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Andy Rothman, investment strategist for Matthews Asia , says China is a tough sell these days despite some misconceptions about the opportunities for investors.
Compared with a year ago, Getty Images' GYI revenue grew just 7% in the third quarter, the fifth straight quarter in which Getty's revenue growth rate fell. Getty's trouble lies in its biggest business, creative stills, which can be further broken into two segments distinguished by the licensing model: rights-managed and royalty-free. The rights-managed approach is the more traditional method of licensing imagery, often used by advertising and media firms. Royalty-free imagery distribution is a newer licensing model that is typically less complex and less expensive. Before the royalty-free model arrived, rights-managed licensing was the only game in town. However, royalty-free imagery has proven to be very popular and now accounts for 39% of Getty's total revenue (rights-managed imagery also stands at 39%). Royalty-free imagery has been growing much faster in recent years than rights-managed imagery. In the past several quarters, though, royalty-free imagery sales growth has slowed significantly, resulting in the five straight quarters of diminishing growth. The overarching reason for this weakness is the continued shift from analog consumption of imagery to digital consumption. As the world moves online and spends more time using digital devices, demand for easy-to-access, easy-to-purchase, and less-expensive imagery expands. This has fueled the growth of micropayment imagery Web sites like iStockphoto, from which a decent, but not professional-quality image can be purchased for as little as $1. Growth at this end of the market has expanded the total market for imagery but negatively impacted volume growth in Getty's royalty-free imagery collections. Just as royalty-free imagery has continually taken share from rights-managed imagery in recent years, micropayment Web sites will likely become a bigger part of the imagery market in the future. Fortunately for Getty, it acquired iStockphoto--the market leader--less than a year ago. Getty has plans to market and expand iStockphoto very aggressively in the coming year. Getty is also investing heavily in its marketing and sales teams to boost growth in its right-managed and royalty-free collections and is pushing to boost sales in developing countries. Getty's film and editorial businesses, which combined account for about 18% of revenue, continue to do very well. Getty is clearly in a period of transition. Given its dominant market position, very strong cash flow, and nimble management, we think the company will ultimately regain its footing. While this will likely take several quarters, we'd view this period as an opportunity to build an ownership stake in a high-quality business with good long-term prospects. The stock has taken a beating in the past few months and is now too cheap to ignore.
“We’re seeing certain markets that are at the same point China was 20 years ago,” a Matthews portfolio manager said.
The risks of frontier markets become more visible in a persistent slow global growth environment.