Digital camera spurs battles
Retailers, printer makers try to lure consumers into film processing with them
By PUI-WING TAM
The Wall Street Journal
Like millions of other Americans, Julie Berry got a digital camera this year. What the 35-year-old stay-at-home mom does with the pictures is the subject of the next big battle over the future of photography.
After snapping shots of her 2-year-old daughter, Ginger, Berry printed them out in her study — and was disappointed. “The photos just didn’t have great color or great resolution,” she said. “I just thought: ‘Oh well, I guess we have to buy a better printer.’”
A few weeks later, Berry had more luck at the digital printing kiosk at the CVS Corp. pharmacy in Mansfield, Mass.
On her first try, Ms. Berry produced 30 digital prints for 29 cents a pop in less than half an hour. Now, she’s a convert.
“It’s easy and it’s very reasonably priced,” she said, “especially considering I don’t want to spend time and money and run out to buy a new printer.”
The switch to digital cameras has already brought sweeping change to the $85 billion photography business. Eastman Kodak Co., the big film company, saw its business drop off and is struggling to adjust. Camera makers found a hot new product.
Now, the next battlefield is rapidly taking shape: Printer makers like Hewlett-Packard Co. are in a fierce struggle with big retailers like CVS and Wal-Mart Stores Inc. as well as upstart Web sites to capture consumers while their habits for printing digital pictures are still in flux.
The stakes are high for retailers, who have long benefited from the foot traffic and profits generated by the $5.3 billion U.S. film-processing business. Wal-Mart stores brought in a hefty $3.5 billion in revenue from photo processing in the last fiscal year, or 2 percent of store revenue.
While printing accounts for 30 percent of HP’s revenue, it generates 75 percent of the company’s profit. HP has been counting on printing color photos at home to keep the ink flowing for years to come.
For a while, HP dominated the market. As recently as 2002, 91 percent of digital photos printed in the U.S. were produced on a home or office printer, according to research firm IDC. With more than 40 percent of the consumer inkjet-printer market, HP was sitting pretty.
Now, the big retailers are rapidly pushing into digital-photo printing, with do-it-yourself kiosks and drop-off centers. They are challenging HP with TV ads and promotional campaigns attacking the cost and complexity of home printing. A new crop of online photo sites promises consumers professional digital images without leaving home.
While printing at home still typically costs 60 cents for a 4-by-6 image, including the costs of ink and paper, retailers generally charge below 30 cents and some online sites charge less than 20 cents.
The result: This year, IDC predicts only about 69 percent of printed digital photos will emerge from home printers like HP’s. By 2007, it projects that figure will fall to 42 percent — albeit in a much bigger digital photo market.
CHANGING PLANS
HP is urgently shifting its strategy to recapture Berry and others like her. When HP entered the digital-photo business nearly a decade ago, it worried most about matching the quality of film snapshots — developing machines that could create high-quality images, but only slowly and at fairly hefty prices.
Since taking over five years ago, HP chief executive Carly Fiorina has invested more than $1 billion in new digital-photography products, including cameras and portable photo-printers.
Today the company is betting that the convenience and instant gratification of home printing will triumph over the hassle of traveling to a store. HP is aiming to cut in half, to 30 seconds, the time to print a 4-by-6 image. It’s testing cheaper paper and ink. And it’s trying to simplify the task of printing images directly from camera cell phones by developing software that easily sends an image to a printer.
“This is absolutely a big bet for us,” said Vyomesh “VJ” Joshi, HP’s executive vice president for printing and imaging. “Retailers are usually one of the slower groups to respond, but they suddenly woke up. So we have to get more aggressive.”
Protecting its printing cash cow is critical. Analysts estimate that ink cartridges carry a gross profit margin — sales price minus the cost to make the cartridge — of more than 60 percent. That’s far higher than the margins on HP’s personal computers, standardized server-computers and other products. HP sells most of its printers at a loss, planning to make up the difference on ink sales. Photo printing is especially lucrative, because pictures consume 20 times as much ink as printing a page of text. HP’s color inkjet cartridges generally cost between $19 and $35.
Printing those pictures is a big growth opportunity for HP, as digital cameras move from high-end gadget to mass phenomenon. Sales of film in the U.S. peaked at $6.2 billion in 2000. Last year, film sales totaled $5.3 billion, down 13 percent. Meanwhile, 66 million digital cameras will be sold this year, up from 12 million in 2000, predicts InfoTrends Research Group Inc.
Others covet those images as well. Online photography sites like Snapfish, the online arm of District Photo Inc., and closely held Shutterfly Inc. will print digital photos for 29 cents or less — under 20 cents for those who prepay — and mail them to customers in a day or two. Yahoo Inc., which started a similar site in 2000, sells prints for 19 cents.
The biggest challenge comes from large retailers that are offering to usher consumers into this unfamiliar world with a familiar routine: Bring us your digital images, and we’ll give you professional-looking finished prints. Even retailers that sell HP printers, such as Best Buy, are beginning to compete with HP by offering digital-photo services in their stores.
For retailers, digital printing is a rich new vein. Traditional prints require the extra step of exposing a negative through a chemical process, and retailers can charge about 15 cents a print because of competition in the field.
Digital prints, which essentially involve only the cost of ink and paper, are currently commanding about 29 cents, meaning gross margins are higher.
In pitching their services, retailers focus on price and simplicity. Walgreen Co. proclaims on posters in its stores that its 29-cent prints are cheaper than home printing. CVS runs TV and print ads showing digital photos being printed while consumers shop for other items. Wal-Mart sells HP printers but increasingly emphasizes its own digital-photo service, at 24 cents a print.
By the end of the year, Wal-Mart expects to offer digital-photo processing in 3,000 of its 3,600 stores and wholesale clubs.
DECADE-OLD BATTLE
The roots of this clash stretch back to the mid-1990s, when film still ruled the day. In 1995, 640 million rolls of film were sold in the U.S., for $4.9 billion. Digital cameras were still expensive — $650 and up — and couldn’t produce detailed images.
But HP looked ahead and saw that affordable digital cameras would soon produce high-quality images. Hoping to expand the use of its consumer printers and to sell more ink, HP in 1995 began building specialized photo printers. The company concentrated on making these printers work well with high-quality inks and paper so that home-printed digital images would retain the gloss of traditional film prints.
HP’s future competitors also calculated ahead. Makers of film-processing equipment for big retailers like Wal-Mart and Costco Wholesale Corp. began to go digital. In 1996, Fuji Photo Film Co. released a digital lab for retailers.
Kodak, meanwhile, is trying to play it all ways in the digital photography world. As it shifts away from its traditional film business, the company is developing photo printers and digital cameras of its own. It also has put a stake in the online digital image market with its popular Ofoto Web site, which charges 29 cents a print. Kodak also sells do-it-yourself digital printing kiosks and other photofinishing equipment to retailers.
In 2000, Wal-Mart executives studying camera sales realized consumers were switching to digital cameras more quickly than they had projected. So in 2001, Wal-Mart began converting its photo services to digital-photo equipment. It also has created an online service that mails prints to users, or allows them to come to the store to pick the photos up.
“We want to make digital-photo printing as easy as going to an ATM,” said Dave Rogers, Wal-Mart’s vice president of photo centers.
The traditional film developers also attacked home printing on price. In 2001, Costco started offering digital prints for 19 cents each. The next year, Wal-Mart cut its standard price to 24 cents, from 29 cents.
“If you really understand what it costs to print photos at home, plus all the extra time involved, then people will see it’s a good deal to print in stores instead,” Rogers said.
