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Friday, July 17, 2009

"There are Lies, Damn Lies, and Statistics"

There's another old saying about statistics: "The biggest liar in the world is a politician, and the second biggest liar is a statistician."

The root of these witticisms comes from the fact that statistics can be used to support most any argument. It all boils down to what your message is, and what details within the statistical data set support that message.

In marketing, this is called positioning.

An illustration of this can be found in two recent news items. One from microstockdiaries.com reports iStockphoto having publicized their expectation to reach $200 million in 2009 revenues. By comparison, the official figures for 2007 were $71.9 million. A huge gain, clearly.

Secondly, a survey from Shutterstock shows that 40 percent of graphic designers are using more stock photography in 2009 as compared to last year, and 32% of them say they will be using even more stock images one year from now.

In each case, the respective companies want to present data that not just supports the notion that their sales are growing, but that the ingenuity of their business strategies is paying off.

From a marketing perspective, the stats are genuine. However, it's the broader interpretation by the analysts and the press that makes the data deceptive. Is stock photo pricing on the rise from the $1/image bottom spearheaded by microstock agencies a few years ago? Is the industry really growing by the same proportion represented by the increased revenue growth? One needs to churn through the numbers and deconstruct surveys to determine what, if anything, can be learned from this.

I contend that most all photo industry surveys leave out too much critical information to draw good, if any, conclusions. In fact, one could draw entirely opposite conclusions for some surveys. For example, one main unstated detail about the Shutterstock survey is the company's subscription service. Here, a buyer can pay $1 for a photo, or he can sign up for a subscription, where he'll pay $250 a month and download 25 photos a day. On a per-image basis, the economics of the math is quite attractive. Yet, chances are likely that most subscribers never use all the images they download. If one were to calculate the images actually used, they're most likely paying far more than the $1/photo price they could have gotten if they stuck to pay-per-use model.

Of course, the picture gets muddier still, because not all image prices are entirely $1 either. (Prices go up with size.) The fly in the ointment for those analyzing the statistics is that it's impossible to know how much buyers use what they've downloaded. One fellow blogger told me, "It's like an all-you-can-eat buffet: Do people really eat more than if they just ordered off the menu? How you can you tell?"

Of course, with digital imagery, it doesn't matter--you never run out of inventory. Shutterstock makes $250 regardless of how much the customer downloads, or how much he actually publishes. The only thing the company wants to do is optimize the amount of money the customer forks over. And the more attractive the "deal" appears, the more likely he'll pay.

So the surveys that Shutterstock does only has that one objective: to enhance that marketing message. Everyone else, however, is using this information to get a pulse on the health of the stock photo industry. And to do that, we really do need to know how many photos the client is publishing.

While we can't know directly from buyers, we can look at broader industry data on advertising purchases and editorial print to get a rough idea of the health of the industries that use stock photography. And, as we all know, ad sales and printed editorial pages are shrinking. So we can naturally assume that, even though "traditional buyers" may be paying more for subscriptions--as Shutterstock and iStockphoto have told us--buyers aren't using more images than before.

These contradictory trends (higher revenue from stock agencies against lower image usage) should be a strong hint to industry watchers that what they thought (and have reported and blogged about) isn't what's really going on.

While stock photo industry executives can be applauded for making more money, the fact that clients are actually paying more to publish fewer images would suggest that these companies have always under-priced their inventory--that buyers have all along been willing to pay more. It's like the all-you-can-eat buffet: if the price for a full dinner on the á la carte menu is $50, and the buffet price is $5, what affect does it have on the buyer if the price doubled to $10? Probably not much. And this is precisely how most image buyers feel about most stock photo prices, too. They're already too low to care if the price happens to double.

This is yet another illustration that most all stock agencies never put any science behind their pricing strategies. I've blogged before about this before in my article titled, The myth that microstock agencies hurt stock photo pricing.

The question still remains, just what is the sweet spot for pricing? That is an entirely different matter, and the aforementioned article above discusses the science of pricing in much more detail. Ultimately, the article concludes that the problem is that no one does true, statistically viable surveys on who the real buyers and sellers of stock imagery are. Almost all price surveys out there are retrospective--what happened in the past--and are limited to a very small and unrepresentative sampling of the stock industry on the whole.

