Changing Picture at Kodak : Photography: Known for its ubiquitous yellow-boxed film, the firm is counting on a hybrid technology to regain ground lost to rivals in electronic imaging.
Seen from the executive offices atop Eastman Kodak Co. headquarters, the clusters of brick factory buildings and steam-belching smokestacks that dot the landscape around this city look like the tired remnants of another industrial era, fading fortresses making one last stand against decades of economic change.
In truth, most of these plants are more modern than they seem, and some still produce many of the photographic supplies that have made Kodak and its ubiquitous yellow box one of the most famous brands in the world. The venerable company, with 42,000 employees in Rochester alone and worldwide revenue of $19 billion, remains a pillar of this city, a stable and respected purveyor of film, chemicals, copiers and many other products.
But Kodak is struggling with a gradual but fundamental transformation of its business, a change comparable in magnitude to those that humbled so many companies in this onetime industrial heartland.
Stated simply, the problem is: Although Kodak has prospered for more than a century by continually improving a chemical photography process, most of today’s advances in image reproduction are coming from the world of electronics.
The electronic video camera has all but eliminated the home movie camera, meaning Kodak no longer has much of a business selling home movie film and the chemicals to develop it. Electronic cameras for still pictures--though still unable to produce film-quality photographs--are gaining ground.
Thus Kodak--big, bureaucratic and tradition-bound--must somehow forge ahead in the fast-moving, fiercely competitive electronics business.
“The number of companies that have been able to shift from one underpinning technology to another . . . well, some say there are none,” concedes Kay R. Whitmore, the 34-year Kodak veteran who took over as chairman and chief executive last year. “Can it be done? Yes.”
Kodak executives and analysts agree that the film business won’t disappear overnight, and the company is diversified enough to survive even if it can’t meet the electronic challenge. But in the long run, if it is to avoid the ignominious decline of the steel and textile mills, machine-tool factories, railroads and other industries that once ruled America’s Rust Belt, Kodak must learn to play by a new set of rules.
In some respects, Whitmore observes, “the basic electronics battle was lost 20 years ago. The opportunity for Eastman Kodak to be a full-line electronics company is gone.” It’s simply too late to get into the mainstream computer or consumer electronics businesses, he says.
Still, Whitmore maintains, the company is well-positioned to exploit the “rich niche” of electronic imaging. He points to Photo CD--a system for converting traditional pictures into the convenient electronic format of compact discs--as a prime example of how Kodak is positioning itself for the future.
Announced last year and scheduled for release in 1992, Photo CD has been well-received by financial analysts and computer industry experts, who view it as an excellent way for Kodak to leverage its expertise in the tricky science of color picture reproduction.
Several other new Kodak products--including a system to join movie film with emerging high-definition television technology--are based on a similar “hybrid” approach, in which images are first “captured” on traditional film, then converted to a computer format that allows them to be easily stored and manipulated.
“Chemical and electronic technologies have settled into a partnership,” asserts Ray DeMoulin, Kodak’s group vice president for professional products. “If you want the highest quality, you need film as the input--and maybe the output. But you want electronics in between.”
Japanese companies such as Canon, by contrast, see end-to-end digital systems as the long-term solution.
Even if DeMoulin is right, and the transition from chemical to electronic imaging proceeds incrementally, the long series of strategic blunders committed by Kodak in recent years has left many wondering whether the company can manage even a gradual transition.
In the 1970s, Kodak’s ill-conceived attempt to challenge Polaroid in the instant-photography business resulted in a massive patent infringement lawsuit, and a court last year awarded Polaroid $909 million in damages.
In the early 1980s, while Japanese companies were tapping a booming market for 35-millimeter cameras, Kodak was pouring resources into an automated miniature camera that packaged film on a disc. Introduced in 1982, the disc camera produced unacceptably poor images. It was finally withdrawn in 1988.
At the same time, the company underestimated the threat from Fuji of Japan and Agfa of Germany, and lost market share in its core film business. Efforts to be a major player in batteries and floppy computer discs proved futile. Four major restructurings in the 1980s reduced the work force by 25,000, but profitability has remained uneven.
Finally, a diversification move--the $5.1-billion purchase of Sterling Drug Inc. in 1988--has been a disappointment. Sterling needs far more investment for new-product development than had been expected, Whitmore says, and Kodak recently agreed to make it part of a joint venture with Sanofi, a French pharmaceuticals firm.
