Views from Phanfare CEO and Co-founder Andrew Erlichson

Link Photo and Video Sharing Economics 101

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.

  • Rob

    Mr. Erlichson:

    I liked this post.

    What about lifetime members (from the 1.0 days)? How do you monetize those people?

  • Howard Larsson

    Thanks for being straightforward and honest.

    Nothing turns me off to a brand as quickly as deception. Many have offered ‘free online storage’ only to later learn the economic lessons you mention and have held customers’ media hostage to their newly institued pricing or lost it altogether—indicating they never had the respect for their customers images, or, therefore, their customers, that y’all at Phanfare seem to have.

    Phanfare remains the highest quality, most responsive, and innovative, site and I happily subscribe. I am also comfortable in the notion that you will not close up shop and go off-line tomorrow or bill me at an arbitrarily inflated price without notice or opportunity to remove my images.

    Keep Up The Great Work,

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  • Roger

    Excellent post

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