More Heat than Lytro: The future of digital photography

It seems like only yesterday that I was growing up learning the art of choosing the right settings on film cameras and using a darkroom.  Then, out of nowhere, digital cameras made it (nearly) all obsolete.  Even the darkroom snobs have professional-grade SLRs to lug around, and that very wave of innovation may have saved mighty Sony from the dustbin.  Quickly after digital point-and-shoot technology reached maturity, it saturated the market. But there may be another wave of innovation coming again in photography, and Silicon Valley-based Lytro is leading the charge.

(credits: Kamil did primary and follow-up research, Steve helped with discussion and write-up)

The Company

Lytro is the commercial end-stage of a Stanford PhD research project that dates to 1996, and seeks to revolutionize digital photography.  The product is a digital camera, similar in size and shape to today’s ubiquitous models, except this one doesn’t require focus; it “captures all the light” from a particular image at a moment in time, much the way our eyes do, and allows us to choose which particular objects or views to bring into focus post-hoc, via separate editing software.

Here’s a Youtube review.  Here’s an Engadget review article.

The product advantages, briefly, are:

•  Greatly reduced shutter speed (almost no moving parts), so you can literally just point and shoot
• Minimal blurring in normal blurry situations
• No focus necessary; choose the optimal focus later on
• Less power consumption: Lytro claims a 2-week battery life (due to no motors for moving parts)
• An ability to render a photographed scene in 3D
• Future 3D video capability with existing camera

 The “catches” are as follows:

• Limited features for preview screen, no playback, no video recording, etc.  Just straight point-and-shoot.
• Slight (but not major) price premium to today’s cameras: price tiers are $399, or $499 for a model with more storage capacity.
• Slightly less zoom and field of view (both of which are probably engineering challenges rather than fundamental limitations)
• Custom image file format and storage type, due to the novel way that images are being captured.  External, proprietary software package required to view, edit, and save to normal JPG, GIF, PNG, TIF etc.

The commercial company was formed in 2006, and currently has ~20 employees and $50M (!) in funding to date,from  top funds including Andreesen Horowitz, Greylock, and NEA.  CEO Dr. Ren Ng has an academic background (math, compsci, Stanford PhD) and this is his first significant venture; CTO Kurt Akeley co-founded SGI.  Other employees come from Apple, Cisco, Google, Yahoo, etc.  So, no serious concerns about the team’s credentials other than the CEO’s limited commercialization experience.

The Market

Today’s digital-camera market sells 140 million units annually worldwide.  America snaps up 36 million digital cameras a year, for a cool $6.9 Bn, an average price point of $192.  Margins remain pretty good even 15 years after the introduction of digital cameras.  Based on penetration rates, this number suggests that Americans replace their cameras every 4-5 years on average.

Good use cases:

• Professional photography, in the medium-term.  Once flash, shutter speed, and other standard SLR features are added to the core tech, professionals will be rapid adopters.  The DSLR market sells 10 million units each year, so at 3% of the current market this may be an early cash cow but will not drive the company’s long-term prospects.
• Cell phones.  The team’s Apple roots and design aesthetic suggest that many forward-thinking phone manufacturers may latch onto Lytro technology as a key competitive advantage in the ongoing smartphone wars, and exclusivity may come with a high price tag.
• 3D modeling.  The ability for Lytro to capture information on depth and shading and “understand” an image in three dimensions is in many ways the most compelling part of the technology, partly due to the numerous potential industrial, enterprise and military applications.  Spy technology, drone scouting and recon, night photography, satellite surveillance.  Medical uses like creating dental casts or picking up subtle appearance anomalies.  Engineers and architects generating designs, turning physical models into digital design diagrams through the medium of photography... the ideas roll out fast and furious.

Tough use cases:

• Amateur market.  Grandma in Kansas can figure out how to take pictures.  She may even be able to automatically send them to Billy and Suzie, if the interface is intuitive enough.  But she probably can’t upload pictures to her desktop, pull up custom software, tune the focus of the shot, and print output to standard image formats.
• Video recorders.  If the features exist, even in the R&D stage, for video production using this whole-image capture system, I haven’t heard of it.  And even if it did, the amount of post-production required (special software) would probably eliminate the casual video recorders & uploaders (the Youtube crowd, let’s say, or even the Vloggers) from seeing this as a viable – and necessary – enhancement. Expect this feature to be implemented in the distant future.

When it comes to pricing, Lytro is testing how high consumers can jump.  Currently, at least on Amazon or eBay, you can get a respectable point-and-shoot camera for $50, while a good one will set you back $150.  Obviously, given the average price point of $192, many of consumers are paying hundreds of dollars for the latest-and-greatest, and they are great Lytro customer candidates. If the entry-level product, at $399, is double the average cost, this represents a big barrier to the average consumer.  Lytro may have to go through several R&D cycles (and several years) before making its product price-competitive..  Luckily, Lytro isn’t competing on price, but rather on features and potential, and the mainstream media attention they’ve received (NYT, WSG) suggests they’re at least capturing the imagination of gadget lovers out there.

