You wouldn’t think about it this way, but Wall Street tends to be highly emotional and jittery  when it comes to stock photo licensing. When companies with voracious growths – anything above 30%-  show any signs of slowing down, it starts running for cover. The reason is very simple: the stock only sought after characteristic from the day of its IPO is the company’s ability to grow above 30% year after year. Speculators do not care about anything else ( the space in which the company evolves, its competitive edge, its offering). It only cares about how long it can sustain its pace and it soon as it slows down, it’s exit time. The game becomes finding out before the others when it will happen.

Shutterstock stock price after its latest quarterly report reflects just that, after dropping an impressive 30% in one day. Three reasons: a missed revenue target (not by much), a CFO’s departure, and a realignment of projected revenue (guidance). But like any forest, there is probably more behind the tree.

Any time any CFO leaves a public company, chaos ensue. Like scared children, investors read this as the sudden departure of a parent, albeit the most reasonable one. Since CFO’s evolve in the  companies deepest secrets, it is always taken as a sign there is something wrong the company won’t make public. Like a rat – no offense intended – leaving a ship before it sinks. One could certainly question the reasons behind Tom Bixby’s departure, who has a compensation package exceeding 300 K a year and was instrumental to Shutterstock’s growth pre and post IPO, especially as no clear explanation was given. Maybe it’s hiding a bigger issue or  it could  be nothing. Regardless, Wall Street expects the worst.

The tree and the forest

However, as visible as this event might be, it is masking what might be, a bigger issue. Shutterstock, after years of hitting or exceeding target, months after months, missed this one. Again, not by much ~ $1million. But for a company in such high growth, who thrives on close analysis of data, who spends 25% of its revenue in mostly online marketing (with predictive consequences), it comes as a surprise. The explanation given during the call was a decline in European e-commerce customers. On top of missing its target, Shutterstock realigned its future guidance to a lower level. Meaning that what it just experienced in the last quarter is not a flaw but a trend.

We know it’s not due to Adobe Stock entry. It is too soon to impact Shutterstock. We also know Getty has posted better than expected revenues ( or a slower decline) but probably more in mid-stock than microstock. But that’s probably not a factor either. Interestingly enough, little mention was made of OFFSET, the company’s mid stock offering, only as a catalyst for increased enterprise clients spending.

Crossing the bridge

Contrary to a widespread belief in the investment world, Shutterstock does not have a protected moat around it. Most of it content can be found elsewhere ( estimates put 90% of microstock content is shared between all big players) thanks largely to Jon Oringer’s dismissal of any exclusivity  strategy. The technology used,  mostly focused on search, can be replicated, if not surpassed tomorrow by any well-motivated group of coffee induced silicon valley engineers. Finally, it sales strategy, a combination of Groupon’s ( throwing myriads of salespeople on customer acquisition*)  and  online marketing can also be challenged by anyone with deep pockets. To make matters more difficult, there is nothing that Shutterstock offers that would nail any customers into not being lured by a competitor.

Almost every month, a new multi-million image strong content licensing company emerges ( Pond5 , 500px, Twenty20, Gopro), most very well-funded by venture capital seeking a piece of the Shutterstock’s pie, especially after such a successful IPO. They have to be taking away market share, even if for now, anecdotal. They certainly increase the cost of online advertising as bidding for keywords is becoming more competitive. More threats are in the pipeline ( think Yahoo’s Flickr). Buyers, as vast a universe as it might be, are not  infinite, especially the recurring, vast usage kind: There are so many ad agencies and publishers in this world.

Where Shutterstock is starting to hurt is in the casual, few images a year customers: the SMB market. Those range from the freelancers to the mom and pop companies who license images on an irregular schedule. Lured by a Google Image search result or banner ad, they have no brand loyalty. While their universe is extremely wide, they are the hardest to capture as they do not exist in a defined environment. They seek convenience and are budget conscious. As pointed out by Tom Bixby, they are the ones who had the most impact on revenue this quarter, mostly those based in Europe. They are also the reason for a  readjusting of the companies guidance as they are the first to jump ship to the competition.

Adding water to the moat

To protect itself, the company has two possible directions. Go all out on pricing war ( which would be self-destructive and  something Jon Oringer indicated he does not want to do) or reach out to new customers. Shutterstock management is clearly aware of this and has taken steps, via acquisitions, to extend its reach by expanding its offering. With music (PremiumBeat) and editorial ( Rex), it clearly seeks to fuel its growth via consolidating markets, aware that it might have reached the limits of expansion of the microstock-only market. It has also readjusted its file download limit for the lower priced subscription model in an effort to capture and keep those slippery casual buyers.

Clearly, the company is in a strategy to consolidate its gains. These are reactive initiatives than proactive ones. Editorial and music are aimed at growing the enterprise market as one is almost impossible to use by SMB’s ( editorial) and the other is too complex ( music ). Download limits are clearly aimed at retaining e-commerce buyers who are being lured away. Nothing in the last earnings call shows any signs of expanding. Little, if nothing, was said about videos, once promoted as the most promising growth opportunity.

Ironically,  Shutterstock’s trading is starting to look very similar to Getty Images when it used to be public. After years of showing healthy signs, Getty fell from a high of $84.00 to the lower $ 30’s within months, right before been pulled out of trading by a management sponsored acquisition. While this is not a sign of things to come, it certainly confirms that the company has a hard road ahead. The last quarters of 2015 will be instrumental at showing whether Shutterstock can continue to grow at breathtaking pace or whether it will be slowed down by a necessity to protect its territory.

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*Tom Bixby mentioned ” We’ve got more than 100 sales reps cranking it out and selling well”

Photo by Dark Dwarf

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