Kodak Learns ‘the World Is Moving’
In 1926, George Eastman said something that the men and women who came after him at Eastman Kodak Co. forgot, for a while. “The world is moving,” he told the people working for him back then in Rochester, N.Y., “and a company that contents itself with present accomplishments soon falls behind.”
Kodak did just that, becoming an also-ran in the business that Eastman virtually invented. Now the venerable company is trying to boost sales and profit and, more important, regain the untouchable leadership role it once owned in global photography.
The Kodak story is a cliff-hanger, and a cautionary tale. The company not only has to play catch-up with rivals around the world, but it also faces resistance from some of its own shareholders. They are furious at management’s decision to slash the dividend by 72% to fund Kodak’s shift of direction.
A month ago, the 122-year-old company announced that it was going to concentrate its efforts in digital photography -- on digital cameras for consumers, on digital imaging products for medical care and commercial industry. There was irony in the announcement, because Kodak holds patents for inventing the digital camera in 1976. The company just never got around to developing the technology, because the pot of money to be made from its traditional business of old-fashioned photographic film was so much bigger, it seemed, than the profit that could be wrung from the newfangled products of the time, such as camcorders.
Kodak looked with disdain on camcorders and other items being furiously peddled by the likes of Sony Corp. and Matsushita Electric Industrial Co. of Japan as “consumer electronics.” As a Kodak chief executive later said, “We didn’t choose to make television sets.” What the camera company didn’t get was that people were being offered new ways to take pictures of children and loved ones at birthdays and weddings and weekend gatherings -- the very kinds of pictures that built Kodak.
Eastman, a genius and high school dropout, founded the company in 1881 after his invention of the dry photographic plate. He didn’t bother with perfecting lenses and trying to rival sophisticated European makers of photo equipment. Instead, he developed the Brownie, a box camera that went on the market in 1900 with an all-American price tag of $1. A roll of film went for 15 cents. Suddenly, anyone could take pictures. The Brownie, quite seriously, changed the world.
After Eastman’s death in 1932, Kodak continued to pioneer consumer products, with color film in 1935 and with the Instamatic camera in the 1960s.
Then, in the 1970s, Kodak blinked. Its sales were rising at that time, hitting about $5 billion in mid-decade, and its profits were solid. So it decided to stick with the tried and true: film and basic cameras.
By the late 1980s, Fuji Photo Film Co. of Japan had come out of seemingly nowhere to snap up huge chunks of Kodak’s market share in film. Kodak management began thinking about photography as a fading business -- and decided to diversify by buying a big pharmaceutical company. Only a few years later, Kodak ditched the drug company and, finally, began to invest in the digital imaging products that were displacing filmed X-rays in medical practice. And it began to push development of its 1976 invention, the digital camera.
The climax of that belated catch-up process came a month ago, when Kodak Chairman Daniel Carp announced that the company would be devoting its energies, and $3 billion in the next three years, to persuading the world to buy its digital cameras and other products. To fund the investment, Kodak said, it will cut its annual dividend to 50 cents a share from $1.80.
Carp promised that by 2006 sales would recover to $16 billion from about $13 billion this year, and keep on growing after that.
“Demand for traditional products is declining,” he said in making his announcement, so “we are moving fast to transform our business with an emphasis on digital commercial markets.”
It is a decisive move, coming when digital camera sales are growing 40% a year. Sony’s cameras, with 22% of all sales, lead the market, says analyst Christopher Chute of market research firm IDC Corp. -- but Kodak is second with a 16% share.
Under Carp, Kodak also is pushing aggressively into China, recently investing $100 million in the country’s largest photographic firm, Lucky Film, beating out bidder Fuji for a 20% stake.
Some shareholders object to all this. Providence Capital Inc. of New York, which owns a small amount of Kodak stock, held a meeting last week of institutional investors to discuss alternatives to the company’s new direction.
One would be to forget about the digital investment, restore the dividend to its lofty level and reap the cash flow out of the fading film business -- which last year was capable of creating more than $700 million of pretax profit for Kodak, or 56% of its total. Other shareholders have raised the idea of splitting Kodak into separate companies, for consumer, medical and commercial products.
Under either scenario, old Kodak would die. Under the first, the one that has received the most attention, it theoretically would be a very long and comfortable death. But long and comfortable passings don’t happen in real business, Carp explained to investment analysts who challenged him last week.
Kodak’s customers, whether retail photo dealers or hospitals with X-ray units, would abandon the company if it tried to milk old products without supplying them new technologies, Carp said. “Our business would go away very fast.”
Can Kodak come back? Investment manager Joan Lappin of Gramercy Capital, which owns some Kodak stock, notes that it isn’t the only company to have veered from the path of success only to try to scramble back. IBM Corp. has recovered stock price and glory after a long slump. Motorola Inc. is trying to do the same.
“Execution,” Lappin says, “is the key to any turnaround.”
In Kodak’s favor is that its management appears to be listening to what George Eastman said 77 years ago: Don’t get comfortable. True then, true today, for more than just Kodak.
James Flanigan can be reached at email@example.com.