Kodak Doesn't Profit as Facebook Bets a Billion on Photo Sharing

In March, many analysts considered Shutterfly's bid for the customer accounts of Kodak Gallery to be a turning point for the company's profitability and pricing power, while thwarting the likes of Apple and Amazon(AMZN) from entering the photo sharing market. Although the move pushed the company's shares up over 16% to $31.36 on March 2, Facebook's April 9 deal for Instagram led to a drop in Shutterfly's stock as some investors saw an increasing challenge to its business and Kodak Gallery bid.

Instead, the lack of competition during Kodak Gallery's bankruptcy auction and an over 5% Tuesday rally in Shutterfly's shares to nearly $31 may speak volumes about what Silicon Valley leaders like Facebook are looking for in acquisitions. After announcing the $1 billion Instagram deal, reports indicated that Facebook CEO Mark Zuckerberg brokered the move in the matter of days after watching the network's quick adoption on Google's(GOOG) Android mobile platform, adding to its 15 million iPhone users.

When making his biggest acquisition ever, Zuckerberg said that Instagram and Facebook combined will, "offer the best experiences for sharing beautiful mobile photos with people based on your interests." It's those needs, over bread and butter revenue and profit that may be the big surprise in the diverging prices of Kodak Gallery and Instagram.

Nevertheless, Shutterfly isn't likely to fret over the valuation analysis of Facebook.

"Our acquisition of Kodak Gallery is a perfect example of the consolidation that we believe will play an important role in helping Shutterfly solidify our leadership position in the social expression and personal publishing category," said Shutterfly CEO Jeffrey Housenbold in a statement.

Kodak Gallery lets users store and share their digital images, customize photobooks, cards and albums -- meshing strongly with Shutterfly's photobook, cards and photo sharing businesses.

Shutterfly competes primarily against Hewlett Packard's (HPQ) Snapfish, Kodak Gallery, VistaPrint(VPRT) and American Greetings(AM) .

The prominence of Facebook, a surge in low priced competitors, and the use of daily deals promotions led to margin erosion in 2011 for Shutterfly and its competitors. Pricing pressures are expected to persist in 2012.