Facebook Could Monetize Instagram By Buying Shutterfly

by Trefis Team
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Following the hubbub about Instagram’s new privacy policies and Facebook’s (NASDAQ:FB) efforts to monetize Gifts this shiny new asset, we look at another way it could gain from Instagram’s addition. In particular, Shutterfly (NASDAQ:SFLY) presents an interesting opportunity and a hypothetical partnership, or acquisition, by Facebook could benefit both companies. This would give Facebook’s users access to quality tools to personalize their photos, gifts and cards as well as pay Facebook without leaving the network page.

This is an idea that has been floated around by others such as PTSD Trader here and Eric Savitz at Forbes has lauded the value in Shutterfly here. The rationale is that Shutterfly would spend less on customer acquisition, an activity which has been the primary cost incurred by the company over the past year. Meanwhile, Facebook’s trouble in monetizing its mobile traffic can also be partially solved as photos uploaded or added using Instagram can now be instantly made available for gifting and photo printing.

Check out our complete analysis of Shutterfly

Facebook Gets To Monetize Photo Sharing

Facebook has been under pressure to monetize its assets. Despite spending a billion dollars on the acquisition of Instagram, the company has been unable to successfully monetize this asset. The Instagram acquisition and the growth in mobile penetration has spurred photo sharing on the social network, and these photos could be used to generate revenues by providing the option to convert them into personalized cards, stationary, prints etc., a field Shutterfly has expertise in.

More recently, Instagram caused a stir when it announced that it would update its privacy policy to be better aligned with Facebook. Many users complained that the new rules would allow Facebook to sell or market users’ photos without their permission. Instagram is insisting that there will be no changes to users’ privacy options.

A recent report by engagement marketing firm Constant Contact (NASDAQ:CTCT) says that almost 60% of total Facebook traffic is through mobile devices. [1] Shutterfly’s recent acquisition of Penguin Digital, a mobile application development company that has an iPhone application allowing users to access their photos from their iPhones, or Facebook, or Instagram accounts and create customized products and gifts from their mobile devices could prove to be beneficial to both the companies. The development costs then gets shared between the two companies and frees up resources for alternative use.

What’s In It For Shutterfly?

Shutterfly’s stock price has fallen almost 20% since September this year on concerns about its spiraling costs as the company acquires users and their photographs from redundant photo sharing and printing services. [2] [3] There are considerable IT infrastructure costs associated with storage of photographs and with the company offering unlimited free storage to its users. Teaming up with Facebook or other photo storage services will permit its user base to store their photographs with other storage service providers they prefer while saving costs for the company.

Along with cost savings, the company would also be able to divert some of its focus from customer acquisition. A Facebook deal would give Shutterfly access to the latter’s approximately 1 billion users and their photographs without spending anything on data storage or customer acquisition. Sales and marketing expenses could also dip as the focus could shift to advertising through Facebook.

Key Risk: Low Resolution Photo Storage On Facebook

Facebook scales down photographs uploaded on its website to a lower resolution prior to storing them, resulting in most of them being unfit for photo printing or photo related gift purposes. A tie-up between the two companies will have to enable a high resolution photo storage on Facebook, which would require substantial expenditure on data storage equipment from Facebook. Since the company is still struggling to monetize its services, it could decide against this basic requirement or put a price on high resolution photo storage. Charges for photo storage could drive away users from the service, and reduce the inherent advantage of such a tie-up.

We have a $40 Trefis price estimate for Shutterfly which is 40% 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 competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and even Apple’s (NASDAQ:AAPL) Cards app on iOS.

Notes:
  1. Half of All Facebook Page Traffic Now Coming from Mobile … and Other Hot Topics, Constant Contact, December 2012 []
  2. Shutterfly to Snap Up Kodak Site, The Wall Street Journal, April 2012 []
  3. Shutterfly Welcomes SeeHere.com Customers, Shutterfly, October 2012 []
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