Tuesday, May 21, 2013

Flickr's terabyte move: brilliant big bet or desperate call for attention?

Flickr announced yesterday that they are offering one terabyte - yes, that would be 1,000 gigabytes - of free storage for still images of any resolution and HD videos up to 3 minutes long.

They also redesigned the Flickr experience. Personally I like the new design, although I am sure there will be as many opinions on this as there are die-hard Flickr lovers out there. Check out my new Flickr profile and photo stream here.

Yet, the real question has to be how can they afford to do this? We all know that storage is becoming really, really cheap. BUT cheap does not equal free. Even Google, with their infinite compute and storage resources, made a big thing last week at Google I/O out of the fact that they are offering 10Gb of free image storage at high resolution, with unlimited storage for your low resolution images. Just in  case it doesn't jump out at you like it did at me: 10Gb is 1% of 1Tb!

So what's the deal? Here is my simple logic and theory:

  • Y! needs to make some big bets to become relevant again in the imaging and photo sharing space.
  • Tumblr and this Flickr reboot are undeniably big bets
  • The new Flickr is an arbitrage play. Here is how it works...

Let's look at Amazon Web Services (AWS), arguably the largest "off the shelf" cloud storage service available to developers of websites and apps. For instance, a big part of Smugmug, a competitor to Flickr is using AWS storage solution (S3) to power their image storage. The AWS list price is $0.05/Gb/mo. In other words, $50/Tb/mo.  Amazon has a really good margin on their storage at that price. Let's assume that Yahoo could build their own, large scale storage solution at 50% of that cost. Heck, I'm feeling generous this evening so let's even say at at a 75% discount. That makes their internal cost $12.50 Tb/mo, or $150 year.  

Now comes the tricky part.  How many photos will the average user upload? I'm going to make a wild guess and say that the average storage utilization will be… 10%? In other words, on average, across all users, it's costing Flickr $15/user/yr to service them.  These prices represent storage costs only. We probably need to add in ballpark 10-20% for compute and bandwidth. But, I'm still feeling generous. Let's stick with $15/user/year. In order to cover this cost, Flickr must monetize their traffic with advertising, which has become a more visible and integrated part of the new design.

I think Yahoo is betting that this will be an arbitrage play with a bipolar usage distribution. The majority of people will only use it a small part of their storage, primarily for smartphone photos. These users will probably be averaging in the low 10's of Gb's of total storage used. On the other end of the continuum, a relatively small minority will actively utilize the full free 1Tb or significant portion thereof. If you actually upload 1Tb of images and video to Flickr, it's probably safe to claim that you're a die-hard and/or a professional photographer. Therefore some of these people will opt for the $499 package that Flickr also announced, which doubles your storage to 2Tb. Again, this will likely be a very small segment in the end, surely less than 1% of total users. Given the price analysis above, at $499 for 2Tb, Y! still makes a healthy margin on these customers.

Returning to my back-of-the-envelope analysis above I conclude that If Flickr can get the arbitrage to work, they should be able to make a break-even or slightly profitable business with this play. Meanwhile, they're showing strong leadership, getting lots of attention and, if successful, driving many more eyeballs to the site - which of course fuels their real revenue engine of advertising.

My vote: a brilliant big bet

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