Shutterfly: It’s Picture Perfect

Housenbold thinks customers will pay more for quality, and Shutterfly's high-end photo culture is on display at its two-story headquarters at the edge of San Francisco Bay. Big photos taken by employees dominate the lobby. Upstairs, on the walls, nearly everyone has giant photos of travel, the spouse and kids. Doug Galen, senior VP for business development, tears up showing off a copy of a photo book written by a 12-year-old cancer patient, who died soon after finishing it. Not all staffers are parents or star photographers, but as chief marketing officer Kathryn Olson says, potential hires had better be "passionate about telling a story." (The company's slogan is "Tell Your Story.")

The CEO certainly is. Housenbold graduated from Harvard Business School and cut his teeth in e-commerce as an executive at Web companies such as Raging Bull and AltaVista, and, finally, eBay, where he supervised mergers-and-acquisitions, and later was in charge of finding and keeping new customers. He sees Web commerce as just a new way to fulfill old human needs. That un-awed attitude once led him to tell CEO Meg Whitman that eBay wasn't "doing anything new"; he went on to quickly explain that e-commerce was a better form of the village marketplace. Whitman, he says, got his point, but urged him "not to tell the technology guys." (An eBay spokesman says Whitman doesn't recall the conversation.)

Once the yearbook photographer at Cedar Ridge High in Old Bridge, N.J., Housenbold now has 106,000 of his own photos on Shutterfly's Web site. His wife, Ruth, makes about 10 photo books a year, and stands as "a great proxy" for key customers—educated women with disposable income who serve as their families' "chief memory officer." With a Wharton degree and three boys, she has plenty of ideas, like adding a spell-checker to the text-writing functions for photo books.

To broaden online sharing, Shutterfly is trying to move into the burgeoning field of social networks. As Facebook and MySpace grew in recent years, niche photo players like Flickr and Photobucket morphed into giant sites for loading low-resolution shots to blogs, MySpace pages and elsewhere. Those sites aren't direct competition in the print or book business. "We are focused on driving traffic and monetizing through advertising," says Alex Welch, president of Photo-bucket, bought for a reported $250 million last year by News Corp., which also owns MySpace. Housenbold knows that while many Shutterfly customers don't want the whole world looking at photos of their kids, they may want to post a few photos on a networking site. Housenbold says that's fine. "Just like the Internet increased the consumption of news, the social networks are breaking down people's barriers to creating and sharing their own content."

The company is also working on products that allow users to tell their stories without leaving Shutterfly. Earlier this year it launched Shutterfly Gallery, a public Web forum where proud creators of photo books have posted more than 10,000 books since February. The point isn't just to encourage creativity, although "letting customers help each other is a natural extension of our brand," says Housenbold. It's meant to stimulate sales by allowing a customer to press a MAKE ONE LIKE THIS button to copy a cool template. Another initiative is Share, a free secure Web site based on technology from a $10 million acquisition of Nexo Systems earlier this year. Within a few minutes the HTML-challenged can create a Web site with news, weather, videos, member polls and other features, and invite as many—or as few—people to share it as they like. "Our customers want to share, but they want security and control, too," says Erik Weitzman, senior director of product strategy.

Social networking was a long way from the company's founding vision. Started in 1999 by legendary Silicon Valley entrepreneur Jim Clark—creator of Silicon Graphics, Netscape and Healtheon—the idea was to use the Web merely to facilitate digital-photo printing. The company had its own quaint nativity tale—it was birthed in a cramped office over a Jenny Craig center. The payroll swelled to 300 employees, and for a time the hallway optimists wondered when the company might be buying up Kodak. When the bust came, the company shrank to 70 employees, but survived in part due to Clark's continued funding. By late 2004 Shutterfly had been profitable for two years, so Clark and the board sought a new CEO to take the company public.