Kodak fell victim to disruptive technology

It was sad but unsurprising that when Eastman Kodak’s stock plunged by two-thirds last week, it caused little remark. The demise of this one-time corporate giant has been protracted: and with its market value now down to a desperate $200m-odd, the investment community no longer cares.

Received wisdom has it that Kodak is just one more victim of the digital age. That is only half true. The more instructive half has to do with the concept of disruptive technology, which is not quite the same thing.

Properly defined, a disruptive technology is cheaper than the existing version and initially not as good. For established players, this poses an acute cultural problem.

They got where they are by giving their customers what they wanted at the highest practicable quality. Faced with a cheap and dirty alternative, they may address the challenge, but it goes against the grain to devote resources to it.

Thus, makers of mechanical diggers failed to meet the threat of backhoe loaders and integrated steel producers were caught unawares by mini-mills making steel from scrap.

Both products were for niche markets – those who could not afford the real thing. By the time they were of equal quality – while still cheaper – it was too late for the old guard to respond.

These examples were laid out in 1997 by the US academic Clayton Christensen in his remarkable book The Innovator’s Dilemma. As it happened, Kodak’s price peaked in that same year at $94.25. Last Friday it closed at $0.78.

Kodak’s predicament was not then advanced enough to figure in the book, but it illustrated the theme to perfection. For a century, it had based its business on silver halide film and paper. It was aware of the threat of digital imaging and had spent considerable sums tinkering with it, but to no useful effect.

In the mid-1990s I paid several visits to Kodak’s headquarters in Rochester, New York, and the cultural mindset was – with hindsight – on full display. Various executives told me how wonderful silver halide was.

Professional photographers could not do without it, nor could Hollywood. Digital was for amateurs. And even they would always want prints for the family album and home movies to send to distant relatives.

Kodak’s then chairman, George Fisher, was in an excellent position to know better. A technologist to his fingertips, he had recently moved from running Motorola. But faced with the stubborn Kodak reality, he took an awkward halfway position.

Film would co-exist with digital. If nothing else, he argued – in an upside-down version of Prof Christensen’s thesis – it was cheaper.

A picture taken with Kodak’s top-of-the-range digital camera would print out on silver halide paper with no loss of quality. But the camera cost $27,000. Even Kodak’s cheapest, with a poorer image than film, cost $1,000.

That would change, he conceded. But “the popular scientists get carried away with the pace of those things”.

It is instructive that Mr Fisher – a thoughtful and well-regarded manager, as well as a technologist – could get it so wrong. But in the event, it was not merely film that was doomed.

The camera itself was to be largely swept away. Today people take pictures with their mobile phones and chat face-to-face with distant relatives on their laptops.

So was Kodak’s fate inevitable? Not entirely.

In the days of film, it shared world domination with Fuji. Founded in the 1930s as Japan’s answer to Kodak, Fuji has had a tough time recently. But not as tough.

Thus, while its sales have fallen 8 per cent in total over the past decade, Kodak’s are down by nearly half. Fuji’s net earnings are down 20 per cent, while Kodak last made a profit in 2007.

And crucially, Fuji still had net operating cash flow last year of $2.4bn, while Kodak has had negative cash flow for the past two years running. Indeed, last week’s share price drop was prompted by fear that Kodak is finally running out of cash.

That looks increasingly plausible. Kodak has just drawn funds unexpectedly from an existing credit line and has hired lawyers specialising in restructuring – while stoutly denying that it contemplates bankruptcy. But why the difference between two so similar-looking companies?

Part of the answer, no doubt, is that whereas the US is the home of IT, Japan has for decades been the home of consumer electronics – digital cameras now included. Another cultural clue: Kodak did not attend the annual Las Vegas Consumer Electronics Show until 2004.

Meanwhile, the company tries to eke out a living from its dwindling patents and a belated push into ink-jet printers. The lesson: when that disruptive technology gets you, the company is never the same again.

tony.jackson@ft.com