Everyone's Smiling for Digital Cameras

Makers are enjoying record sales and growth rates, while consumers are reaping ever-better products at ever-sinking prices

For Jim Barr, digital cameras are an early Christmas gift. As the general manager of commerce services at Microsoft's (MSFT ) MSN, the country's second-largest Internet service provider, Barr tracks sales across dozens of categories in MSN's online shopping mall. This year, digital cameras are on fire. "It's our top category," says Barr, who claims sales are up 40% to 50% vs. last year. He won't break out exact numbers on how many digital cameras MSN moves, but he says they account for a significant portion of consumer-electronics sales, a category that makes up 30% of the $11 billion-plus that MSN expects its visitors to spend at MSN Shopping's vendors this holiday season.

Barr's bounty is par for the course this year. Online and off, demand for digital cameras has exploded as consumers have warmed to capturing images in bits and bytes instead of on silver halide film. In 2003, their sales will eclipse those of analog film-based cameras in both market share and dollar value for the first time, according to a number of analysts and industry trackers including the Consumer Electronics Assn. (CEA).

Old-line camera giants and relative upstarts are facing off in this fiercely competitive market. "Anybody who can find a manufacturer to make a digital camera for them is doing it," says Elliot Peck, director and general manager for camera sales at Canon USA (CAJ ). "There's going to be a shakeout over the next couple of years." At the moment, Canon and Sony (SNE ) are running neck and neck in the battle for No. 1, each with about 20% of the market, Peck claims. Five players collect more than 75% of total sales: Olympus, Canon, Sony, Kodak (EK ), and Fuji (FUJIY ).


  The biggest winners in this free-for-all are consumers, who are taking more pictures using higher quality cameras that sell for less. "It's really changing consumer behavior with photos," says Michelle Slaughter, director of digital-imaging trends at Norwell (Mass.) tech consultancy InfoTrends. "Before, you might finish a roll every month or take pictures of major events. Now people are sharing their daily lives. You don't have to wait for pictures anymore. It has completely changed the way we view photography."

Witness Hewlett-Packard's (HP ) experience with its Photosmart 245 printer. A portable photo printer that weighs less than three pounds and fits in a small backpack, the 245 was a hot item from the day it debuted. HP bundles the printer with its digital cameras.

Reports began filtering back to Chris Morgan, vice-president for worldwide sales and marketing at HP's digital-imaging unit, that customers were asking for battery packs to run Photosmart portables. "Remember how people used to go to a wedding and there would be a stack of disposable cameras so everyone could take pictures?" says Morgan. "We're seeing people who want to print out their pictures at the event." So HP hustled out a battery pack for the U.S. market, which had previously been available only in Asia.


  The convenience of portable photo printing is a plus, but dramatic improvements in ease of use have proven even more consequential in driving digital camera sales. Many can now print directly via printers without requiring a PC intermediary. Even printing from PCs has gotten much easier, with far fewer steps required to convert images on a screen into snapshots in a wallet. "The barriers that made it hard to do digital photography in the past -- complicated device drivers and software, exotic attachments -- no longer exist," says Peck.

The payoff showed up in the first nine months of this year, when U.S. shipments of digital cameras to dealers (not including camera phones) hit 7.6 million units, an increase of 35% over the same period last year, according to the CEA. It had originally forecast that 10 million units would ship in 2003 but upped that estimate to 12.5 million after sales soared over the summer and fall, says Sean Wargo, director of industry analysis for the CEA. With cameras selling for a retail average of $350, the trade group estimates that the U.S. market alone is now worth at least $4.4 billion annually.

Plummeting prices on digital cameras have surely helped boost sales. When the first ones hit the shelves in 1996, they cost more than $1,000 and turned out pictures that were clearly inferior to those made with film. Over the past seven years, prices have nosedived and performance has soared. For $200 to $300, consumers can take snapshots -- 4x6 or 3x5 prints -- that are virtually indistinguishable from those taken by film cameras.

In some respects, they're better. HP predicts that digital photos made with its latest printing systems will create images with an estimated 70-year lifespan. That's longer than regular film images can hold their color and clarity if they're exposed to light.


  Here's another telling measure: The price of digital cameras per megapixel (a measure of how finely detailed a photo is) has fallen from more than $200 two years ago to less than $100 today. "Before the holiday season people were paying about $100 per megapixel, but in recent sales I have seen some for as low as $50 per megapixel," says the CEA's Wargo.

Manufacturers hope to make up for sliding margins on the cameras by selling associated items such as specialized photo printers. HP and Kodak are aggressively packaging cameras with such printers, which can cost as little as $100 to $200, says Stephen Baker, an industry analyst with retail sales tracker NPD Group. Camera users also snap up expensive lithium ion battery packs. Additional memory is another must-buy. "If somebody is buying an HP camera, there's a strong correlation with them buying other photography equipment like printers or memory," says HP's Morgan.

While 2003 might be the peak year for percentage growth in sales, this is a market with plenty of legs. About 30% of U.S. households have digital cameras right now. But 60% of all households use cameras to snap pictures, says Wargo.


  Digital cameras that are good enough to replace advanced analog cameras have only this year fallen below $1,000 -- and could go as low as $800 by 2005. In that segment, annual sales growth is exceeding 200% for Canon, according to Peck. In part, that's because technological improvements in digital cameras have come so fast and furious that many early adopters are now upgrading to better cameras.

All told, it's a pretty picture this holiday season for both consumers and makers of digital cameras.

By Alex Salkever, Technology editor for BusinessWeek Online

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