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In my last blog post, Selling Stock: It's About Search Rank, Not
Price, I argued that the price variability in the stock photo industry
can be exploited by those who garner high search rankings. The rationale
is that the direct and indirect cost (overhead) of finding an image so far
exceeds typical license fees, that photo buyers are more indifferent to
those license fees than sellers believe. Thus well-ranked photo sites
would be able to command higher license fees, simply because they have
first access to the buyer.
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In fact, well-ranked photo websites are undermining their own
profitability by lowering prices unnecessarily, mostly because they are
following their perceived competitors, not because the market is
demanding lower prices. Note that the "market" is different from "their
customers," because (as this essay will show), most customers for stock
photo agencies are a small subset of the larger market, nor are they
(or their behaviors) representative of what the market will command.
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Traditional economic theory would typically predict that market efficiencies
would result in photo buyers finding lowest prices using modern day search
engines. That would be true under normal economic conditions, but even
with problems of "volume of content" aside, the main problem for search
engines is that they are optimized for text. It's still largely impossible
to truly guess what the searcher is looking for with any given query.
Therefore, photo buyers have a much harder time finding all the available
sources for images they're looking for than they would for common retail
items, ranging from electronics to cars to real estate.
In economic terms, the photo industry represents a classic case of an
"inefficient market."
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The definition of an "efficient market" is one where
all information is available to both buyers and sellers. (See this Wikipedia
link for extended definitions, examples, and citations.)
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Examples of efficient markets are exchange-traded commodities like oil,
orange juice and automobiles, among others. Here, producers of
commodities make their wares generally available, and market-makers trade
on this information. It is exceedingly difficult (if not impossible) to
have inventory that the market is unaware of, or to purchase commodities
without the broader market's awareness. These are the conditions that lead
to the definition of an "efficient market."
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While there will always be price volatility, it is almost entirely
governed by predictions of how
supply and demand might be affected by external events. The weather
affects the price of Orange Juice; war and instability affects the price
of oil; and a litany of factors affect the auto industry.
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By contrast, most photo buyers and sellers do not have that much information
about the global market of buyers or sellers, let alone access to
conditions that can affect future supply and demand. This results
in "market inefficiency," which results in price inconsistencies,
precisely as predicted by economists. Therefore, prices vary from high
to low across the spectrum, depending on the perception of the buyers
in any given time/place. This is because they have limited and
incomplete information about the global supply chain.
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This also explains why people objected to my proposition from my prior
article. They do not have access to "all information," and worse, they are unaware that their worldview is
limited. That is, most pro photographers are under the illusion
that the entire market of stock photos is monopolized by a small number of
stock agencies.
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Ironically, the other markets (non-agency buyers/sellers) don't see the
other side either. These discrete and separate markets will, by
definition, find different prices than buyers in other markets. Stock
agencies will view one another as competitors and lower their prices,
whereas websites that are unaware of stock agencies (or don't attempt to
compete with them) will command higher prices.
To optimize prices
and create an efficient market, the following would have to take place:
- Stock agencies would have to expand to cover a larger
proportion of the image-buying market. As my prior article advised, the
way to do this is to partner (or merge) with photo-centric websites, whose proportion of global internet traffic is
very high. This will allow "more information to be more universally
available to a greater proportion of the buyers and sellers." This now
leads to market efficiency.
- Once the market became
efficient, it could then be automated through predictive pricing
algorithms, precisely the way Google automated online ad prices using an
auction-based mechanism. No doubt this is not a simple algorithm, and it
took years to evolve, requiring considerable data mining to determine
optimal market pricing. But it was achieved to a point where it is now a
highly viable (and mutually beneficial) economic model for buyers and
sellers. The market of photo buying is similarly large, and there's enough
economic activity that appropriate data-mining efforts could lead to
similar algorithms for auction-based image license
pricing.
The question is whether anyone is willing to invest
enough into this untapped market.
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