An Engineer

There are few areas of the Internet that have taken the lives of more startups than photo and video sharing for consumers. Why is it so hard? Seems like everyone wants to share their photos and videos and enjoys taking photos and videos. Yet, no company (yet) has managed to crack the code of creating a mainstream service that preserves fullsize original media for the consumer and is free for all to use.

Let’s assume that consumers expect services to be free on the Internet. Not all consumers expect this, but if you are hoping to go mainstream, then the majority do. To be free, you need to have some other way of making money. There are two basic models for making money in consumer photos and video sharing: advertising and selling prints/gifts. Let’s start with the prints/gifts model. That is the model of Shutterfly, Snapfish and Kodak. The fundamental problem with the model is that people are printing less as online sharing gets better.

Most printing happens within the first few weeks of taking the photos so those printing services are holding your content forever but only monetizing it briefly. Add to the problem that video can not be printed and these services quickly made the decision that to keep costs down and avoid consumers uploading content that they did not want to print, they would not allow downloading of fullsize originals. Ouch. If a service does not allow you to get back the original content then it can not provide a real backup to the local drive. Hence the print to share model is fundamentally flawed for consumers. it’s not a lot less broken for Shutterfly, Snapfish and Kodak. Storage costs are killing these guys and the liability of holding a huge dataset where only a small percent drives printing revenue is unattractive.

The other model is to monetize the service through advertising. Online advertising is a huge market, more than $18B in the US alone and growing briskly. As a publisher, your advertising revenues will be directly proportional to the number of page views. Business is pretty simple. Your revenues need to exceed your costs at scale and we call the difference the profit.

What are the costs? You have to store the media, and you have to serve the media.

When you serve the media, you incur bandwidth costs, but you also earn revenue from advertising since you are creating pageviews. Hence, bandwidth costs are directly proportional to the revenue potential for a certain type of media. Provided the ads sell for more than the bandwidth costs, things are good and tend to get better at scale as your bandwidth pricing improves. Hence, we can ignore the bandwidth cost.

There are constant factors in the equation for photos versus video, since video takes more bandwidth per minute of viewing, and the value of advertising inventory is different depending on the demographic and context, but for the most part, you don’t need to worry too much about bandwidth costs if you sell ads. It tends to work itself out or will soon enough as bandwidth prices drop.

That leaves the storage costs as the other cost driver of serving media. Alas, for personal, mainstream photos and video sharing, where there may be, on average, 10 other living souls who care to see your stuff, the page views per byte stored are quite low if the company keeps the fullsize original photos and videos. Storage costs are the most significant driver.

This low page view/byte stored ratio is the fundamental problem facing the consumer photos and video sharing industry. In fact, page views per byte stored are so low and the CPM rates for ads put on consumer photos and videos are so modest that putting ads around the media itself is nearly worthless. You need some other interaction with the consumer to monetize through advertising.

Note that this problem does not occur for crazy popular media like TV shows. There the page views/byte stored are much higher. Similarly, YouTube, has a much higher page views/byte stored ratio (and the deep pockets of GOOG to hide any short term imbalances).

Getting back to our basic business economics, we have industry revenues that are proportional to page views and we have costs that are proportional to bytes stored. Hence, Profit = Page Views – Bytes Stored. Hence if Page views/bytes stored is high, you are happy; if page views/bytes stored is low, you are sad. This is the driver.

The economic difficulty of monetizing personal photos and videos is the true irony of the industry. While the media we store is the most valuable to you personally, it is the least valuable in terms of being able to monetize that media through advertising because the page views/byte stored are so low. Or to put it another way, I would be really sad if my house burned down and I lost all my photos and videos, but the collective sadness if my house also contained an unaired tape of “The Office” would be even greater in the aggregate.

But all is not lost. The technological trends are in our favor. Storage gets cheaper over time. Bandwidth gets cheaper over time and after some period of expansion, digital camera sensor size will probably plateau. So in the long run, you will be able to support with advertising a consumer-oriented photos and video sharing service that stores and preserves full size originals.

