What happens when Shutterfly goes private?

From a macro standpoint, this is probably a healthy thing for both Shutterfly investors and the company as a whole. Big investors are like magpies, attracted to shiny objects. Shutterfly and other online printing firms like VistaPrint, CafePress, etc., are solid, profitable businesses but lack the flash of a Snapchat or Instagram (despite the fact Shutterfly actually generates revenue).

When Snapfish, Ofoto and Shutterfly all launched in the late 1990s, just getting prints from your digital camera was a novelty. Actually, the business model back then was to mail in a roll of film, and get the prints mailed back to you (along with posting online). This was pre-open photo sharing, when keeping customers in your walled garden was a viable tactic. Later, when digital cameras began to yield decent quality, direct uploads and printing took over from film.

Shutterfly went public in 2006, finally giving an exit to early investors like Jim Clark. A rough IPO market delayed for years the offering. “ ‘It’s been a long process,”’ said George Zachary, one of the original investors in Shutterfly. Attracting customers “was slower and consumed more money than we would have liked,” he added, according to the New York Times.

Actually, that’s always been the case in the photo business; acquiring customers who actually pay for products is never easy and never goes as planned.

The big photo services are also challenged by the dozens of niche photo printing sites, who have thin overhead, outsourced developed and laser-targeted marketing. Look at Mixbook: This is a $25 million profitable photo-printing company focussed on select custom products for discerning customers.

Snapping up Snapfish?

On the other side of the coin, Snapfish by HP, is also making the news for being for sale . Yet, the “news” about Snapfish being for sale isn’t news at all. Industry insiders have known for years Snapfish has been shopped. Photo printing has long stopped being a strategic importance to HP, which has IBM-envy and is jockeying to be a cloud services company. (So is Xerox, for that matter) When Vyomesh “VJ” Joshi was reportedly pushed aside in 2012, that was the last straw in a long series of steps to disenfranchise the venerable printer division. Certainly, HP makes impressive printing hardware and platforms, but they no longer command the cache as before.

As for Snapfish, the reality is, it’s not that attractive of a purchase. There is no unique technology or customer set. The printing itself is outsourced to partners and the mobile apps are not leaders.

Even from a customer-acquisition standpoint, a Snapfish purchase would yield little fruit, as there are likely very few Snapfish U.S. customers who aren’t already Shutterfly customers. (International is another story; however, Snapfish has quietly been closing some international sites.) Further, Snapfish plays at the heavily discounted end of the market; if purchased by Shutterfly, look for those Snapfish cheap-print deals to disappear.

What does a private Shutterfly do?

So, if taken private, what should Shutterfly do? It’s a nearly $2 billion company with a sterling brand, leadership position, annual profits and impressive capabilities. The company is literally the “Kodak” of consumer photo printing. As a private company, Shutterfly executives won’t have to listen to dummies compare their company to Snapchat or Instagram. That alone is worth taking the company private.

Yet, there are still holes in its portfolio that can yield further growth.

• Mobile – Shutterfly has a smattering of apps for its various brands (TinyPrints) and services (ThisLife, photo books, etc.) but none of them are particularly earth-shaking. According to the June 30, 2014, earnings call, mobile drove 11 percent of revenues on the Shutterfly brand. That’s a 100-percent increase but still a long way from becoming a mobile-first company.
• Retail – Shutterfly has no significant retail partnerships, except for a co-branded print delivery activity with Target and some shelf space at Best Buy. There are lots of opportunities in the home decor and craft space for retail partnerships, such as Jo-Ann Fabrics and Michaels.
• Year-round volume – Unlike many of its competitors, Shutterfly is vertically integrated with company-owned plants and facilities. The company has ramped up its commercial printing division, but it has a long way to go to compete with Staples, VistaPrint, etc. This does, however, play to the company’s strengths. With the worldwide glut of color printing capacity, Shutterfly can be very competitive on a cost basis in commercial markets.
• International – Even without a Snapfish acquisition, Shutterfly still has opportunities for expansion into developed markets like Canada and Europe, through acquisition. Those are mature markets but well-suited for Shutterfly’s balance of product selection and value.

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