Image Industry Consolidation and The DNA Factor

After nearly a three year pause in activity, consolidation in the image licensing business has begun anew. The past 12 months have seen all three of the industries top players investing significant sums in acquisitions. Corbis' acquisition of ZEFA and the Roger Richman Agency, Jupiter Media's (Nasdaq: JUPM) acquisition of Comstock and Dynamic Graphics, and Getty Images (NYSE: GYI) recent announcement of Digital Vision and Photonica all send a clear signal that leading companies in the content licensing business have resumed their bullish outlook on the future of the industry.

And no wonder: Getty's rise to dominance can be almost singularly attributed to their effective execution of an industry roll-up strategy (initiated in 1995 with the acquisition of Tony Stone Images). Moreover, Getty has also demonstrated that by their nearly flawless integration of these companies, that partners and shareholders can realize greater value through effective execution of a roll-up strategy.

For competitors, partners and investors alike, acquisitions provide insight to the buyer's business and the buyer's DNA, aka strategy and approach, to the market:

Corbis: This Bill Gates-owned company (and the distant #2 player in the industry at $170MM as compared to Getty's $700MM) has been active in acquisitions and their inherent DNA - slow to innovate and avoid risk -- seems to be playing out again. The ZEFA acquisition, while certainly a move that bolsters revenue was done primarily to preserve market share and remain competitive in Europe with Getty. ZEFA adds little to Corbis' ability to innovate and as such is low risk/low return. Similarly, The Roger Richman Agency acquisition, while strengthening Corbis' rights clearance business (and appealing to their trained-as-a-lawyer CEO), the bottom-line effect will be minimal due to the nature of the rights clearances business. While Corbis will no doubtedly enjoy the spotlight of managing rights of famous artists and celebrities, rights clearance by definition is a labor intensive business fraught with complexities and therefore will be near impossible to automate or scale.

Jupiter Media: By contrast, Jupiter's DNA is an internet media company and their acquistions reflect this fact: While also pursuing acquisitions for content and market share, Jupiter is primarily using acquisition to accelerate adoption of a "subscription licensing" model very different from Getty and Corbis. Subscription revenue is something media companies live and die by (and highly desireable as a preferred model for business operators "to see revenue" in the future). And, unlike, Getty or Corbis, Jupiter sees itself as a pure internet play and is using it's acquisitions to enhance its position as such. Evidence of this strategy taking effect can be found in the superior Alexa rankings for the collective Jupiter properties when compared to Getty and Corbis (not to mention traffic generated to and from Jupiter's numerous affiliates). In short order, measured by acquisition, traffic and total revenue, Jupiter's DNA has guided the company in becoming the 3rd largest player in the industry.

For its part, Getty knows a good thing when it sees it. Its recent acquisitions reinforce Getty's DNA: acquire, integrate for efficiency, improve margin and generate free cash flow. Some have argued that Getty paid too much for Digital Vision (Getty paid $165MM; it has been rumored that only a year ago DV was to be had for less than half this amount). Don't bet on it: Jonathan and Co. are investment bankers by training. They ran the numbers, amortized the acquisition cost and will deliver to The Street exactly what it wants: Greater margins. By no longer paying DV a royalty for images sold, Getty gets to realize 100% of every sale and gross margins upward of 70%. The recent Photonica acquisition reflects a similar rationale: The Photonica acquisition not only buys Getty better margin, (Photonica, like DV, is also an existing Getty image partner) but will also give Getty a stronger footprint in the Japanese and the larger Asian markets which it greatly covets.

When looking at the acquisitions through the lens of a company's DNA, a very clear and consistent picture emerges. Competitors, partners, customers and investors should take note.