Getty's Share Price Tumbles; an Omen for Photographers

Getty executives crowed energetically in a conference call to analysts on January 26. Revenues for 2005 had increased 18 percent over the previous year, net income was up 40 percent, and operating margins had risen to 31 percent.

But none of that was enough to satisfy the relentless demands of investors. Following the announcement, investors began selling off the company's stock, driving the share price down more than ten percent?from about $90 to $80?over the next several days.

The reasons? First, Getty had missed its estimated sales projections of at least $735 million for 2005 by a mere $1.3 million dollars?just two-tenths of a percent. That's an amount of revenue Getty pulls in before lunchtime on most days, and the company blames it on the New York City transit strike.

"Without that [strike] we would have probably, I'm quite sure, been right at what we had said," CFO Liz Heubner told analysts.

The second reason investors sold off shares was because the company lowered its revenue forecast slightly for 2006.

With those elephants in the room, Getty CEO Jonathan Klein painted a positive picture for analysts, reminding them of the company's enviable performance over the last decade, trying to focusing attention on performance measures besides revenues, and emphasizing the plans in place to sustain Getty's market dominance and growth in the future.

But investors have already rewarded past performance, driving the company's share price up steadily from less than $20 per share since mid 2002.

Naturally, investors always wonder how long a company with performance as remarkable as Getty's can keep up the pace. The sell-off of shares was investors' way of saying they don't have as much confidence in the company's future performance as they once did.

There are probably several reasons for that. First, Getty has acquired most of the leading stock photo agencies, so gains from future acquisitions are bound to contribute less to the bottom line than previous acquisitions. Second, it has wrung most of the inefficiency from its business, so it can't count on efficiency gains to boost earnings as much anymore. And last but not least, the competition is now tougher. Jupiterimages in particular is making strategic acquisitions and jumping into new niches (subscription services and the microstock business) as aggressively as Getty. (Getty announced the acquisition of the royalty-free micropayment site iStockPhoto on February 9; see PDNews story, page 18.)

Wall Street may have lowered its expectations, but Getty is still under a lot of pressure from investors. The company has announced it will increase its operating margins even more?from the current 31 percent to 34 or 35 percent during 2006. Those gains are likely to come mostly at the expense of photographers fees, which are one of Getty's biggest costs.

To cut photographers' fees, the company has instituted a strategy of acquiring, producing, and selling more wholly-owned images. As Huebner told analysts in the January 26 conference call, "Wholly-owned content?is driving the [photographers'] royalty rate down, and therefore [driving] the gross margin up. So, yes, we do think it'll continue."

That may be assuring to investors. For photographers, it's more reason to worry.