End of Eastman
Kodak
Eastman Kodak Co. the unprofitable 131-year old camera
maker, is weighing options including a bankruptcy filing because of concerns
raised by possible buyers of its patent portfolio. It’s
amazing to me that Eastman Kodak (EK) has lasted as long as it has. In the
1980s, Kodak was heading unstoppably for its end decades ago — but it took
longer than anticipated. Kodak plunged 91 cents, or 54 percent, to 78 cents a
share on September 30, in New York Stock Exchange composite trading, the
biggest drop since at least 1974. Trading was halted four times by circuit
breaker introduced following the May 6, 2010, crash to prevent losses in one security
from spreading throughout the stock market.
When Kodak was founded in 1888, quality was its
“fighting argument.” It gladly gave away cameras in exchange for getting
people hooked on paying to have their photos developed — yielding Kodak a
nice annuity in the form of 80% of the market for the chemicals and paper used
to develop and print those photos.
Inside Kodak, this was known as the “silver halide”
strategy — named after the chemical compounds in its film. Kodak had a
fantastic success formula that keyed off of international distribution, mass production
to lower unit costs, R&D investment to introduce better products, and
extensive advertising to make sure consumers knew about Kodak’s
superior quality.
Unfortunately, competition came along and introduced ugly
splotches all over this beautiful picture. Here are three examples:
·
Instant photography
In
1948, a Massachusetts-based inventor, Edwin
Land, offered consumers an instant camera that developed
photos in 60 seconds – just in time for Thanksgiving. Instant
photography threatened Kodak’s profits from chemicals and film. Kodak responded
by introducing its own instant photography products. Polaroid sued — alleging
that between 1976 and 1986 Kodak stole its technology – asking for $12
billion in damages. In 1990, Polaroid won a mere $909 million and
ultimately filed for bankruptcy in October 2001.
Cut rate film from
Japan
·
In
the 1980s, Japan’s Fuji started to sell rolls of film at a price way below the
one that Kodak had been accustomed to charging. Fuji’s willingness to cut
prices was quite popular with the rapidly growing mass merchandisers like
Wal-Mart (WMT) that preferred to deal with suppliers who were willing to sell
high volumes at ever-lower prices. And Fuji helped make consumers aware of its
value by sponsoring big events — such as the 1984 Los Angeles Olympics. By
1999, Fuji’s market share gains were so great that Kodak took a $1.2 billion
charge along with 19,900 layoffs. Such layoffs persisted, for example in
January 2009, Kodak took a $350 million charge to nuke 3,500 people on a
24% revenue plunge.
·
Digital photography
Digital
photography offered consumers a better value but one that wiped out a decent
way for Kodak to make money. After all, digital film — flash memory —
was a low margin proposition even if you had the huge fabs needed to produce
it. And even though Kodak was number two in digital cameras by 1999, it lost
$60 on each one it sold. In one of many bids to replicate its Silver
Halide business model in digital photography, Kodak offered a Photo CD
film-based digital imaging product – but since it was priced at $500 per
player and $20 per disc it did not attract many customers.
In January 1988,
Kodak acquired Sterling Drug for
$5.1 billion.
Kodak thought this was a wise investment for two reasons:
drugs had high margins and Kodak made chemicals. Unfortunately, those two facts
were not sufficient to make this deal pay off for Kodak shareholders.
To do that, Kodak
would have needed capabilities that it lacked — such as the ability to
come up with new, valuable, patented drugs or to make generic drugs at a
rock-bottom cost. It only took six years for Kodak to realize that
Sterling Drug was not a good fit for Kodak and sell it off in
pieces.
One hope for returning to a decent business model might
have been producing high quality personal printers for those digital images.
Selling inkjet cartridges and papers might have yielded a nice profit
stream for Kodak. But regrettably for Kodak, many other competitors — most
notably Hewlett Packard (HPQ), had gotten there first.
Since peaking in
February 1999 at about $80 a share, Kodak shares have suffered a steady tumble
that wiped out 99% of their value — to 78 cents a share as of Sept. 30.
At the end of June, Kodak’s liabilities exceeded its assets by $1.4 billion. It
then owed $1.4 billion and had $957 million in cash, down $847
million from the end of 2010.
Its latest CEO
(since 2005), former HP printer exec, Tony Perez, has been unable to
revive Kodak. Last week, it pulled $160 million from its credit line
and hired restructuring advisor, Jones Day on Friday even as Kodak
denied that it was on the verge of filing for bankruptcy.
It’s taken decades for Kodak’s final picture to develop —
but the corporate skull and crossbones it depicts is the result of too much
success leading to a slow and painful inability to adapt to a changing
competitive landscape. The end of Kodak marks the end of an era and gives a
lesson to the world that no matter how big you are one has to fall if it fails
to keep itself in line with the changing environment. To prosper one have to be
innovative and flexible and corporate needs to formulate their strategies with
much more accuracy leaving minimal chances of failure.
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