Will Eastman Kodak Innovate or Die?

Running a business is all about innovation. Whether you're a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to a business' success. Without innovation, companies run the risk of complacency and getting passed by competitors, or, even worse, folding up shop altogether like Circuit City did a couple of years ago.

No company gets a "free pass" when it comes to adapting its business plan. When push comes to shove, we need to ask ourselves: Will this company innovate or die?

Today, let's take a closer look at Eastman Kodak (NYSE: EK  ) to determine whether the company can adapt to rapidly changing consumer demands, or whether it will be pushed into the background.

What's wrong with Eastman Kodak?
Eastman Kodak has a major problem -- it's at the deep end of the pool, and it can't swim. Despite being responsible for countless technological innovations in the film and digital photography arena, investors still question whether Eastman Kodak can adapt quickly enough to even survive.

Eastman Kodak generated the majority of its profits from the highly lucrative film business in the 20th century. But with the emergence of digital technology, not only has its film business rapidly declined, but the company's late rollout into the digital space has been brutalized by increased competition from Sony (NYSE: SNE  ) and Canon (NYSE: CAJ  ) . The digital segment has been commoditized at a much more rapid pace than Eastman anticipated, eating into margins and crippling any chance of the company being profitable. Not even the company's printing division is immune, as the trend toward laser printing and away from inkjet printing threatens to eat into its margins even further.

Getting Eastman Kodak back on track
I'm not the CEO of Eastman Kodak, but for a moment, let's pretend I am. As I see it, the company needs to do three things to get back on track:

  • Sell the printing division. Eastman is hurting for cash, between its underfunded pension plan and its underperforming business. One of the most logical solutions here is to put its printing division up for sale. Eastman has shown an inability to innovate quickly, so it should market this division around while there's still some value to it. As for a possible buyer, I'm thinking Lexmark (NYSE: LXK  ) would make sense -- and it'd also love the decreased competition.
  • Be Shutterfly version 2.0. Kodak needs to send its leading innovators to Shutterfly's (Nasdaq: SFLY  ) home office, give them a pad and paper, and tell them not to come back until they've learned everything they can. OK, perhaps that was a bit sarcastic, but Eastman's only real moneymaking opportunity left is to battle Shutterfly on its own ground. By claiming a piece of the digital photo-sharing cloud, Eastman may have a shot at a high-margin service yet again.
  • Three strikes, you're out. CEO Antonio Perez has been turning Kodak around forever, and it hasn't worked. The inkjet division is expected to weaken in the coming years, its digital division's margins are falling, and the company is at the tail-end of the innovate scale. That's three strikes for this corporate leader. Shareholders would be wise to call for a change.

What's the verdict?
Without Kodak's patents or its brand name, I doubt the company would be worth the paper its stock certificates are printed on. Shareholders have their fingers crossed that pending lawsuits against Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) pan out, because there isn't much to be excited about on the innovation front. Like I said in January, I still feel that the Kodak name has value, but from an investment standpoint, things continue to look sketchy. Right now this is a toss-up, but the pendulum is leaning toward a potential slow death.

What's your opinion on Eastman Kodak's future? Share your thoughts in the comments section below and consider adding Eastman Kodak to your watchlist to keep up on the latest news in the digital photo arena.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy paints a picture-perfect scene of transparency every time.


Read/Post Comments (11) | Recommend This Article (4)

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  • Report this Comment On June 22, 2011, at 12:24 PM, q8trader wrote:

    you forgot Kodak's inkjet business. Kodak's inkjet printers are getting more exposure lateley but they need to be more aggressive on marketing. They have one of the lowest ink cost printers in the market.

    Kodak is trying to convert from film to ink.

    Check Kodak's late 2170 printer.

