Eastman Kodak Left Overexposed

As if lit by a flashbulb, the risk inherent in Eastman Kodak's (NYSE: EK  ) reliance upon its intellectual property for growth is now much easier to see. After one big technology-licensing deal fell through, the iconic film manufacturer's fourth-quarter profits plunged 95%.

I've been critical of this business model for some time, even nominating Kodak in a contest for worst stock -- and winning. It's a path fraught with danger, as the current quarter shows, and it shouldn't have been the basis for Kodak's turnaround strategy.

And with an International Trade Commission administrative law judge issuing a negative recommendation on Kodak's patent complaint against Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) , it looks like Kodak's days as a patent troll are numbered, too.

Not a pretty picture
Revenue fell 25% in the quarter, to $1.9 billion, as digital camera makers Sony (NYSE: SNE  ) and Canon (NYSE: CAJ  ) , along with cell phone manufacturers that include high-resolution cameras in their phones, pressured sales. Digital revenue dropped 25%, while the consumer digital imaging group -- which includes Kodak's licensing portfolio -- plummeted 40% from the year-ago period.

Patents can be a key growth component for a company, but Kodak's attack on Apple and RIM, and the judge's refusal to accept the camera maker's arguments, show the dicey road it has chosen to take. Of course, the full panel could overrule the judge and agree that Kodak's patent for previewing a digital photo is worth upholding, but the picture looks pretty bleak right now.

Use a wider lens
Kodak struck deals with Samsung and LG Electronics to cross-license technology by using the ITC as a weapon, and reported $72 million in IP income this quarter from an NEC licensing agreement. But those deals may be harder to come by in the future, if it doesn't have the sledgehammer of patent litigation with which to batter competitors.

Kodak also points to the growth of its core business of consumer and commercial injket, packaging, and workflow software, which rose 23% in the quarter. Yet even that is in danger, as the price of laser printers drops and Lexmark (Nasdaq: LXK  ) focuses more intently on that segment of the printer market. Laser printers, not inkjets, will be the dominant printing format in the years ahead. Remember that Kodak's also weighed down by a severely underfunded pension plan.

Kodak inside
I agree with my colleague Sean Williams that there is value in the Kodak brand -- just not as an investment itself. It would make a better fit as part of Hewlett-Packard (NYSE: HPQ  ) or some other company, rather than a stand-alone business. HP could make a big splash selling Kodak-branded equipment.

The company's attempts to live off its intellectual-property portfolio are proving hit or miss, and investors would be wise to develop a healthy wariness before committing any money to its stock.

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 27, 2011, at 3:06 PM, khaledmrd wrote:

    Kodak is the next Digita Prinitg Giant, they have the technology and patents and Global reach, watch out 2010 Latest Products in Printers and Consumables and more in 2011.

    Spaces is Home, Office, Commercial, Packaging, Kiosks, Express Stores all now tramsforming to Digital.

    Cameras is not the not the core biz but Adjacent will be OK when re launched in 2011 in the China and India with Sharing with Social sites but it is about Prinitng from Online Social sites more Ink, More paper , more Services.

    that is all about the new Digital Kodak and other like Patents is an addition.

    Apple and RIM was one Patent out of Thousands of Kodaks in many areas and still the decision is not final, Kodak won the same Patent onece against Samsun and against SUN so it is not over yet this patent.

  • Report this Comment On January 27, 2011, at 5:50 PM, zoodiverse wrote:

    Remember when Kodak came out with the disc camera in the 80s, yeah its like that all over again,The only thing this company has got left is the Eastman Kodak name,and a drawer filled with undeveloped discs that your local pharmacy cant develop cause the discs are older than the kids working there,maybe China will buy it who knows.

  • Report this Comment On January 27, 2011, at 9:03 PM, rjriley5000 wrote:

    Inventions, specifically patented inventions which teach are a product in their own right. They have value, often staggering value.

    Many large companies believe in capitalism when they are selling their product or service and become socialists when they need an inventor's services.

    The patents in question have been battle tested. An adverse ITC ruling does not change this.

    Kodak will likely file a lawsuit and unless someone can find valid prior art, not likely since the patents have already been litigated, they will win.

    There is an issue here more important than Kodak. America cannot produce high paying jobs in the face of global competition except by inventing and protecting those inventions with patents.

    Inventors produce new wealth by extending life, improving quality of life, making it easier and faster to do our chores and on and on.

    Without patent protected inventions we are not expect to be paid any more than people in developing countries.

    The sheer foolishness of people who blab about issues they do not understand is astounding.

    Ronald J. Riley,

    President - www.PIAUSA.org - RJR at PIAUSA.org

    Other Affiliations:

    Executive Director - www.InventorEd.org - RJR at InvEd.org

    Senior Fellow - www.PatentPolicy.org

    President - Alliance for American Innovation

    Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel

    Washington, DC

    Direct (202) 318-1595 - 9 am to 9 pm EST.

  • Report this Comment On January 28, 2011, at 1:52 PM, staff1 wrote:

    Call it what you will...patent hoarder, patent troll, non-practicing entity, etc. It all means one thing: “we’re using your invention and we’re not going to pay”. This is just dissembling by large infringers to kill any inventor support system. It is purely about legalizing theft.

    Prior to eBay v Mercexchange, small entities had a viable chance at commercializing. If the defendant was found guilty, an injunction was most always issued. Then the inventor small entity could enjoy the exclusive use of his invention in commercializing it. Unfortunately, injunctions are often no longer available to small entity inventors because of the Supreme Court decision so we have no fair chance to compete with much larger entities who are now free to use our inventions. Worse yet, inability to commercialize means those same small entities will not be hiring new employees to roll out their products and services. And now some of those same parties who killed injunctions for small entities and thus blocked their chance at commercializing now complain that small entity inventors are not commercializing. They created the problem and now they want to blame small entities for it. What dissembling! If you don’t like this state of affairs (your unemployment is running out), tell your Congress member. Then maybe we can get some sense back in the patent system with injunctions fully enforceable on all infringers by all inventors, large and small.

    For the truth about trolls, please see http://truereform.piausa.org.

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