Shutterfly 2008 Annual Report Download - page 11

Competition
The market for digital photography products and services is large, evolving and intensely competitive, and we expect competition to increase in the future. We face intense
competition from a wide range of companies, including the following:
We believe that we compete favorably with respect to many of these factors, particularly customer trust and loyalty, quality and breadth of products and services, and customer
service. None of our competitors offers a comparable value proposition, trusted brand or singular focus on customers. Many of our competitors promote their products on the basis of
low prices or the convenience of same-
day availability for digital photos printed in drugstores or other retail outlets. As a general matter, we currently plan to distinguish ourselves from
such competitors principally on the basis of product quality and innovation, rather than price or same-day delivery.
The level of competition in our industry has been consistently high since our inception in 1999, and is likely to increase as current competitors improve their offerings and as new
participants enter the market or as industry consolidation further develops. These competitors have or could develop a variety of competitive advantages over us, including significantly
longer operating histories; larger and broader customer bases; greater brand recognition; greater financial, research and development and distribution resources; and greater ability to
acquire, invest in or partner with traditional and online competitors. Well-
funded new entrants may choose to prioritize growing their market share and brand awareness instead of
profitability. We may be unable to compete successfully against current and future competitors, and competitive pressures could harm our business and prospects.
Intellectual Property
Protecting our intellectual property rights is part of our strategy for continued growth and competitive differentiation. We seek to protect our proprietary rights through a
combination of patent, copyright, trade secret and trademark law. We enter into confidentiality and proprietary rights agreements with our employees, consultants and business partners,
and control access to and distribution of our proprietary information. In February 2008, we entered into a licensing arrangement with a third party for certain of our patented
technology. Under the terms of the license, we expect to receive annual installment payments of the license fee beginning at the time of the contract execution, and continuing through
March 2010. We expect to enter into other similar arrangements with third parties who seek to use our patented technology or infringe on our patented technology.
As of December 31, 2007, we had 21 issued patents, which expire at various dates between November 2019 and May 2025, and more than 30 patent applications pending in the
United States. Our issued patents and patent applications relate generally to the user interface for our website, our computer network infrastructure and software, personalized photo-
related products and automated workflow and digital printing. We intend to pursue corresponding patent coverage in additional countries to the extent we believe such coverage is
appropriate and cost efficient. However, we cannot be certain that any of our pending or any future applications will be granted. In addition, third parties could bring invalidity, co-
inventorship or similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future.
We have in the past received claims, and in the future a third party may claim, that we have infringed its patent rights. This can result in litigation and/or require us to enter into a
license agreement with a third party. For example, effective May 1, 2005, Shutterfly entered into a settlement and license agreement to resolve litigation with respect to alleged
infringement of certain processes under U.S. patents relating to uploading, storing, sharing, accessing, downloading and/or requesting or obtaining digital images or prints of digital
images or merchandise to which such images are applied. Under the terms of the agreement, Shutterfly paid $2.0 million for a license to certain patents, including a non-
exclusive,
fully-paid up, royalty-free, worldwide license to the patents underlying the litigation, and a mutual release of claims.
Our primary brand is “Shutterfly.”
We hold registrations for the Shutterfly service mark in our major markets of the United States and Canada, as well as in the European
Community, Mexico, Japan, Australia and New Zealand. We also hold “Shutterfly.com”
Internet domain registrations in the United States, Mexico, Australia and New Zealand, and a
“Shutterfly and Design” trademark, “Shutterfly Express”, “Shutterfly Collections” and “Postcards by Shutterfly”
service mark registrations in the United States. An additional
application for the Shutterfly mark is pending in Brazil. We also hold a registration for the “VividPics”
service mark in the United States and Mexico, and have pending applications for
additional marks, including “Shutterfly Studio”, a “Shutterfly Studio and Design” trademark, “Your pictures and more”, “Marking it personal”, and “Memory Vault”.
During 2007, we also acquired the trademark to our tagline, “Tell Your Story.”
These brand registrations are a critical component of our marketing programs. If we lose the ability to use our Shutterfly mark in a particular country or our domain name, we could
be forced to either incur significant additional expenses to market our products within that country or elect not to sell products in that country. In addition, regulations governing
domain names and laws protecting trademarks and similar proprietary rights could change in ways that block or interfere with our ability to use our current brand and to acquire or
maintain the domain names that utilize the name Shutterfly in all of the countries in which we currently or intend to conduct business.
• online digital photography services companies such as Kodak EasyShare Gallery (formerly known as Ofoto), Snapfish, which is a service of Hewlett-
Packard, American
Greetings
’
Photoworks and Webshots brands, and others;
• “Big Box” retailers such as Wal-Mart, Costco and others that are seeking to offer low cost digital photography products and services. These competitors provide in-
store
fulfillment and self-service kiosks for printing, which may, among other strategies, offer their customers heavily discounted in-
store products and services that compete directly
with our offerings;
•
drug stores such as Walgreens, CVS and others that offer in
-
store pick
-
up from Internet orders;
•
regional photography companies such as Wolf Camera and Ritz Camera that have established brands and customer bases in existing photography markets;
•
Internet portals and search engines such as Yahoo!, AOL, and Google that offer broad
-
reaching digital photography and related products and services to their large user bases;
• home printing service providers such as Hewlett-
Packard, Epson and Canon, that are seeking to expand their printer and ink businesses by gaining market share in the emerging
digital photography marketplace; and
•
photo
-
related software companies such as Adobe, Apple, Microsoft, Corel and others.
We believe the primary competitive factors in attracting and retaining customers are:
•
brand recognition and trust;
•
quality of products and services;
•
breadth of products and services;
•
user affinity and loyalty;
•
customer service;
•
ease of use;
•
convenience; and
•
price.