They're Coming for You, Shutterfly

Why is everyone so eager to nab my Shutterfly (Nasdaq: SFLY  ) business this year?

I consider myself a pretty loyal Shutterfly customer. I have ordered my photographic Christmas cards from the digital-snapshot specialist for a couple of years now. I recently ordered a photobook -- chronicling the various trips that my family took this summer -- and my wife is so smitten that she swears she will never bother with a conventional photo album again.

The inner Peter Lynch in me would jump at the chance to be a Shutterfly investor. But, seeing the many different companies that are trying to cram into Shutterfly's digital photography sweet spots, I think I'll pass.

Really. Check it out:

  • Zazzle is pushing customized photo holiday cards and calendars like Shutterfly's, with matching personalized stamps like the kind (Nasdaq: STMP  ) offers.
  • Hewlett-Packard's (NYSE: HPQ  ) Snapfish is now offering photo books that look exactly like Shutterfly's workhorse.
  • Even Webshots is getting into the act. American Greetings (NYSE: AM  ) acquired Webshots from CNET (Nasdaq: CNET  ) just a few weeks ago, but it has already monetized the photo-sharing site with a merchandising makeover. The site now offers premium photo cards.

Shutterfly isn't exactly hurting. Its fourth-quarter outlook calls for the top line to clock in 38% to 42% higher than it did during last year's holiday season. Unfortunately, margins are expected to contract slightly, meaning that Shutterfly probably knows it's going to have to roll up its sleeves to drive home sales this period.

If there's any consolation, it's that no rival seems to be any better at doing what Shutterfly is doing. (Having Target (NYSE: TGT  ) as an ally doesn't hurt, either.) A pricing war wouldn't be pretty, but it's not as if Shutterfly's existence is being challenged. The pressure now is to keep margins in check as the competition pours in from all sides. And it's not going to get any easier; photo-sharing sites such as Yahoo!'s (Nasdaq: YHOO  ) Flickr are growing even more popular, and Shutterfly doesn't offer a convenient way to bring over uploads from third-party sites.

I'm loyal, but can the same be said for the rest of Shutterfly's installed base of customers? We'll find out in a couple of months, when the company announces its results for the quarter that falls during the holiday season.

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