  • Report this Comment On June 22, 2011, at 1:09 PM, Red777aetrof wrote:

    The writer doesn't really seem to understand that Kodak today is primarily a printing company rather then relying on film (everyone agrees film, what's called FPEG division at EK, which primarily serves the movie industry in distributing prints to theaters by the way and not the little film cartridges that go into throw-away cameras (which already is extinct), continues to shrink at double-digit volumes).

    He makes outlandish and unsubstantiated statements: "as the trend towards laser printing and away from inkjet printing threatens to eat into its margins even further" -- where's the data that substantiates this opinion? He should ask HP, LEXMARK, EPSON, and Brother where they make their monies in consumer printing.

    The writer advocates "sell the printing division" -- which division is he referring to -- does he even know what he is referring to? Is he referring to Kodak's printing plates biz that serve the offset printing industry, or the flexographic printing product line that serves packaging, or is he referring to the large scale commercial digital printers, or digital scanners, or is it the consumer inkjet printing business. I guess he must mean the last, since his proposed acquirer LXK has no position whatsoever in commercial printing or packaging segments.

    And in the consumer printing segment, EK had year-over-year unit volume growth during Q1 of +97% in printer sales because EK is the innovator in consumer inkjets with a new technology that takes the print-heads out of print cartridges and resides in the printers instead, and thereby upsetting industry business models (by selling ink cartridges at substantial discounts to the rest of the industry). I can understand why LXK, which is an also-ran in consumer printing, and has had an average -4.2% growth the past 2 yrs, that's NEGATIVE 4% average annual growth, in its printer segment, would want to buy into a disruptive technology, but EK can extract a much higher toll from others who have a lot more to protect. But why anyone would want to sell the division that is at its inflection point of gross profits from ink supplies (from installed base) that is about to out-run the negative gross margin from printer placements (an investment activity) makes zero sense to me. Is there evidence that Kodak cant get its printers accepted by consumers (notwithstanding the 2MM units in 2010 doubled what was placed in 2009, and that company is on pace to easily exceed its 3MM target for 2011) despite targeting a 30% price premium at the point of sale, or that ink cartridge sell-through (at 2x the average for the industry compared to other vendors) resulted in doubling of ink gross profits in 2010 and a doubling again in 2011 (this tracks the cumulative installed base). The idea of selling the division that is attacking a segment with a extremely healthy and large profit pool is simply inane, and furthermore to target one of the weakest in the segment as the acquirer makes even less sense.

    And the writer tsk-tsking Kodak by citing the competition in digital cameras by holding up Sony and Canon as examples is laughable --those are excellent competitors, but the whole digital camera segment, particularly in point-and-shoot where EK participates, has been destroyed and commoditized by integrated camera phones, including the digital camera businesses of Sony and Canon as well, by substitute consumption from devices made by such as HTC, Samsung, Apple, Nokia, LG, Huawei, Kyocera, and numerous others making increasingly sophisticated smartphones that are subsidized at the point of sale by wireless carriers. It is simply a lousy business being in the standalone digital camera business (and getting worse) and it doesn't matter who you are -- teh difference is that Sony and Canon, and Nikon can hide at the high end SLR segment, and back to their historical hobbyist niches.

    The author's opinion that the only real money-making opportunity left for EK is to copy Shutterfly is laughable. That's a segment that is dying as aggregate photofinishing volumes continue to decline, as despite the multi-fold increase in digital images that are being captured (compared to the old film days), the actual numbers of images that are actually printed is continuing a slow and steady decline (as consumers instead share their images via social networks and store it in digital cloud) so despite the fact that SFLY is an excellent operator, it fundamentally occupies a segment that is challenged (notwithstanding the growth in printing to gifts and calendars, photobooks, et al). It would be simpler for EK to fire the "innovators" at Kodakgallery and simply copy every move at SFLY instead as a low-cost R&D for what is fundamentally a mature business. But by no means is that segment ever going to "save" Kodak.

