Kodak’s focus on blueprint for the digital age

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For generations of Americans photography meant Kodak. Since 1888, when the company coined the slogan “you press the button, we do the rest”, film, paper and chemicals have been the holy trinity keeping the company well-fed and sustaining its reputation as one of the most iconic brands of the 20th century.

So there is a reflexive sense of shock when Antonio Perez, its chief executive, asserts: “Soon, I’m not going to be answering questions about film because I won’t know. It will be too small for me to get involved.”

While Mr Perez’s comments may initially disconcert they are a recognition – overdue, say critics – that with the rapid rise of digital cameras in recent years, film’s death march has become a sprint. The changed landscape has forced Kodak into the most important restructuring and transformation of its history, aware that its survival depends on whether it can create a new business model for the digital age.

Kodak’s challenge is an all-too-familiar one in boardrooms across the western world. From music and newspapers to travel and advertising, industries are trying desperately to forge a clear vision for themselves in a digital age that is still opaque. Less than a week ago, Konica Minolta, which trails in third behind Fuji Photo in the film-making market, gave up the struggle, announcing that it was pulling out of its traditional camera and photo businesses to stem growing losses.

Other companies in the sector have been forced into less radical action. Nikon said earlier this month that it was discontinuing single lens reflex cameras to focus on digital models.

The scale of the digital challenge is rendered more complex and intense by the speed with which the technology is evolving. In a speech early this month at the Consumer Electronics Show (CES) in Las Vegas, technology’s largest tradeshow, Mr Perez, who took the helm six months ago, proclaimed digital cameras as “dinosaurs that cannot evolve as fast as the environment around them”.

The future, he says, will be less about stand­alone cameras and more about technology that allows consumers to search, share and display images on different media such as mobile phones and the internet.

Yet Kodak’s legacy business – which accounted for about 70 per cent of sales in 2004 – is still crucial for its turnround in the short term. Sales from celluloid used in movies is one of the cash cows Kodak needs to fund investments, operations and cash-intensive restructuring until revenues from digital products can take up the slack.

Interviewed earlier this month at the CES, just out of earshot of blasting televisions, buzzing monitors and all manner of bleating devices, Mr Perez, a silver-haired 60-year-old, predicts: “The movie business is great. Sure it’s going to go away, but not in the next two years.” He added: “All I care about is that it stays with us for two years. If it stays – which I think it will – it will be gravy. But if it starts to go down, it won’t bother me.”

As for the little yellow boxes, the death knell has rung. “The other film is going down at a high speed. That’s it. There’s nothing we can do it about it,” he shrugs.

The statement might affront George Eastman, Kodak’s founder, who is buried in the sleepy upstate New York town of Rochester, which is still Kodak’s global headquarters.

A quick tour of Rochester reveals something close to a company town, albeit one that now has a slightly ghostly air following years of redundancies from both Kodak and Xerox, the city’s other big corporation. The University of Rochester is home to the top-ranked Eastman School of Music as well as the Eastman Dental Centre. The George Eastman House, a National Historic Landmark and photography museum, is one of the city’s better-known attractions.

Letting go of this deeply ingrained attachment to film photography is part of the challenge Kodak faces in reinventing itself. Critics have excoriated its sluggish response to the advent of digital over the past decade.

Sales of film slid by 10 per cent annually after 2000 and fell 30 per cent last year, yet Kodak maintained significant production, including a global network of factories. At the end of 2003, Kodak employed 69,300 staff worldwide – just 700 fewer than the previous year.

To cut the umbilical cord, Mr Perez was hired as Kodak’s chief operating officer in 2003 after 25 years at Hewlett-Packard where he enlarged its consumer printing businesses. One month after becoming chief executive last June, Mr Perez called for 10,000 job cuts in addition to 15,000 previously announced as a way of staunching Kodak’s “bleeding year after year” and finally phasing out film. He outlined a plan to reduce manufacturing facilities by about two-thirds from $2.9bn to $1bn. “We need to establish an end point for this transformation and we need to get there soon,” he urged in July.

Kodak is now half-way through the four-year restructuring plan begun in 2003. Some sense of its progress will emerge on Monday when it reports results from the crucial fourth quarter – a period when camera makers and film companies traditionally generate more than 40 per cent of total revenue.

After it announced a 72 per cent dividend cut to buy digital companies and phase out film in September 2003, shares in Kodak plummeted. Investors were highly sceptical that Kodak could make up for precious lost time and compete with entrenched camera and electronics makers such as Canon, Sony, HP and Nikon.

Kodak is also attempting to remedy a significant strategic blunder: over-
estimating the demand for film in emerging markets, especially China. Only last May Kodak said film would continue to be its main source of revenue there because sales of computers and digital cameras were well behind the west and Japan. In a sharp reversal, Mr Perez now says the rate at which the Chinese are adapting to digital is “immense”.

