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

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Tuesday, July 17, 2007

The total size of the licensing market

Just how big is the photo licensing market?

The question keeps coming up because there is money to be made if one particular answer is (or is thought to be) true. Moreover, the answer to this question is even more important because if you have the right methodologies for deriving the best answer, you have solved the Gordian Knot for succeeding in this industry.

To illustrate how all things are connected on this pivotal point, consider that most industry analysts look at the total aggregate sales of all the known stock photo agencies, plus some statistical sampling of the independent stock market (small specialized agencies and such), and add it all up to get about $2 Billion. If you accept that as roughly accurate, then business decisions are made based on that assumption, such as whether Getty is truly a market leader worth investing in; whether other agencies have a chance at an IPO, or even catching up; whether start-up companies in the field can hope to ever raise money; whether market prices for various kinds of stock photos will rise or fall; what kinds of income photographers could ever expect to earn; and so on.

In other words, whatever the "industry" believes is an accurate number, the players within that industry behave consistently with that assumption. Go against the grain, and you're on your own. If you're right, you could win big, provided you execute your plan well and have enough backers to take the ride with you. These extra caveats are the reality that should make you think twice before being too much of a maverick and moving out on your own. Being right isn't enough--you have to have support and execute well..

Whether you want to win, or simply compete, the objective isn't necessarily to "actually" know how big the photo licensing market is, but whether the methodologies used to derive a potential range of plausible answers is genuinely sound. If so, that's a much better predictor of more important and interesting things, like: What trends are making more money? Are market prices really affected by microstocks? What kind of income should photographers expect to earn? What role do consumers play? So, when it comes to how current "industry analysis" determines how big the market is, what I'm interested in is which data they choose to gather, which they choose to ignore, and how do they churn the results.

Asymmetric Information
One fundamental problem with how traditional "old-school" analysis has been done (looking at only the sales of the major stock agencies and other larger photo suppliers) is a hold-over from the pre-internet era, when only entities that sold images were agencies and media companies. As obvious as this may seem to the junior economist in high school, this has proven to yield poor results more often than not. To properly and accurately gauge the economics of anything (including photo licensing), you must look at more than just "sales." There are other factors that contribute to the true size of the market. In fact, this is what Joseph E. Stiglitz proved when he won the Nobel Prize for economics. He, along with George Akerlof of the University of California, Berkeley and Michael Spence of Stanford University came up their analysis of markets using "asymmetric information."

As Stiglitz explains,
Market economies are characterized by a high degree of imperfections. Older models assumed perfect information, but even small degrees of information imperfections can have large economic consequences. Our models took into account asymmetries of information, which is another way of saying 'Some people know more than others.'

To put this into context that just about everyone is familiar with in today's world, there is the question of what is the total cost of the war in Iraq. Stiglitz and Linda Bilmes, a budget expert at Harvard, did an interesting analysis recently, which you can (and should) read here.

In it, they note that the Congressional Budget Office estimates that the total cost of the war is $500B. This includes the money paid to soldiers, the cost of weapons, and so on. The kind of stuff most people think about when they go to war. "Honey, we're going to war tonight, so be a dear and pick up some extra AK-47s at the market today, K?"

However, this number doesn't include a trove other related "asymmetric information," such as, for example, the cost of treating severely wounded veterans. At the time of his writing, this included roughly 16,000 people, 20% of whom had serious brain and head injuries. The cost of lifetime disability and healthcare the government will have to pay for years to come are not calculated into their original figure of $500B in the "total cost of the war." Using known data on the cost of treating people with these conditions over the course of their life expectancy, Stiglitz estimates that the government will spend between $500B and $800B.

And there's more asymmetric information: the fact that we don't have that money in the treasury now means that we have to raise the money in through taxes. But until those taxes are collected, the government has to use "borrowed money" (in the form of treasury bonds), and the interest that bond holders receive is paid by the government using--you guessed it--tax dollars. So, again, the costs of caring for the soldiers continues to rise, this time through interest payments. In fact, that $500-800B health care bill requires borrowing money that will cost another $100B to $350B in interest payments over the course of time.

