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Digital cameras were at the top of many holiday wish lists. And if the nearly 25% of U.S. households that were considering buying one last fall actually did, the number of installed units could significantly increase from the already healthy year-end household penetration figures as estimated by the Consumer Electronics Association.

"About 25% of households now own one, which leaves plenty of room for growth, given that about 60% (of U.S. households) use cameras on a regular basis," said Sean Wargo, senior industry analyst, CEA. "We are seeing tremendous consumer interest and growth in the category. Digital cameras ranked No. 2 in the CE gift list, based on our yearly holiday survey, behind the almighty DVD."

Analyst Ed Lee of Lyra Research estimates nearly 21 million digital cameras will be shipped to stores in 2003, adding to an estimated installed base of 21 million units. Not only are people new to the category flocking to purchase their first digital camera, but also "we're starting to see some replacement buying going on," said Lee. "People are looking for other features than those that appeal to first-time buyers."

Since the technology's introduction, much of the buzz surrounding digital imaging has been about pixels or resolution, as camera manufacturers rapidly increased available resolution to move the medium beyond just computer or Internet use. Low-resolution VGA units are now considered toys and are found on hang pegs at discount and drug stores, and cameras with less than two megapixels represent just 6% of all digital camera sales, according to NPD Techworld. The majority of digital camera sales, or 52%, fall within the 2.0 and 3.9 megapixel range.

Prices have remained relatively stable even as resolution has improved. According to NPD, the average price for a digital still camera has averaged $380 for the final three months of 2002, down just 1% for that period and 10% on a year-to-date basis. According to Wargo, companies are now charging roughly $100 per megapixel. Consumers now consider features to be more important characteristics than price when deciding which camera to buy. "Optical zoom is a big issue," said NPD Techworld analyst Monica McKane. "And for some, it's the size and weight of the camera." Digital units are increasingly compact and portable. Less emphasis on pixels means manufacturers can turn their attention to style, form and features, including speed.

Canon recently introduced Digic, a proprietary chip currently available in three cameras that improves the image processing and color saturation, speeds up and expands the auto focus and uses 25% to 30% less battery power, according to Chuck Westfall, assistant director, camera division, Canon. And on par with what is happening in the industry pricewise, the new technology has not added cost to the camera. Instead, the improved performance is just part of new models as they are introduced to replace older units, he said. The next step for Canon is to let consumers know about the new functions as a point of differentiation. According to West-fall, the company will unveil its marketing message sometime around the Photo Marketing Show in early March.

But traditional camera manufacturers such as Canon, Sony, Minolta and others are enjoying renewed popularity in the digital imaging category as consumers care less about resolution and more about the overall usability of the camera and the quality of the images.

"Branding has risen to the forefront for consumers," said Lee. "The traditional cameras and strong CE companies are rising to the top." According to McKane, "The camera companies have never looked away from the lens issue," the quality of which is once again becoming important with new buyers of digital units.

It is a point illustrated during a recent visit to a Circuit City store in Jacksonville, Fla., as a sales associate carefully pointed out the importance of lens quality, recounting a little bit of several camera manufacturers' history in that area and ultimately leading the consumer to a traditional camera company for the digital format purchase.

Perhaps even more important than the robust holiday sales of digital cameras that retailers enjoyed last month is the opportunity for follow-up or add-on sales. According to Salomon Smith Barney analyst Craig Ellis, photo printer sales spiked during December in both 2000 and 2001, "with 25% to 28% of annual photo printers sold during December alone in those years," he wrote in a recent report. "Holiday retailers and manufacturers are leveraging the digicam/photo printer relationship with bundled products again this year. HP offered a $75 rebate on its digicam/photo printer bundles, while Wal-Mart offered a Concord 2MP digital camera/Lexmark bundle for under $150."

Adds McKane: "It's a good opportunity for retailers to try and entice customers to think about printing. Retailers have a really good opportunity in January to sell high-quality printers, paper, storage media and other supplies."

Consumers are returning to stores after digital camera purchases for more than just printers. Storage is increasingly an issue and, although many cameras come with photo-management software bundled in, the more images consumers capture, the more they will seek out advanced programs, according to Lee.

With the price of media cards declining, additional storage mediums are more attractive to consumers.

It's also an opportunity for retailers to entice consumers to use the photo kiosk located in many stores, from discount department stores to drug chains and specialty retailers. "Chain stores are explicitly and overtly trying to explain to consumers that they can handle any kind of digital original," said Westfall. "They really see it as a crucial way to tap into a revenue stream that was once dominated by silver halide."

There is one thing on the horizon that could help to boost digital-print services: disposable digital cameras. These products recently became available in Japan, and although such products are typically introduced there years before reaching U.S. shores, CEA's Wargo said: "These will be popular with consumers who don't necessarily have a photo-quality printer or even a computer. That's probably a few years away, though."