To illustrate the shift, Mr Perez recounts a story told him by a Kodak executive. In Shanghai a man was seen catching a fish with a crude bamboo rod. “All of a sudden he reaches in his pocket and takes a picture of the fish,” says Mr Perez, gesturing excitedly. “Immediately he makes a call, sends the picture and then he’s talking to someone to make a deal. He gets the fish on his bike and goes to deliver the fish.” Mr Perez bursts into incredulous laughter. “He broke five different generations of supply chain in the west!”

The jolting collision of 21st-century technology with a way of life that, in some respects, has scarcely changed for centuries underlines how the country can confound outsiders seeking to predict its patterns of consumption. Now Kodak is hiring Asian executives to lead regional operations after firing the American who steered the company in the wrong direction.

Mr Perez acknowledges Kodak hit a trough last year after sweeping job cuts, a $1bn loss in third quarter related to a non-cash restructuring charge and the fast decline of film in China but insists its turnround remains “on track”. One bright spot for Kodak is its success in ousting Sony and Canon for the top spot in US market share of digital cameras, according to technology consultancy IDC.

For Kodak, attendance at the CES tradeshow was a crucial part of trying to change its image from a traditional photography group to a “technology company dedicated to digital imaging”.

To avoid relying on low-margin cameras for revenue Kodak is trying to increase consumers’ appetite for ­showcasing and organising their collections of digital images. And with consumers printing only one in four digital images that can cost as little as 13 cents per print, standard photofinishing will no longer be as profitable.

Breaking out of the “box” – whether film, camera or even a 4x6 print – is a big idea symbolised by a small move: Kodak’s new logo retains its familiar red and yellow lettering but removes the brand’s name from a yellow square reminiscent of a box of film.

Kodak’s initiatives launched at CES included a 10-year partnership with Motorola, the US mobile phone maker. The new partnership will share technology in an attempt to make images from mobile phones more mainstream.

Kodak has teamed up with Skype, the internet phone company that recently agreed to be bought by internet auctioneer Ebay for $2.6bn. Kodak and Skype are offering a new “digital storytelling” service that combines live voice and online photo sharing through Kodak’s online photo service, EasyShare Gallery.

At CES Kodak also introduced a sleek digital camera with two built-in lenses for both traditional and panoramic shots a year after it pioneered the first wireless digital camera. That underlined the importance of constantly improving its digital camera range to keep up with the demands of ever-more sophisticated consumers.

Another key to Kodak’s survival is diversification. It is pouring resources into high-growth areas of digital commercial print and medical imaging to make the company into a more stable three-legged stool. “I picked areas where we thought we could be number one or number two and I’m going to be very faithful about that notion,” says Mr Perez.

In 2008, Kodak expects half its revenue to come from “consumer imaging”, or photography-related business, with the rest split between commercial printing and health. It is a significant change of focus. In 2004, commercial print and health accounted for 12 per cent and 18 per cent respectively.

Meanwhile, there is still room for growth in the unglamorous but lucrative business of digital printing. In the past Kodak has stumbled when attempting to integrate new businesses. But Mr Perez insists he is confident about integrating the print companies it has bought since 2003, including Creo, NexPress, KPG and Scitex which make up a complete digital printing supply chain.

“I came to Kodak and I had a list of companies we needed to buy. My fear was that if we couldn’t get them all it would be a problem.” To his relief, deep-pocketed rivals HP and Canon stayed out of the bidding, keeping prices within Kodak’s budget.

Health imaging will also extend far beyond Kodak’s legacy business of X-ray film. While big players such as GE Healthcare and Siemens are leaders in the sector, growth potential is enormous as entire healthcare systems become digitised. In 2004, Kodak opened a major medical imaging centre in Shanghai.

Kodak believes it has some other aces up its sleeve. It has been slow to commercialise its intellectual property although it has been investing in digital technology for 20 years. Now, Mr Perez is banking on Kodak’s portfolio of patents to create profitable digital technology applications.

Mr Perez may have joined Kodak less than two years ago but the company has been on his radar for years. “Carly [Fiorina, former CEO of HP] made public once that HP wanted to buy Kodak. It wasn’t Carly. It was me who wanted to buy Kodak,” Mr Perez divulges. “I knew the technology Kodak had. I was very jealous of the intellectual property and the brand.”

Will Kodak successfully reinvent itself? The demands of the digital age may push it to become a very different company. Last year, it divided itself into four distinct units – imaging, commercial print, medical and traditional film-related business – allowing easier valuation of those parts. There are no concrete plans yet to spin-off or sell any of the units but Mr Perez concedes Kodak “will do whatever is good for shareholder value”.

Apart from some broad hints about heavy investment in wireless technology and search software, such as facial recognition technology, Mr Perez declines to reveal details of the vision he is crafting. But one thing is as clear as a digital image: the concept of pressing a button and letting Kodak do the rest will have to take a dramatically different form if the company is to make it as a 21st-century business.

Brutal pace of innovation makes incumbents sweat

Judging how quickly consumers will adopt new technology is never easy, but the speed of today’s digital innovation and its near-instantaneous spread around the globe is turning such forecasting into the modern chief executive’s nightmare, writes Dan Roberts.

