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The Size of the Photo Licensing Market

Tuesday, July 17, 2007

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Just how big is the photo licensing market? Why do we need to know?

Simply put, there is money to be made. It's why one asks how much oil is in a particular well. Or how much gold is in a particular mine. Whenever there's a commodity to harvest, there's an economic balance between the investment and the potential yield. Furthermore, one also needs to examine trends -- whether the market size is growing or shrinking -- as this governs per-unit pricing; the more of it there is and the deeper the well, the lower the price will be.

As with oil, gold and any other commodity, the secret to financial success is answering these questions accurately. And accuracy depends on methodologies.

What makes the stock photo industry so interesting is that, unlike every other media type that's licensed or sold, photography is the only one that has the fewest economists that follow it. (In fact, there are none.) What's more, those in the business of buying and selling stock photography use antiquated, legacy models to track actual revenues. As the main thrust of this article will address, the fact that everyone in this industry uses the wrong methods for assessing the stock industry means that there's a Gordian Knot waiting to be undone. The one who does it will be king.

To illustrate the basic premise, consider that most industry analysts measure the total size of the stock industry as the total aggregate sales of all the known stock photo agencies, plus some statistical sampling of the independent stock market (small specialized agencies and such). Add it up, and you get about $2 Billion. (This figure has been constant since 1999-2000.)

In other words, whatever the "industry" believes is an accurate number, the players within that industry behave consistently with that assumption, thereby perpetuating current trends. That is, if market prices for stock photography is trending downward, and no one regards the industry any differently than before, then no actions will be taken to change course. So, the trend will continue.

In order to make smart business decisions, one needs to use plausible and sound methodologies in analysis so as to make better predictions for more important and interesting things, like: What photo trends are making more money? What business segments are thriving, and which aren't? Where should marketing dollars be spent, and where to pull back? Should investments be made in social networks that harvest user-generated content? Are market prices really affected by microstock agencies? What kind of income should photographers expect to earn? What role do consumers play in both the supply and demand of stock photography?

With the exception of discussion of microstock agencies, none of the other questions above are ever asked or considered in photo-industry press, blogs, or online discussion forums.

Asymmetric Information
One fundamental problem with how traditional "old-school" analysis that only looks at aggregate sales of major stock agencies, is that it doesn't take into account the elephant in the middle of the room: the internet. In one respect, this isn't surprising. Up to 2000, most stock sales were from agencies and media companies, largely because digital cameras were hardly capable of producing sufficient size or quality, and because consumers weren't contributing content to user-oriented sites (like photo-sharing). So, it was actually accurate to measure the industry from these traditional sources.

But today, with trillions of images online (and growing), and photo ranking and crowd-sourcing acting as "great editors in the sky", photo buyers have long learned that traditional agencies aren't the only suppliers. Yet, industry analysts still haven't revised their methodologies for measuring the market. Even junior economists in high school know that a viable sampling of buyers and sellers need to be more representative of the population at large, not just formal stock photo agencies.

In fact, this is what Joseph E. Stiglitz proved when he won the Nobel Prize for economics. He, along with George Akerlof of the University of California, Berkeley and Michael Spence of Stanford University came up their analysis of markets using "asymmetric information." This is a method by which accurate information about your target subject can be more accurately measured by looking at other, tangential information that may appear to be unrelated at first glance, but still has a measurable impact on that target subject of research. In other words, information that appears to be "asymmetric" is often an indicator that there's other data that can bring these disparate points into symmetry.

The example that Stiglitz used is one that measured the total cost of the Iraq War. He and Linda Bilmes, a budget expert at Harvard, [analyzed the economic impact|https://www.danheller.com/images/FAQ/Business/JES_paper.pdf] by looking at a statement from Congressional Budget Office (CBO) that estimates the total cost of the Iraq war to be $500B. This includes the money paid to soldiers, the cost of weapons, and so on. The kind of stuff most people think about when they go to war. What the economists found was that this number doesn't include a trove other related "asymmetric information," such as the cost of treating severely wounded veterans. At the time of his writing, this included roughly 16,000 people, 20% of whom had serious brain and head injuries. The cost of lifetime disability and healthcare the government will have to pay for years to come are not calculated into the CBO's $500B figure. Using known data on the cost of treating people with these conditions over the course of their life expectancy, Stiglitz estimates that the government will spend between $500B and $800B.

The fact that this figure is not calculated into the CBO's "total cost" is what makes it _asymetric._

And there's more asymmetric information: the fact that we don't have that money in the treasury now means that we have to raise the money through taxes. But until those taxes are collected, the government has to use "borrowed money" (in the form of treasury bonds), and the interest that bond holders receive is paid by the government using--you guessed it--tax dollars. So, again, the costs of caring for the soldiers continues to rise, this time through interest payments. In fact, that $500-800B health care bill requires borrowing money that will cost another $100B to $350B in interest payments over the course of time.

