Nokia is the largest camera manufacturer in the world. It’s a fact that Caterina Fake, the co-founder of photo-sharing site Flickr, brings up time and again to emphasize how the photo industry is changing. And it’s those changes that are driving the popularity of sites like hers.

is the largest camera manufacturer in the world. It’s a fact that Caterina Fake, the co-founder of photo-sharing site Flickr, brings up time and again to emphasize how the photo industry is changing. And it’s those changes that are driving the popularity of sites like hers.

Nokia does sell more cameras through its phones than any camera manufacturer—it’s looking to ship 100 million camera phones this year—and has done so for more than a year. In the United States alone, 37.5 million camera phone units were sold between January and September, according to the NPD group’s Techworld. As digital cameras get smaller, cheaper, and more ubiquitous, it’s becoming easier and more convenient to take photos. According to Forrester Research, online consumers take an average of 24 pictures per month.

The web sites that sprung up to capitalize on digital photos relied primarily on printing photos to make money. But those companies—including Ofoto, now known as Eastman Kodak’s EasyShare gallery; Snapfish, which Hewlett-Packard purchased in March; and Shutterfly, a venture-backed company that’s still independent—soon found out that selling prints wasn’t enough to build a successful business. Of the 24 pictures taken each month, online consumers print only two at an online photo site, and print 11 at home. The rest are never printed.

Hewlett-Packard

Still, the sites are still around; several have millions of users, and many are making money.

“The evolution of photo-sharing for a long time was post and print,” says Martin Green, corporate vice president at CNET, which owns the most popular photo site on the net, Webshots.com. Most people put a photo up on a web site “for the express purpose of sharing it with family, and sharing it so that they could print as well.”

CNET

But as more and more families went digital—43 million homes (40 percent of the market) in America have digital cameras—offline retailers that used to do print jobs for film cameras also decided to go digital. Wal-Mart, for example, charges just $0.12 for digital images, matching Snapfish’s rates.  

  

As everyone from Elephant Pharmacy to Target jumped into the printing business, the prices of prints went down—and so did the margins. It’s a small market that everyone’s fighting for. Some photo sites have turned to online ads to make money; others have accepted buyout offers from large acquirers. Several have yet to figure out how they will make money. Finding a business model for digital photos doesn’t seem to be as easy as selling the cameras.

A World Where People Want to Share

A growing interest in blogs and online networks has helped a bunch of photo-sharing and image-hosting sites flourish. In fact, people share more photos than they print online—an average of four per month. Regardless of how viable these free sites are as businesses, they’re garnering rapidly growing audiences and interest from potential acquirers. Flickr became a part of Yahoo earlier this year for an undisclosed sum; its cult-like following was the apparent reason.

Yahoo

Flickr, which launched in January 2004, had amassed 1.8 million users by August. It grew quickly, largely due to its success in creating a community. Photos posted on Flickr through its free membership can be viewed by anyone visiting the site. Users praise its founders, Caterina Fake and Stewart Butterfield, and swear loyalty to the site on their blogs.

Despite its loyal following, Sunnyvale, California-based Flickr probably would have had limited growth options—it had broken even by March—had it not been purchased by Yahoo. Forrester analyst Ted Schadler points out that for photo sites to really survive from online advertising, they have to draw a very large audience. And while photo-sharing has an audience, it pales in comparison to the numbers generated at web portals like Yahoo.

Perhaps that is why Flickr is now getting into the old-fashioned photo printing business. But given its cool, experimental image, it isn’t going to offer regular photo prints. It’s tied up with Qoop, a Mill Valley, California-based company that prints out online content, so that Flickr members can order books of images or posters. It also has tie–ups with startups to produce DVDs, slideshows, and stamps of the photos. Nevertheless, it all essentially boils down to a glossed-up version of the original business model in the photo business.

“You have to have community and commerce in a compelling way,” says Jeff Housenbold, CEO of Shutterfly. “You have to sustain the community, but to reap the rewards of that networked relationship. There has to be a business model.”

Six-year-old Shutterfly has been profitable for three years. With 3.5 million users, it was the seventh-most-popular photo site in August. The privately held company won’t disclose its revenue, which it primarily generates through sales of photo books, calendars, and other photo-related materials. Its model has been threatened by the entry of behemoths like Wal-Mart into digital printing.

Mr. Housenbold emphasizes that Shutterfly isn’t just a printing site. People can also share, archive, and store, much as they can on any other site. And in a nod to the rising popularity of blogs, the Redwood City, California-based company has launched a section where people can form closed groups and communities to view each others’ photos and postings.

And just because Shutterfly doesn’t look to online ads right now, that doesn’t mean it never will. In some cases, if a company is big enough, online ads can generate revenue effectively.

The iTunes Effect

Webshots, which had 11.6 million users in August, is aggressive about getting a piece of the online ad pie, even though it also brings in money through subscriptions and printing options. That’s largely because its free, online ad-supported photo-sharing category is growing much faster than its other categories, says Mr. Green. Because Webshots is a part of CNET, it has access to the media company’s large online audience as well as its resources. It runs paid search on its site as a form of advertising, and also dips into Google’s ad network through a relationship with the search giant.

Webshots also charges $30 per year for a premium membership, which doesn’t require users to share their photos with the world. Subscription-based models are the only ones that will work in the long-term, believes Chris MacAskill, the founder and CEO of SmugMug. Three-year-old SmugMug has no ads, and relies only on subscriptions, which range from upwards of $29.95, depending on the type of account. He points out that his site drums up annual revenue of $5 million and managed to turn profitable six months ago. “Napster was free, and iTunes costs you money,” says Mr. MacAskill. “But it’s so well managed. How much does it hurt you to pay $0.99 per song?”

SmugMug’s subscriber base differs from the youthful audience seen at photo-sharing sites. Its customers range from their mid-20s to early 50s, says Mr. MacAskill. They’re people willing to pay to ensure that their photos don’t sit next to any ads. So it makes sense that the site is popular among travelers and people sharing baby and wedding photos.

Larger Internet companies like Google and Yahoo know that personalization is crucial to succeeding on the web. Photo sites are also beginning to realize the value of customization. Val D’Souza noticed that the customization options offered on his site, PictureTrail, were drawing a very young audience. The Santa Clara, California-based company that he bootstrapped in 1998 is now reinventing itself as an online photo site for people under 25. He wants to bring in targeted online ads and sponsorship campaigns targeting the 14- to 25-year-old audience that advertisers can’t reach through traditional media. But as it aims to do so, the profitable site has fallen off the top 10 chart. That doesn’t bother him much.

Google

“The traffic went down, but revenue went up,” says Mr. D’Souza, PictureTrails’ CEO. “The bottom line is as important. Now, we’re going for a long-term play. We’ve got to get critical mass, and then ad dollars will go in.”

Mr. D’Souza and his counterparts at other photo-sharing sites hope that more ad dollars will come their way as their audience increases—a natural conclusion in their eyes, given that people are getting more comfortable with the concept of socializing online. Additionally, high levels of broadband penetration coupled with third-generation wireless will only make it simpler to share photos. But that’s easier said than done.

The addressable market might be large and growing, but that doesn’t mean anyone can put out an ad-supported photo-sharing site and make it work, says Forrester’s Mr. Schadler. “Everybody, especially with venture backing and using ads, has an exit strategy,” he says. “It’s to be bought out by Google, Yahoo, AOL, or MSN.”

AOL