Shutterfly’s Strategy: A Conversation with CEO Jeff Housenbold (Part 8)

SM: Why didn’t Flickr elect to work with you?

JH: At the time we were competing with Yahoo Photos, and Flickr chose a small company who is producing product as their outsource manufacturer. That small company has signed up a number of sites who in the early days thought they were competing with Shutterfly. They do not have the same scale or quality that we have. My understanding is that the sell through on any of these sites is less a few million dollars. Many players have tried to play in our space but they had trouble making it a business. Yahoo photos shut down, they had 100M accounts and $4M in revenue. Sony, which is a great company with regard to quality and design, did not have the brand in the services and photos space. Best Buy has tried it, AOL has tried it with limited success. There have been over 1,000 venture backed companies which have moved into the photo sharing space and failed. The venture backed small companies tend to create features or functionality, but not companies. They may have a cool slide show with neat graphics, but they haven’t monetized.

SM: It is clear the monetization in the photo vertical is either in hosting like Flickr and the other is merchandising; the print and photo merchandising. I have always said that Yahoo should buy Shutterfly.

JH: Deconstruct that even further. If you look at PhotoBucket, they had $6M in revenue for photo hosting and my belief is that hosting over time becomes a commoditized product. At eBay we used to have IPix host the photos on eBay, and we were paying them all this money. We then just spent a little bit of money, built a team internally, and we were able to do it ourselves.

SM: That is definitely going to be a commodity market. The thing which is so interesting is that Flickr is a very nice photo sharing service, community wise.

JH: If you look at the Forrester report, and I may have these numbers slightly off, they said something like .8 of 1% of all Flickr users generate 99% of the content. Flickr is more like YouTube… a few people publish, a lot of people view and it is a model which is advertising based. When Flickr was out of money and they could not make payroll and they started shopping themselves around, Yahoo was the exact right buyer because they are an ad network and they created a viewership model not dissimilar to radio and television and so taking an ad network and overlaying the power of all the Yahoo users and its ad network on top of that model was the right thing.

Small guys are creating features or functionality, a few people moved in on a space they thought they had to own but it’s much more complex, and we are the only site that does not down sample and compress your images. With others if you upload too many images they shrink the images to thumbnail resolution so you lose the quality. Facebook is another example of a company that did a lot less printing than you think, because it is just thumbnail resolution. We think there is great opportunity for us because we have the cheapest storage in the industry, much cheaper than Amazon’s S3. Our secret sauce in this area allows us to hold the high resolution image. We also do not force delete, whereas our competitors will delete your memories if you do not come back and spend a certain amount of money in a certain timeframe. We have always had this customer centric approach, where it is not about photos and it is not about this month’s revenue , it is about a lifelong relationship. I have 93,000 photos. I am probably an anomaly today, but roll the clock forward 5 years from now and you will probably have 93,000 photos and 1,000 video clips. What brand are you going to trust to hold your memories? It is going to be the one that has never deleted them, forced you to sign in and register.

SM: I have a lot of pictures on Shutterfly. I don’t even remember how many, but I have a lot.

JH: Your hard drive might crash, your house might catch fire, and if something like that happened your memories are safe with us.

SM: It’s not just that, it’s the sharing and the family sharing which you talk about. I wouldn’t put that type of thing on Flickr. I use Flickr for the public display of pictures, but that is only a very select set out of the Shutterfly set.

JH: When I look at the business models that have been in this space, you have the hosting guys and Fox had to buy PhotoBucket because they were disintermediating themselves from their MySpace customers and there was no other market for that asset. There were a lot of other startups which were doing mashups and sharing, but they are not making money. Then you have people like the Sony’s and Yahoos of the world who can’t make money in the printing space because it’s not their core competence or focus. Then you have the CNets which should have been MySpace and Facebook with their webshots asset.

SM: CNet is not well run.

JH: Then you have traditional companies like Kodak and Fuji who had a mentality that they sell chemicals, ink and film. That is what HP is doing with SnapFish. They have said publicly that they want to sell more ink. What we have said we want to build a deep personal relationship with our customers in a place where they trust us with life’s memories. Howard Schultz has built a great business with coffee where people said it was a commodity, where people said consumers would not pay more. IPod’s are not the best MP3 players, but the user experience is great. We are building a premium lifestyle brand in the vain of Starbucks, Nike or Apple.

This segment is part 8 in the series : Shutterfly's Strategy: A Conversation with CEO Jeff Housenbold
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