    At the end of the day, Kodak has placed its bets, and it lacks the resources, both financial and human capital, to deviate from that bet. It will either have successfully shifted its profit opportunity from film to proprietary ink, which actually can have as high or higher margins then it did in film, or it will die. The die was long cast -- just strap in for the rest of the ride. It's only 18-36 months before pay-off. If you don't buy the strategy, sell the stock. Most shareholders have already.

  • Report this Comment On June 22, 2011, at 3:53 PM, KodakwilSurvive wrote:

    Kodak and the market has changed alot since Kodak's CEO took over in 2003. With 70,000 employees in 2003 and down to 18,000 today it's a different company. Yes, the world is digital, Film is history, photo prints minimal, and even cameras - well they are bundled into phones. With Facebook, and other social sites - it's easy to post and shared photos without ever having to "print" them. Thus, the reveune from films, cameras, photo paper, and etc. are drying up.

    Thus Kodak like others have to look at other digital markets like with consumer and commercial inkjet marekts to survive. Yet this has become very competitive - everyone wanting a piece of the pie. Profit margins thus become smaller and smaller. And Kodak like alot of OLDER companies has an aging work force. This means higher average salaries and a higher cost for benefits. This of course hurts the competitive edge thus one way to reduce costs is to reduce people which Kodak has been forced to do in recent years. Will Kodak survive? Probably. Will Kodak as the Kodak we once knew survive? NO. Kodak is no longer the Kodak everyone once knew. Kodak cannot remain to be the Kodak we once knew or for sure it won't survive. Will Kodak's CEO survive? Probably not. He's had 8 years - he will probably have to take the hit.

    But CEO's still make out okay. It's the employees that suffer.

  • Report this Comment On June 22, 2011, at 6:03 PM, george1902 wrote:

    Why do those so-called expert analysts seem to reach profound conclusions about a particular company when it's too late to help potential investors? Let's see: Could it be that after-the-fact analysis is pretty easy work...while reading warning signals of the coming demise of a company is much harder work.

    Needless to say, the seeds of Kodak's possible demise were planted many years ago, say at least ten years. Then, were experts predicting Kodak's fate? I personally don';t recall.

    One could argue that it's rather difficult to get out of the "gold" business when "gold" is doing so well. Film was such a great business for Kodak for so long, the senior management team was essentially addicted to it. Kodak, of course, was, and may still be, a great research organization. But the research side of Kodak apparently never could convince senior management of the value that could be unlocked from converting its patents into products.

    This is essentially the old "railroad" story all over again. Kodak, at one time, was a great innovator...but it did not realize the value of its discoveries and inventions when developed into consumer products. Kodak's "golden years" are probably behind it unless its management can think "outside the box" and use its patents rather than licensing them for royalities.

  • Report this Comment On June 22, 2011, at 6:32 PM, mychookie wrote:

    The issue with Kodak is that there really isn't anyone in management who cares about the company. Perez is an outsider who is stripping the company for personal gain. His intense focus on inkjet was a play to prove HP wrong when they passed him over as CEO; guess HP was right.

    Kodak has one really top-notch consumer play and Perez's myopic focus on inkjet has steered the strategic spending over a cliff....it may be too late.

    Go visit a CVS and tell me that after experiencing the speed and ease of use, you would still choose to print at home or print with Shutterfly. If Kodak made this high speed user-firendly digital printing interface the core of their strategy, I think they could win the hearts and pursestrings of those who continue to choose to print.

    I have used Shutterfly. It is fantastic! However, it is not and will never be immediate. My wife wanted to send out books of photos of my daughter's graduation to the relatives. My first thought was Shutterfly. The books would have been fabulous. I could have done all the work at home. I would have spent about $25 per book.

    Instead, we went to CVS. With a little guideance, we created very fine books in an hour for about $10 per book. I'm sold. The stuff CVS is able to do in an hour is fantastic.

    If Kodak had invested in this platform instead of following Perez's Inkjet field of dreams, I think they would have been in much better shape. It may be too late....but maybe not.

