Dan Heller's Photography Business Blog Industry analysis from www.danheller.com

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Monday, August 08, 2005

Turning point for the photo industry: photo-finishing distribution

I was recently contacted by someone who said he had a new business where he could fulfill print orders and many other photofinishing services over the web. He directed me to his website where I could order prints for myself, or have other people I refer order prints. The statement, "others I refer," piqued my interest. Why would I refer other people to some guy's website? Seemed he was trying to market his business, but to ask me (or any single individual) to come to his site is ridiculous. To market to any appreciable degree of success, one needs to engage in more broad, wide-net marketing tactics to grab lots of fish with fewer efforts.

Anyone who makes a major investment in business certainly knows better, and if he'd done what he said he'd done, why was he foolishly doing this one-off, single-individual emailing campaigns? This bothered me so much that I had to learn more. I wasn't interested in any of these services for myself, and I have yet to ever "recommend" a service or any other business as part of my role as an industry analyst (so as to remain objective and credible in my writings). But, I took a look at his site to see how his site differed from other competitors in the marketplace to see if there's been any ground-breaking advancements in "photo-finishing services," a market segment that I feel is already overly-saturated.

To be honest, my first impressions were extremely positive. Not because the site did anything that hasn't been done, but that it was just done so darn well. And again, it wasn't even that. It's that the site was done by "some guy" who told me he just set up this business (presumably, on his own--or so I thought).

In short, his site was extraordinarily built, well-organized, and clearly featureful and functional for the target audience: the average consumer who wants to make prints from his digital camera. Indeed, he provided a huge array of photo finishing services, ranging from standard prints on photo paper, to canvas prints, to photos applied to commodities like t-shirts, mugs, you name it. If you want a picture on it, he can do it. Now, doing that kind of work as a corner shop owner is hard enough, but to set up an internet site to this degree was... Well, let's just say, I was floored. But again, with such a great site, why was he emailing me like an amateur?

It was only after I surfed around the site did I realize that this guy wasn't his own site. It was a personalized site because he was a franchise of another company. And that company is itself a smaller subdivision of a much larger company. In fact, a huge company. In this case, it's Nu Skin Enterprises, a direct-marketer of consumer products. And the subdivision is Photomax, a smaller (but big in its own right) photo-finishing company. The business models of both companies isn't unique--many direct marketers do this. And the site, Photomax.com, while well done, is also not unique from others in the same category (shutterfly.com, ofoto.com, etc.). But, it's the guy who emailed me was a franchisee!

Why is this interesting? Well, it says so much about the state of not just the photo-finishing market, but of the photo industry as a whole. To explain that, let's review some business basics:

Traditionally, a "distributor" usually has to have some degree of business experience, invest an appreciable capital outlay, and usually goes through months (or more) of specialized training before he can open his own storefront that brands the name of the parent company. Even starting your own corner McDonald's is not for the faint of heart. But no more! Yes, with Photomax,you can (like this buy) be a franchisee, or even a master distributor, have your own personalized website, and start raking in the pennies as consumers order their prints through it. Sounds easy, right? Well, it is. But that's where the first lesson of business comes up: if it were easy, everyone would do it. So, there must be something more to it.

it's not that there's anything unholy going on here. It's all above-board. It's just not clear who's going to be the winner here. I said earlier that I felt that the photo-finishing business model was a saturated market. In fact, all the players who will succeed already exist today. The question is now which of the pieces will remain on the board as the game progresses. Sure, players may come and go, but they really only do so in the form of cycles of small growth and consolidation. Early in a product growth cycle, everyone tries to get into the game. At one time, it was just Kodak, and then others (Fuji,, AGFA, etc.) Once the players are established, and consumers "adopt" the new product, the market matures to the next level where we see a broadening of the distribution channel. This is what brings down prices and widens the product pipeline. (That is, more people are out there selling product.)

Fast forward to the digital revolution and the wide acceptance of the Internet as a consumer communication platform. More people are taking more and more pictures, even to the point where consumers are touching upon opportunities historically only available to seasoned professionals. The fact that Photomax is now signing up distributors to handle an online presence for photo-finishing, clearly validates the assertion that the business model has reached a saturation point, and that the next phase is around the corner: consolidation.

Or not.

It may be that consolidation never happens. When it comes to really low-cost, easily managed businesses--like photo finishing--the question of whether consolidation will ever occur relies on one fundamental question: what's the barrier to entry? If a huge investment of capital and other resources are necessary to acquire a competitor and consolidate the market, this keeps future competitors out. But, if it's too easy for new players to come in, then the investment for acquisition is less justifiable. Photo-finishing is, in my opinion, just such a business. Anyone can do it, and with Photomax's new sign-up form that let's anyone with several hundred dollars get into the game, the question is no longer if anyone can do it, but the mere fact that the barrier to entry is so low, and it wouldn't possibly be worth it for anyone to ever get into this game at the top level.

At the bottom level, it's another story, and that's where the consumer comes in. Sure, people may get a few dollars here and there by having other consumers buy prints from their personalized Photomax websites, but the real winner here isn't going to be the franchisee, it's Photomax. And that, only if Photomax can get enough people to participate. (In some way, even that doesn't matter; their investment is mostly complete, and the profitability is so high, that they will probably survive by mere entropy.)

We've seen this before. You may recall the popular "MLM" marketing schemes in the 80s and 90s, where your friends and neighbors may say to you, "Hey, if you ever need some perfume, come to me! And if you want to make a lot of money yourself, I'll help you become a distributor like me!" These fads always go in and out, and it's not that there aren't those who do make some good money, but as a percentage of those who try, the success rate is tiny. But that also doesn't mean the perfume business is dead--it just means that the market is big enough that the major players will just grow and grow, and the little dollars trickle down to those hard-working people who sell it for them.

Let me summarize what all this means about the photo industry today:

1) The digital imaging market has so evolved away from "professionals" and into the consumer market, that even the job of "photo marketing" has trickled down to the consumer market too.

2) Because of (1), this market segment can now be defined as mature: it's well-saturated and capable of being run by the average person with little or no technical or marketing experience. When a market is that mature, competition is going to be tough. Success is certainly possible, but only time will tell which of the many players will survive.

3) The best chances for success is to be at the top of the food chain, and, as the "Opportunity" tab on the Photomax profile page(s) pretty much admit in clear detail: they get rich through 1% of the effort from 100 people, rather than 100% of their own efforts.


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