Photo start-ups zoom in on film amid digital dearth

Digital camera users have a wealth of printing and scanning services available to them on the Web, but many online photo companies are realizing that a large portion of the photography population--those still using film cameras--has been left in the dark.

According to Steve Hoffenberg, an analyst at Massachusetts-based Lyra Research, 95 percent of households in the United States have film cameras, and fewer than 10 percent have digital cameras despite a significant increase in digital camera shipments worldwide.

In a bow to that phenomenon, San Jose, Calif.-based Club Photo is the latest among several online photo ventures to launch Web-based services for processing traditional film.

Through its February acquisition of privately owned photo lab Signature Color, Club Photo expects to enhance its consumer photography services by fusing 35 mm film developing with online photo processing and selective print ordering services.

Instead of going to a local photo shop, photographers can mail their rolls of film for developing, preview the images online, and pick their favorites to share through an online photo album--all for only a dollar. They also can order 4-by-6 or 3-by-5 prints for 45 cents each.

"Even though everyone talks of digital photography, it'll be a long, long time before the 35 mm and paper disappears," said Andrew Wei, Club Photo chief executive. "The model that we're introducing will actually give the 35 mm a new life."

Other companies, such as start-up Ofoto and Netscape Communications co-founder Jim Clark's Shutterfly.com, also offer film processing. That side of Shutterfly's business is relatively new; when the company launched, it touted only its technology for digital images.

According to Carl Holec, director of research at La Jolla, Calif.-based ARS, Shutterfly's shift in strategy is "an inevitable thing" even though other companies are ahead of it in that effort. He added, however, that the market is still young, and the company's strategy shift will allow it to greatly expand its potential audience.

"If somebody only looks at themselves as a producer of images from a digital format, that's really kind of limiting the size of the pool that you're swimming in," Holec said. "I think Shutterfly is going about it the right way. The biggest challenge for them now is getting the exposure and letting people be aware of the advantages of using their services."

Hoffenberg echoed that it's too early to tell who's the leader of the pack.

"Nobody's ahead of anybody. They all got out of the starting gate two seconds ago, and the race is miles long," Hoffenberg said. "What matters six months from now is who's got the most actual users."

Club Photo's acquisition of its own photo lab helps set it apart, according to some analysts.

"What helps differentiate Club Photo is that they own Signature Color--one of the largest photo labs in the country," said Chuck Davenport, also an analyst at Lyra Research. "And that puts them in the position of providing output services to other photo-sharing Web sites, which is an enviable position to be in."

Incentives for eyeballs
To pull ahead, several photo start-ups have been inking partnerships and unveiling marketing gimmicks, such as low-cost or free services to be the first to draw in as many customers as possible.

For example, Redwood City, Calif.-based Shutterfly this week unveiled a partnership with BabyCenter.com to develop a service that allows parents to share pictures of their newborns online. The companies also hope to provide film processing services in a couple of months, which they say will be offered for free.

"By focusing on gaining membership, the online companies want to build loyalty," said Richard Rambaldo, another analyst at ARS.

He added, though, that many online photo services likely will recant their low-cost offers after gaining a loyal audience and then will begin charging higher rates to boost revenues.

In addition to building their audiences, young photo companies also are angling for venture funding.

Snapfish, for one, said yesterday that it has pocketed $33 million in a second round of financing, led by Japan-based Trans Cosmos, with new investors Audax Ventures, BellSouth and Compaq Computer and previous investors CMGI @Ventures and the Mayfield Fund.

Snapfish CEO Rajil Kapoor said that although online start-ups have been retooling to address services for 35 mm camera users, his company's target has been film-based customers from day one, as that's where "96 percent of the world is," he said.

The company offers developing, printing and online photo storage free of charge. But it also hopes to get 35 mm photographers comfortable with online photography and to provide them with a bridge to eventually go digital, Kapoor said.

"We're going early in the customer life cycle by bringing that consumer into digital faster," he said, adding that he hopes 35 mm camera users will end up purchasing digital cameras.

Aiming for the big time
Building an audience by appealing to film camera users is only part of a crucial race to gain customers for survival, according to analysts. The photo start-ups also must face something all young Internet companies contend with: the ability to survive as small fish in a big pond.

Online giants such as America Online and Yahoo, whose services attract a majority of Internet users, are developing their own photo initiatives. In October, AOL introduced its photo station, You've Got Pictures, which was created in cooperation with Eastman Kodak. Among hardware makers, Hewlett-Packard has its own online photo album service, Cartogra.

Analysts said not to expect the photo start-ups to try to compete with the likes of AOL. Rather, striking partnerships with established companies is key to the small companies' survival.

Lyra's Davenport noted that portals such as Yahoo, Excite and AltaVista have virtual communities already in place and are "potentially prime players" for photo-sharing communities.

"Sharing photos and images actually was already happening when you think about it, but nobody had a name for it," Davenport said. "(Internet photo start-ups) are competing against each other, but I don't see them competing against Yahoo, AOL or Excite."

Several Internet photo companies, including Shutterfly and Club Photo, already have aligned with big partners. In December, Club Photo struck a deal with telecommunications company US West to provide photo-sharing capabilities to US West's network users. Three months later, Shutterfly teamed with Yahoo to launch Yahoo Photos.

"As much as anything in this environment, in the online photo business, a company's ability to rapidly adapt to change may be more significant than where they are right now," Lyra's Hoffenberg said. "A small company that does not successfully land partners that can draw some substantial number of eyeballs is going to have a real hard time of surviving in the long run."

Davenport added that despite the competition in the online photo business, the portals aren't necessarily going to replace the Internet photo start-ups or the local photo shop.

"I don't think Yahoo is going to buy a photo lab or be a photo lab," Davenport said. "But they'll find somebody to do it for them."