Kodak Scores With Digital Cameras but Film-Biz Losses Cloud Big Picture

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Kodak is back in the picture.

Written off just two years ago as a has-been brand too closely associated with the dying business of photographic film, Kodak has aggressively transformed itself from an also-ran to a serious digital player.

Still, Kodak has a ways to go. The company posted first quarter sales April 15 of $2.83 billion, down from $2.92 billion a year ago; analysts had expected a flat return and the stock took a hit. Analysts said part of the problem is while the digital business is growing nicely, the traditional film business is dropping off much faster than expected. Kodak will need to move fast to get to the point where the digital lines can replace revenue lost in its traditional business.

Kodak CEO Daniel Carp said the "short-term volatility" is to be expected during the transition to digital. Sales of digital products and services rose 23% to $1.32 billion, while sales of traditional products dropped 18% to $1.51 billion.

"Kodak hasn't been as clueless as many people think," said Jupiter Research analyst Michael Gartenberg. "The key here is that Kodak aligned itself with photography and snapshots and pictures, instead of cameras and film. They've maintained the lifestyle of taking pictures."

What the company did right was maintain its century-long simple stance that Kodak equals pictures.

Today, it is No. 1 in digital-camera sales in the U.S. and ranks No. 3 in the world with market shares of 21.9% and 11.8% respectively, according to IDC. It sold more than 2 million printer docks in 2004, leading photo-printer sales. Kodak's online printing and storage site, renamed from Ofoto to Kodak EasyShare Gallery in March, now boasts 20 million members, leading the online printing pack, which also includes HP's Snapfish, Shutterfly and Yahoo-owned Flickr. While only 5% to 10% of photos are printed online, that part of the industry is seen as a lucrative growth area especially as customers increasingly store photos online to ease the burden on home computers.


So how does an entrenched giant remake itself in just a few years? The truth is it hasn't been all that sudden-and it's also not over yet. Kodak showed off the first digital camera almost a decade ago, and the company has been at work on digital technologies and patents for almost as long. Kodak's problem was mostly a priority and resource-allocation one. In trying to protect its storied film legacy business, the digital message was repressed and not given front-and-center attention.

"That Kodak was late to the digital game is one of the biggest mischaracterizations in the business. It was always there and digital was always being developed. It's just the emphasis wasn't placed on digital until later," said IDC analyst Chris Chute.

However, that all changed in September 2003, when Mr. Carp announced the strategy shift to digital. Investors groaned; another reorganization? Wall Street moaned; sell off whatever valuable divisions you've got. And so Kodak stock hit a 20-year low that day.

Mr. Carp was undeterred-and had little choice. He did, however, have choices about execution and that day he laid out a plan to hire smart and to acquire a lot. He had a shopping budget of $3 billion. But more importantly he had a co-conspirator. Just months earlier, Mr. Carp had spirited Hewlett-Packard highflier Antonio Perez and made him chief operating officer. Now Messrs. Carp and Perez had just hired another well-regarded industry executive from HP, James Langley, to head the newly formed commercial-printing group, adding to several key 2002 executive hires including Bernard Masson from Lexmark. In an even bigger coup a few months later, the duo snagged Yosuke Kojima, known simply as Kojima-san in the industry, the "father" of Olympus' very successful digital-camera family.

In June, the company will start shipping its EasyShare One, a sleek, innovative camera that will be the first to offer WiFi capabilities. It's a far cry from the first unwieldy EasyShare introduced in 2001. Analysts expect a big marketing push around the One camera introduction; Kodak declined to comment. Currently, the company is focused on campaigns for its existing EasyShare system that center on the idea of all-in-one bundled packages and printer docks ease of use.

While pushing ahead stylistically with a film-noir look, the ads from WPP Group's Ogilvy & Mather, New York, still follow the century-old brand message from Kodak, one of the few things that hasn't changed during Kodak's digital transitions. Kodak spent $109 million in measured media in 2004, $71 million of that on digital cameras, according to TNS Media Intelligence.

"Nobody knows more about capturing, sharing and protecting pictures than Kodak. This new ad speaks to the brand's long tradition representing the state of the art of photography," said Chris Wall, Ogilvy co-creative head.

acquisitions key

Acquisitions have also changed the face of Kodak. Its two-year buying spree has resulted in a robust Graphics Communications Group with the resources to challenge industry leaders like Xerox and HP; as well as expanded inkjet technologies and patents. At the same time, Kodak reduced overhead costs by laying off staff more than 20% of its work force and instituting a method to reduce inefficiencies.

Challenges still lie ahead, of course. While most agree that Kodak has made the important brand perception leap to digital, the actual business model is still being proved. HP has also emerged as a close competitor with products and services mirroring Kodak's portfolio, and analysts caution to not forget old film competitor Fuji.

Kodak, like others in the digital-photography market, will also have to deal with deceleration rate of camera sales as the market matures, and new competitors such as cellphone makers embedding advanced cameras in their devices.

"At one point, it's fair to say Kodak was in a state of complete confusion. But they've made strong progress on their digital strategy and we expect that to continue," said Michael Wolf, analyst at InfoTrends. Mr. Gartenberg added, "They're still a brand in transition, but they're on the right path."

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