And that's why Shutterstock's own surveys can ultimately lead to more self-destruction than the temporary uptick they may have gleaned from the marketing message.

Viable Sample Sizes

Unfortunately, there's a more disturbing fact at hand. If the Shutterstock survey is representative of anything, it's that it is typical of the kinds of surveys usually done by everyone in this industry. And the major errors are that their sample sizes are far too low, and the people they survey do not represent a random distribution of buyers. In this case, Shutterstock asked only 300 "successful art directors and graphic designers" (according to the survey report) about their buying habits.

Why only "successful" ones? Unsuccessful buyers are still buyers, and there's plenty more of them than successful ones. One can even argue that "unsuccessful" art directors probably overpay for images. (Another quote, this one from P. T. Barnum, "There's a sucker born every minute.") And if there are more of them, it would suggest the market will bear higher prices than what people currently see. The real question is, which group represents a more accurate sampling of industry buyers and their behaviors?

The PR firm that contacted me about this survey (Morton PR) said in response to my query on the matter:

...the survey doesn't include the average consumer ... many professional photographers obsess about the importance of the design community as an image marketplace.

And this type of thing is at the root of a systemic problem with the stock photo industry: The obsession with the "traditional" buyer.

What is it that constantly reinforces this misperception about the stock photo industry? To illustrate, ask yourself this: What percentage of the cell phone market is represented by the iPhone? Most people think it's rather large. All you hear and read about these days is the iPhone and applications for it. Everywhere you look, people are hunched over their iPhones, thumbing away... often while driving.

Now, let me broaden the question to include all smart phones, such as the Blackberry and all the Palm phones. What percentage of the cell phone market do all smartphones represent? While most people think these devices account for 80% of phones, the reality is that they all collectively add up to only 10%.

The false impression that people have of the cell phone industry is a byproduct of several factors: hype, consumer buzz, and the news media. The psychological effect all these have on human perception translates to our subconsciously looking for smartphones: because that's all we hear about.

The same thing is true of the photo industry: all the "news" gravitates around stock agencies. And by consequence, everyone thinks that's the only important part of the industry. And this belief creates an echo chamber and feedback mechanism, resulting in even more news coverage, bloggers, photo forums, industry trade groups, and of course, survey methods.

A classic (and consistently repeated) example of how this misperception is perpetuated by press-analysts can be found in the article, Will Hobbyists Take Over? Here, Jim Pickerell addresses this question by examining only stock agencies. He concludes:

An examination of iStockphoto's top sellers reveals that those making the most the sales are very active stock producers, not part-time shooters. Over 70% of those with images on iStock have had five or fewer downloads. They are the hobbyists.

The assumption that iStockphoto is a viable representative of where most people buy stock images is more than just incorrect, the agency represents such a very narrow niche of buyers that it is probably least representative of any single buyer demographic. Yet, the constant focus on iStockphoto (because it's the largest of stock agencies) is like the iPhone of the cellular world. Accordingly, his statement perpetuates the misinformation that the company sells the lion's share of images worldwide.

The evidence against this is overwhelming. Even traditional research in the year 2000 showed that only a third of licensed images came from stock photo agencies. The rest were purchased directly from photographers. In those days, only pros were selling stock images--consumers weren't really that engaged in online photo sharing to a sufficient degree to affect the market. But has that ratio changed towards or against agencies over the past ten years? What with the growth of photo-sharing social networks and high-quality digital cameras, why would one think that the ratio of stock image sales would remain in the hands of pros, or even the stock agencies?

Pickerell's observation of iStock's sales and the distribution of pros/hobbyists is quite easily explained: most pros heard of stock agencies, and have traditionally use them, so it's natural that they gravitate there. The same with the photo buyers who use them: they go there because they always have. They all happen to be the native species to that particular economic ecosystem -- it shouldn't surprise anyone that "hobbyists" won't go there, or do well there. That iStock may have many "hobby-like" members is nothing compared to sites like like Flickr which have have millions upon millions of users. And many of them sell stock quite well.