This analysis goes on and on with other "asymmetric information." In the end, Stieglitz estimates that the true cost of the war ranges between $1.2 and $2 trillion. Yes, that's a 'T'.

Not surprisingly, those who are in favor of the war say that those additional costs are not "related" closely enough, and also not counted are the savings from not having more terrorist attacks, which cost more money. Those who are against the war say that money is going to be spent no matter what, so you can't just eliminate it from the "cost of the war" analysis. Indeed, even as the bickering goes back and forth on the merits of the war, neither side disagrees that the money is being spent--it's just how you frame the debate that matters.

And that brings us squarely back to the photo industry and the size of the licensing market. Asymmetric information helps paint a more realistic picture of what the true size of the photo industry is. Unlike the war in Iraq, there isn't a risk of personal safety, and there is no influence by politicians in Washington, so there shouldn't be the same kind of heated debate over the subject. There is only one reason to generate numbers: to establish financial opportunities.

But make no mistake, though: those with money in the game do have the objective of protecting their investments. That, or, to create situations where they can capitalize on data not yet known. And, as Stiglitz puts it, "some people know more than others," which puts the question forward: do those who are doing the analysis know more than what they report to us? I am not suggesting any malfeasance by any means. However, photography is one of the least regulated industries, ranging from the product itself, to the professionals in it, to the industries acting in it. This means that players have a vested interest in preserving not only their turf, but making all the other players believe the same things they do.

So, all the more reason to look at the way data is gathered and analyzed.

Holes in the Data
One thing people think about when they consider the size of the photo market is how many pro photographers there are. If you ask ten photo agencies how many photographers they represent, and you add them all up, you may get a sense of how many pros there are. But, if you ask a market research firm that talks to photographers, they'll tell you that most pros submit their images to about 6-7 different agencies, on average. Here, we have a case where the market research firm "knows more than the others." This kind of "imperfect information" is necessary to understand that the holes in the data are there. Now it's a question of finding them all.

Speaking of market research firms: they're the ones that say the size of the photo licensing market is about $2B. One way to test that would be to do random sampling of clients to see that actually purchased those licenses for the amounts paid (for the terms specified).

Yet, when other sources do that, they uncover sobering news that most clients get their images from additional sources beyond just agencies. Even as far back as the year 2000, research showed that 35% of photos were purchased from stock agencies, the rest were directly from photographers. Yet, they assumed that the photographers those buyers got their images from were professional photographers, and they weren't. (Though we didn't yet know that at the time.)

So, the industry research firms got some stuff right that showed the agencies' own analysis was off the mark; but independent studies showed that the industry research had flaws as well. And empirical data from that one study seven years ago also showed flaws in the independent analysis. Yet, with all these flaws everywhere, most people still look at the annual revenues by Getty and the other major players as indicators of the total aggregate size of the industry as a whole: $2B.

Now, I can understand that data gathering is an imperfect task, but basing your financial decisions on least viable of all the data is just plain dimwitted. One thing we can firmly establish, the market is not anywhere near $2B. In all the analysis I've seen, there is no evidence at all that surveyors have collected "asymmetric information," let alone calculated it into their analysis. I would be hard-pressed to believe that even those conducting surveys even know what "asymmetric information" is.

So, how does one measure the size of the stock photo industry from this point? Well, first of all, keep in mind that what we want to know is not (necessarily) the size of the photo market, just yet. We want to start with the methodologies of surveying. Like Stiglitz, we don't expect to come up with a firm number, but a range of plausible values, depending on the various qualities of the data we gather.

Data's Building Blocks
Analysis must start with an understanding of the most basic, fundamental building blocks of any market: the raw materials. For the photo industry, that's the camera itself. To that, I cite a recent announcement by Canon that they are building a $450M plant that will make nothing but CMOS sensors for its digital cameras. This year alone, canon will sell 28M cameras, 3M of which are sold to pros.

