DIMdump

Analysis #30--How Do Subscription Users License Images One-Off?

In my last post, I gave the first part of my answer to the question from my salesperson Glen, about how Index Open affects Index Stock licensing.  As you recall, Index Open is my stock photo agency's royalty free photo subscription product (www.indexopen.com).  Index Stock (www.indexstock.com) is our 1,000,000-image strong one-off photo licensing product, for both royalty-free and rights managed images.

I showed in my previous post that Index Open users who registered on Index Stock's Web site actually bought more one-off licenses, than the average Index Stock Web site registrant.  While I had some evidence that those who bought and Index Open subscription were heavier-than-normal users of images, our subscription product did not appear to be seriously cannibalizing our artists' revenue.

I next wanted to investigate whether Index Open subscribers license one-off images differently than the other users of our Index Stock site.  For instance, many people have characterized photo subscription as "low end" customers.  If so, they should be paying less per image use, than other Index Stock registrants.

As before, I compared those customers who bought Index Open in the first quarter of 2005 with those customers who registered on Index Stock during the same period, but did not buy an Index Open subscription (either then, or later).  I averaged the price per image paid by these users, for their one-off licenses on Index Stock.  As you can see, they pay essentially the same $600 per image average license fee.

I next looked at the pattern of licensing activity, over time.  As you can see below, Index Stock registrants spent more money on one-off licenses in the first month after they registered, than they did later on.  In contrast, Index Open subscribers seem to have a steady pattern of buying--perhaps even a steadily increasing pattern of one-off licensing!  This is very encouraging information, as it suggests that photo subscription buyers continue to license images one-off, even when they have a solid subscription product like Index Open, as a creative resource.

Remember how I compared the Index Open users with their colleagues who had registered on Index Stock, but had not bought an Index Open subscription?  I did that analysis again, so I could contrast their one-off license purchase pattern.  As you can see, the colleagues had a similar flat profile, to the Index Open subscription buyers.  It may be that steady buyers of stock photos are more likely to want a subscription product, than those who have a one-time need.  Makes sense, doesn't it?

So, what is the bottom line effect of royalty-free photo subscription products, on one-off licensing behavior?  From what I can tell, subscription buyers may initially do a little less one-off licensing than they might have otherwise (based on the data in the previous blog).  However, they don't seem averse to paying a normal fee per image, when they need a one-off license (this blog's first chart).  Those who buy subscriptions probably differ from our normal one-off buyer in their need for a steady supply of images (as shown in the other two charts in this blog).  For regular buyers, having the choice of finding an image in a photo subscription makes good economic sense, and is convenient creatively.  Since the amount we may have lost through cannibalization seems to be less than the added revenue we receive from subscription fees, the overall effect of subscriptions on artist earnings should be positive.

Please feel free to ask questions (thanks again to Glen for this one), and let's see if we can come up with more answers about how photo subscription products will change our industry.

Analysis #29--How Does Subscription Affect One-Off Image Licensing?

One of our salespeople (Glen) asked me a very good question, recently.  He wanted to know if our Index Open subscription product helped or hurt our Index Stock one-off licensing business.  It took me about a month to find the numbers I needed to answer his question, and analyze them in depth.  I was encouraged to see that our subscription product appears to support and perhaps even improve, our one-off photo licensing.

Before I plunge into numbers, let me remind my readers about how Index Stock Imagery's two high-end products fit together.  Our largest and best-known product is Index Stock (www.indexstock.com).  Index Stock offers its customers their choice of more than 1,000,000 images.  About 250,000 of these are royalty free--the rest are rights managed.  Our average license fee per image on this site is over $500, and typical customers are advertising agencies, design firms, corporate designers, and publishers.

We serve these same customers with a royalty-free subscription photo product called Index Open (www.indexopen.com).  This tool allows its users to download up to 25 high resolution (50MB) images per day, during their subscription period.  The Index Open collection has rapidly grown to more than 80,000 images, from more than 80 different professional artists.  We offer one month, six month, and one year subscription terms.

