Prepared for Purdue Entrepreneurship
Certificate Program
Team Analysis & Discussion
Spring
2007 © Hank Feeser
iStockphoto
Case Study: How to evolve from a free community site to successful business
Kempton
Lam, November 26th, 2006 From: www.startup-review.com
iStockphoto is both an online community for photographers
and a source of high quality, low-cost stock photos. As of October 2006,
iStockphoto’s stock photo library contained ~1.1 million images contributed by
23,000+ photographers. In 2006, iStockphoto expects to sell 10 to 12 million
photo licenses from this library, at prices ranging from $1 up to $40 per
image. iStockphoto’s success opened up a new market segment for stock
photography, catering to customers who could not afford traditional, high cost
stock photos from the likes of Getty Images and Corbis. This success caught the
eye of Getty Images,
who acquired iStockphoto for $50 million in cash in February 2006.
Interviews conducted: Bruce
Livingstone, founder & current CEO of iStockphoto. Patrick Lor, first
employee and ex-President of iStockphoto. Paul Connolly, independent consultant
specializing in digital media and the stock photography market. Special thanks
to Kara Udziela and Yvonne Beyer of iStockphoto for helping to support the
creation of this case study.
Key
success factors
Offered a free alternative for a
previously high cost service
iStockphoto established the market
for “microstock” photography by providing high quality stock photos at extremely low
price points. iStockphoto’s innovation was offering all its photo licenses
royalty-free, available via easy download over the Internet. The notion of high
quality photos licensed for free was a game changing development in the stock
photography market in 2000. iStockphoto enabled the distribution of photos from
budding and semi-professional photographers to reach a large market for the
first time. iStockphoto also drastically reduced the cost of stock photography
for a slew of customers (graphic designers, small businesses, non-profits,
etc.) that could not afford traditional sources of stock photography.
As iStockphoto increased in popularity, hosting and bandwidth fees for the site
grew proportionally, forcing a decision upon Bruce as to how to pay for bills
approaching $10,000 per month. Bruce opened the discussion to the iStockphoto
community, ultimately allowing the community to determine an acceptable
solution. In February 2002, the community decided to charge $0.25 per photo
mainly to cover site maintenance fees, with 20% of charges going back to the photographer.
iStockphoto has since gone through
several iterations of its business model, but continues to offer photos at a
relatively low price point. The first iteration occurred in 2004, when
iStockphoto officially became a for-profit entity. At that point iStockphoto
charged 1, 2, or 3 “credits” (priced at $0.50 per credit) for photos of
different sizes, offering a 20% commission to the contributing photographer.
Today, iStockphoto offers photos at a myriad of price points and has a more
robust photographer commission structure. For example, photos are offered at
price points of 1, 3, 5, 10, 20, or 40 credits (priced at $1 per credit).
Commissions vary from 20% - 40% based on sales milestones reached and whether
the photographer grants iStockphoto exclusive use of images.
Fostered a loyal and active
community
iStockphoto was started as a
hobbyist site by founder Bruce Livingstone and it remained so for several
years. The fact that iStockphoto wasn’t created as a business venture from the
start was a big factor in iStockphoto’s success. In many ways it parallels the
start of another popular online community, Craigslist. Just as Craig Newmark’s
personality has had an influence on Craigslist, so too has Bruce’s personality
and passion for photography had an influence on the iStockphoto community.
Bruce was always a core user of the site, and as such attempted to nurture the
needs of its users.
iStockphoto consciously fostered its
community from day one through forums, emails and face-to-face meetings. iStockphoto
has many active online forums where new users can post questions and get help
from experienced users. These active forums have made the iStockphoto community
welcoming to new users and engaging for experienced users. Secondly,
iStockphoto makes a point to provide very prompt responses to user questions
submitted via e-mail. Even as CEO, Bruce routinely takes the time to send
emails to users to offer encouragement or help. Thirdly, iStockphoto hosts a
series of trips (called iStockalypses) where users can shoot photographs of interesting places
and share knowledge about the stock photography trade.
The iStockphoto site itself has many
features that help to get users engaged with the service. For one, it provides
transparency around how active certain members are with the site, specifically
around number of photos uploaded and number of paid downloads. This enables new
users to learn from the success of power users, providing examples of the types
of photos that get the most traction. iStockphoto also creates a sense of
positive psychological exclusivity amongst users by only approving photos that
meet certain quality standards. This process helps users improve their photo
taking skills and makes them feel that they have “earned” their place within
the community.
Emergence of low-cost “prosumer”
digital SLR cameras
In the winter of 2003, the Canon
Digital Rebel (a 6.3 mega pixel prosumer digital SLR camera) became available
at a price under $1,000. Both Bruce and Patrick viewed the availability of
these cameras as a turning point for iStockphoto because they created a great
influx of high-quality photos. iStockphoto was in a great position to
capitalize on this emerging trend through the infrastructure they had developed
over the previous years.
Took measures to ensure that
submitted photographs met quality standards
As the popularity of the iStockphoto
service grew, the number of photos submitted exploded. At the same time,
customers came to expect a certain level of photo quality from iStockphoto. As
such, iStockphoto developed detailed guidelines for what constituted acceptable
photo submissions. iStockphoto views this both as a quality control mechanism
and a means to provide feedback to photographers. iStockphoto takes time to
explain to contributors why their photos are rejected. According to Patrick,
sometimes a new user may only start with a 25% acceptance rate but with
constant feedback and guidance are able to improve their acceptance rate to 75%
- 90% within 6 months.