As for the buyers, the story is much the same. We don't expect to see many non-traditional buyers go to agencies either, since they traditionally never have. And since agency's websites rarely come up in general search results for most search patterns, there's no sign that this trend will change much in the future.

Ok, But So What?

Indeed, fear may be at the heart of all this. For if one to were actually do a proper study proving my point, what then? How would that change things?

More to the point: What's the alternative to a stock agency? Though many photographers sell on their own sites, it's not necessarily easy to do. It's a saturated market, and it's hard to get instantly noticed. Most photographers either can't, or don't want to build their own sites, nor have the patience or wherewithal to wait for their site to increase in google rankings so their images are "discovered." Which brings them all back to agencies (not that they do any better with them, by the way--it's just easier to fail with an agency than it is to fail entirely on your own).

The same is true for the traditional photo buyers: they've used stock agencies for years as well, and typically choose the kinds of images produced by those particular kinds of photographers. Tracking the behaviors of buyers who don't use agencies is, admittedly difficult. How do you find them? True, they're everywhere, but that doesn't necessarily help.

Difficult though it may be to target the consumer-photo-buyer, it doesn't mean they don't exist, or aren't worth trying to track. And it certainly doesn't mean they don't have a very large tidal effect on the market as a whole. They deserve attention. Ignoring them is, and always has been, the greatest reason why the stock photo industry has been struggling. There's more to the stock universe than agencies.

It reminds me of the quote from the Blues Brothers movie, where Elwood (Dan Aykroid) asks the bartender, "What kind of music do you usually play here?" To which she responds, "Oh, we got both kinds. We got country and western!"

Turning a blind eye to the rest of the stock photo universe affects decisions about where to put marketing dollars, where to do research into buyer behaviors, pricing, and business development. If it were generally accepted that the market were larger, agencies could form partnerships with other media licensing agents, social groups and legal networks that reach that larger market. (Getty's relationship with Flickr is in name only--there's been no actual change in how business is done. They only want to get access to rights-managed images from a uniquely small and select group of photographers. In short, it's a marketing ploy, not a true embracing of the consumer market.)

Discovering Buyers and Sellers

If the wider stock industry is so large, who are those photographers? To name a few: Wedding photographers, sports shooters, and many other "pros" (as Pickerell defines them) who have begun selling their inventory as after-market stock over the past five years. Do they get more than 50% of their income from stock sales to qualify as "pros" in Pickerell's definition? No, but they're not hobbyists either. And they certainly account for a great deal of sales.

An internal survey done by a magazine that I once wrote for showed that over 75% of pro photographers that don't "normally" shoot stock sell over $15K of stock licenses annually. This isn't a lot of money by Pickerell's definition of a "pro stock photographer" -- or, for a photographer that focuses solely on stock -- but it certainly represents a healthy chunk of stock sales that he dismisses from his calculations. The circulation for that magazine was over 50,000 at the time, which means that 37,500 people earn $562,500 annually from stock sales. While not huge by itself, it's one (small) magazine. Extrapolate to all pro photographers everywhere, the numbers get impressive: 500,000 photographers would generate $5B in stock sales annually, and Pickerell's data doesn't take into account.

And those are the pros. What about non-pros, who outnumber all pro photographers by orders of magnitude? We don't know specifically because no one has done that kind of survey. (Doh!) But, we can look to other data that might suggest what that might look like. For this, I revert back to the question of who the buyers are:

The Small Business Administration says that small businesses account for 80% of the american workforce. If so, this segment of the US economy must easily overshadow the "traditional photo buyer". And it would be naive to assume they don't license imagery. So, where do small businesses get their images?

A survey I did in 2007 of individual stay-at-home graphic designers and page-layout contractors (many of whom were part-time) shows that they purchased an average of $10K of images in the past year for their small-business clients. They create ads and brochures for professional services (doctors and lawyers) and family-owned businesses (drug stores, hardware shops, restaurants and cafes), among others (sometimes including larger corporations).

