June 22, 2004 Recent Consolidations May Have Major Impact . . . By Ron Rovtar Managing Editor The Stock Asylum This year's new wave of stock distributor consolidations may not have the ground-shaking impact of the first wave in the mid- to late-1990s. But, indications are that the results may still be profound, perhaps even bringing some clearer organization to a market that, in some ways, has ceased to fully make sense. So far this year a21 purchased Superstock, Veer bought Solus, PictureArts acquired Nonstock and Jupitermedia absorbed Comstock. All four buyers indicate interest in further acquisitions under the right circumstances and all four appear financially capable of growing large enough to be considered middle-sized agencies. The industry's midlevel was decimated during the 90s consolidations, leaving significant gaps in the overall organization of the industry. Organization is good. It helps buyers decide where to look for particular images, speeding up the search process and improving the overall shopping experience. In stock photography, organization comes in four forms -- style, price, subject matter and basic usage (commercial or editorial). The industry is adequately organized by subject matter. Many smaller collections have specialized in areas like medical, nature and sports. In addition, the largest collections are diverse enough to meet most of the numerous subject requirements of buyers. A reasonable amount of organization by usage also exists, with companies of all sizes specializing in either editorial or commercial, the two main market divisions. Even at the top, Getty Images, the largest distributor, caters more to advertising and design markets while Corbis, the second largest provider, offers a strong editorial collection. But, because nearly all of the companies that might be middle-sized today were snatched up on the first round of consolidations, few viable style options exist. Some small collections offer variety here, but it costs buyers a lot of effort to search numerous small web sites -- time they often do not have. A more balanced stock photography market would provide more large collections with stylistically distinct approaches much like a big city provides many clothing stores, each with its own take on current fashions. The situation in the stock industry today resembles a small town with a couple of clothing outlets -- enough clothes to go around, but not much variety. Organization by pricing has also suffered in recent years with many providers offering cheap royalty-free photography and more expensive rights-managed work on the same web pages -- sort of like selling $500 summer dresses from New York's swank Henri Bendel store on the same rack with $25 sun dresses from K-Mart -- confusing, to say the least. Furthermore, determining a price for a particular rights-managed usage can be a daunting task for an online buyer. Web site price calculators can be complicated and sometimes use inexact jargon, leaving buyers unsure they are purchasing the correct set of rights. No one knows how many potential rights-managed buyers give up on these calculators and just download royalty-free work even when a rights-managed package would better suit their needs. Midlevel companies that understand market positioning could bring some pricing organization to the market by creating clearer divisions between high end image providers with products most appropriate for advertising and design, middle ground suppliers with solid work for everyday marketing and editorial needs and low end distributors with good work for power-point presentations, ad hoc promotional materials, in-house business presentations and low-traffic web sites. And, who knows, the competition might just inspire someone to create simplified online pricing for rights-managed licenses. In order to understand the current situation a little history is in order. Stock photography was a relatively stable industry well into 1990s. No stock photography distributor claimed a lion's share of the market and virtually all stock sales were executed individually under a model now called "rights-managed," meaning the cost of licensing an image depended on usage. The buyer, for a price, had the option of exercising some control over other licenses granted for the same image. The first sign of turmoil appeared into the early 90s with the start of the digital revolution. Several new companies offered cheap royalty-free images on CDs, creating two distinct pricing structures. Royalty-free, of course, meant essentially unrestricted usage rights for one price, with no control over how the image could be used elsewhere. This confused and appalled traditional stock distributors who claimed that the royalty-free model would never survive while hedging their bets by preparing their own royalty-free experiments. The traditional distributors probably made two mistakes here. First, they did not properly position their rights-managed offer in the marketplace. While early royalty-free companies clearly labeled their own products as the "cheap" alternative, traditional distributors emphasized only the technical advantage of managing rights -- not a very sexy message when they could have emphasized quality photography, deep/diverse collections and personalized service. Then, as the traditional distributors started offering their own royalty-free, they missed another opportunity to clearly distinguish the two products. Instead of giving the new offer a clear new identity, they placed it next to their rights-managed offer, giving it instant legitimacy as a substitute for rights-managed work. As a result, royalty-free and rights-managed are today so wedded together that it is very difficult for a rights-managed distributors to survive without offering some royalty-free, which accounts for well over half of all stock