Launch
strategy and marketing
iStockphoto was originally started
as a hobbyist site in May 2000 by Bruce Livingstone. Bruce created the site as
a means to share and publicize his portfolio of photographs. Initially seeded
with 1,600 of Bruce’s photos available for free download, the popularity of the
site prompted Bruce to open the site to other photographers who also wanted to
contribute their photo collections. This transformation took place 6 months
after initial launch, creating a thriving community of contributing
photographers.
Bruce initially marketed the site by
word of mouth, telling friends via e-mail. One of Bruce’s friends, web design
guru Jeffrey Zeldman helped publicize the site from its early days by blogging
about it and using iStockphoto images in magazines like Macworld. Mr. Zeldman’s
influence in the designer and photographer communities was highly instrumental
in popularizing the use of iStockphoto for royalty-free stock photos.
As the iStockphoto community
evolved, its photographer base served as the main marketing vehicle. By
promoting their own iStock photos, these photographers create publicity and
word of mouth marketing for the service. iStockphoto provides them with some
interesting marketing tools (like free, customizable business cards) to help
them self-promote their portfolios. Today iStockphoto has 23,000 photographers
that are the cornerstone of the company’s marketing efforts.
Later on its lifecycle, iStockphoto
began advertising its service on the Internet, in print, and at trade shows. An
extension of this advertising strategy was to maintain good long-term
relationships with influential book authors within the design community who could
provide increased awareness for the iStockphoto service.
Exit
analysis
iStockphoto was able to support its
operations for many years from the revenue generated by photo sales. However,
during business planning in late 2005, the company realized that they needed
about $10 million to meet their future growth expectations, including $3
million for hardware expansion costs. With this new capital requirement, the
iStockphoto management team sought venture funding for the first time. After
securing a term sheet from a VC, management became hesitant that this was the
best option for the company. The team feared that they would not be able to
maintain product control or nurture the community in the same fashion that
iStockphoto had been built upon. Thus Bruce decided to seek other options, and
contacted Jonathan Klein, CEO of Getty Images. After some positive
conversations regarding company strategy and cultural fit, iStockphoto was sold
to Getty Images in February 2006 for $50 million in cash. This represented a
valuation substantially higher than the valuation placed on the company by the
proposed VC investment. Hence the sale to Getty Images made both financial and
cultural sense for Bruce and the rest of the iStockphoto team.
Food
for thought
I was surprisingly struck by the
parallelism between iStockphoto’s company history and evolution, and that of
another successful online community, Craigslist. Both began as a hobby fueled
by the passion of their founders: for Bruce it was photography and for Craig
Newmark it was local events. The popularity of both services grew beyond
anything the founders had envisioned, largely driven by creating a free service
where only high cost options existed before (high end stock photography and
print classifieds respectively). Both grew to a point where the services had to
be sustained by incorporating small fees into the service, all with the support
of the community itself.
Some great lessons can be learned by
the examples set by these two successful companies. For one, the needs of the
user base will tell you when is the right point in time to add fees, rather
than implementing a revenue model prematurely. For iStockphoto, as the level of
sophistication of its users grew, so did the necessity for more advanced pricing
and commission models. For Craigslist, they began charging for some categories
of online classifieds to improve the user experience. In both instances, it was
actual user needs that drove the revenue model and timing of the revenue model.
Secondly, you have a sustainable
company on your hands when you have created or contributed to the financial
livelihood of a segment of your users. One reason that iStockphoto has such an
active community is that their power users have personal, financial ties to the
overall success of the company. For example, the top iStockphoto photographers
have had hundreds of thousands of their photos downloaded – that’s real money
that iStockphoto is putting into the pocket of its users. eBay and Google are
probably the best two examples of Internet companies that have also created
significant personal wealth for individual users. iStockphoto has created it as
well, albeit on a much smaller scale. Can you create a service that contributes
significant personal income to your users? If you can, chances are you’ll have
a successful service.
On a separate note, both Bruce and
Patrick credited much of their success to having great mentors and advisors
involved with iStockphoto. Both Bruce and Patrick have been reading, learning,
and applying business concepts and ideas from the business guru Guy Kawasaki
for years. After meeting Guy in 2003, he became a close personal mentor for the
iStockphoto management team. Having great advisors and mentors can be critical
to the success of any company, but particularly a start-up. No entrepreneur can
possess all the skills and experiences necessary to succeed themselves; it
helps immensely to have the right mentors to act as a sounding board.
Reference
articles / additional reading
Additional thoughts on iStockphoto at Kempton Lam’s blog.
“The Rise of Crowdsourcing”, Wired, June 2006 (the paradigm shifts initiated by
iStockphoto and others)
“2006 Fast 50 nomination of Bruce
Livingstone”, FastCompany.com (a glowing
nomination, and a long list of supporters’ endorsements that make for a
fascinating read)
“Interview: Bruce Livingstone, CEO
istockphoto.com”, Decker Marketing blog, January
2005
Nice interview with Bruce who has some insightful responses on what makes the
istockphoto different from the competition and why it was initially successful.
“The stock photo community”, DesignMentor Training website
Has a few detailed paragraphs on Bruce’s background and how iStockphoto got
started.