Do stock agencies benefit from the rise of digital imaging? Public data is available over the 2001/2003 time period for two companies, Getty Images and Superstock. (The latter info is thanks to the acquisition of Superstock by A21 Group.) These companies seem to have seen about a 10% reduction in their internal expenses during this period—probably thanks to the benefit of digital automation.
In addition, during 2000 and 2001, many agencies (including my agency, Index Stock) asked their artists if they could keep a bigger share of royalties they generated. They raised the share they keep of each license to 60% or 70% of the gross instead of 50%. One reason they said they needed this extra money, was to handle the conversion of their systems from film-based to digital-based. They needed to add higher-powered computers for their editing staff, bring in more scanning equipment, and upgrade their image storage facilities. They had to upgrade their Web sites to support e-commerce pricing and digital delivery of images.
As many artists pointed out at that time, this grab by the agencies was unfair. Artists also were facing increased expenses due to the shift to digital, and needed more money to pay for new cameras and computer equipment. Of course, the “bargaining power” in this situation lay with the stock agencies. Some agents at least attempted to make countervailing concessions (e.g., eliminating catalog or ingestion fees). Most artists reluctantly agreed to change their contracts.
Unfortunately, even with the benefit of BOTH lower operating costs AND lower commission expense, few traditional stock agents have been able to make money. We only have reliable published figures on about eight agencies, but if you plot these figures on a simple “industry map” chart, it is easy to see the problem. To make money, an agency must pay out less than in operating costs and commissions, than it brings in via licensing images. The average operating costs for the five traditional agencies with published numbers (Getty Images, Superstock, and ImageState) is about 70% of revenue. To make money, they would have to pay out less than 30% to their artists. This is at the low end of the traditional agency model—a payout of between 30 and 50%.
Of course, industry-leader Getty Images has managed to put itself at the low end of BOTH the range of operating costs AND the range of commission payout to artists. It has been able to do this thanks to its immense scale advantage over the rest of the traditional industry. A few other agents may be able to either squeeze their costs, their payouts, or both enough that they can eke out a profit. However, most agents are likely to lose money, at least some of the time.
An alternate model seems to be working better for some agents—although it may be worse for artists. This is the “wholly-owned” model, where the agent buys images outright. The operating costs for these agents may be as high as those for traditional agencies. However their low commission payout rate gives them room to make a respectable profit.
There are a few agents who are claiming that their “fully-digital” model will allow them to have both low operating costs and high payouts to artists. The publicly-available data on these models is slim. However, all that I have seen suggests these companies are generally losing money, as their operating costs turn out to be higher than they expected, partly because they fail to generate a lot of license volume. A payout rate of 70% or more requires operating expenses of less than 30% of revenue. It is hard to see how this is possible. Even massive Web sites like Google and Yahoo spend 40% to 50% of their revenue on operating expenses. It may be a myth to think there is a high payout, low expense model available, in the stock image industry.
Is the outlook grim for traditional agents? Not necessarily. There are two ways they can react that seem likely to help. First, traditional agents can push further into digital technology and use it to lower their costs and improve their responsiveness to their market. For instance, an editor in a fully digital agency should take less time to review digital images on a screen than he or she took to view film images on a light box. When images come in to the agency already digitized, it cuts out scanning costs and removes a major bottleneck. The result is that the lag time between an image coming into an agency and being ready for licensing to a customer, should drop dramatically (and has for Index, as shown below).
(A side note. Unfortunately, a fully digital workflow makes agency backlogs are now more visible to their artists. Before, if a film image sat on an editor’s desk for a year, no one could tell. Sure, it didn’t earn any money and it didn’t show up in any catalogs. But, most images don’t earn money or go into catalogs. Now, with every image that is accepted going on line, artists can watch daily for their images to appear.)
The other thing traditional agents can do is move up in image quality, service quality, and price. Digitization makes more of the costs of licensing an image fixed. When agency moves up its prices by 10% or 20%, its costs to deliver each image won’t change much. The agency will make another 4% or 8% for its artists and get to keep another 6% or 12% for itself. I have mentioned in earlier blogs, our agency has been working hard to improve its service and image selection, and has been able to increase its prices, as a result.
So, are agencies winners or losers from this change? A ten percent benefit in expenses normally is a huge shift. Add this to another 5% or 10% thanks to lower commission expenses, and agencies should be making great profits. Unfortunately, the available evidence shows that only a few very large agents and those with a wholly-owned model are showing strong bottom lines. By itself, digitization is not going to solve the business puzzle that faces traditional stock image houses.
Artists win; agents are helped but not enough. What about customers? My next blog will discuss the effect of digital image capture on them.
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