Kodak's Digital Struggle

Today is my son's birthday. Like millions of other proud parents, I'll be snapping digital photos throughout the day. Now, Eastman Kodak (NYSE: EK  ) says it wants to crash our party.

This week, the photo pioneer took Sony (NYSE: SNE  ) to court on infringement claims over 10 patents related to digital photography and video camera technologies. Published reports say Kodak has been negotiating with Sony about licensing its intellectual property since 2001. Sony says it has not violated any patents and will defend itself.

It's easy to understand Kodak's rationale for the suit. After all, millions in revenue could be at stake. Kodak says it has license agreements with more than 10 camera makers, including Olympus and Sanyo. Sony, however, is the big dog on the block. Market researcher IDC says Sony was the top seller of point-and-shoot digital cameras in the U.S. last year, shipping 3.6 million units.

Digital photography is also a fast-growing business. The Photo Marketing Association International says 42% of U.S. consumers will own a digital camera by the end of 2004, up dramatically from 31% during 2003. Indeed, a check of Amazon's (Nasdaq: AMZN  ) electronics store this morning shows two of the top five sellers overall are digital cameras from Canon (NYSE: CAJ  ) .

So far, investors don't seem pleased with the news. Shares of Kodak were down nearly 2% by yesterday's closing bell. That's understandable. So far, 2004 has been the year of patent lawsuit as business strategy. But there are some key differences here, and Fools shouldn't be too quick to criticize Kodak management.

First, the suit is targeted, unlike SCO Group's (Nasdaq: SCOX  ) scorched earth approach. Second, it comes after three years of talks. Lastly, the upside could be huge, especially if Kodak were to get a cut from every digital camera sold.

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Motley Fool contributor Tim Beyers is contemplating a patent for his unique Italian macaroni and cheese recipe. He doesn't own shares in any of the companies mentioned here.

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