H-P Seen Pressuring Kodak's Lead in Online Photos

NEW YORK (Reuters) - Web sites that let consumers e-mail and print digital pictures have become a new battleground for companies like Kodak and Hewlett-Packard, which hope to use the growth of these sites as a conduit for selling highly profitable products like paper and printers.

Eastman Kodak Co. may see its lead in the burgeoning market for online picture development -- which lets travelers, for example, share vacation pictures before they've even returned home -- pinched by recent moves at Hewlett-Packard Co.

The threat comes even from retailers like Wal-Mart Stores Inc.

More than 1.3 billion pictures were transmitted, or "uploaded," to online systems from personal computers in 2004, as digital cameras and camera phones went mainstream. The lion's share of those images went to Kodak's Ofoto service, which was recently renamed Kodak EasyShare Gallery.

But last month H-P, the leading maker of computer printers, purchased Snapfish, which was ranked third behind Ofoto and privately held Shutterfly in a market that includes sites like Photango, dotPhoto and Google Inc.

Snapfish gives H-P a heartier online component, says Infotrends analyst Jill Aldort.

H-P may woo photo enthusiasts, particularly those with H-P printers, to store their pictures, she said. It's possible that H-P may offer discounts on replacement ink cartridges.

"H-P is certainly going to put more marketing muscle behind Snapfish, which already had a strong brand name," she said. "I think Kodak should be concerned, but I don't think they need to stay awake at night. It makes the market more competitive."

KODAK SEES BIG GROWTH POTENTIAL

Kodak, which is almost 18 months into a tough transition away from its flagging traditional film business, says it is not losing sleep over the consolidation, such as H-P's move and Yahoo Inc.'s recent purchase of online site Flikr.

"There is a huge upside in the market, as evidenced by the deals," said David Rich, vice president of marketing at Ofoto, now known as Kodak EasyShare Gallery. "We have over 1 billion images under management and we will double that over the next year."

That big number belies the online photofinishing market's relatively small size, which reached only $160 million in revenue in 2004 and is seen growing to $630 million in 2008, according to Infotrends. That's a drop in the bucket for H-P and Kodak.

CATERING TO 'ONE-HOUR PHOTO' FANS

Still, analysts say it is essential that these companies solidify an online strategy, since consumers adore taking pictures, even as methods change.

Digital cameras will outsell film cameras this year. And young people are more apt to e-mail pictures than print and store them in albums.

But it is printing where the money is made: high-quality paper and high margin ink and toner are profit drivers for Kodak, H-P, Canon Inc. and others. What's more, users and friends make repeat trips to the sites, giving each company another chance to showcase its brand, and sell other products.

"They are set to face off against each other, whereas before this, H-P was undiversified. They had these home (systems) and that was about it," IDC analyst Chris Chute said. "Kodak has been pushing into H-P's space, so now H-P is saying 'We need to get into this."'

In all, about 25.9 billion total prints are expected to be made in the United States in 2005, with digital prints growing 50 percent to about

7.7 billion from 2004, industry group Photo Marketing Association projects.

But some habits die hard. More and more, consumers are coming back to retail stores for digital prints. PMA says the number of pictures printed at retail will nearly double to 3.1 billion in 2005.

IDC's Chute said that the so-called Internet-to-retail market is going to double to about $1 billion in 2008 revenue. In Internet-to-retail, users upload pictures to, for example, Wal-Mart's or Ritz Cameras' Web sites, which are both powered by Kodak rival Fuji Photo Film Co. Ltd. They then go to local stores and pick up the pictures, days faster than a Web-only store could deliver.

"The problem online is that I have to wait for my pictures, and this constituency is used to 'One-Hour-Photo.' This combines the best of both worlds," Chute said.

Copyright 2005 Reuters, Limited.

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