“We went through a period where we tried to do too many things, and I was one of the ones who led us into too many things,” Whitmore acknowledges. In the future, he vows, he’ll keep a tight focus on electronic and chemical imaging.
The recent missteps stand in stark contrast with Kodak’s long history of technical and marketing innovations. George Eastman, a high school dropout and bank clerk who became fascinated with photography, founded the company in 1880 as a manufacturer of dry plates, then the standard medium for photographic images. Soon Eastman developed the first roll film, which, like the dry plates, used a thin layer of light-sensitive silver-halide solution to capture images.
In 1889, Eastman introduced the Brownie camera, which for the first time made photography cheap enough and convenient enough to attract a mass market. Over the years, Kodak continually improved the silver-halide film process. It was also a leader in using advertising to increase sales, in recognizing the importance of overseas markets and in providing employees with benefits such as health insurance and profit sharing.
Today, Kodak’s core film and photographic supply business--though growing slowly--remains relatively healthy. The strong year of 1990 yielded operating earnings of $1.6 billion on sales of $7.1 billion.
The specialty chemicals subsidiary has also proven stable, with $602 million in operating profit and $3.6 billion in revenue last year.
But the information segment, where Kodak’s copier and computer-oriented businesses are concentrated, is a different story. Revenue slipped 1% to $4.1 billion last year, and operating earnings totaled a paltry $5 million. That looks good only when compared to a $360-million loss in 1989.
In a recent report, Smith Barney, Harris Upham analyst Peter J. Enderlin says “greater competition, maturity and technological obsolescence of silver-halide media” raise questions about Kodak’s ability to sustain its high margins in the core film business. A turnaround in the information sector is important, Enderlin writes, because it “represents the majority of new technologies that affect Kodak.”
But he is not optimistic, noting that the information products area “inherently clashes with Kodak’s corporate culture. The company is used to proprietary, consumable-products businesses with very long product life cycles, where it has a dominant market share position. The company simply has not yet figured out how to deal with very rapid product obsolescence, low barriers to entry and cyclical characteristics. Whereas many photographic film products have product life cycles measured in years if not decades, information products may have effective lives measured in months.”
Kodak has taken steps to change its culture, notably by abandoning a horizontal organizational structure that limited communication among the product development, marketing and manufacturing functions, and replacing it with integrated business units that target specific markets.
Executives from Whitmore on down are keenly aware of the need to bring products to market quickly, control overhead and manufacturing expenses and stay in close touch with customers--all widely recognized necessities for staying afloat in electronics. “Reduced cycle time”--speeding the transition from product conception to sales--has become a veritable mantra at the company, quips one insider.
Yet the management ranks are still dominated by Kodak career men, and the company remains firmly entrenched in Rochester--a pleasant city but hardly a hotbed of high-tech innovation. Xerox Corp., the other local titan, moved its headquarters to Connecticut to escape the isolation of upstate New York.
In Kodak’s information unit, where much of the electronics work is concentrated, the biggest business is copiers--some of which use digital technology that enables them to connect to computers and function as printers. Whitmore recently told securities analysts that the information group, which includes products for the graphic arts industry and microfilm systems, had seen the worst of its problems and would be generating a 10% return by 1995.
But just as important as profitability in copiers is Kodak’s ability to be a player in emerging electronic imaging niches. For example, the company is now playing catch-up in the market for big, expensive machines used to enhance and retouch photographs for publication. The Atex subsidiary, which sells editing systems for newspapers and magazines, has been losing money and market share.
Yet these businesses are important because they lie at the juncture of chemical photography and electronics, and the electronics will take over more of that chain as time goes on. Magazines, for example, might be able to scan photos into their text-editing computer for retouching and enhancement, lay out each page electronically and receive as output a ready-to-use printing plate--thus eliminating several photo-chemical steps in the production process.
The Photo CD provides a good model of how Kodak hopes to keep pace in electronics while exploiting its film franchise. When the system is in place next year, a customer will bring a standard roll of 35-mm. film to a photo lab, just like today. But instead of offering only negatives or prints, labs would also offer to put the photos on a compact disc.
Each disc will hold 100 photos (customers can bring the same disc back to the photo finisher until it is filled), which can be displayed on a television that’s hooked up to a CD layer. Kodak believes that the CD players now sold for playing music will soon offer, perhaps as an inexpensive option, the ability to play Photo CD, and photo-only machines will probably be available as well.
