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Online Photo Services: Smile, You are on the Internet
5 Fenruary 2003

Digital camera manufacturers had a bonanza Christmas, with early sales figures suggesting they were a "hot product." That is good news, too, for internet-based service providers which offer somewhere for digital camera owners to file their snaps.

The penetration of digital cameras has been accelerating fast over the past two years. According to InfoTrends Research Group, a US digital imaging research specialist, worldwide digital camera sales are growing at a predicted annual rate of 24 per cent between 2000 to 2006 and 24m digital cameras were sold last year worldwide. One third of internet households own a digital camera, up from 25 per cent in 2000.
If revenues follow InfoTrends' predictions, internet-based photo service providers such as Shutterfly, Ofoto, ImageStation and Snapfish will also be looking forward to more customers.

InfoTrends' study of the online photo services market reveals a growing percentage of internet users are using photo websites. Online photofinishing revenue grew to nearly $23m in 2001 and is expected to exceed $240m by 2007.

The growing penetration of digital imaging hardware, broadband internet usage and film digitisation services are driving the adoption of the online photo market.

Offering a range of services, from printing and sharing to storage and merchandising, web-based vendors are fast making a niche for themselves and edging towards profitability.

Early last year, Shutterfly, a Silicon Valley-based online photo company, announced its second quarter of profitability, posting a 116 per cent gain over the previous year and net revenue of more than $16m. More than 86,000 new customers signed up for the service in December 2002.

When online photography services appeared in the late 1990s, many of them focused on expanding their customer base by offering services such as sharing and printing for free. Profitability has become as key a concern as consumer adoption, and vendors are now balancing free services with paying options. Print orders and merchandising have become primary revenue sources.

"Initially, companies focused on photo sharing, but being hard to monetise, companies switched pretty rapidly to print," says Kristy Holch, principal digital imaging analyst at InfoTrends. "Printing photos from digital images is the killer application for online photo companies right now."

James Joaquin, president of Ofoto, the California-based online photo services company that is owned by Kodak, says the company generates most of its revenues through sales of 4in by 6in prints.

Meanwhile, most companies still offer storage and sharing for free, although they generally impose time limits on storage for inactive accounts. With many people storing photos on computer hard drives, archiving is not considered a major revenue source. However, Ms Holch believes this will change. "Because computers can crash or become obsolete, people will eventually value the internet for safe archiving."

Storage, sharing and uploading services also continue to be free because online vendors recognise the power of photo sharing in influencing print sales. "Online photo sharing is the biggest single source of new customers," says Mr Joaquin. Consumer research at Shutterfly reveals that 93 per cent of people who upload photos go on to make a financial transaction on the company's site.

"There is a direct relationship between the number of images people upload and the amount of money they spend on printing and other services," says Andy Wood, chief executive of Shutterfly. "So we want to encourage people to upload their photos by making it as easy as possible and providing free storage."

Alongside printing, merchandising is becoming an important part of e-commerce for the sector. Online vendors are being more creative and are selling such goods as calendars, posters, albums and greetings cards. After launching a line of greetings cards in October 2001, Ofoto sold more than 1m cards before the year was out.
Although interest in digital imaging is growing, capturing a critical user mass is proving a challenge.

Consumers - even digital camera owners - are unaware of the services online photo finishers can offer.
"Our key competitor is the lack of awareness, rather than competition from other companies," says Mr Wood. "A good number of digital camera owners don't know how to delete an image on their camera, let alone print photos online."

Companies are approaching the problem one customer at a time, emphasising viral marketing over expensive campaigns. Shutterfly, for example, organises "soirees" to explain how digital imaging works to small consumer groups.

"Viral marketing, which occurs when people share photos with their friends and thus expose new people to the service, has proven to be a far more effective tool than spending millions of dollars on advertising and promotions," says Ms Holch.

Strategic partnerships are also helping develop users. While Ofoto and ImageStation owe much to the brand names of parent companies Kodak and Sony, companies are actively pursuing partnerships with retailers to spread the word about their services.