By Michael Cohn

Smilebox upgraded its photo-sharing service Monday to include video clips so couples can send each other Valentine’s Day e-cards and photo albums with not only stills, but videos too, in lieu of the requisite boxes of candy.

The Redmond, Washington-based company is also upgrading the sites it runs for customers like Hallmark, Creating Keepsakes magazine, and Big Fish Games so their users will also be able to share video clips in the midst of their online photo albums and greeting cards.

Online photo sharing has become an increasingly popular web application for many consumers, especially with the proliferation of inexpensive digital cameras and camera phones.

But with that popularity comes a lot of competition as sites like Smilebox need to rival and try to surpass the features offered by entrenched players such as Kodak’s EasyShare Gallery, Hewlett-Packard’s Snapfish, Yahoo Photos and Flickr, Sony’s ImageStation, CNET Networks’ Webshots, and other startups like Shutterfly, Photobucket, Tabblo, and SnapJot.

Adding video clips seems like a natural progression for Smilebox. The company is able to play back the clips at a rate of 15 frames per second, which it claims is comparable in performance to YouTube. Uploading a short clip doesn’t take long either.

“The service is about enabling people to connect with family and friends in a creative and compelling way,” said Smilebox CEO Andrew Wright.

He pointed out that Smilebox has more than 400 designs in its service, including scrapbooks, photos, and greeting cards for special occasions such as birthdays, anniversaries, and weddings, not to mention Cupid’s special day.

“As far as e-greetings go, it’s pretty slick,” said David Card, a senior analyst with JupiterResearch. “They’ve really done their homework. I’m not convinced if this product they’re offering is a full product or just a feature, but it’s a pretty cool thing they’ve got there.”

He notes that the technology caters mainly to women, especially moms, but he’s not sure if the technology completely differentiates Smilebox from the rest of the pack.

“It’s more about sending greetings and polished productions rather than bare-bones photos,” he said. “They’re not going after the same target market as Flickr. They have premium content, and a pay-to-be-a-member business model, which is challenging. I like the product, but it’s difficult to make a go of that in a crowded market, so they’re targeting an audience pretty specifically.”

Mr. Wright said Smilebox targets moms first as its core audience, followed by dads, followed by younger girls.

“It works well,” said Alan Bullock, associate director of Internet imaging trends at InfoTrends. “It’s a great way to add videos and sound to what had been simply still images.” He believes it could help Smilebox sign up more customers. “Certainly more people would be interested if they could use video,” he said.

Microsoft and Real Heritage

Mr. Card pointed out that Smilebox’s executive team understands how to make money from online content, since many of the founders hail from Seattle-area companies such as Microsoft and RealNetworks.

“They know how to do paid content,” said Mr. Card. “I’m pretty positive on them, but a little skeptical of the market opportunity.”

Mr. Wright worked at both Microsoft and Real, first helping create imaging applications such as Picture It while he worked for Microsoft from 1994 to 1999, and then helping build the RealArcade casual game business at RealNetworks, which still makes up a healthy chunk of Real’s revenue.

With Smilebox, he set out to integrate high-quality professionally designed templates with personal media, recognizing that the e-greetings market and the digital scrapbook market were converging.

The company received a $1-million angel round of investment in the spring of 2005, thanks to Macromedia Flash creator Jonathan Gay, RealNetworks Chairman and CEO Rob Glaser, and Macromedia Chairman and CEO Rob Burgess.

Smilebox next raised $5 million in January 2006 from Frazier Technology Ventures in Seattle.

“Now we have plenty of cash and we’re building up the business,” said Mr. Wright. “Smilebox is on a pretty strong growth path from a revenue point of view.”

By the end of 2007 or early 2008, he plans to raise additional money. Meanwhile the company earns money from its users, who pay $0.99 to $1.99 on an à la carte basis to create a postcard, greeting card, scrapbook, and other content, or they can join as regular subscribers to avoid watching any advertising on the site.

Fast Translator

So far, about half a million copies of Smilebox’s client software have been downloaded and installed. The client software encodes the video clip on the user’s PC, taking about 20 to 30 seconds to translate a minute of video into a smaller file.

Users can take the video clips and put them in any design along with the images, rotate them, pan them, move them around, and share them.

“The breakthrough that we think we have here is the speed,” said Mr. Wright. “We’re dealing with upload times that would be a fraction of what services like YouTube or One True Media or Google have because they do the encoding on the servers. We insulate the consumers from all that.”

Smilebox offers about 400 different designs, including 30 to 35 Hallmark designs, as well as designs from independent firms such as Pinkerton Designs. The content integrates music, photos, and now video through a drag-and-drop interface.

The video is embedded on the page so the user can go to it whenever he or she wants instead of having to wait for it to come up in a slide show format.

Mr. Wright has gotten out the word about his service by advertising via keyword on Google and Yahoo, buying search terms like Christmas and Valentine’s Day.