Barely five years ago, digital cameras remained a rare sight. Expensive, low-resolution images trapped on a computer screen offered few advantages over the tried-and-tested method of converting celluloid film into holiday albums.

A few iterations of Moore’s law (for accelerating computing power) later, and digital cameras are ubiquitous not only in Europe, Japan and the US but also in many parts of the developing world – where a new generation of happy-snappers will never know what a negative looked like.

By some counts, this is already a mature industry. The Japanese market peaked in 2004 and market researchers at InfoTrends concluded this month that sales of digital cameras were beginning to plateau in the US. But predicting the direction of this headlong rush into the digital future is one thing. Getting the timing right is quite another.

For Kodak, and many other incumbent companies like it, it is essential to know how quickly the old market will evaporate – especially when it is as profitable and capital-intensive as manufacturing celluloid film. In this case, predicting the future becomes a perilous balancing act between shedding costs while eking out remaining profit. Assume that a market will hold out for longer than proves to be the case – as Kodak did in China – and the financial consequences can be disastrous.

Similar miscalculations can be seen in the video rental industry. Experts have long agreed that films will one day be sent into the living room electronically but plenty of investors saw good money was to be made in the interim from hiring out VHS tapes and DVDs. As recently as 1999, the business model of Blockbuster, the world’s largest video chain, looked robust enough to float on the New York Stock Exchange. Now its majority owner, Viacom, is resorting to giving the remainder of the company away through a spin-off after failing to interest buyers. Smaller chains and independent stores are disappearing faster still as online rivals such as Netflix use the internet in ways few could have imagined. Amazon and Apple are wreaking comparable havoc on the traditional record store.

Business models come and go but the pace of innovation has rarely been this brutal. Product life cycles used to be measured in decades, giving companies time to adjust. It took 50 years for the telephone to become commonplace. Mobile handsets took 10 years to catch on. Internet telephony may reach a critical mass in two years.

Ray Kurzweil, a futurologist whose recent book The Singularity is Near predicts further rapid acceleration in innovation, argues that the shortening of technology life cycles is inevitable and exponential.

“We see a smooth acceleration in the adoption rates of communication technologies over the past century,” he writes. “At this rate, technological progress in the twenty-first century will be equivalent to two hundred centuries of [human] progress.”

Some might regard these as extreme extrapolations, but even hard-headed business leaders warn that the pace of change is becoming harder to deal with. And it is not just digital media; it can happen to anyone, anytime. A.G. Lafley, chief executive of Procter & Gamble, has admitted that one of the few things that keep him awake at night is the fear that someone might invent a novel alternative to washing clothes that would devastate P&G’s detergent business: “Every time some Korean scientist says he can microwave a shirt, we are there.”

China rejects its role in a corporate escape plan

In China, black and white photography took a long time to fade, writes Mure Dickie. Monochrome film remained a staple of the mass market into the 1990s, long after it had become the marginal preserve of hobbyists and professionals in rich nations.

These days, however, things are different. The most recent shift in photographic technology – from film to digital – has been embraced by urban Chinese consumers with almost as much alacrity as it has in the west and Japan. That has been bad news for Kodak, which had been hoping that continued demand for film in China would help ease its transition to digital technology elsewhere.

“Now the film-processing machines in my shops don’t even get switched on,” says Zou Kan, an entrepreneur who runs a number of Kodak Express stores in Beijing. “If they didn’t have digital, customers would get prints of every roll of film they use. But now with digital they can be choosy and just print 10 or 20 shots out of one or two hundred. That is not a good thing for the industry.”

Chinese consumers bought 4.2m traditional cameras in 2002 but only 3.6m in 2003, according to the China Culture & Office Equipment Professional Association. It no longer bothers to count traditional camera sales but it estimates fewer than 2.2m were sold last year. Meanwhile, digital camera sales soared to 4.5m in 2005, according to CCID, the marketing consultancy, and are expected to hit 6.7m this year.

The shift has thrown Kodak’s entire China strategy into doubt. In the late 1990s, it stole a march on rivals such as Fuji of Japan by investing more than $1bn to buy local photographic film and paper companies and ally itself with the national champion, Lucky. George Fisher, then chief executive, said in 1998 that the China thrust was likely to prove the “most important thing Kodak has ever done” – and it has brought the company a market presence that some officials have denounced as a damaging monopoly.

The US company’s 8,100 Chinese Kodak Express shops do give it a platform to embrace the digital age. Mr Zou’s bright and clean stores are an advertisement for the brand, for example. But many other outlets are poorly equipped and sparsely decorated operations that happily sell other brands and have little obvious connection to the franchise.

Kodak has enjoyed some success selling digital cameras it manufacturers itself in China. The company quotes research saying that it is the third-largest seller of digital cameras in China’s 21 biggest cities. It has also launched a campaign to market film services in rural parts of western China.

Such efforts, however, can bring only temporary relief. Mr Zou sees a future in photography stores that can provide personalised services for customers. But, in an era of fierce competition between electronics companies, there is no guarantee such services will be based on Kodak equipment.

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