This isn't exactly what you'd call a "Kodak moment." Despite a storied history in photography, it looks like Eastman Kodak (NYSE: EK ) sees its future as being little more than a patent troll.
Fresh off a settlement with Samsung, the iconic photography company is zooming in on both Apple (Nasdaq: AAPL ) and Research In Motion (Nasdaq: RIMM ) with a few rolls of patent infringement lawsuits. The groundbreaking technological innovation it's protecting? Previewing a digital photo.
Not so black-and-white
In reality, this probably amounts more to an argument in favor of patent reform than a screed against Kodak for asserting its rights. Much like Amazon.com (Nasdaq: AMZN ) getting a business process patent for one-click checkout (which it used to bludgeon Barnes & Noble (NYSE: BKS ) ) or MercExchange wrangling $35 million out of eBay (Nasdaq: EBAY ) for its "Buy It Now" feature, such obvious developments were never meant to be protected.
Apple and Research In Motion did have notice, though; Kodak had been trying to obtain licensing fees from the companies for years
Shake it like a Polaroid picture
As its film business collapsed, Kodak was left with few options other than to turn to its patent portfolio to eke out a living. It's not a pretty picture for Kodak:
- Its traditional consumer film business is all but dead.
- As newspapers and magazines disappear, its commercial segment is crumbling.
- It hasn't made a convincing leap from old technology to new.
Even investing legend Bill Miller, who owned more than 18 million shares of the filmmaker in his Legg Mason Value Trust fund (as of Oct. 31, 2009), once noted that few companies have successfully switched gears from old school technology:
There aren't many companies that have been terribly successful making big technological transitions. How many typewriter businesses moved into computers?
It underscores why Kodak is pressing so hard on its digital imaging patent portfolio.
No news left to print
According to Publishers Information Bureau, industry-wide magazine advertising revenues plunged 18% in 2009, twice the rate of decline from the year before, with a 22% decline in ad pages in the fourth quarter. That's bad news for Kodak, whose prepress equipment segment accounts for about 39% of revenue. Sales in the segment were down 18% in the third quarter.
Worse for the company that invented the digital camera in 1975 (clunky though it was) is that net sales of cameras and accessories were nearly cut in half over the first nine months of the year, and not even a 58% jump in consumer printer sales could offset the decline. So revenues at its consumer digital imaging segment are about half of what they were just four years ago, and with Hewlett-Packard (NYSE: HPQ ) presenting a formidable obstacle to future growth, expect this niche to stall.
Through the viewfinder
While last year's $700 million debt restructuring led by private equity shop Kohlberg Kravis Roberts (KKR) probably gave Kodak a little breathing room, the price may be too high for outside shareholders.
KKR bought $400 million in senior secured notes with steep 10.5% interest rates, but also got warrants to purchase up to 53 million shares, equal currently to about a 20% stake in Kodak. It also got two seats on Kodak's board.
While KKR's infusion may amount to a vote of confidence that better times are ahead for Kodak, the private equity lender will come out ahead on its interest payments on the secured notes, which are due in 2017, regardless of the stock's performance. Commercial banks aren't exactly tripping over themselves to lend money, so KKR's favorable terms may have been Kodak's only recourse -- but that doesn't mean you should want to invest in the photography legend alongside them.
Take a picture; it'll last longer
In short, Eastman Kodak has been a company in freefall, one that seems to be perpetually in turnaround mode, with restructuring charges becoming a permanent fixture on its financial statements.
The fourth quarter may give Kodak a bounce because stronger consumer electronic sales were one bright spot this past holiday season. Web analyst comScore says such sales were up 15% this season, second only to watches and jewelry. But considering the tripod of forces arrayed against it, Kodak is no longer the epitome of innovation and mass marketing prowess that created the Brownie, Instamatic, and Super 8 film.
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