How Big Can ThisLife Be For Shutterfly?
Online personalized photo retailer Shutterfly (NASDAQ:SFLY) acquired ThisLife, a cloud-based solution offering intuitive photo and video organization, storing and sharing, in January 2013. [1] Since the acquisition, Shutterfly has layered ThisLife’s technology onto its own core photo sharing and printing platform and has started a beta version of the offering in October 2013. ThisLife competes with other photo organization platforms like Picasa from Google (NASDAQ:GOOG) and Flickr from Yahoo! (NASDAQ:YHOO).
What differentiates ThisLife from Flickr is its privacy. Photos and videos on Flickr can be accessed without the need to register an account. ThisLife, on the other hand, gives the user a private account by default and provides options to link and share across social networks such as Facebook and Twitter. In this note, we take a look at the company’s strategy of integrating its acquisitions such as Photoccino and Penguin Digital with ThisLife and its core division, Shutterfly.
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Growth In Digital Media Should Build Monetization For ThisLife
ThisLife has a free subscription plan for users having lower than 1,000 images attached to their ThisLife account. However, this free plan does not include video management. Its paid model offers management and storage services for close to 25,000 images and video files with a total size limit of close to 100 gigabytes. ThisLife offers both a monthly and an annual subscription plan, costing $7.99/month and $59/year respectively. The acquisition of ThisLife builds an end-to-end solution for customers to intelligently store, share and create physical and digital products across the web and mobile devices.
By combining its digital printing services with an online, photo management service like ThisLife, Shutterfly effectively paves way to a robust revenue opportunity through cross-selling. ThisLife offers intelligent photo management features and allows users to organize images using an variety of filters, including chronological management, through its proprietary image processing and photo ranking algorithms. Currently, Shutterfly’s own photo management platform houses close to 18 billion images. [1] Additionally, the company reported that it had a total customer base of around 8.1 million users at the end of fiscal 2013, which we believe includes customers acquired from ThisLife and other acquisitions. [2]
Assuming that 20% of the customers account for 80% of these 18 billion images, the average number of images owned by the rest of the 80% falls short of the 1,000 threshold limit for free users. This would give the ThisLife platform a potential target base of 20% of Shutterfly’s 8.1 million customers. If 10% of these customers were to subscribe for the photo management platform in addition to Shutterfly’s services, the amount of additional revenue from this cross-selling activity could amount to close to $11 million annually, or 1.4% of fiscal 2013 revenues. If 100% of the potential target base signs up for the ThisLife platform, Shutterfly could gain close to $112 million, or 14% of fiscal 2013 revenues from the acquisition.
The table below indicates a scenario-based revenue analysis (dollar figures in $ millions), with the number of customers having more than 1,000 images on average in the first column and the conversion rate onto ThisLife in the right row.
| 10% | 20% | 30% | 40% | 50% | 60% | 70% | 80% | 90% | 100% | |
| 20% | $ 11.18 | $ 22.36 | $ 33.53 | $ 44.71 | $ 55.89 | $ 67.07 | $ 78.25 | $ 89.42 | $ 100.60 | $ 111.78 |
| 25% | $ 13.97 | $ 27.95 | $ 41.92 | $ 55.89 | $ 69.86 | $ 83.84 | $ 97.81 | $ 111.78 | $ 125.75 | $ 139.73 |
| 30% | $ 16.77 | $ 33.53 | $ 50.30 | $ 67.07 | $ 83.84 | $ 100.60 | $ 117.37 | $ 134.14 | $ 150.90 | $ 167.67 |
Cloud Storage And Management Should Be Detrimental To Margins
We expect Shutterfly’s margins to decline as more customers sign up for the ThisLife service. Although additional subscriptions support revenue growth, the cloud storage and management business is a low margin business, given the significant investments into creating and maintaining a cloud infrastructure and hence, incremental revenues from the ThisLife service should lead to a heavier drag on overall margins. In 2013, Shutterfly had an overall EBITDA margin of about 19.2%. In comparison, we estimate EBITDA margin for Web Services from Amazon (NASDAQ:AMZN) to be close to 9.7% in 2013. Assuming ThisLife’s EBITDA margins to be comparable to AWS, higher revenues from the low margin ThisLife business should lead to a proportionate drag on overall margins.
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Notes:- Shutterfly Acquires ThisLife to Power Next Generation Photo Solution, Shutterfly IR, January 2013 [↩] [↩]
- Shutterfly 10K, Investor Relations [↩]