  • Report this Comment On June 23, 2011, at 12:58 AM, MOTLEYSHAME wrote:

    Motley should be ashamed of itself. This column is being used on the eve of the decision by ITC in the patent wars between EK VS. RIMM AND APPL.

    I question the sincerity and integrity of this article that just conicidentally is printed in detail the night before the decision comes out from the ITC.

    I think articles like this and their timing give newsletters a black eye.

    Motley- you get the black eye award. No matter how the ITC decision shakes out, Motley should be ashamed of itself. Did you ever think of writing this detail bashing article long time ago? I think not. Case closed. Your integrity is worth about as much as your black eye!

  • Report this Comment On June 23, 2011, at 10:13 AM, Red777aetrof wrote:

    Regarding mychookie's infatuation with the CVS "platform". The supplier of that is a Canadian company called PNI Digital Media Inc. (PNDMF on OTC bulletin board). The company also provides the engine for Costco in US and Canada, and actually supplies Kodak Australia with its web interface and retail kiosk. The company has all of $25MM in annual revenues (check out its financials since it is a public company) and it's static because people don't print any more. You want to save Kodak by doing what -- getting out its $7B revenue businesses to be all-in in a $25MM revenue category (the retail user interface)?

    Oh by the way, the consumables and equipment used by CVS to processs those prints and photobooks are most likely made by Kodak. You'll also note that Kodakgallery has a strategic partnership with CVS where a Kodakgallery user can send their order to be picked up at a nearby CVS in an hour.

    While we are all appreciative of your satisfactory user experience with CVS, it doesnt seem that alone should define what or how Kodak should prioritize its resources to earn a return for its shareholders.

    Anyway, if you really like the CVS user experience and like to have exposure to retail consumer photofinishing, you should investigate PNI Digital Media -- it is small company but has no debt (sits on cash), is buying back its stock, and currently trades dirt-cheap at under 4x 2011 EBITDA (FY ending 9/30).

  • Report this Comment On June 24, 2011, at 7:29 AM, golf1richard wrote:

    This article was right on button. Kodak is in self destruct and is almost dead. The patent law suit will give stock holders a shot in the arm but one that is short lived. It's not a cure and the cancer still grows. It's like getting chemo therapy. Kills everything and makes one think they are in recovery but then it sneaks up and they are gone. That is what is happening to KODAK. They will be a history lesson for those 20 years away. One thing is very strange. How can Perez survive this long and the board of directors allow him to stay on. He is like Obama. A bull S artist. He should be replaced with one that can do something but you need to get rid of the root cancer, and that is PEREZ.

  • Report this Comment On June 25, 2011, at 1:40 PM, Riverwoodsbrad wrote:

    Any analysis of EK should include the merits of its Prosper 5000 XL printing press which sells for $5 million

    If EK is going to survive it will be as a result of its commercial business.

  • Report this Comment On June 28, 2011, at 10:49 AM, Phoenix2011 wrote:

    If you include the Prosper 5000 XL @ 5 Mil per unit we should figure out the profit on that cause based on the less than 6 sales so far and the countless 10's of millions into the project so far I'd say by the time Kodak files for protection another company will pick up promising technology for a deal.

    Kodak needs to trim another 17,900 people from the roles and just keep the 100 Lawyers on staff until they completely grind their patent portfolio into the ground.

    Even Legg Mason finally realized the horse is DEAD!!!

  • Report this Comment On July 04, 2011, at 6:04 PM, Nobodie wrote:

    I think Kodak is like a big ship and is not able to react fast enought. Kodak need more fresh products with standalone features. Why has Kodak not one real camera for professionals? They had sponsored big events like Olympic games but all the photographer's used their Nikon or sheaper Canon products. Kodak gave the film. Now the "film" is made by a chip and nothing is Kodak. I think in 5 to 10 years no one knows what Eastman Kodak was.

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