Getty, and Bill Gates’ Corbis, has perhaps the easiest business to attack with a wiki-model business out of anyone out there.  I have estimated that their model could be attacked by anyone employing a wiki-model in a Web 2.0 world for $20,000.00 with operating capital to last 6-months.  An industry contact Augustine Fou, CEO of PictureSandbox.com says this can be done far less: "Anyone with $1,000 can build a web 2.0 service — something as simple as a meta search engine for photos which searches across every available microstock collection. Helping the potential buyer more quickly and easily find and license a photo means that purchase will occur outside walls of traditional stock houses."

Today Getty’s stock didn’t just hit a 52-week low.  At $30.10 it has now given up all the stock gains back to early 2003.  In early 2003 this went from a stock in the high-$20′s and low-$30′s rapidly up to $40+, then $50+ by December 2003, and it reached the $70′s, $80′s, and even the $90′s before the end of 2005.  There is less and less war coverage now and the coverage that requires photos can be had for far less.  But the main area of attack is the non-copyright (royalty-free) event photos in what is becoming more and more royalty-free.  A high resolution picture of a bear eating a salmon just isn’t worth what it was even in 2005.  As media conglomerates merge it creates fewer clients, and any new media start-up out there knows it can get stock photos and digital audio or video media for free or very close to free.

Getty won’t implode, or at least we are fairly sure it has a place in the future.  We sent out our Special Situation Investing Newsletter in early May when Getty Images stock was just above $50.00 with a $36.00 to $38.00 target price by early 2008.  We even gave the options strategy for it as the maximized way to limit risk.  Early in August we sent out an alert after it hit our downward target.  It has continued its slide, even worse than we thought it would.  At some point we feel that this could become an incredible value stock as long as it can stay profitable, but we aren’t about to go out with any call like that this soon.

We are constantly looking at special situation investing opportunities out there for our newsletter subscribers.  We won’t be putting Getty on any reverse list for any private equity or management buyouts in the immediate future, but we’ll be issuing for more and more special situation opportunities that have the same criteria.  Some special situations are buyouts, some are break-ups, some are pending de-mergers wrecking an industry, and others are special situations for other reasons.

Jon C. Ogg
August 15, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Analysts have been somewhat cautious in general and the average target looks very close to the adjusted current price after today’s gains.  The chart has also been closer to the lower-end of a longer-term trading band, but the pre-earnings gain puts this one in a neutral stance with no clearread either way.  Options are hard to read with today’s gain, but it looks like options traders would be expecting a move of up to $0.45 to $0.50 in either direction.  Sorry the actual internals are hard to read today, but that is what the tea leaves are indicating.  Lastly, NASDAQ has its short interest as 2.318 million shares for July, more than 6-days average volume.

This one will be interesting to report because of some overlaps with recent earnings and recent industry changes.  The Jupierimages unit was the likely reason for the buyout offer from Getty Images (NYSE:GYI).  If you subscribe to our special situation newsletter or if you read some exit updates this week regarding what we thought was going to happen to Getty Images and legacy stock photo businesses, then the run in Jupitermedia today will even be more of a headscratcher.  The good news for Jupiter is that it has other operations and has been trying to keep itself diversified in new media areas (see its last acquisition of MediaBistro.com) that will keep that major stock photo business from being such a key factor in the years ahead.

The balance sheet on this one is not one we normally we would want to give a solid evaluation to because of the large goodwill and intangibles, even if it does own the beloved Internet.com domain.  This 10% rise ahead of the numbers is more than puzzling.

Jon C. Ogg
August 8, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Last week Getty Images posted an earnings and revenues increase, but the company’s lowered guidance (which we expected) is taking a serious toll.  Revenues rose 6% to $218 million and earnings came in at $0.56 on a diluted basis. First Call estimates were $218.8 million revenues and $0.58 EPS.  Getty also announced a restructuring and related reduction in workforce of about 100 employees.  Unfortunately it also trimmed guidance for Q3 and Fiscal 2007.  Cash balances were $288.6 million at June 30, 2007. During the quarter, the company spent a total of $248 million for acquired businesses, of which $120 million was financed through the company’s senior credit facility and the remaining $128 million paid from existing cash balances.  The cash is very important here, at least it will be more important ahead.

We aren’t entirely negative on Getty Images, because even if it faces rough waters it still has a shot of maintaining high profitability if it focuses on what will be its core markets and can fend off fledgling competitors for a while longer.  Getty will likely have a strong place in a few lines of copyright protected material for live events.  With a 15 forward P/E ratio the company doesn’t expensive at all, but they are going to have to fight harder and harder to compete in the same pricing model.  At some point, it wouldn’t even be uncharacteristic for the co-founders Mark Getty and Jonathan Klein to try to mount an MBO.  They didn’t exactly come from nowhere and could probably get financing even in a liquidity crunched world.

The argument that it is really just a value trap for investors is equally or even more overwhelming.  Vast portions of the company’s business will fall prey to mass collaboration, and anyone with about $20,000 can build a similar wiki-model stock photo and copyright video and audio business.  It isn’t that Getty will start losing money, it is that margins could face a perpetual squeeze here.  Once these online digital photo hubs begin to  take a C2C or C2B (yeah, remember those terms?) (now p2p) approach a step further, then there is more trouble for Getty.  The value of digital, audio, and video images is unfortunately not what it was once even 12 or 24 months ago (see article on Jupiter Media deal falling apart).  Not in a world where your business has the easiest model to mass collaborate or Wiki at any rate.  Getty Images is now and will continue to be the true wiki-model victim.  Even though it has made some good acquisitions it cannot acquire everyone.

If you think the $20,000.00 sounds low, an industry contact of a relatively new competitor estimated only a fraction of that.  Augustine Fou, CEO of PictureSandbox.com, stated, "Anyone with $1,000 can build a web 2.0 service — something as simple as a meta search engine for photos which searches across every available microstock collection. Helping the potential buyer more quickly and easily find and license a photo means that purchase will occur outside walls of traditional stock houses."

So, is Getty Images now great value stock, or is it just a major value trap?  We are looking into this now to see if there is a reason to reverse our negative projection.  This stock didn’t really participate in the last major market rally, and this last drop from guidance has made it fare much worse than the broader markets.  For now, we are looking at many other special situation investing situations and going to just call this one a victory for now. 

Download ssin_getty_may_8_2007.pdf
Download ssin_getty_close_aug_2_2007.pdf

Jon C. Ogg
August 6, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.