Analysis

Unfortunately for Lytro, the selling points of the first digital-camera revolution (convenience, portability, no time/money costs to develop or scan to digital, no special expertise required) don’t apply here.  That first revolution expanded the market by allowing more-ordinary people to be photographers, and allowing current photographers to do their jobs better.  Lytro is counting on introducing a product that solves a pain point of “focusing my shots is annoying”, and does so at the expense of price and convenience.  That’s a tough hurdle to clear.

In terms of product-market fit, it may be helpful to think of Lytro from a 5-Forces perspective.  Because they control the core IP behind this light capture technology, they are not very vulnerable to supplier influence and even less vulnerable to the threat of new entrants.  Competitors don’t exist within the segment (for the foreseeable future).  Customers don’t have a ton of power because this is not a commoditized market but rather a new product being introduced, and customers will either buy the value proposition or remain with the status quo – if the product takes off, margins won’t be under pressure.

The threat of substitute products is real and meaningful, that substitute product being “the $50 Kodak I have that gets 8 megapixels”, but nothing can really substitute at the high end for the pains the Lytro solves, namely 3D photography and rendering, and freedom from focusing.  Overall, though, Lytro is insulated from standard market forces for the time being.

Lytro’s primary strengths as a venture proposition, of course, are their barriers to entry.  As the first-mover and patent-holder, their competition for the foreseeable future will be the status quo.  Sony, Kodak and Canon won’t be worried as long as Lytro is a premium product for a niche audience.  If the broader-appeal questions get answered, then we can expect a significant resistance to market entry: a marketing blitz and price competition by the incumbents that even a VC-backed startup can’t afford to fight very long.  So long as the giants slumber, Lytro can count on undermining them slowly from the top of the market.  And perhaps those incumbents could even come to see Lytro as more attractive from an M&A perspective than a crush-the-upstart perspective.

Kamil’s Take

These sensors can fundamentally replace the camera lenses that we see today.  Consider:

• Security cameras
• Augmented-reality eyeware
• Cell phone cameras
• Laptop cameras
• Robotics (e.g. vehicle automation)
• Medical applications
• Military

The Lytro cameras offered today and in the near future aren’t game changers, but merely a herald of what will eventually be game-changing sensor technology.  The coming convergence of 3D video, augmented reality, computer vision, etc will turn up applications we haven’t yet considered.  We can’t limit our analysis to disruption merely of the consumer point-and-shoot digital camera market, because that misses the big idea at play here.

In the immediate term, there will be a small core group of early adopters, and mainstream adoption will hinge on product design and whether the current inconveniences can be minimized or eliminated, the current feature gaps can be bridged, and the current pricing can be either reduced or (ideally) become a non-issue because price isn’t a primary consideration for customers.

Medium-term, we can gain a lot of optimism from the apparent viral nature of the product.  Tech blogs and professional or famous photographers have been effusive in their praise and the launch (and PR blitz behind it) has been very reminiscent of Apple’s launches of various consumer electronics over the last decade.

Longer-term, the success of this technology probably hinges on cell phones, and I think it makes a huge difference there.  Utilizing the expertise (and media clout) of Lytro’s VC backers will inevitably allow them to punch above their weight.

Steve’s Skeptical Rebuttal

First of all, Lytro has not exactly put up a bunch of pages on its website advertising the various enterprise applications or sector-specific solutions utilizing their technology.  Until they do, I think we can conclude that those applications are either not yet baked, or would not be economic for them to continue baking.  I’m fine talking about a hypothetical world where we can instantly create 3D maps of an area the way our brains do with the data stream coming in from our eyes.  But Lytro does not (yet) bring that world into reality.  Nor are they trying to do so, in all fairness.

Secondly, there really is an annoyance factor involved here with the external software package for editing.  I’m not a photoshop whiz, but copying-and-cropping is something that even a basic MS Paint or Word/Powerpoint user can figure out.  Even if the software is intuitive, the fact that people have to use it at all is annoying (and annoyingly Apple-esque, but I’ll spare everyone that rant).  If the file format that Lytro was introducing was an open standard, and there were ongoing open-source projects to create editors for the file format or integrate it into standard graphics packages, then I can see this becoming less of a big deal.  But Lytro is no more going to create and keep customers by forcing proprietary toolkits on them than AOL kept customers by promising them a “walled garden” of internet content unavailable to non-AOL netizens.

Lastly, partly as a result, it’s important to emphasize that the consumer applications of this device appear, on the surface, to be limited to hardcore photo-artists and professionals who see a particular value-add to their niche.  The proverbial Kansas Grandmother, taking pictures at the church social, has neither a huge need for Lytro (focus really isn’t that big a pain point for her) nor the inclination to deal with the marginal hassle, learning curve, or price.  Tech bloggers can rave about this, but I want to see focus group studies or the equivalent before I’m convinced that Lytro is ready for prime-time.