SAN FRANCISCO (01/04/2000) - In the beginning, there was free e-mail. And the market responded so enthusiastically that no major portal was complete without it. Then came free Internet service, a concept so hot that it has been adopted by some of the industry's biggest players, including America Online Inc., Microsoft Corp. and Yahoo. Then there was the free PC, a proposition that has faced its share of problems but nonetheless has left its mark.
The latest freebie is a move that could turn the $14.2 billion photo-processing market on its head, Snapfish, an upstart backed by CMGI and the Mayfield Fund, is telling consumers they'll never again have to pay to get their film developed. That's the snap; here's the fish: In return for free photos, Snapfish is asking consumers to furnish personal information - and to endure a steady stream of pitches.
Expected to launch in the second quarter, Snapfish is the latest online photo service to be backed by big money and an experienced management team. The best-known player so far is Shutterfly.com, the new venture by Net mogul Jim Clark. Other firms include PhotoAccess.com and Ofoto.com.
All are betting that photo processing is just the beginning. They envision a day when customers will store their pictures on the Web instead of in shoe boxes. These online photo albums, the thinking goes, will then turn into highly trafficked portals, as friends and relatives log on to view snapshots, vote in amateur shutterbug contests, and of course, order reprints, frames and other merchandise.
Snapfish distinguishes itself in two ways. First, it will mail their pictures, printed on 4-by-6-inch Kodak paper, for free. People typically pay mail-order outfits $5 or more for the same service. Second, Snapfish is the only new service that will work with traditional - rather than digital - film.
To generate revenues, Snapfish plans to feed its customers ads and pitch them on larger prints (for which there's a charge) and photo accessories. To target the ads, the company will use "creeper profiling," gradually asking customers for personal information such as their birthday or how many kids they have.
Then, when family and friends visit Snapfish to look at photos and order prints of loved ones, they'll also be queried and served with targeted ads. (Users will get a password to protect against nosy strangers.) Snapfish's strategy is a gamble. For one thing, it's betting that film-based cameras will be around for a while. Just 6 percent of U.S. households currently own digital cameras, but that number is expected to jump to 14 percent by 2002, according to Credit Suisse First Boston. Given that Snapfish's free offer extends only to pictures taken with traditional cameras (there's a charge for making prints from digital files), one of Snapfish's key selling points may vanish when most cameras are digital.
Another question is overhead. It's not yet clear how much it will cost Snapfish to develop customers' film and print their pictures, but it probably won't be cheap. With the average household using more than seven rolls of film each year, the retail cost of processing those pictures could reach into the billions. Snapfish CEO Rajil Kapoor says the company will get a steep discount from District Photo, an equity investor and the largest U.S. mail-order photo processor, but he declines to be more specific. He does say the cost will count for a "significant portion" of Snapfish's marketing. "It's not very far off from what Internet companies should pay for marketing," Kapoor adds. He declines to detail the amount Snapfish will pour into more traditional forms of marketing, such as advertising.
The biggest risk is basing the company's revenue model on a customer's willingness to divulge information about family members and spending habits.
Kapoor sees the emotional attachment people feel for their snapshots as a commercial opportunity. As he puts it, "[because] photos are so event-driven, there's a high opportunity to sell" additional products.
But it's unclear whether Snapfish will be able to collect enough information to make back the money it will spend to develop its customers' pictures. People may lie when answering questions or choose a less intrusive service. And a security breach like the one that last year exposed thousands of e-mail messages stored on Hotmail would be disastrous. Still, as AltaVista, Juno and NetZero have learned, there's a lot of money to be made giving stuff away.