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Getting in the Picture: HP Targets Booming Digital-Photo Print Market

Posted on: Thursday, 23 February 2006, 09:00 CST

By Mike Freeman, The San Diego Union-Tribune

Feb. 23--Taking a shot at its top rivals in digital photography, Hewlett-Packard yesterday launched two new photo printing machines that allow camera buffs to make prints in retail stores.

The Palo Alto-based technology giant, the leader in home photo printers, unveiled its self-service kiosk and behind-the-counter studio in hopes of capturing a piece of the surprisingly strong market for making digital prints in stores.

It wasn't supposed to be this way with digital photography. Given the flexibility of digital images, most prints were forecast to be made at home or ordered online -- bypassing retailers.

Before last year, that was the case. But as digital cameras have become mainstream -- they're now in more than half of American homes -- many people have found the old habit of getting their prints developed at the neighborhood drug store hard to break.

"Home printing is still growing, but with the mass market adoption of digital photography, it's retail that is growing faster," said Kalle Marsal, director of marketing for retail photo finishing at HP.

HP introduced the Photosmart Express kiosk for making 4-by-6 prints and the Photosmart Studio, which makes fancier products such as posters, albums, booklets and greeting cards.

The company is unveiling its retail push today in advance of next week's Photo Marketing Association convention in Orlando. The project is being orchestrated out of HP's Corvallis, Ore. and San Diego campuses, with inkjet cartridge heads manufactured at HP's Rancho Bernardo site for now. Once demand increases, production probably will move offshore.

"HP's strategy is to be involved in every facet of the photo printing market," said David Haueter, an analyst with technology research firm Gartner. "They already dominate the home space. They got into online with the acquisition of Snapfish last year. This is the third piece of the puzzle."

HP's kiosks and studios put the company in a head-to-head battle with Eastman Kodak, FujiFilm and other well established competitors in the $35 billion retail photo printing market.

Kodak already has 75,000 kiosks at retailers for processing digital prints, so the market could be tough for HP to crack.

"I think it's going to be hard to gain much market share from FujiFilm and Kodak," Haueter said "They've both been in the retail market for several years now. They have a lot of customer loyalty built up with certain retailers."

But HP had little choice but to dive into retail digital photo processing, according to analysts.

Last year, about 65 percent of the 33 billion digital photo prints made worldwide were produced on home printers, mostly inkjet. Ink cartridge sales provide a hefty profit for HP and other makers of photo printer.

By 2010, only 40 percent of the prints will be made at home, according to HP. The market will be substantially larger -- with 80 billion digital prints produced. But about half will be made at retailers. Roughly 10 percent will be ordered online.

"HP is entering this industry because a lot of people taking digital images are still going to the photo lab to process them," said Gary Peterson of Gap Intelligence, an industry research firm in San Diego. "They're not printing at home. So all that volume is not going into HP's pocket."

The company has deals to install the studios and kiosks in about 100 Longs Drugs stores in California beginning this summer, with possibly more later.

In addition, kiosks will be tested in several Albertsons supermarkets in Southern California, including San Diego. HP hopes Albertsons and other retailers ranging from big box stores to photo specialty shops buy the kiosks and studios in coming months.

"We've leveraging our photo-printing leadership in the home to drive down the cost for retailers and to bring consumers more choice than they've ever had in stores," said Vyomesh Joshi, the San Diego-based executive who runs HP's $24 billion Imaging and Printing Group.

HP dipped a toe into retail photo finishing once before. In April 2000, it co-founded Phogenix, a promising San Diego-based joint venture with Kodak that was developing digital inkjet photo production machines.

But in 2003, HP and Kodak pulled the plug on Phogenix, ostensibly because the startup was producing inadequate returns.

By some accounts, however, another reason for the closure of Phogenix was the looming rivalry between HP and Kodak in digital photography. In fact, Joshi's former boss at HP, Antonio Perez, is now chief executive at Kodak.

While some analysts expected HP to roll out Phogenix-like photo processing system, that wasn't the case. HP relied instead on a new scalable print technology system. Its pitch to retailers is the system's speed -- kiosks deliver 4-by-6 prints in as little as five seconds.

In addition, HP claims its inkjet kiosks need less attention from retailers because they hold more ink and paper than existing kiosks, like Kodak's, that use dye sublimation technology to make prints. The result is as much as 40 percent savings, according to HP.

Stores can buy the kiosks outright, or they can allow HP to install and run them itself, splitting the profits.

"There are margins there for the retailers," said Ron Glaz, an analyst with Boston-area research firm IDC. "But I don't think Kodak or FujiFilm are going to lose market share. The install base continues to grow. Just two months ago Ritz Camera bought 500 Kodak kiosks. But it didn't replace its Fuji kiosks."

Besides the kiosks, HP's behind-the-counter studios produce calendars, greeting cards, albums and posters in an hour or less. HP uses algorithms developed at HP Labs to lay out the photos and choose which ones to highlight.

The idea is to get consumers to tap the potential of digital photography to do more with their prints.

Retailers, meanwhile, make more money on these products than they do on 4-by-6 prints.

"If, for $30, you can get 50 images in a book that is bound for you -- where you don't have to buy an album -- I think there's a lot of opportunity there," Glaz said. "The market is starting to evolve and look beyond the 4-by-6 print."

Longs Drugs tested the behind-the-counter studio in two San Diego County stores and two stores in Northern California, said Todd Vasos, chief marketing officer for the chain. He was impressed with the repeat business, with posters and calendars the most popular purchases.

Vasos declined to give specifics about whether the machines were profitable for the drug store chain.

"Really what it is for Longs, we're a leader in photo finishing," he said.

"This gets us first-to-market in this new technology and keeps us a leader in photo finishing in the mind of the consumer. That's worth more than any return on investment right now."

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Copyright (c) 2006, The San Diego Union-Tribune

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Source: The San Diego Union-Tribune

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