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Yahoo's Photo Finish

In the continuing race for the hearts and minds of email users, Yahoo! (Nasdaq: YHOO  ) has announced a new service called PhotoMail, which allows users to send a few hundred digital photographs in a single message. The user-friendly interface is a huge improvement compared to sending images as individual attachments. That routine took forever, and not everyone who received the emails could see the attachments.

Why is Yahoo! introducing the new feature now? I think it has much to do with a company whose name starts with "G". In recent years Google (Nasdaq: GOOG  ) and Yahoo! have fired new-product volleys back and forth, from search engines to email to news portals. The two giants' habit of nipping at each other's heels provides users with fresh new technologies. It's anyone's guess, now, how long it will be until Google follows up with a similar email photo technology.

For now, Yahoo! is still the biggest Web-based email service; Time Warner's (NYSE: TWX  ) America Online mail comes in second, followed by Microsoft's (Nasdaq: MSFT  ) Hotmail. To stay in first place, Yahoo! will have consider more than just gigabytes of storage space. Charging $19.99 a year for POP access, archiving, and mail forwarding -- all features Gmail users now get for free -- might become Yahoo!'s Achilles' heel.

About 88% of the company's revenue comes from advertising. I'm not convinced charging for email is a viable way to generate additional revenue, but the email service itself drives users to other Yahoo! pages full of ads. Having tried out PhotoMail, I must say photo sharing is a cool idea that will be appealing to users. But it comes with a price tag. Yahoo! is investing money into infrastructure to expand its features, generate additional traffic, and in turn garner more ad revenue. Time will tell whether this strategy works -- or simply lowers profit margins.

It seems that revenue is no longer cheap for the Yahoo!s and Googles of the world. They're spending increasing amounts just to hang on to existing income. It seems that on the Web, this cycle is now the name of the game.

We've attached more Foolish Takes on email:

Fool contributorKelvin Taylordoes not own shares of any of the companies mentioned. He has used Yahoo! mail for nearly a decade, and is a recent Gmail user.

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