OIL vs. IMAGES

When I put together the audio slide show for "A Bridge to Tomorrow" I went looking for high resolution images to dramatize the concepts in Chapter 1 of my book. I couldn't find any good ones in the usual places. By accident I found Getty Images. Two things were immediately clear to me. First, this site wasn't designed for someone accustomed to paying five bucks for stock images on the Internet. Prices stared at $55 and went up quickly from there. Second, the selection and quality of images, both still and moving, was extraordinary. I ended up buying four of the $55 images for that presentation.

Then, while running the numbers on the ratio of a company's market value to its sales revenue (its "v/r ratio") to compare it with the company's intangible value I noticed that Getty Oil was an outlier in the early 1950s with a v/r ratio of 17.2 in 1956. In other words, the company created $17.20 in market value for every $1.00 in sales revenue. That was more than twelve standard deviations away from the average of all companies in that year. The 782 companies reported in Standard & Poor's COMPUSTAT files in 1956 had a combined market value of $207 million and combined revenues of $206 million, putting the market's v/r ratio at 0.99.

So I ran the numbers on Getty oil over three decades. In every year between 1950 and 1983 the company reported the value of intangibles on its balance sheet (item 33 in the annual COMPUSTAT data) was $0.00. In all but six of those thirty-four years, the depreciated value of its tangible assets was greater than its market value. This I thought was a company ripe for takeover. Sure enough the following story appeared in the New York Times on January 8, 1984:

"Texaco Inc. and the Getty Oil Company are tentatively prepared to close the largest merger in American history, but a judge is delaying the estimated $10 billion agreement so that heirs of the oilman J. Paul Getty can study it."

Then I wondered, is there any connection between Getty Oil (ticker symbol GET.1) and Getty Images? So I went to Yahoo Finance and looked up the company (ticker symbol GYI). Sure enough Getty Images was founded in 1993 by Getty's grandson Mark. It went public in 1995 and complete financial data became available in 1996.

At the close of business on December 31, 2005 Getty Images had a market value of $5,558 million. The intangible market value of the company was $4,750 million, or 85% of total value. Its value/revenue ratio was 7.6. Or the company created $7.60 in shareholder value for every $1.00 in sales.

To me the comparison over five decades of an oil company with an image company in the same family captures beautifully the choices managers and investors must make in placing a value on tangible vs. intangible assets … oil vs. images. This in turn goes to the heart of the reasons I think drive these choices. I think they boil down to three forces: brands, technology, and services. And design plays an important role in all three of areas.

~V