2008 is off to a forgettable start for Shutterfly (Nasdaq: SFLY). Shares of the digital photography e-tailer have surrendered 19% of their value through the first three trading days of the new year.

The culprit is Hewlett-Packard's (NYSE: HPQ) Snapfish, which slashed prices on its photofinishing services last week. Going from $0.12 to $0.09 a print is a bold move, but it unfortunately tosses the entire niche into a margin-crushing price war.

Shutterfly is about more than just the online ordering of 4" x 6" prints of your nephew's third birthday party. If that were the case, Shutterfly wouldn't have survived the proliferation of affordable photo printers and self-serve kiosks at your local drugstore. Shutterfly would also have smoother seasonality than it does now; the holidays have usually marked its lone profitable quarter each year.

The writing is on the digital wall, though. If cutthroat pricing is the law of the land in snapshot development, it won't be long before prices begin to fall on Shutterfly products like photographic holiday cards, photo books, and calendars.

Coming up Nexo
You'll have to forgive me, then, if I read a little more into Shutterfly's purchase of photo-sharing upstart Nexo this weekend.

The price tag is inconsequential -- less than $15 million. It's not even Shutterfly's first foray into Web 2.0. The company acquired Let's Make It About Me last year, a publishing company that inserts kid faces into storybooks, complete with the popular MyABCAdventure.com website.

Nexo is a bit different, because it's not exactly a photo-driven site. Nexo.com offers groups the ability to collaborate on free websites. From a family reunion to a youth athletic team to a graduating high school class, Nexo provides a catchall Web page for participating parties to hang out. Users can obviously share photos, but the site serves more as a closed social network, in which members can also dig into discussions, share calendars, and even upload videos.

If you haven't heard of Nexo, join the club. You don't command a ransom of less than $15 million these days unless you're an obscure Web 2.0 player. All the same, I think the company is perfect clay in Shutterfly's artisan hands.

If it's not Web 3.0, then maybe it's Web 2.5
Successful photo-sharing sites thrive on community. Where would Yahoo!'s (Nasdaq: YHOO) Flickr be without viewer tagging and comments? Maybe CNET (Nasdaq: CNET) would have stuck it out with Webshots a little longer -- instead of handing it over to American Greetings (NYSE: AM) -- if the site had done a better job of turning its countless snapshots into social hubs.

Shutterfly's fluency in Web 2.0 is weak, beyond the viral nature of sharing an online photo album with friends. Blame that on its DNA as a photofinisher. Snapfish and Kodak's (NYSE: EK) Kodak Gallery also have all the personality of a beefeater on duty. These sites want you to buy something and get out -- loitering is not encouraged.

Shutterfly has succeeded despite these shortcomings -- including the lack of even the simplest of conveniences, like porting over uploads on third-party sites like Flickr -- because it's the premium brand.

The company has won prized spots in the media limelight, from a product placement on ER a couple of months ago to a deal for Martha Stewart Living (NYSE: MSO) licensed photo books and holiday cards, because its award-winning product line stands out.

Unfortunately, price wars have a funny way of turning thrifty consumers into brand-agnostic shutterbugs. That's why I think the Nexo purchase is important.

Shutterfly is no longer a Wall Street darling. Its stellar post-IPO honeymoon run is over. Shares have fallen by 44% since they peaked at $37 less than three months ago. The company needs new hooks on the line, and a platform like Nexo is perfect.

If a parent is taking snapshots of your kid's soccer team, wouldn't you want a print? If you're fond of a particular organization, won't you want to stay close to its Nexo site (and thus within Shutterfly's reach)?

Shutterfly's audience is large enough to grow Nexo's user base, if Shutterfly rightfully decides to promote the site to its growing base of customers. The market sees the situation differently, alas, preoccupied by the mother of all price wars in digital photo prints. Me, I see the mother of all buying opportunities coming up. The investing public just doesn't understand that Shutterfly is more than just a pretty beefeater these days.

Picture-perfect Foolishness:

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Longtime Fool contributor Rick Munarriz has never tried to shake it like a Polaroid picture. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy awaits further developments.