Struggling to monetize its business model, Facebook’s (NASDAQ:FB) photo-sharing site Instagram announced in mid-December its decision to amend its advertising policy to allow advertisers to use data and content from its users for ads.  Following a huge outcry, the company reverted back to the terms of service created in 2010.  Instagram was trying to transition into a money making business and planned on leveraging data from its 100 million plus users. The decision generated a feeling of distrust among the users with several of them closing their accounts. 
We believe that the resulting distrust towards Instagram’s intentions and monetization plans could be leveraged by personalized photo expressions company Shutterfly (NASDAQ:SFLY) to expand its customer base at a minimal costs. Shutterfly offers unlimited online photo storage for free and monetizes its data bank by letting users design custom photo-books or personalize gift items through services like Treat.com, Tiny Prints, Wedding Paper Divas.  An updated mobile app with photo-editing features similar to Instagram could result in the company capturing business from Instagram. Currently its mobile app allows users to crop only and is not as easy to view and share photos with friends.
Trends recorded by app traffic tracking firm AppData suggest that the traffic to Instagram has shrunk consistently since the company announced the amendment. The Daily Active Users as a percentage of Monthly Active Users shrunk from a healthy 40% on December 18 when the news came out to about 22% on December 31. Daily Active Users stat stood at 10.0 million users on December 31st.  There were rumors circulating that Instagram lost as much as a quarter of its customer base which were categorically denied by the company.  We expect the rumored numbers to be greatly exaggerated while the impact to have been considerable.
Shutterfly could capitalize upon the situation by updating its own mobile app which allows for photo editing similar to Instagram and perhaps more. An app along these lines could provide growth in the total number of registers customers who could through aggressive internal marketing become users of Shutterfly’s other services. It’s working on updating its mobile apps and took another step in the direction with the new app which lets users create and order products on the go instead of just managing their photo library. 
Its recent acquisition, Penguin Digital, has helped in this app update. We expect the company to roll out more updates of its mobile apps to better compete with Instagram and leverage the growing usage of mobile devices. A successful integration of features similar to Instagram on Shutterfly’s mobile apps could see the company achieve monetization of photo storage services, a front on which Facebook and Google have failed so far.
We have a $40 Trefis price estimate for Shutterfly which is 35% above the current market price as we expect the company’s recent acquisition of customers from Kodak Gallery and Fujifilm to drive future revenue growth across its diversified product portfolio.
- Shutterfly Q4 Earnings: Holiday Sales Boost Earnings As The Company Crosses $1 Billion In Full-Year Revenues
- Shutterfly Earnings Preview: Holiday Demand Could Drive Revenues This Quarter
- Shutterfly Q3 Earnings: The Enterprise Segment Soars, While The Consumer Business And AOV Lag
- Shutterfly Earnings Preview: Enterprise Segment And New Products Could Drive Growth
- Shutterfly’s Growth Momentum Could Continue In The Coming Quarters
- Shutterfly Demonstrated A Healthy Second Quarter With Broad-based Growth, Though Average Order Value Declined
- Instagram seeks right to sell access to photos to advertisers, BBC, December 2012 [↩]
- Instagram Rolls Back Policy on Advertising, The Wall Street Journal, December 2012 [↩]
- Instagram uproar: Users, photographers say they’re leaving, Los Angeles Times, December 2012 [↩]
- Free, unlimited picture storage, Shutterfly, January 2013 [↩]
- Instagram, AppData, January 2013 [↩]
- Instagram Says 25% User Exodus Is Bullshit, Gizmodo, December 2012 [↩]
- With Its New iPhone Application, Shutterfly Is Ready To Compete On Mobile, TechCrunch, December 2012 [↩]