|BUSINESSWEEK ONLINE : AUGUST 2, 1999 ISSUE|
Film vs. Digital: Can Kodak Build a Bridge?
The giant is betting there's money to be made in both worlds
George M.C. Fisher spent his entire five-and-a-half years as chairman of Eastman Kodak Co. struggling to move the world-famous photography giant into the Digital Age. The once-idolized ex-Motorola Inc. chief recently announced that he will step down as CEO on Jan. 1, declaring that Kodak's digital strategy is finally poised to reignite the company's sluggish sales. Fisher cites an array of digital initiatives that will help boost overall sales by 8% to 12% a year in five years. ''We've finally turned the corner,'' Fisher says, ''even though we don't have the results to prove it yet.''
Those results aren't a lock. For one thing, success in the digital world requires constant innovation and change--things Kodak (EK) is not known for. Moreover, the projects Kodak has unveiled so far are unlikely to provide the short-term sales jolt the company badly needs. And the job won't get any easier as digital technology comes down in price, opening the door to new competitors. ''Kodak's digital-imaging initiatives appear to be aimed at brand building, not revenue generation,'' says Donald Strickland, a former Kodak executive who is now CEO of digital-imaging software maker PictureWorks Technology Inc.
Indeed, building its brand may be Kodak's best move. It's critical that the company extend its name to digital since the technology represents a long-term threat to its core franchise in 35mm film. Although experts disagree over how long it will take for digital imaging to start shrinking the worldwide film market, that day is surely coming. Kodak sees just 5% growth in its film market over the next decade and even that may be optimistic. Market researcher Lyra Research estimates that worldwide film sales will grow only 1% annually through 2003 and slowly shrink after that. Rapid growth in markets such as China will be tempered by a shift toward digital cameras, especially in the U.S. and other developed markets.
That's where Fisher's heir, Daniel A. Carp, comes in. A 29-year Kodak vet, Carp made his name as a brand builder rather than a techie. His challenge: build the consumer trust in digital that Kodak already has in film. That way, as the technology spreads, Kodak will be set to profit. ''We see digitization creating a film and a photo-finishing aftermarket that should fuel an explosion of pictures and use'' of digital and 35mm technology, Carp says.
At its core, Kodak's digital strategy is to create a profitable bridge between the old and new worlds of photography. Even as it hopes to jump-start sales of digital cameras, the company wants to transfer as many of its customers' traditional snapshots as possible to digital form. It figures there's big money to be made uploading traditional pictures onto the Internet and in expanding its share of the market for reprints, inkjet paper, and photo-editing software.
Such changes can't happen soon enough. Amid the long-term shift in its market, Kodak has been struggling. A debilitating price war with Fuji Photo Film Co. (FUJIY) has crimped sales in its core business, which accounts for just over half of total revenues. Meanwhile, Kodak has been pouring money into new ideas for digital imaging that have yet to pay off. At a recent $74 a share, Kodak stock has barely budged since 1997. A $1.2 billion cost-cutting program launched in 1997 that will trim 20% of its workforce by yearend has buoyed profits. But revenues dropped 5% in 1998 and are expected to be up just 3% this year, to $13.8 billion, with about $1.5 billion coming from digital. Second-quarter earnings were flat on a 2% rise in revenues.
NET IDENTITY. The company's long-suffering investors don't sound convinced that Carp has the right angle to get Kodak in focus again. ''Kodak is going to be controversial until they can do something right on a consistent basis,'' says one money manager whose fund has 5 million shares.
The centerpiece of Kodak's digital strategy is a joint venture with America Online Inc. (AOL) called You've Got Pictures, which could give the photo company a strong Internet identity. When it is rolled out this fall, consumers will be able to drop 35mm film off at the drugstore and for about $6 have a roll of 24 pictures digitally scanned and uploaded into their AOL accounts. From there, consumers will be able to E-mail the images to friends, order reprints or gifts, or download high-resolution copies that can be edited on a PC. They'll be able to store 50 pictures on the site for free.
Even under the brightest scenario, You've Got Pictures won't translate into big revenues quickly. Analysts estimate that Kodak will get 40% of the upload charge. Even if each of AOL's 17 million subscribers uploads one roll of film by yearend, Kodak's take will amount to only about $41 million, plus merchandising and storage fees. Still, Barry Schuler, president of AOLInteractive Services, says the long-term potential is huge: ''Over time, this could be as big as E-mail.''
To expose even more more consumers to digital photography, Kodak since June has offered a service nationwide called Picture CD. For $10 a roll, consumers can get images from 35mm film loaded onto a compact disk. But it won't be a big revenue producer anytime soon, either. The CDs simplify the process of getting high-resolution images into a PC and come with a wide assortment of image-editing software. Fisher forecasts that Picture CD will generate up to $100 million in revenue in its first year, and analysts say Kodak may get 40% of that total, after retailers and partner Intel Corp. get their share; that's barely $10 million a quarter. Still, Kodak plans to broaden the market for Picture CD by tailoring it to professional markets. Realtors, for example, might give customers Picture CDs with 3-D images of homes for sale.
HIGH-END EDGE. Kodak also has high hopes for the fast-growing digital-camera market, even though it is currently losing money there. Its 17% share of digital-camera sales in the U.S. badly trails Sony Corp.'s (SNE) 52%. However, analysts say most future market growth will come from the higher-end photo-quality digital cameras. Kodak leads in that segment, though Sony is preparing a new assault. International Data Corp. predicts that the worldwide digital-camera market will grow 25% annually, to $6.5 billion, in 2003. If Kodak keeps a 20% share, cameras could become a $1.3 billion business for the company.
The fourth leg of Kodak's digital strategy is already paying off. Over the past two years, the company has installed some 19,000 Picture Maker kiosks at retail stores worldwide that print pictures from both digital and traditional film. These devices accept negatives, CDs, or digital-camera memory cards and let users edit images and make prints. At about $15,000 each, Carp says they are highly profitable and account for about $200 million in sales. And with 95% of customers who use them coming back repeatedly, they produce steady photo paper sales.
For all their promise, however, each of Kodak's new products will be under intense competitive pressure every step of the way. Upstarts such as Photoloft.com Inc. are offering to store photos on the Web for free and make money selling trinkets like mugs and greeting cards. Seattle FilmWorks Inc. includes Internet uploads free with its $10 film-processing charge, and many analysts think upload prices will fall rapidly. It's a similar story with picture CDs. Some retailers sell Fuji-made picture CDs--without the software Kodak adds--for about 30% less than Kodak.
Fisher understands all too well the power of rivals to undercut his prices. And he acknowledges the uncertainty around Kodak's digital strategy and ability to nimbly create a bridge between the old and new technologies. Kodak has ''to come up with at least one or two big ideas every year'' to add to its digital arsenal, he says. Kodak may have a few already, but in the digital world, even the best ideas can fade fast.
By Geoffrey Smith in Rochester, N.Y.
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Film vs. Digital: Can Kodak Build a Bridge?
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