We have promoted Index Open to those who register on the Index Stock site, as a great everyday source of images and as a basic creative tool.  We have made it easy for Index Open users to find images also on Index Stock, by automatically executing all Index Open searches simultaneously on Index Stock.  This allows Index Open users to see what is available on Index Stock with a single click of their mouse.  (For instance a search for "business" on Index Open shows there are 5,286 business images available to those who have bought our subscription.  The "get more" area at the top right of the search results tells Index Open users that there are "16,975 more Royalty Free and 15,831 more Rights Managed images on this subject on Index Stock."  Pretty cool, huh?)  This feature gives our users an easy choice between our subscription and one-off licensing models.

The first thing I did was compare the registration databases for the Index Stock and Index Open Web sites.   (All of my analysis was done on Web-registered users.  We have some customers still who do not use our Web sites, but it is a small number and shrinking rapidly in terms of activity.)  I found that about 60% of our Index Open subscribers were also registered on the Index Stock Web site.

I then focused on just those people who either bought the Index Open subscription or registered on Index Stock, in the first quarter of last year.  I looked at the average total value of one-off licenses each of these groups bought on Index Stock, in the ten months after they signed up.  By using the same time period for sign up, and by using a standarized period after signup to track sales activity, I hoped to make the data consistent and comparable.

I was pleased to see that customers who had bought an Index Open subscription, still bought a substantial amount of one-off licenses, during the ten month period.  In fact, it seems they bought about 20% more one-off licenses, than our average Index Stock customer.  Of course, Index Open customers also bought at least one Index Open subscription license, during this time.  Add that revenue to the one-off revenue, and these are pretty good customers for both us and our artists.

Did you notice that I had a third bar on this chart?  I was worried that there was a selection effect in my data.  Perhaps subscription buying customers are the most active licensors of stock images, in general.  If so, my result might be badly biased.  These customers might have been licensing many times more one-off images than "ordinary" customers, before they bought Index Open.  We might then have cannibalized some of this revenue, by converting what would have been one-off licenses, into subscription downloads.

I was able to test this question pretty directly, thanks to an interesting anomoly.  It turns out that a number of our Index Open subscribers work with colleagues who have not bought Index Open, but who have registered on Index Stock.  I was able to look at the average buying of these colleagues.  I found that they bought quite a bit more than an average user of the one-off Index Stock site.  I suspect that the $120 per customer difference I measured is due to cannibalization of some of our one-off sales by Index Open.  However, when you add back the $600 to $1,000 we earned on subscriptions for each Index Open customer, we have still gained net revenue, for our artists.

Now, some skeptic out there may say that these colleagues are actually sharing the subscription of the Index Open user!  If this were true, then I might have underestimated their original level of Index Stock licensing activity.  I suppose this is possible, but not that likely.  First, most people don't like sharing anything that has their log in and password.  Second many Index Open subscribers use their full 25 image download capability, at least once in a while.  (See my previous blog on this.)  They would not want to "go to the well" and find it dry!  Third, most of the customers on this list are bigger companies.  Each person working there is likely to have her or his own budget and workflow.  The non-subscriber may not even know yet, that Index Open exists and is being used elsewhere in his or her shop!  Finally, I used data from the first quarter of 2005, when the subscription marketplace was just starting to heat up.  I don't think these users would change behavior and start sharing a subscription in a few months time, even if they knew Index Open was available.

I've got more to offer on this subject, but will save it for a future blog.  For now, I take pleasure in seeing that our subscription products are building revenue for our artists, rather than destroying it.

Industry Comment #20--The Dirty Secret of Ranking

Over 200,000 of the more than one million images in my stock photo agency’s library contain the keyword “people.” Have you ever wondered how we decide what image from those 200,000, to show first?

Of course, the first element in ranking generally is the quality of the match between the search string a user entered and the metadata the stock photo agency has added to its images. There are many tricks and twists available when a user has typed in a long search string. But, because 57% of all searches done on our site contain only one word, we need to use other tricks to put our images into order.