This analysis goes on and on with other "asymmetric information." In the end, Stieglitz estimates that the true cost of the war ranges between $1.2 to $2 trillion. Yes, that's a 'T'.

And that brings us squarely back to the photo industry and the size of the licensing market. We can use asymmetric information to help paint a more realistic picture of what the true size of the photo industry is.

Holes in the Data
One thing people think about when they consider the size of the photo market is how many pro photographers there are. If you ask ten photo agencies how many photographers they represent, and you add them all up, you may get a sense of how many pros are represented by them. But, if you ask a market research firm that talks to photographers, they'll tell you that most pros submit their images to about 6-7 different agencies, on average. Here, we have a case where the market research firm knows more than the others. This is what Stiglitz calls "imperfect information", which is necessary to understand that the holes in the data are there. Now it's a question of finding them all and adjusting numbers to bring us closer to a true picture of the industry.

One way to test how many pros there are would be to do random sampling of buyers to see where they actually acquired their images, rather than to ask agencies what their sales are..

Interestingly, non-photo industry trade associations (such as advertising research groups) have asked such questions. As far back as 2000, there's been a pretty consistent statistic that most buyers get their images from photographers themselves, not agencies. Advertising Age had published statistics supporting this consistently since 2000 showing that 35% of photos were purchased from stock agencies. Yet, most people still look at the annual revenues by Getty and the other major agencies as indicators of the total aggregate size of the industry as a whole: $2B. Clearly, the market is far bigger than $2B. In all the analysis I've seen, there is no evidence that researchers have collected "asymmetric information" about these independent photographers simply because these shooters aren't mentioned--only agency data is. (In private research done for a client, current estimates are that 80% of licensed images are done on a peer-to-peer basis between photo buyers and photographers.)

So, how does one measure the size of the stock photo industry from this asymmetric information? Or rather, what information is missing so we can bring symmetry back in line? Well, first of all, keep in mind that what we want to know is not (necessarily) the size of the photo market, just yet. We want to start with the methodologies of surveying. Like Stiglitz, we don't expect to come up with a firm number, but a range of plausible values, depending on the various qualities of the data we gather.

Data's Building Blocks
Analysis must start with an understanding of the most basic, fundamental building blocks of any market: the raw materials. For the photo industry, that's the camera itself. To that, I cite a recent announcement by Canon that they are building a $450M plant that will make nothing but CMOS sensors for its digital cameras. This year alone, canon will sell 28M cameras, 3M of which are sold to pros.

This presents two points to consider:

Three million pro photographers? That's already a lot more than what most "industry analysis" has ever shown, and far more than can be accounted for by stock photo agencies, photo trade association memberships, and magazine subscriptions, to name a few. So, who are these pros that Canon knows about that no one else does? This is asymmetric information, and we need to explain it (probably by other data) to bring that information back into symmetry with known data.

Some have suggested the missing pros that Canon knows about could be wedding, portrait and staff photographers. Fair, but that assumption is also that such photographers don't traditionally contribute to the stock industry. That assumption may not necessarily be true. Examining data gathered by the industry groups that represent those photographers, we learn that about 10% of their own revenue is now derived from stock sales. And, that number is rising. The data also shows that these photographers are selling direct to buyers, not through agencies.

This is the kind of missing information that helps bring data back into parity. Putting it together, 10% of three million is 300,000 photographers. We know that the total number of microstock members isn't nearly that many, so we can deduce that the "industry analysis" isn't taking their contribution of stock sales into account when calculating the total size of the market.

Now let's assume each of these "pros" makes ONLY $1000 a year in stock photo sales. 300,000 photographers (that use Canon cameras) at $1000 each for a year, that's $300M that isn't really being accounted for in "traditional" industry surveys. So far, this puts their error off by 15%.

And that's only Canon cameras. What about Nikon? What about all the others? The total number of cameras of 8mps and higher is closer to 100M from all the manufacturers combined. Since we're likely to find a similar distribution of pros and consumers among them, and even assuming the conservative (but conveniently round) estimate that 10% of the buyers of those cameras earn a meager $1000 in a year from licensing, that suggests that 10M people will earn an aggregate of $10B from photo licensing.

Before you start thinking this is way out of line, pay attention to stories in the New York Times, USA Today, and other daily newspapers and magazines that tell stories about stay-at-home moms who are running photo businesses shooting everything from their kids to their vacations, and selling them online for extra income. The number of such stories is increasing at rates faster than ever seen before, as can be found using search features on the websites of major news periodicals. The cameras are clearly being sold, the stories about these home-businesses are emerging faster than ever, the vast accumulation of photos on the web is growing at astronomical rates. Is it "really" far-fetched to believe that 10% of camera owners may realize $1000 in one year from licensing?

But wait, there's more asymmetrical data.