photography sales, though less than half the revenues. Had stock industry leaders of the early to mid 90's done a better job of distinguishing market segments (especially the emerging low end segment) and then offered appropriate products to each level, the industry would almost certainly be much healthier today. The industry must still address this task of marketing appropriately to each segment if it wants to resume overall growth. As it stands, the best estimates show that the industry has generated roughly the same annual revenues (about $2 billion) for a number of years -- not a sign of financial health. The second huge stock industry change occurred in 1995 with the formation of Getty Images. Getty purchased 29 existing agencies, notably Tony Stone, The Image Bank, FPG (now Taxi), Photodisc and Eyewire. Later, Corbis picked up The Stock Market, Sharpshooters and a few others. Several of these companies would probably be midlevel companies today had they not been absorbed by the two giants. All these first-round consolidations left a considerable vacuum in the market. While many smaller distributors remained, few, if any, had collections or sales large enough to call themselves second-tier stock marketers. Aiming to fill this void, several new distributors sprang up, including workbookstock.com, Solus and Alamy. These new distributors slammed smack into the bursting dot-com bubble, fallout from the World Trade Center attack, the recession, and the accompanying decline in advertising spending. Solus lost its financial backing in the wake of 9/11, leading to its recent acquisition by Veer. The jury is still out on the other startups, which are not publicly traded companies so financial information is not readily available. Still, none appear to be doing anything near the amount of business of a true midlevel stock company. For perspective Getty Images reported sales of $523 million last year and expects to report more than $600 million in revenues this year. Corbis claimed $140 million in revenue last year and expects sales to reach $164 million this year. Considering these figures, one might conclude that a stock company would need to post at least $50 million in annual revenues to legitimately call itself "midlevel." Unfortunately, an organized market where various segments can easily find appropriate products at appropriate prices (no K-Mart dresses on a Bendel's rack, or vice versa), is not likely to happen in the stock industry until the midlevel vacuum is filled. Small stock companies do not have the market presence to bring about this kind of change and the largest companies lack the incentive since they make money either way. But, this could change. Most, if not all, of the acquisitive companies in the current round of consolidations appear to have reasonably significant financing, which should allow them to grow their acquisitions while possibly buying additional stock companies to fill holes in the current collections. In addition, all four companies know where they want to plug into the market and each seems to know how it wants to reach its particular clients. PictureArts, for example, tries to fill niche holes in the overall stock market. "We are a collection of collections," says Jeffrey Burke, vice president of Picture Archive Council of America (PACA) and co-owner of PictureArts with his wife Lorraine Triolo. We want to offer things you cannot get elsewhere." Along with Nonstock, PictureArts operates Brand X Pictures, a royalty-free collection, Foodpix, a collection of food images, and Botanica, an eclectic collection of lifestyle and nature images. Nonstock is a general collection, but its offbeat, arty style separates it from most other collections. Burke says PictureArts is one of the four largest stock suppliers in North America. Slightly coy about income, he characterizes PictureArts as "a very solid eight-figure company." He says such revenues provide the flexibility to move when the right collections come available. He notes PictureArts acquired Nonstock with no outside financing. "We are looking around, Burke says, "but we are not just looking to bulk up." Any acquisitions would have to be a good fit with the rest of the company and its approach to the market, he says. Likewise, Veer plans a careful approach to any further purchases, says Jacqueline Wallace a founding partner who is responsible for business development and communications. Veer seeks a place in the sophisticated, high-end designer market. Most of the partners running Veer were principals in EyeWire and presumably profited handsomely from the sale of that company to Getty. One could speculate that at least a portion of the Getty money is available to Veer, giving it a strong financial base. "We're always open to opportunities, but we are not aggressively pursuing any acquisitions," she says. "It would have to be a quality product that fits with our strategy." Solus was a good addition, she says, because of its "sophisticated, stunning images." Wallace says that Veer is working hard at improving its current offer of still photography, illustration, video footage and fonts. The existing Solus collection is being scanned at high resolution and cleaned so that all images are ready on demand -- the kind of service buyers would expect from a midlevel agency. Solus scanned and cleaned images as-needed. In addition, Wallace believes that Veer can talk to the high end of the stock market in ways that other agencies cannot. "We are designers ourselves," she notes. "We really understand the whole design process. We can approach creatives on their own level." Superstock, on the other hand is aiming for wider market, though still upper level, says Haim Ariav, a former photographer and Superstock's President and Chief Operating Officer. A21 had planned to start its own stock photography company, he