This presents two points to consider:

Three million pro photographers? That's already a lot more than what most "industry analysis" has ever shown. Some might argue that most of these pros are wedding, portrait and staff photographers that don't traditionally contribute to the stock industry. True, but by using asymmetric information by examining data gathered by the industry groups that represent such photographers, we learn that about 10% of their own revenue is now derived from stock sales, and that number is rising. The data also shows that these photographers are selling direct to buyers, not through agencies. Putting it together, 10% of three million is 300,000 photographers. We know that the total number of microstock members isn't nearly that many, so we can deduce that the "industry analysis" isn't taking their contribution of stock sales into account when calculating the total size of the market.

Ok, they contribute to the market--but enough to skew the numbers? Let's assume each of these "pros" makes ONLY $1000 a year in stock photo sales. 300,000 photographers (that use Canon cameras) at $1000 each for a year, that's $300M that isn't really being accounted for in industry surveys, which is 15%.

And that's only Canon cameras. What about Nikon? What about all the others? The total number of cameras of 8mps and higher is closer to 100M from all the manufacturers combined. Since we're likely to find a similar distribution of pros and consumers among them, and even assuming the conservative (but conveniently round) estimate that 10% of the buyers of those cameras earn a meager $1000 in a year from licensing, that suggests that 10M people will earn an aggregate of $10B from photo licensing.

Before you start thinking this is way out of line, pay attention to stories in the New York Times, USA Today, and other daily newspapers and magazines that tell stories about stay-at-home moms who are running photo businesses shooting everything from their kids to their vacations, and selling them online for extra income. The number of such stories is increasing at rates faster than ever seen before, as can be found using search features on the websites of major news periodicals. The cameras are clearly being sold, the stories about these home-businesses are emerging faster than ever, the vast accumulation of photos on the web is growing at astronomical rates. Is it "really" far-fetched to believe that 10% of camera owners may realize $1000 in one year from licensing?

But wait, there's more asymmetrical data.

So far, we've only counted the cameras that are sold to "pros." What about the other 90% that were sold to consumers? Just because they are not pros doesn't mean they don't contribute to the total size of the market somehow. To be as plausible as possible, let's be very conservative in our numbers: if only 10% of consumers earn $100 a year (yes, a measly $100--likely one or two low-ball inadvertent sales), that equates to 90M people (at $100 each) yielding $9B.

Again, think that's far-fetched? Ok, try this on for size: consumers also sell their crap on Ebay, and last year, Ebay had revenues of $6.35B. That's just their cut of the revenue exchanged by consumers. Estimates of how much money exchanges hands between people on Ebay range from $100B to $500B. And that's between people buying and selling stuff like used toothbrushes. So, is it so far-fetched to believe that your next door neighbor got a check for $100 from a magazine or hotel for their vacation photo in Hawaii?

$10B from pros unaccounted for in surveys? $9B from consumers? The numbers are starting to add up. What other asymmetric information is out there for us to consider that isn't likely calculated by current research by the photo industry? How about:

  1. Money collected from copyright violations
  2. Sales of photos as "art" through licensing agreements
  3. Money paid by companies to their own staff, customers or clients for photos or photo-related responsibilities, which is normally a "stock" style transaction
  4. Independent self-representing photographer/agencies like myself

There is enough anecdotal evidence to show that each of these categories by themselves have signs of growth that have exceeded everyone's prior expectations. The mere existence of the billions of photos on the net, which grows daily, imply that they are finding their way to uses that have resulted in some sort of exchange of money. All of these are simple examples that collectively amount to enormous sums that are not included in the total estimate of the "size of the photo market" by anyone doing surveys.

Market Opportunity
What do we do with this information? First and foremost, it confirms that opportunity exists for companies to capitalize on the fact that there is currently no organized mechanism by which the common consumer can participate. Microstocks may think they are, but they are failing in so many other ways, both in infrastructure and in market presence (that I've already discussed in previous logs), they can be ruled out until they change course.

Similarly, larger agencies, such as Getty and Corbis, continue to see the photo-buying market as their traditional clients, such as the media and advertising agencies, that they are not prepared to reach out from behind the green curtain and show themselves as the Great Oz. This could be why such agencies continue to embrace the industry statistics of $2B for photo licensing. In fact, Getty itself uses that figure constantly when it refers to itself and its relationship with the entire industry. It's their way of saying as a distraction, "don't pay attention to that little man behind the green curtain!"

