A Stock To Avoid: Getty Images Inc.

HEARD ON THE STREET: For Stock-Picture Firm Getty, The Stock Picture Is Grainy (subscription required) in today's Wall Street Journal is an interesting article because it discusses a company that might be going through an inflection point. In his book Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company, Andy Grove, former leader of Intel, discussed how businesses go through fundamental changes or shifts. Getty Images Inc. (GYI) is likely experiencing a fundamental shift in its business as stock photography has become more popular with the masses and their digital cameras, whether those cameras are digital SLRs or simply cell phone cameras.

"We still need Getty for past and near-past events, but today photographs taken by laymen can appear on the front page of world-wide newspapers," says Jd Michaels, director of print services at BBDO, an advertising firm in New York. "In the next election, will we really need to go to Getty for a great digital picture of Barack Obama? Maybe not."

Getty's biggest customers, representing more than half of its revenue, are advertising, marketing and design companies working on behalf of clients. About 25% of revenue comes from media companies. Some say they will be looking for cheaper ways to gain access to images.

"Over the next couple years, we'll probably spend less" on Getty's images, says Jigisha Bouverat, director of art buying at ad company TBWA\Chiat\Day in Los Angeles. "All the technological advancements with digital technologies and the Internet are allowing more photographers and agents to build and share their libraries, giving buyers like us greater range."

Some of the most popular images today, such as those of celebrities, often are of lower quality -- or even blurry -- suggesting that there may be less need for the expensive, top-quality images sold by Getty, some argue.

Although I have not read the latest conference call transcript (Seeking Alpha) or thoroughly investigated the company's financial statements, I am leery of Getty Images as an investment because of the potential threats from newcomers. Say, for example, that Flickr decides to allow its members to sell their photos—an idea that I borrowed from Dan Heller (see below). Many photos on Flickr already have GPS coordinates attached to them. Flickr already has algorithms to determine interestingness and most of the photos are already tagged. A user wanting an image can readily search Flickr's database for almost any location on the planet with the more interesting photos surfacing first. Just imagine the impact to Getty and other stock photo sites if Flickr allowed its members to unleash their vast treasure troves of photos.

For those interested in learning more about the business of selling online stock photography, I highly recommend reading Dan Heller's Photography Business Blog and more specifically five recent posts:

1. Why Corbis won't go public...yet
2. Follow-up (correction) to Corbis posting
3. Photo Marketing isn't about pushing, it's about pulling
4. The future of photo sharing sites and agencies
5. Two-Phased Approach to photo-sharing/licensing model

For all the reasons that WSJ references and that Dan Heller mentions in his articles, I am avoiding Getty Images as an investment.

Update

Today Getty Images filed a FORM 12b-25 with the SEC.

PART III — NARRATIVE

As was disclosed in its press release dated November 9, 2006 and in its report on Form 8-K dated November 9, 2006, the board of directors of Getty Images, Inc. (the “Company”) has established a special committee to conduct an internal review of the Company’s historical stock option grant practices and related accounting for stock option grants. This review is being conducted with the assistance of independent outside legal counsel.

The Division of Enforcement of the Securities and Exchange Commission (the “SEC”) had earlier notified the Company that it is conducting an informal inquiry into the Company’s historical stock option grant practices, and has requested that the Company provide the SEC with certain information relating to the Company’s historical stock option practices. The Company is cooperating fully with the SEC in this informal inquiry.

At this time, the special committee has neither completed its review, nor reached any conclusions about the Company’s stock option practices and related accounting. Until the special committee’s review is complete, the Company will be unable to file its Annual Report on Form 10-K for the year ended December 31, 2006, which will not occur within the prescribed time period for the filing of such Form 10-K (including the extension under Rule 12b-25). The Company intends to file its Form 10-K as soon as practicable after the completion of the special committee’s review.