In fact, smaller companies were five times more willing to pay higher license fees than larger companies. This should also be no surprise, as big companies have weight and negotiating skills. WalMart negotiates for lower wholesale prices from suppliers, for example. On the other side, consumers are willing to pay higher per-unit prices as a general rule anyway. Consider ATM fees, which are usually $2-3 per withdrawal, regardless of the amount. Most consumers withdrawal $20, making the fee 10% of the transaction. Richer people withdrawal up to $200, reducing the fee to just 1%.

If stock agencies really wanted to improve per-image pricing, target the consumer. While they say they do, over 75% of the buyers I surveyed never heard of "stock photography" as a business. (Several thought I was referring to "stock footage", as in film reels.)

Of those who were familiar with stock-photography as we know it, only 60% heard of Getty. And only 10% of them used Getty. (In follow-up interviews, they heard of Getty because those are often the by-lines for newspaper photos; not because they purchased from them.)

So, where do they get their images? The #1 answer: "Google". Most people use the internet to find images, and extremely few image search results are from stock agencies. They bought directly from the photographer. Those photographers were not necessarily pros either. One woman said she expressly avoided buying from pros because they make the purchase process too difficult; they would require her (and sometimes her client) to sign lengthy license agreements. "It's just not worth the time. The cost of the image isn't the problem, it's the hassle."

If they're buying images and avoiding pros, one can only assume these are "hobbyists."

The #2 answer for where people buy images was specifically characterized as "Local Photographers." In follow-up interviews, the pattern is the same: friends, wedding photographers, art photographers (found from local galleries), referrals, and even their own photography.

The average purchase price per image from these hobbyists: $150/image. A price even Shutterstock would envy.

Was my survey representative of the industry at large? Not according to the rules of statistical sampling and random choosing of participants. I make no claims about the science of my methods. I conducted my survey by tracking down and interviewing the people who created the brochures that I receive from local businesses in my mailbox everyday. I also find those who create tri-folds that you find in hotels--the kind that advertise helicopter tours over the Grand Canyon. Things like that.

It's also not the first time I've done this sort of thing. But I get roughly the same results every time. It's admittedly not scientific, but the consistency of the responses certainly suggests that the "traditional" surveys done by industry analysts and trend-watchers is questionable.

Another fact my survey continues to support is the already-established truism that most stock sales are done on a peer-to-peer basis. That is, the buyer goes directly to the photographer. And this is also why it is hard to truly nail down the exact size of the stock photo industry. Unlike cell phone sales, where data is gathered by organizations that mine quarterly reports from publicly traded companies, photo sales are not done entirely through known entities who are required to release this information. (Heck, they may not even know themselves, because it's too "casual" as an income line item.)

Spending Habits

Having a better sense of who photo buyers and sellers are is one thing. But another important element is the analysis of their spending habits. This is another area where most traditional surveys fall quite short.

For example, surveys should break down buying habits by industries: which buy more, and which don't? Certain sectors do quite well in recessionary times, such as consumer staples, beverages, entertainment, to cite only a few. Would these companies show a trend towards one kind of photo source for imagery than those from other industries that don't do as well, such as construction, transportation, energy, travel? You can imagine that the old GM suppliers are probably not buying a whole of ads or spending marketing dollars, but companies that sell to grocery stores are probably buying a heck of a lot of imagery for their marketing programs.

Another data point about spending habits that's missing from the Shutterstock survey is "patterns." It showed that photo buyers "used more stock photography than they did a year ago." But that presents more questions than answers. The statement says nothing about total dollars spent on photography, or the distribution of how those dollars were divided. One naturally assumes that money has been diverted from one kind of photo expenditure (such as assignment) to stock. But that's just an assumption -- the survey didn't ask that.

For instance, if buyers spent 200% more on photos than last year, but only 10% more of that went to stock photo purchases, then it is still true to say that they "bought more stock than last year," even though their spending on other photo sources was even higher. (Of course, this is just a hypothetical to illustrate flaws in the survey methodology. I doubt this was actually the case here.)

