At first glance, it's an ugly picture for image companies Getty Images (NYSE: GYI) and Jupitermedia (Nasdaq: JUPM).

Nobody is framing these stock charts.

A few pesky problems -- the two companies talked about merging, but didn't. S&P gave Getty a credit downgrade because Getty can't file a quarterly report with the SEC. But the street's real concern is price deflation.

No Castle Moats Here
If you prefer economic moats around your investment, look elsewhere. These companies don't have fences or locked doors, much less moats. Getty and Jupitermedia license stock photos mostly to businesses and consumers. Their businesses are mostly B2B, less B2C. They sell pictures, a business with no barriers to entry.

Today, you can upload your photos to Yahoo's www.flickr.com. Soon, I'd imagine, Yahoo will let you sell your photos.

Hewlett-Packard (NYSE: HPQ) is buying www.tabblo.com, a place to upload photos and surround them with a social networking context.Probably someone you know has already started a photo sharing business?

To illustrate the bad news, consider that I paid a whopping two dollars for these "cheap" images at www.istockphoto.com:

1740-gettyPhotos.gif

The first is a vector-based illustration in Nick Monu's incredible urbanity series. Another pro snapped the second photo. How can these total pros offer exceptional art for one dollar? As the old saw goes, they make it up in volume. Nick sold the above photo about 2,500 times! (yea, for a buck, I have to share 'em). The second photo has been sold almost 200 times. And counting.

That's the good news of the so-called long tail -- on the net, almost-free multiplied by a large number of customers, it turns out, equals something.

But There is Always a Market for Quality
This sector is a case study in the destructive potential of the long tail -- they say microstock companies (i.e., companies like istockphoto that sell cheap images mostly to consumers) will pull down the prices of B2B photo stock companies like Getty, Corbis and Jupitermedia (i.e., the three largest B2B agencies that sell primarily to ad agencies and other businesses, Corbis is not public).

The Wall Street Journal recently portrayed the "grim" prospects for Getty but a current Business 2.0 article by Robert Levine was better at, er, illustrating the truly mixed-picture outlook.

Bill Gates reportedly asked Corbis executives, what the heck is their future (i.e., in a flickr world of free stuff), if they charge $200 for photos of bears?

The answer be rather simple -- not all bear photos are created equal. The article compares a $200 bear to a $1 bear. The expensive bear looks much better. If you are a business, using the bear in an ad campaign, you want the expensive bear. It's hard to see all photos going to zero -- great photos have gotta command a premium.

Getty Smartly Disrupts Itself
Currently, the microstock segment is about 3 to 4% of the estimated $2 billion market for all stock photos. In dollars, it's a drop in the bucket. But disruptive markets, by definition, start imperceptibly (VOIP is about the same percentage --3 to 4%-- of the current home phone market, and nobody thinks that number will stay small).

Getty cared enough about this threat to buy www.istockphoto.com (where I bought the above images). About two-thirds of istockphoto buyers are small or tiny businesses. Jupitermedia competes with its 90%-owned, less successful microstock company called www.stockxpert.com.

So the first bright spot is that both companies are disrupting themselves. Ask any cannibal about the first rule -- if you are going to get eaten, you might as well eat yourself. Given the current smallness of the microstock market, the question is, will B2C (think flickr) force meaningful change on B2B (think high-quality photos on billboards, and professional images in magazines and the net)?

On the one hand, as Dan Heller writes, photos are "a commodity with infinite supply." But demand will rise, too. Companies will need quality images to stand out in a noisy marketplace. They will need more quality images, not less, I would think.

More Than One Market
The second saving grace is that markets are neither as monolithic nor as static as we investors often see them. Today's photo can imagers morph into tomorrow's something-or-other if they can capitalize on their platform.

There may be an analogy in book publishing, which is bifurcated at best, fragmented at worst. The buzzworthy Lulu.com allows authors to self-publish and, here's the key, they share more of the revenue with authors. But lulu's success doesn't seem likely to threaten Amazon.com anytime soon.

Perversely, what seems like head-to-head competition on the net is often a mutual aid society. In books, there will be several winners. Against the compelling trend of a gradual power shift to the authors and customers, some publishers and fewer platforms will flourish.

If photos go like books, the trends could be: photographers' net-net will share in a greater percentage of the revenue; traditional gatekeepers like editors and publishers will need to revise their job descriptions to add greater value; and a very limited number of scale-seeking, winner-take-all platforms could become the Amazons of the sector.

It's still an open question whether, given fragmentation, this sector can support public company business models. And if Getty and Jupitermedia are merely in the business of brokering photos between photographers and buyers, it's hard to see their future and the Street's grim prognosis looks correct.

But, one the other hand, the premium photo market has got legs for running. And a platform like www.istockphoto.com has terrific potential, if they can prove they are more than a photo distributor. And they already look smart here, as they've started to feature multimedia (flash) assets and video clips. Because they aren't just in the business of brokering photos. If you look at them from a blurry distance, they are a lot like Amazon, a community for connecting customers with digital assets.

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