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Shutterfly Bets Kodak Gallery Users' Precious Memories Are Worth Big Bucks

Online Photo-hosting Company Paid $23.8M for Giant's Customers; Expects to Make $21M in 2012 Alone

By Published on .

Kodak moments are becoming Shutterfly moments.

The 12-year-old online digital-photo service is taking over Kodak Gallery, the online business of the Rochester, N.Y., imaging giant, on July 2 as part of Kodak's bankruptcy reorganization and exit from the camera business.

But what does an online photo service that 's known more for things like custom-cut wall-art photos than basic 4x6 prints want with a brand mired in not only bankruptcy but perception problems?

It's the database. Shutterfly was indeed the lone bidder, but the key prize in the deal is Kodak Gallery's online customer set, numbering 75 million accounts. Shutterfly will transfer those accounts, and the 5 billion images they contain, to become the new keeper of those memories, unless a Gallery customer specifically opts out.

Shutterfly estimates Kodak Gallery customers will contribute $21 million in revenue for 2012. It has agreed to pay $23.8 million for the business, awaiting final approval by bankruptcy court.

This kind of deal is not Shutterfly's first. It was the default photo-storage transfer site for SonyImageStation when it closed in 2007, and PhotoWorks when it closed last April. In both cases Shutterfly did not buy the services and the photo transfers were not automatic, as they will be with Kodak Gallery.

And while the traditional view of a Kodak customer may be someone who is older and possibly resistant to a forced change, that 's not how Shutterfly sees it.

"It's easy to get hung up on the idea of the 100-plus -year-old brand of Kodak," said John Boris, CMO of Shutterfly. But "this is an online customer base, so from a customer standpoint they have the same mind-set and desire to share and express themselves through an online service as Shutterfly customers."

Shutterfly has the youngest customers among online-photo services, but Kodak Gallery consumers are fairly youthful, too, skewing about the same as the industry average. More than half of dollars for both Kodak and the industry as a whole came from consumers 35 and younger, according to NPD Group data."While Kodak's customers may be a bit more traditional with many coming through digital-camera sales, it's hard to imagine many, or any, will be unhappy with Shutterfly services. They're very similar with very similar product lines," said InfoTrends analyst Alan Bullock.

Shutterfly won't take possession of the actual customer database until July, so Mr. Boris' team is working with Kodak, which is taking the lead in contacting its current customers with reassuring and engaging messages. So far, the number of people who have opted out is "infinitesimal," Mr. Boris said, and only in the low single-digit percentages.

Shutterfly is also preparing for its own direct marketing to the new customers. The plan is to concentrate most heavily on the 1 million or so Kodak Gallery "superusers," but they will also create four to five other "communication streams" to target users who may be dual account holders, have dormant accounts or just be less-frequent users.

Shutterfly concentrates most of its marketing spending in CRM, with direct messaging, acquisition marketing, display ads, paid search and affiliate programs, but it is testing direct-response TV ads in two markets. The company creates its advertising in-house, outsourcing some projects to agencies.

Its estimated revenue will hit $580 million in 2012, a 20% annual increase.

InfoTrends ranks Shutterfly at No. 1 in the online-photo-finishing category, followed by Hewlett-Packard's Snapfish and then Kodak Gallery. Mr. Bullock said the kind of specialty photo products that Shutterfly specializes in are growing rapidly, while the traditional print business continues to decline. He said the "net to mail" category of photo products -- those ordered online and mailed -- will generate sales of $1.3 billion in print and merchandise this year, with 75% coming from merchandise.

Mr. Boris said Kodak customers have been more traditional printers of 4x6 printed photos, while Shutterfly customers are more active in the array of specialty products like photo books, calendars and greeting cards.

However, any online photo customer, especially in high-growth specialty products, tends to be younger overall, said NPD Group analyst Liz Cutting.

"Eighteen-to-34-year-olds show the biggest growth in revenue [in specialty print products]. They tend to be married, moms and first-time families. Both Kodak Gallery and Shutterfly overindex in that area," she said. "It's counterintuitive to think that people don't need prints anymore, because guess what? It's the young moms who are doing it. They want real, and real means printed products."

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