In a remark that sent chills down the spines of those of us in the channel distribution business (the author holds a management position at a RF channel distribution company,) Meckler speculated that, while he could not say for sure, the poor performance of the distributors might have resulted from Internet-induced disintermediation; the elimination of the middle-man causing more clients to by-pass distributors and go directly to the source (Jupiter) for their images.

Anecdotal evidence regarding the small but growing micro-payment sector of the industry suggests both CEOs may have missed the point or, if not the point, a point well worth considering.   At the PACA Conference held in Key West last month, a panel of principals from four micro-stock companies addressed the ins and outs of the micro-stock business. The many edifying revelations to come out of the  panel included a) the incredible rate of growth of these businesses  has surprised even their founders and b) iStockphoto (owned by Getty) will exceed 10MM downloads this year.  The panel also addressed the question of who are the customers downloading all these images.  Facts are hard to come by on the matter.  Getty famously found that only 8% of its "traditional" buyers also use iStock.  We don't know, however, what percentage of the 10MM iStock downloads these 8% will account for.  

The anecdotal evidence I refer to comes from hearing from various sources at the many industry events in October, about how “traditional” RF clients are catching on to the benefits of the micro-stock sites and are purchasing images from them, more often.  One art-buyer and reader of this publication posted a comment including the following point:

“I recently landed a big behind-the-scenes job and my moneyed client was delighted that instead of spending $800 on a photo (their previous expenditure) we landed a stock photo for $3. The previous BigAgency never offered the option. And the client didn't know the option existed.”  

That’s just one example; make it three points for micro-stock and minus eight hundred points for traditional RF.  In the aggregate, the matter bears some simple mathematical computations, even if we must take a guess at one of the variables surrounding the issue, as follows:

Let’s assume that 5% (five percent) of the downloads from iStock represent buyers who would otherwise have purchased traditionally-priced RF images.  Sources tell us the average price per download on iStock is $1.63 per image. The 5% of downloads, then, represents 500,000 images and revenue of  $815,000.  If we compare this to the average price per conventional RF image of $215, the 5% represent a trade-off of $107,500,000 in RF revenue for a net decrease in revenue to the industry of $106,685,000.  That’s a serious dent in RF volume in an industry commonly thought to represent $2BB to $2.5BB in annual world-wide revenue, including both RF and  RM licensing. Note that this formula does not even take into account the traditional RF buyers who purchase from the many other  micro-stock sites.

If you find that 5% figure too high or too low, here’s a spread-sheet showing the net loss to the industry from a wide range of guestimates:

Click here to view full size version of the chart above.

Whatever one may think is the correct percentage today, the number of art-buyers defecting to micro-stock will only increase over time as more and more of them learn about them and as the micro-stock image quality improves.

Meckler, when asked about the downward pressure on image pricing, responded that he believes prices will continue to go down, but that Jupiter, with its huge collections of wholly-owned imagery and its wide array of licensing options stands to benefit from such a trend.  Klein also included the further development of iStockphoto as one of the key parts of the company’s plan for growth in 2007.  Our numbers indicate, however, that micro-stock volume will have to increase by an astronomical rate in order to make up for the losses in traditional RF revenue as more buyers switch from their usual sources of RF to micro-stock.  Consider the 5% example cited above.  The other 95% of buyers -- presumably the “new” buyers, never seen before -- account for revenue of $15,485,000 (again, at $1.63 average per download.)  This hardly comes close to making up for the net loss to the industry of $106,685,000 caused by the 5% switching from regular RF to micro-stock.  The industry remains in the hole to the tune of $91,200,000.  At $1.63 per micro-stock download, we’d need to see 55,950,920 more downloads to make up for the decrease in revenue from the 5% defector group.  iStock would have to grow from 10MM downloads per year to over 55MM, or by 450%, just to keep Getty’s combined RF and micro revenue at current levels.   That’s if the traditional buyers continue to account for only 5% of iStock downloads.   When they grow to account for more, the “new” buyer volume will have to grow almost exponentially to keep up the over-all revenue volumes.  To consider the extreme case, where 100% of traditional RF buyers switch to micro-stock, the volume of images downloaded would have to increase by 13,000% (the same percentage increase as from $1.63 to $215.00) in order for sales volumes to remain stable.

The reality will fall somewhere in between that 5% and the 100%.  Though the required increase in “new” buyer download volume seems a lot to ask for, the micro-site companies claim they see no end in site to their extraordinary growth.  They’ll need to keep it that way.

Both Getty and Jupiter own micro-stock businesses and both have touted their spectacular growth this year and their plans to expand them next year. While many have compared the arrival of micro-stock on the scene to that of RF in the early '90s, and argued that, ultimately, this new business model will not unhinge the industry, as some feared RF would, we wonder whether these simple numbers aren’t even more chilling for the traditional RF sector over-all than the prospect of disintermediation is for distributor channels.  The numbers suggest that the traditional RF sector of the industry may be at risk of long-term weakness and decline.  At least the old RF business has reason to reconsider the matter.  And, perhaps, so should Klein and Meckler.

----

Related Stories: 

The future of a traditional stock agency is in its own hands (October 24, 2006)

Editorial: Micro payment agencies - A force for good or evil? (July 17, 2006)

Editorial: iStockphoto acquired by Getty Images (February 10, 2006)

Editorial: The evolution of the stock photo industry (January 12, 2006)