Does image rank matter? It is hard to say. There are many variables associated with each image licensing decision. However, in certain categories such as royalty-free lifestyle images, there are many competing suppliers with similar product lines. In these “commoditized” subject areas, it seems likely that a hierarchy similar to search engine ranking may exist. According to a Marketing Sherpa study, the top three lines on a text Web search get 60% of all clicks. Pushing a set of images twenty or thirty pages down in a search result probably would cut their license fees by 50% or more.

There are several ways that stock agents could rank images:

1. Random. I know of one agent who uses random ranking. I find it extremely annoying. I don’t search linearly for images, but recursively. In other words, I may try the same word several times, as I wander around an image site. On the randomly-sorted site, if I see an image I like, but neglect to put it into my lightbox, I may never find it again!
2. Newest image first. Most of the celebrity and news stock photo agencies work this way (see Newscom for a well-organized and clean example). Whatever has come in most recently, hits the top of the list. This makes good sense for news images, but doesn’t seem suited for general purpose stock photography.
3. Best image first. Doesn’t this sound like a great approach? Make the first image the one that is the most creative, most artistic, and most interesting image that matches a certain search term. Of course, the problem lies in deciding which image is the most beautiful or marketable. I know of two approaches:
   1. Human editors pick the top images. This approach gives consistent results, but requires “tuning” of the editor’s taste to match the taste of stock photo customers. Without this correction factor, the editors can get away from current market trends, and develop a view that misses the reality of their market.
   2. Customers “vote” for top images. This approach purports to give power to end users to express their views. However, it can lead to self-perpetuation (an image that is “voted up” will stay highly ranked, because its higher starting position gets it more viewing opportunities) and to style lag (what was popular yesterday remains popular for too long).
4. Most profitable image first. This it the “dirty secret” I mention in the title of this blog. Major agencies are starting to rank images based on how much of the revenue they keep from each license. That means that an agency that has created and owns its own images will put those images first (and keep 100% of all licenses). It will then follow its “owned” images with the group of images on which it has negotiated the lowest commission payout. It will show last the images it makes the least on. This policy is not enunciated on the Web sites of these agents. Some of them make it especially hard to spot, by hiding the names of the party who contributed the image, deep in their site.
5. Sell the top ranking. Some search engines are starting to charge extra fees, if you want your link to show up in the “preferred” area. I don’t know of any stock agents that have tried to extract this type of fee from their image contributors—yet!  I doubt that it would fit our industry association code of ethics, but a lot of the new players in the stock industry aren’t PACA members.

Which approach do we take, here at Index Stock? Option 3a, of course! While it is more work for us, we feel a human-based ranking gives our customers the best possible search result. Our approach favors those artists who give us their best images. That seems fair, and is easily understood. To keep things simple, we do not tell our salespeople what our profit margin is on an image. Their goal is to satisfy a customer and maximize the revenue we generate for our artists, not to maximize our gross profit.

While we endorse Option 3a, Option 4, the “most profitable first” approach, seems to be sweeping the industry. Recently, several of our distributors approached us and threatened to “demote” our images, unless we cut our commission percentage. For about fifteen years, the “standard” payout from a stock agency to a distributor had been 40%. Now, distributors are now demanding 50% or even 60%, with image ranking as their lever.

A change in ranking could easily cut the license revenue from a distributor by 50%. Therefore, it could seem rational for a stock agent to agree to a cut in payout from 60% to 50% of gross revenue (a 17% drop), instead. However, accepting this cut might invite a further cut later. Further, if the distributor is investing heavily in shooting and promoting its own material, it is likely to push up these images to the top. Then, its agent partners will see even fewer revenue opportunities.

There is a risk for our distributors, from this strategy. If our percentage gets too low, we will eventually make more total revenue for our artists by going around our distributors, and marketing directly to their customers. I estimate that the “break point” for this strategy is somewhere between a 50-50 split and a 60-40 split in favor of the distributor. We hope our partners will understand this, and not push us to the point where it makes more sense to buy email lists and do our own pricing and marketing, instead of relying on them.