It all adds up the simple fact that opportunities are abundantly available industry-wide, but there is no photo-equivalent of Ebay to help realize that potential. Why? Because people don't believe it exists. This, for the same reason that no one expected Ebay to succeed at what it does, or that Google would succeed at tiny text ads distributed on other people's pages, or that FedEx would ever succeed in making a business out of overnight delivery. Unless someone actually does it, it's easy for everyone else to say, "it can't be done."

That doesn't mean it's easy--as noted earlier, it's all about execution. Even in my past life as an email tech guy in silicon valley, no one ever believed my proclamations that email would be the consumer phenomenon it turned out to be. I wrote as vigorously back then as I write about the photo industry today, but all the players back then denied that the opportunity existed in the newly emerging internet. Yet, mine was the only company to succeed in the space, passing up everyone else, from IBM, Microsoft, Lotus and Oracle--all the top players in the market at the time. None of them had an internet-based email solutions, nor did they until I sold my company and left the industry.

In the photo business, as with email, the errors being made by the major players all stem from the same errors made by the others before: they think that because they're big, they're infallable and they control the market. Yet, the mark they're missing is that they keep focusing on the incredibly tiny (by proportion) segment of buyers in the media and advertising worlds. It's almost as though they are still in denial that the internet exists, and that the real opportunities lie there.

And they make this error because the industry analysis of "how big the photo market is" is so flawed.

The Boost from Latent Demand
Despite the fact that no King Arthur will emerge to pull the sword out of the stone anytime soon, it doesn't mean it won't happen some day. And when it does, this very fact will itself cause another inflation of the market due to latent demand. Let me explain:

When people ask me what I think the total size of the photo licensing market is, I say it's probably around 10x what most people think it is today--that is, real, recognized revenue generated by people that current industry data doesn't take into account. Yet, the potential size is 20x larger than that, once an Ebay-type entity makes news. what happens is that a public swell of interest causes more and more people to jump on the bandwagon, just as people jumped on Ebay. The lure of money for your junk is compelling, and if a model emerges that people understand, the magic chicken starts laying those golden eggs. This is a phenomenon called "latent demand." It's another term used in economics to describe human behavior once the perception of opportunity emerges. Examples include:

  1. Lottery ticket sales skyrocket once the value of the jackpot exceeds a certain psychological barrier.
  2. People invest more in the stock market when common news headlines show that it's reached all-time highs.
  3. People will drive more on highways when a carpool lane opens up, because the perception is that the new lane will relieve congestion, thereby removing the very disincentive they had for driving in the first place.

The phenomenon of latent demand is so powerful that it is precisely the unexpected wildcard that throws off data projections in any industry. In fact, this is precisely why Ebay became the phenomenon that it did.

Here's another way that latent demand could emerge: in a previous post, I suggested that Google could radically change the photo licensing market by simply making it possible to find all instances of a given photo on the net, thereby making it nearly impossible to "steal" images without at least being exposed to a financial liability. This, in itself, would fuel the rate of licensing to levels never anticipated. This could actually be the catalyst that proves the existence of the larger market, which will in turn provide the impetus for an Ebay-like company to emerge. Market forces have a tendency to coalesce and organize a more controlled and competitive market once opportunity appears less risky.

How am I capitalizing on all this? My entire business is successful because I know that most people who buy images have no idea that stock agencies exist, large or small. With 100 Billion people on the internet, when one of these people wants a photo, they use search engines--not stock photo sites. Of the 20,000 or so who visit my site on a daily basis, and of the tiny percentage who end up licensing, most are doing so for the first time in their lives. And, they have no idea what's involved, what market rates are, or anything. I make it as easy as possible to do so given the constraints of my single-man operation and self-imposed restrictions (that I should someday lift). I'm not competing with anyone at all, provided that the buyer is unaware of anyone else. It's simply whether they really want the photo for the price I'm asking. Indeed, if they can't afford it, some are lost as to where to go next. I said to someone once, "go back to the search engine where you found me." His response was, "I would, but it's just too time-consuming. I don't want to go through that again."

this wouldn't happen if there were an Ebay for photos...

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