And this gets us to why Phanfare still charges for usage above 1GB. It is not that we want to charge, or that we believe consumers expect to pay long term for storage online. It is that the date when you can monetize a service like Phanfare through advertising is far enough off that if you don’t charge for the high storage customers, you would go out of business waiting for costs to drop.

I have always loved this quote from Theodore Roosevelt:

Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat.

Changing the course of Phanfare by adding social networking, allowing Phanfare to be free and leaving our web hosting roots behind us was a risky move for us. But doing nothing was even riskier.

Our only true asset in life is time. Each and every one of us gets to decide how we will spend it. I would rather spend it on doing something great, and possibly failing, than by pursuing a middle course yielding neither failure nor success.

If you read the comments of this blog, one might conclude that we are completely insane. By removing open public albums and adding social networking (which requires registration) to the Phanfare system, it may seem like we have angered all our users. But those commenting on this blog do not represent everyone. My blog is read by a small minority of our users, albeit a sophisticated and internet savvy group of people to be sure.

Last week I emailed all our customers and got about 300 replies. I read and answered every one of them. And they were not overwhelmingly negative. In fact, many were quite positive, especially from the exact group we are trying to serve, the family shooter who cares about privacy on the net. I got permission from folks to quote them here.

A Dr. in NYC, who has been a Phanfare customer since 2005 wrote:

Just got upgraded and I am completely and totally overjoyed it looks FANTASTIC. You guys must have done an unbelievable amount of work putting this site up. I’m already connected to one person and can’t wait to connect to more. The site has features of connectivity with others that I’ve longed for for quite a while. GREAT job!

A user from Seattle:

My immediate family of 20 are scattered from Seattle to Grand Rapids, MI to Ft. Pierce, FL and Beaverdam, OH. We were long-time users of MSN’s family website (with paid storage), but none of us liked it very well; we just hadn’t found a better alternative for our primary goal of sharing photos of nieces, nephews and grandchildren.

None of us has a problem with the changes in 2.0, and we all see the advantages. In fact, the new functionality – particularly the free 1GB of storage – will allow some of the family who would not have been willing or able to pay for storage to now share some family photos.

A phanfare user of two years:

The changes in the way access permissions are given have been very good. After using Phanfare for 2 years, I felt a need to get more flexibility in sharing specific albums with specific people – and when I contacted the helpdesk, Shannon responded that I could be on Phanfare 2.0 in two weeks – offering me that option. And after having used it for a month, I can say that the new online access is experienced as very good. The family and friends I shared it with have reacted very positively and some started creating their own albums (which they hopefully for you will grow beyond 1 Gb). I have had some struggles with the desktop client, but your team has been very responsive.

A woman from NYC:

I want to give you my congratulations and encouragement.

I think that Phanfare is a wonderful site with helpful and friendly people. I have always been impressed by everyone’s responsiveness to every question I every had. At first when I saw the changes, I only thought about my silo and wasn’t used to the new dashboard yet, so I felt a little like my old Phanfare was going away. But in fact, I personally haven’t lost anything and I quickly realized it is much better for the company and for others who want to share photos and with whom I want to share.

Thanks very much and best of luck. I know this next phase will be a success.

A user from Firestone, CO:

At first I wasn’t sure I would like the new platform. However with some use I find that I do like the changes, a great deal. The Friends, Family and Group assignments work well for me.

The biggest complainer I had on the 2.0 change ended up being the person who has used the 1G account the most, so far anyway. She is now posting vacation pictures.

I won’t pretend that everyone feels well served by the changes we are making. At the edges, there are users who are disappointed by the changes and will leave. For those people we are doing everything we can to enable them to get their media back and land safely somewhere else. But for the quiet middle, Phanfare 2.0 is working out great. We are thrilled to be able to serve a greater number of people with the new version and to tighten the focus of the product on the family shooter.