Sunday 11 December 2016

Photo finish for giant Kodak

Published 21/01/2012 | 05:00

Iconic brand files for bankruptcy despite controlling up to 74pc of the American market as recently as 1998

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Kodak, which filed for bankruptcy this week, was the American icon that brought photography to the masses but was ultimately laid low by its inability to change with the times.

To a generation that has grown up with digital photography it is hard to recall just how big Kodak was as recently as two decades ago. With its iconic yellow packaging, Kodak photographic film was a seemingly permanent fixture in American drugstores, and Irish chemists' shops, for well over a century.

George Eastman, the tortured genius who founded the company in 1880, revolutionised photography.

Before George Eastman came along, photographers used enormous tripod-mounted cameras that were the size and several times the weight of modern microwave ovens.

The images these cameras recorded were stored on extremely fragile glass plates. This meant that photography was very expensive and confined to specialist photographers.

Most people only had their photograph taken a couple of times during their lives, and only when they could afford to visit a photographic studio.

Eastman Kodak, as the company was officially known, changed all of that. In a series of brilliant inventions in the 1880s, George Eastman took photography out of the professional photographer's studio and placed it in the hands of everyman.

He replaced the glass plates with celluloid roll film and designed a new, smaller and lighter handheld camera to use this roll film with.

Mr Eastman also formulated the chemicals necessary to develop his new film and the emulsions required to transfer the resulting images to photographic paper.

The invention of roll film also paved the way for the movies with the first silent pictures using Kodak film appearing in the 1890s. Since then most of the great Hollywood movies have been filmed using Kodak film.

Extraordinary as these inventions undoubtedly were, it was the business model Mr Eastman devised to market them that was truly remarkable. Instead of charging top dollar for his revolutionary new camera, he sold it cheaply, with Kodak making its money on sales of film and on film processing instead.

First introduced in 1900, the "box brownie" initially cost just $1, sold in the tens of millions and remained in production in various guises until 1967. "You push the button and we do the rest," Kodak assured purchasers.

And it did just that. After buying their cheap cameras, customers were effectively tied to Kodak for their film and developing. As late as 1976 Kodak still controlled 90pc of film sales and 85pc of camera sales in the US.

The truly remarkable thing was not that this highly profitable monopoly eventually attracted competitors, but that it lasted as long as it did.

While Kodak had long faced competition in the Far East from Japanese firm Fujifilm and in Europe from Belgium's Agfa-Gevaert, none of them came even remotely close to challenging Kodak's global dominance.

That began to change in 1984 when Kodak declined to become a sponsor of the Los Angeles Olympics, judging the sponsorship fee being sought as too expensive. It quickly proved to be a false economy.

Fujifilm

Fujifilm jumped at the chance of establishing its brand name in the United States. From then on Kodak's market share in its most profitable market started to come under pressure.

However, it wasn't greater competition in the photographic film market -- the company still had a 74pc share of the US market as late as 1998 -- that hurt Kodak, but the rise and rise of digital photography.

Ironically Kodak was one of the pioneers of digital photography producing the QuickTake range of digital cameras on behalf of Apple in the mid-1990s.

Much of the basic research that makes today's digital cameras possible was conducted by Kodak, which has registered over 1,100 digital imaging patents. Indeed it was a Kodak researcher who invented the first digital camera way back in 1975.

Unfortunately Kodak didn't react quickly enough to the new medium. To do so would have been to turn its back on George Eastman's business model, which had been so profitable for over a century.

Even when Kodak did embrace digital photography in earnest after the beginning of the 21st century, analysts calculated that it was losing up to $60 on every digital camera it sold.

Without the profits from the sales of film and processing services that had underpinned its profits for more than a century, the digital photography revolution spelled the death knell for Kodak. In 2005 Antonio Perez, the former head of Hewlett Packard's printers business, was drafted in as Kodak's chief executive.

For the past seven years Mr Perez has attempted to turn Kodak into a sort of HP me-too. It has bet its future on printers, attempting to replicate George Eastman's original strategy of selling the printer cheaply and making its profits on the sale of ink and paper. Without, it would seem, much success; Kodak has been profitable for just one year since 2004.

Instead Kodak has survived by becoming a sort of glorified patent troll, ruthlessly pursuing more successful competitors for alleged breaches of its more than 11,000 patents. Kodak has harvested more than $3bn in patent licensing fees since 2003.

In 2009 Kodak won almost $1bn in once-off royalty payments from Korean consumer electronics giants Samsung and LG. Without this source of income it is unlikely that the company could have avoided bankruptcy for as long as it did.

While Kodak is perfectly within its rights in seeking to enforce its intellectual property rights, it is still a sad reflection on the plight of the company George Eastman founded over 130 years ago.

And Mr Perez clearly hopes that Kodak's patents will prove to be the gift that keeps on giving. Kodak has recently instituted legal proceedings against HTC and Fujifilm alleging violation of its patents, while in 2010 it took legal action against Apple and RIM, producer of the Blackberry smartphone.

Mr Perez is on record as saying he expects Kodak to receive at least $1bn from the Apple and RIM legal actions.

While this strategy was adopted by Kodak more than a decade ago it has clearly been further encouraged by last year's $12.5bn Google purchase of Motorola, a transaction that was largely driven by Motorola's treasure trove of patents.

Indeed Kodak, while never mentioning Motorola by name, implicitly conceded this point when, at this week's bankruptcy hearing, Kodak lawyer Andrew Dietderich told the court that its patents were worth between $2.2bn and $2.6bn.

So can Kodak find a buyer for its patents and, even if it does, what future, if any, does it now have? On the plus side Kodak has diversified its activities away from its legacy film business and three-quarters of its revenues are now derived from its digital operations.

The bad news is that Kodak has been unable to make any money from these new digital businesses.

Indeed it would seem that film is one of the few profitable Kodak businesses.

This does not augur well for the future. With debts of $6.8bn against assets it claims are worth $5.1bn, Kodak is unlikely to survive in anything like its current form. Having failed to adapt quickly enough to the introduction of digital photography, Kodak looks set to join the manual typewriter and the punch-card machine in the industrial history museum.

Irish Independent

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