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Why Shutterfly is (probably) going private: They missed mobile

Tim Boyle | Bloomberg | Getty Images

Online photo service Shutterfly is reportedly putting itself up for sale. If you're wondering why, check out your mobile app store. IPhone users will find that Shutterfly is currently the 70th most popular free photo and video app, while on Android it ranks 49th in the photography category.

As consumers migrate more of their daily activity—taking photos and video—to mobile platforms, they're increasingly choosing services like Instagram, Flipagram and Retrica or even Facebook, Twitter and Dropbox.

Shutterfly's business predates mobile. The company was founded in 1999, and generated more than $780 million in revenue last year, largely through sales of photo books, stationery cards and personalized calendars.

Based on investor sentiment, that's not a model for future success. The stock had plunged 24 percent in the past year before surging 15 percent Wednesday that the company hired investment bank Qatalyst Partners to seek a buyer.

"Mobile penetration is pretty low," said Victor Anthony, an analyst at Topeka Capital Markets in New York. Shutterfly is investing in a smartphone and tablet product called ThisLife, acquired in 2013, that "should help them strengthen their mobile position."

It may be too late. With a stock market value of $1.9 billion, Shutterfly is likely worth less than Snapchat, a photo-texting app that's yet to make any money. And Facebook spent about half that much two years ago on Instagram, which had just over a dozen employees and no business model. Snapchat turned down a $3 billion offer from Facebook last year.

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But unlike Shutterfly, those start-ups began on smartphones and developed apps that went viral with kids, who aren't using personal computers and definitely aren't buying hardcover picture books.

Shutterfly CEO on 'great' quarter

Gretchen Sloan, a spokeswoman at the Redwood City, California-based company, didn't return a call for comment.

The risk factors section of Shutterfly's latest quarterly report was littered with references to mobile and how the company's business will suffer it it's unable to adapt to the changing landscape. Still, Christopher Merwin, an analyst at Barclays Capital, wrote in a report Wednesday that Shutterfly has "clear strategic value" and may be attractive to some big Internet companies seeking new growth areas.

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While Shutterfly struggles to satisfy investors, another photo company is flourishing. GoPro, the maker of cameras that surfers, cyclists and skydivers attach to their helmets, has almost doubled in value since its IPO last week and is worth more than $5 billion.

—By CNBC's Ari Levy. Follow him @levynews