So far, we've only counted the cameras that are sold to "pros." What about the other 90% that were sold to consumers? Just because they are not pros doesn't mean they don't contribute to the total size of the market somehow. To be as plausible as possible, let's be very conservative in our numbers: if only 10% of consumers earn $100 a year (yes, a measly $100--likely one or two low-ball inadvertent sales), that equates to 90M people (at $100 each) yielding $9B.

Consider that consumers sell stuff on Ebay; in 2006, Ebay had revenues of $6.35B. That's just Ebay's fees from the sales exchanged by consumers. Estimates of how much money exchanges hands between people on Ebay range from $100B to $500B. And that's between people buying and selling stuff like used toothbrushes. So, is it so far-fetched to believe that your next door neighbor got a check for $100 from a magazine or hotel for their vacation photo in Hawaii?

$10B from pros unaccounted for in surveys? $9B from consumers? The numbers are starting to add up. What other asymmetric information is out there for us to consider that isn't likely calculated by current research by the photo industry? How about:

  1. Money collected from copyright violations
  2. Sales of photos as "art" through licensing agreements
  3. Money paid by companies to their own staff, customers or clients for photos or photo-related responsibilities, which is normally a "stock" style transaction
  4. Independent self-representing photographer/agencies like myself

There is enough anecdotal evidence to show that each of these categories by themselves have signs of growth that have exceeded everyone's prior expectations. The mere existence of the billions of photos on the net, which grows daily, imply that they are finding their way to uses that have resulted in some sort of exchange of money. All of these are simple examples that collectively amount to enormous sums that are not included in the total estimate of the "size of the photo market" by anyone doing surveys.

Market Opportunity
What do we do with this information? First and foremost, it confirms that opportunity exists for companies to capitalize on the fact that there is currently no organized mechanism by which the common consumer can participate. Microstocks may think they provide a sales channel for consumers, but they are really just getting photographers from larger agencies (who sign up with as many agencies as they can). One can measure the attraction of consumers to microstock agencies by seeing how poorly ranked such sites are in search engines for common photography subjects and keywords, and by the poor ranking they have in traffic metrics on sites like alexa.com and compete.com.

The perpetuation of misinformation of the size of the market and who the buyers are by stock agencies and traditional analysts explain why Getty and Corbis continue to see revenues drop, quarter over quarter, and also have no strategy for countering downward trends of stock license fees. They continue to erroneously focus their sole marketing efforts towards traditional media buyers, and also continue to ignore the rapidly growing photo-sharing social networks as potential vehicles for attracting both buyers and sellers of stock photography.

In short, there is no photo-equivalent of Ebay to help realize the potential of the non-traditional stock photo buyer and seller. As long as people don't believe it exists, the market trends will continue on their present course. Indeed, no one expected Ebay to succeed at what it does, or that Google would succeed at tiny text ads distributed on other people's pages, or that FedEx would ever succeed in making a business out of overnight delivery. Unless someone actually does it, it's easy for everyone else to say, "it can't be done."

The Boost from Latent Demand
Despite the fact that no King Arthur will emerge to pull the sword out of the stone anytime soon, it doesn't mean it won't happen some day. And when it does, this very fact will itself cause another inflation of the market due to latent demand. Let me explain:

When people ask me what I think the total size of the photo licensing market is, I say it's probably around $20-25B, which represents real, recognized revenue generated by people that current industry data doesn't take into account. Yet, the potential size is 20x larger than that, once an Ebay-type entity emerges. What happens is that a public swell of interest causes more and more people to jump on the bandwagon, just as people jumped on Ebay. This is a phenomenon called "latent demand." It's another term used in economics to describe human behavior once the perception of opportunity emerges. Examples include:

  1. Lottery ticket sales skyrocket once the value of the jackpot exceeds a certain psychological barrier.
  2. People invest more in the stock market when common news headlines show that it's reached all-time highs.
  3. People will drive more on highways when a carpool lane opens up, because the perception is that the new lane will relieve congestion, thereby removing the very disincentive they had for driving in the first place.

The phenomenon of latent demand is so powerful that it is precisely the unexpected wildcard that throws off data projections in any industry. In fact, this is precisely why Ebay became the phenomenon that it did.

Here's another way that latent demand could emerge: in a previous post, I suggested that Google could radically change the photo licensing market by simply making it possible to find all instances of a given photo on the net, thereby making it nearly impossible to "steal" images without at least being exposed to a financial liability. This, in itself, would fuel the rate of licensing to levels never anticipated. This could actually be the catalyst that proves the existence of the larger market, which will in turn provide the impetus for an Ebay-like company to emerge. Market forces have a tendency to coalesce and organize a more controlled and competitive market once opportunity appears less risky.

(NOTE: This article was written in 2007, and Google came out with their image-recognition search in 2009. Furthermore, Picscout announced a similar engine and infringement search technology in 2009 as well.)

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