they can answer that, their valuation won't be high enough for savvy industry analysts to give them the kind of multiples on their valuations necessary to make an attractive IPO. Getty's price drop and other internal problems is indicative of the same misguidance.

This is not to say current companies won't survive. iStockPhoto is sufficiently large enough (as a consequence of being owned by Getty) that their demise is hardly written stone, let alone sand. They may (and will) continue to grow as a consequence of (again) Livingstone's simple observation that the business model has proven itself. Moving forward is another question. Many claim that Microsoft isn't innovative at all, that they simply "adopt" ideas and business models after someone else has proves their viability. Like MS, iStock/Getty are big enough that they are going to be formidable players, so long as they remain flexible enough to buy into the new directions that other, truly innovative companies "prove."

Whether they choose those directions wisely is another story. I've written copiously about how I believe that Getty is still wedded to an archaic premise that controlling the "channel" and the "supply chain" is the way to stay on top. This premise is outdated: there is no channel anymore, and the barrier to entry to the photo business is too low to bother trying to buy up agencies that have photos or photographers. (They'll simply scatter to where the money is as those opportunities arise.) In short, Getty's investment of hundreds of millions of dollars into this obsolete business model, is, as a percentage of their own revenue, like Microsoft sinking billions acquiring CD-ROM manufacturers. Sure, there's money to be made there, but is that really the future of the PC? As Warren buffet said, "you can make a million dollars by investing a billion dollars in an airline."

Here's another related quote from Livingstone:
... you have this community that's used to sharing and they do things a certain way, and then suddenly you're introducing this business element that wasn't there before. I'm not sure it's going to be as easy as they think.

"Easy" can apply to the technical implementation of an idea, or the viability of the business model. It just so happens that the technical side is so easy, that doing it requires almost no risk. Thus, people will do it because of its ease. Who all decides to play in the sandbox is another story. This is that "second phase" of business development that I cited in the beginning: time is required to let the idea marinate with users, which involves changing of the model to accommodate. So the statement that it's not going to be easy is simply part of the order of things. All who know me know that my first quote of any business is, "if it were easy, everyone would do it." Successful business isn't because someone chose a model that's easy--it's because they were innovative.

Stephen's next question to Livingston is critical:

What about legal repercussions? There are a lot of photos on Flickr with faces visible that don't have a model release form attached.

As an aside to this discussion, it's critical for people to be familiar with how model releases relate to stock licensing through agencies. This link is required reading:


And that pertains to this:

Livingstone: It's a very complicated process. A model release in France is much different than a model release in the United States. For example, in France, they actually get to say, "I can only be used in ads that have to do with this, this and this, but I don't want to be used in ads for pharmaceuticals or sexual preference." There's also copyright.

As discussed in the model release primer referenced above, it is the responsibility of the publisher/user of the photograph, and no one else, to ascertain what kind of release -- if any -- is required for any given use.

Most images that companies license to users do not technically need to be released. Sure, some companies may want a release even though one isn't necessary, usually for an extra level of comfort that they won't be sued. (As we all know, "merit" is rarely the reason why people sue--they do because there's money to be had.) But the needs of a few clients should not dictate the entire business model of an agency. Not every photo that contains an identifiable person needs to be released, since many (most) uses don't require them anyway. That agencies don't accept non-released images is simply ignoring economic opportunity from a significant industry segment--those other than the largest companies who fear being sued. Again, this business decision is based on the underlying paradigm of the market: who's the primary buyer?

Do agencies see this lost opportunity? Clearly not, because they don't recognize the "paradigm shift" associated with the fourth phase of the business cycle. When you see the world as the smaller universe of only large corporate sales and advertising, you think having model releases on all recognizable photos is critical because you don't think there are other buyers for them. But, when you see the larger opportunities of the broader consumer market, you see the dollar signs on those unreleased images, and realize this it's a marginal matter. Hence, Flickr's stash of unreleased images are a veritable cash cow for those who seek people images.

The odd thing about all this is the false sense of confidence people have about the "protection" they have from agencies. People may think they're safe by licensing released images from a reputable agency, but if they ever got sued, that agency isn't going to lift a finger to help. I know of no cases where this was ever the case. In fact, what any agency's lawyers will do is (correctly) state that the buyer bears full responsibility for how the image is used and whether or not a release is required. (More examples are cited in the model-release primer article I cited above.)

The academics of this aside, the broader point is that "released images" do not present an economic barrier to entry for the online licensing market. That is, online licensing sites are already realizing this fact, and are accepting such images.

Now, I'm not suggesting that the issue is moot. I'm just saying it's a red herring to say that it's a business concern, despite Livingstone's claim. All any agency needs to do is require full disclosure on whether any given photo is released so the buyer can choose accordingly.

To even further support the economics of this argument, Livingstone adds the "complication" of France's laws of licensing. Why stop there? Add Canada's back-peddling on the issue along with the inconsistencies of most other EU countries, and the answer is clear: an agency can't possibly attempt to engage in this, especially if they don't need to. They can't protect buyers, and even if they claim to, they couldn't possibly afford to actually defend them in a real lawsuit should one come up. Buyers--especially the large corporates and media--surely must know this. (Anyone that makes an ad for sexual dysfunction drugs and uses an image from any agency deserves everything coming to them--if you're making an ad this risky, hire a photographer and model, and shoot it yourself.)

This leaves the business reality that "innovative" stock agencies are going to see this red herring for what it really is and capitalize on it.

So, in summary, we have this:
Livingstone: The ideas are changing. A lot of pro photographers are now submitting to microstock agencies, and at least testing it out and seeing, "Can I actually make money here?" I think a lot of them are finding that yes, they can.

With all due respect, he's a little biased. Independent analysis shows that microstock agencies are making money, but the the photographers themselves aren't really making the kind of money commensurate with being a staff photographer somewhere. So, iStock and others are really better for those with low expectations of financial returns (semi-pros and hobbyists), and is not not likely to garner much more than "toe-dipping" by pro photographers until the fundamental model evolves.