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Kodak seeks firm foothold in digital imaging
Old company completes huge, painful overhaul
ROCHESTER, N.Y. – The boom in digital photography triggered a series of aftershocks at the 127-year-old Eastman Kodak Co. as one after another of its aged factories was dynamited.
Since 2004, the world's biggest film-manufacturer has eliminated 27,000-plus jobs, cast off major operations and invested billions to gain a firm foothold in the highly competitive arena of electronic imaging. It now offers an alluring patchwork to help people harness their photo collections: a 70-million-member online service, 80,000 retail kiosks and an array of digital cameras, printers and other devices.
Kodak said Wednesday it finished 2007 with a surge in its fourth-quarter profit, propelled chiefly by a bump in sales of digital cameras, retail kiosks and patented technology as well as a promising launch in the lucrative inkjet printer market.
Earnings climbed to $215 million, or 71 cents a share, in the October-December quarter, up from $16 million, or 6 cents a share, a year earlier. Sales rose 4 percent to $3.22 billion from $3.11 billion a year earlier.
"The large, expensive and difficult corporate restructuring is over," Chief Executive Antonio Perez said in a conference call with analysts. "We have now established a sustainable business model for the decline in (our) traditional business and our digital businesses are growing profitably."
But questions about the photography pioneer's prospects are intensifying: Will it adapt and flourish, propelled by a rich portfolio of patents? Is it destined for a breakup? Might it even join forces a few years from now with Xerox Corp., its historic cross-town rival?
"Their strategy makes sense, they're doing the right things, ... but the competitive reality they face is extremely daunting and will only grow more challenging over time," said Citigroup analyst Matthew Troy.
Perez, who ran Hewlett-Packard Co.'s digital printing operations before succeeding Dan Carp at Kodak's helm in June 2005, "is doing an excellent job," Troy said. "It's just that, with what he has, I don't know if anyone can do that job."
Kodak's payroll, which peaked at 145,300 in 1988, has shriveled to around 30,000, a level not skimmed since the Great Depression.
"Supposedly the restructuring is done. Now show us in 2008!" implored George Conboy, president of Brighton Securities, a money-management firm in suburban Rochester. "What they need to convey is the image of a transformed company, and they are far from having done that."
Despite a 30 percent slide in U.S. sales of consumer film in recent years, Kodak can still rely on its longtime cash cow – and especially its motion-picture film unit – to ease its bumpy ride.
While digital businesses now account for more than 60 percent of Kodak's revenue and are growing rapidly, they still net only modest profits.
Ulysses Yannas, a broker with Buckman, Buckman & Reid, thinks Kodak has the technology, management, distribution and iconic brand name to support success.
"They'll never get the margins they used to get out of film, but the sales gains they can get out of digital, especially in commercial printing, are unbelievable," he said.
There were inklings of vitality in 2007, when Kodak posted profits in back-to-back quarters for the first time in three years. In July through September, Kodak earned $82 million from digital units as sales jumped 12 percent to $1.59 billion. In contrast, traditional, film-based sales sank 16 percent to $986 million.
As high-profit film fades, Kodak's survival will hinge on how well it prevails against entrenched, digital-consumer-savvy competitors such as Sony Corp., Canon Inc. and Hewlett-Packard.
"You're fighting against much larger players with a more singular focus, better balance sheets and bigger scale," Troy said.
Kodak's answer has been to outsource camera manufacturing and leverage its imaging know-how and intellectual property via licensing deals. And it has splurged $2.6 billion on a promising slice of the high-end commercial printing market where the likes of HP, Canon, Ricoh, Xerox and Fuji also are doing fierce battle.
Unloading analog baggage everywhere it could, Kodak sold its health-imaging unit for $2.35 billion, rather than bring the 111-year-old X-ray business into the digital age.
Nowhere was its transformation starker than at Kodak Park, a colossal manufacturing hub north of downtown Rochester that George Eastman opened in 1891. The park has shrunk from 1,600 acres to 700 over the last decade, with scores of buildings sold off to developers. And beginning last July, five mammoth plants where silver halide-based products were made or stored were reduced to rubble.
"It's an extremely sad and shocking time" for longtime employees and retirees "when buildings that size vanish inside 10 seconds," said Robert Burley, a photography professor at Ryerson University in Toronto who came to see an 89-year-old paper-products plant implode in September.
"Even though these technological transitions in the end take 10 or 20 years to happen, this one is happening very quickly. It's remarkable," Burley said.
Kodak has high hopes for its inkjet photo printer that uses inexpensive ink cartridges and is targeting $1 billion in sales by 2010 in a $16 billion home-printer market dominated by Palo Alto-based HP.
And in May, it aims to shake up the commercial market with a 2,000-page-a-minute, highly customizable inkjet machine that delivers offset-print quality.
That would put it in closer competition with Xerox, the Stamford, Conn.-based office-equipment imaging company that also was founded in Rochester, in 1906, and still has its biggest factories here.
"Don't be grossly shocked, two years out, if you find Kodak and Xerox together because each one wants to get on the other guy's turf," Yannas said.
Kodak's meteoric rise to blue-chip status in the 20th century was "emblematic of what America is capable of," so the perils it faces invoke "a wistful worry," said Mark Zupan, dean of the University of Rochester's Simon Graduate School of Business Administration.
"You're starting to see more of an edge to Kodak," Zupan said. "But just one or two successful innovations aren't going to do the trick. It takes aggressiveness, ingenuity and a willingness to take risks."