The Business Paradox of Doing "Real" Research

In a follow-up interview I did with Felicia Morton, the president of the PR firm that helped orchestrate the survey and who represents Shutterstock, we discussed the difficulty in conducting what I would consider to be a viable study on the subject. The challenge is that a broad and detailed survey is expensive, so someone has to fund it. I asked whether someone would conduct the survey and sell the data to photo buyers. She said it was unlikely -- that companies like Nielsen Research wouldn't do it because they wouldn't think there's a sufficient number of buyers.

Seems obvious. Coincidentally, I had just such a client and would have been willing to pay for this research. So, I followed Felicia's lead and tried to contact someone at Nielsen to see what it would take to do the kind of research necessary to get a much more accurate handle on who really buys and sells stock images in the USA?

But, no one would return my call. I called two other national research firms, and one returned my call, and we spoke at length. But I was asked not to quote them by the time we got to the end of it. What I can say is that there is a general perception that the stock licensing industry probably is as large as I've always said ($20-25B), but the research firm doesn't believe existing players in the industry have any desire to either purchase the data, or (more importantly) to have the data out there if it were true. (This is why the firm didn't want to be named.)

Why would existing companies want to maintain the status quo if it were known that the stock industry were 10x larger than people think? Because it would require them to rethink their entire business model, which they would not be able to afford, which itself could compromise their current position. Therefore, with no one to buy the data, there's no financial justification for doing the research.

We also priced it out: it'd cost about $200,000 to do a real, nationwide research survey of consumers in determining what actions they've taken that might constitute a financial transactions involving stock image licensing.

Needless to say, when I reported this back to my client, he balked. His main concern wasn't so much the price (not that it would have happened anyway), but something more surprising: if the market really is $20B, everything changes. The big risk: one has to actually penetrate that market, or it might compromise the company's existing market position. It's hard enough to compete against companies that are already bigger than they are, but if it were known that there's far more fruit on the tree, then the bigger companies are already in a far better position to grow, ranging from financing to partnerships, and so on.

The question seems to have shifted now. It's not whether the market is so big, but rather, is it too big to tackle? Unless and until someone comes up with a business model that can successfully service the consumer-oriented stock photo buyer and seller -- which itself would require a monumental investment for a small company -- no one's going to try it. And if no one tries it, no one's going to spend money on a survey that shows the true market size. Moreover, no one wants that data to known, or it'll force the issue, and everyone's at risk. The industry is locked in its own self-imposed a stalemate.

This is not only understandable, but history has shown a similar phenomenon: again, in the cell phone industry. For years, not one of the major cell carriers was willing to "open up" handsets to allow consumers to download applications, not because they didn't think there was opportunity, but because it would disrupt their existing business models, which had been fine-tuned to a science. Furthermore, no one was willing to do the research to determine if there might be growth opportunity. Anything that might cause them to change their existing models was deemed as "risky."

When Apple finally disrupted this assumption, the model changed, and with it, so did the industry. Well, sort of. Cell carriers really haven't lost the stature they had before, but it sure has cost them considerably to weather the transition. But the real reverberations are being felt in the handset market -- all carriers (except for Apple) are suffering unprecedented losses. (The financial section of the July 16 edition of The New York Times had sequential headlines of reported losses by cell carriers.)

So, what will it take for the stock photo industry to change its ways and realize the potential of the consumer as both buyers and suppliers of stock photo content? It's unlikely to be spearheaded by an inside photo trade organization or stock agency, and the stock industry analysts, bloggers and pro photographers are locked into the position politically that the universe "is and always has been about agencies and pro photographers." (See my blog on the Economics of Controversy.)

It'll most likely be an outside player who sees the untapped opportunity of the global opportunity with stock imagery, much as Apple disrupted the cell phone industry. (An event that no one could have predicted just a few short years ago.) One thing for sure, whoever does shake the ground for stock, it will start by funding a statistically viable study.

I've predicted on my blog and in interviews that I think it'll be an existing media licensing company that merely expands its content library to include still images. They're already big, and they already have business models that include "consumers" as both producers and buyers of content. The stock licensing market is potentially enormous, and the existing stock agencies are drastically undervalued (because they don't recognize the industry as large.)

then again, I've heard of no rumors so far.

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