Perhaps even more important, computers equipped with increasingly popular CD-ROM drives will be able to play Photo CD. Thus, someone preparing a document on a personal computer will be able to call up a picture from a Photo CD and merge it into that document or send a picture to someone as part of an electronic message.
Although few personal computers have CD drives or software capable of handling pictures, that is expected to change in coming years as so-called multimedia computers--which handle sound and images as well as text--gain broader acceptance.
“This is a very interesting approach, taking quality still pictures and merging them with consumer electronics,” says Jonathan Seybold, a Los Angeles-based desktop publishing consultant. “If it’s successful, it has all kinds of implications for computing and publishing.”
Gaining acceptance for Photo CD is a complex process because it requires the assent of many companies in different fields. Photo finishing labs must agree to buy the Photo CD production package, consumer electronics companies will have to make their compact disc machines Photo-CD-capable, and computer software publishers must incorporate the Photo CD format into their publishing products.
“What we’re really proposing is a digital imaging standard,” says Scott Brownstein, manager of the Photo CD project. In line with that strategy, Kodak will license the technology widely to companies that want to make discs, machines and other Photo CD-compatible products, just as Philips did with the basic compact disc technology.
Stewart Alsop, publisher of PC Letter, says he expects Photo CD to succeed because it fills a critical gap in the development of multimedia computing: the absence of a good source of high-quality images.
Many had expected digital cameras to be the source, but they are far more expensive than regular cameras and provide inferior pictures. The prospect of an all-digital photography system--long a goal of Canon and other Japanese camera and electronics companies--remains the biggest threat to the success of Photo CD.
Yet Alsop points out that Kodak is in several respects an ideal candidate to establish a standard computer format for color images. “Color is an incredibly complex thing to represent” in the digital language of computers, he says, and because colors are fundamentally subjective, it’s not easy to gain agreement on how they should be represented.
“With Photo CD, everyone relies on Kodak to make those judgments, which we always did anyway,” he says. Acceptance is made easier by the fact that Kodak is not in the mainstream computer business and thus is considered a disinterested party. “All of the major companies that are trying to deal with color in page composition are supporting this.”
Because the market among photo labs for the Photo CD production equipment is limited and because Kodak will not sell CD players, the company might not realize a great deal of direct revenue from Photo CD, even if it is a big success. But the system promises to boost film sales, slow the encroachment of electronic cameras and support the development of underlying technology--such as the digital film scanners used to put photos onto CDs and the thermal printers that can produce high-quality hard copies of the pictures.
“We’ll sell those scanners in other markets, and we’ll sell some printers, we’ll sell blank CDs, we’ll sell software for image manipulation and graphics systems,” Brownstein says. “We’re doing all the right things for our high-tech brothers” in different parts of the company.
Indeed, a key test for Kodak will be its ability not only to establish Photo CD as a standard, but to leverage that success into broader gains in electronics.
BRINGING PHOTOS INTO THE COMPUTER AGE
Kodak’s Photo CD system, set for introduction next year, is one of several new techniques for combining the superior resolution and color of traditional film with the flexibility of electronic images.
Once pictures are in electronic form, they can be stored, transmitted or displayed like regular computer files, adding a new dimension to desktop publishing and other computer applications. The use of computerized pictures is expected to grow dramatically as more and more personal computers are equipped with color displays and other features needed for “multimedia” computing.
Step 1: Exposed film is taken to any photo processor that’s equipped for Photo CD. The negatives are developed in conventional fashion.
Step 2: The negatives are fed into a “film scanner,” a sophisticated device that reads the image information and converts it into the digital ones and zeros of computer code.
Step 3: The raw computerized information from the scanner is transferred to a powerful computer workstation, which organizes that data into the special format designed for Photo CD. Step 3a: The workstation also creates a separate batch of information for the index print, which contains thumbnail prints of each picture to identify the contents of each photo CD disk.
Step 4: The formatted information is transferred to a CD writer, which engraves the information onto a compact disc, the same kind now used for playing music.
Step 5: Using any CD player that has Photo CD capabilities--expected in the future to be an inexpensive option--the pictures can be viewed on a television screen.
Step 5a: Using the CD-ROM drives that are increasingly popular as high-capacity storage devices for personal computers, the Photo CD pictures can be accessed by a PC and merged into other documents, sent to other computers or even altered and enhanced., Los Angeles Times
