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A Totally Different Picture


In its heyday, Eastman Kodak Co. (EK) was an icon of innovation. Now that its core film business is fading like an old photo, Kodak is fighting to climb back as a leader in digital photography. Its new line of inkjet printers is a critical piece of that strategy. "This is a do-or-die product for Antonio Perez," says Charles LeCompte, president of Lyra Research Inc., an image research firm in Newtownville, Mass. "If they want to make money in consumer imaging, they had to get into printing."

Perez is attempting the most difficult challenge of a CEO: revamping his company's business model. His answer has been to position Kodak as the Apple Inc. (AAPL) of pictures. He is building a portfolio of digital cameras, Web services, and retail photo kiosks that will help consumers manage their proliferating collection of digital photos. And he is moving aggressively to license Kodak's intellectual property and beef up its presence in the high-end commercial printing market. In the most recent quarter, $123 million, or 82% of the operating profits of Kodak's digital imaging group, came from licensing deals.

But Kodak's transformation has not yet translated into financial success. The digital world brings tougher rivals, lower profits, and increased investment needs. Last year sales from Kodak's film and film printing business fell 22%, to $4.2 billion, while its digital imaging group saw sales drop 9%, to $2.9 billion, largely because Kodak stopped selling low-end digital cameras. Overall, the company lost $600 million in 2006 and $1.4 billion the previous year.

That's what makes the consumer printing effort so important. If inkjet printers and cartridges prove popular, they could provide the kind of ongoing, high-margin revenue that film once did. "The profit potential is compelling," says Matthew Troy, an analyst with Citigroup Global Markets (C). And if the new printers don't catch on? Kodak may well be relegated to bit-player status in the consumer market. Says LeCompte: "They would end up as the rump of a company in commercial imaging."

That definitely would be a blow to investors, who have bid up Kodak's shares from a five-year low of 19.09 last August to about 26 today. Kodak's strong brand and $1.2 billion in cash flow from operations last year might suggest it's a candidate for a buyout. But Perez already is making many of the tough choices that private-equity specialists are known for: He has laid off some 27,000 workers, unloaded major operations, and invested for the future. What's more, Kodak is on the hook for hundreds of millions in environmental cleanup costs, which would likely scare off most buyout shops. All the more reason why Kodak's future rides on Perez' new printers.

By Spencer E. Ante


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