said, but decided buying Superstock would help the company reach its goals much faster. Ariav compares Superstock's strategy to the Target Department Stores. "Target's a good place to shop. It allows people to get what they want when they want it. They draw you in with some high-end brands, but have all the affordable everyday items you will ever need." Ariav clearly has his eye on the stock industry's midlevel vacuum. "I'd be lying to you if I said we were not looking at that," he says. He believes the money is available to make it happen. Ariav said a21 used investor money to purchase Superstock. Now the company will sell Superstock's 73,000-square-foot facility in Jasksonville, Florida, and lease the building back. The sale should generate considerable cash for operating and updating Superstock while allowing a21 to leverage additional investor money for financing future acquisitions, Ariav asserts. Like the other companies, he says, Superstock and a21 will exercise a great deal of care in picking new companies to purchase. "If the content isn't what we are looking for, we won't buy it," he says. We are looking for growth through purchases that fit with our strategic plan." Jupitermedia's purchase of Comstock is different from the other three acquisitions in at least one way -- the purchaser is not primarily an image licensing company. However, Jupitermedia does operate Photos.com, a paid subscription service that allows users to download up to 250 images a day and Clipart.com, another subscription service of illustrations, sounds, photos and animations. "We're essentially the Walmart of the business," says Alan Meckler, Chairman and CEO. "We're less expensive and easier to use." The Darien, CT, company, which reported almost $47 million in 2003 revenues, has a number of internet interests that provide information and other services. JupiterWeb, for example, owns more than 150 web sites and over 150 e-mail newsletters viewed by 20 million users. Meckler says that Comstock, which owns all images in its files, will continue to sell rights-managed and royalty-free photography. He says Comstock will be a brand of Jupitermedia and will retain most current employees. One change, he notes, is that all Comstock sales will be web-based. "Everything will be online," he says. "there will be no sales people." In addition, Meckler says, Jupitermedia will roll out "something new to the market" by the end of the summer. He won't supply details. Meckler says that Jupitermedia has the money for additional acquisitions. He adds, however, that the company wants only wholly-owned collections. "We don't want to represent photographers," he says. So where does this all leave the stock photography market? "This consolidation is positive for the customer in that there will be less confusion about where to go for the image you need," says a21's Ariav. "There will be the same number of images there, but less competing noise." Adds Burke: "There is a clear stratification in the market and I think you are going to see more of that." "Stratification" and "less confusion" are both possible signs of organization returning to the marketplace. Stratification should result in products with appropriate pricing for various market levels. Less confusion may come from this stratification and from the emergence of several larger collections, each with its own distinct style. Royalty-free in particular seems to be finding stable niches at both ends of the market. At the low end, brands like Jupitermedia's Photos.com and Picturequest's Liquidlibrary provide inexpensive subscription services that could undermine offers in the middle of the market. This brings better images to buyers who cannot afford more expensive work but don't care how many times the same image is used elsewhere and for what purposes. In addition, both Burke and Ariav noted that Stockbyte, an Irish company, plans to introduce collections of very high quality royalty-free images for about $250. These would be high resolution scans with embedded clipping paths, making it easy to remove backgrounds. At the high end, a check of several established web sites revealed small royalty-free collections selling for as much as $800. Buyers may be disappointed if high-end royalty-free prices rise, but higher prices do assure a certain level of security. Buyers of $800 collections (or individual images costing $400 or more), at least know that price is a kind of exclusivity in itself. No one interviewed for this article wanted to predict exactly where all these changes will take the market. Even if the industry starts to grow again, it will remain a finite market and agencies trying to become true midlevel will need to pull sales away from Getty Images and Corbis. Certainly the two large distributors will react competitively to any potential loss of market share. But, nature really does hate a vacuum and that, in itself, may make the middle ground fertile territory for the right stock providers. Says one industry observer: "Every time you talk to picture buyers you hear them say, 'You know, I would like to buy stock from someplace other than Getty.' " Superstock can be found at: http://www.superstock.com A21 can be found at: http://www.a21group.com Veer can be found at: http://www.veer.com PictureArts, Nonstock, Foodpix, Botanica and BrandXcan be found at: http://www.picturearts.com Jupitermedia can be found at: http://www.jupitermedia.com Comstock, Photos.com and clipart.com can be found at: http://www.jupiterimages.com Getty Images can be found at: http://www.gettyimages.com Corbis can be found at: http://www.corbis.com Workbookstock.com can be found at: http://www.workbookstock.com Alamy can be found at: http://www.alamy.com Stockbyte can be found at: http://www.stockbyte.com Liquidlibrary is at: http://www.liquidlibrary.com © Stock Asylum, LLC