Having spent last week providing tech support -- and by tech support I mean both hand-holding and occasional scolding -- to a gaggle of nervous photographers at the Missouri Photo Workshop, I noticed a marked preference for the memory chips and card readers delivered by struggling Lexar Media (NASDAQ:LEXR).
Today, that firm tried to beef up its street cred with high-end shooters by debuting a handful of new gizmos at the big annual photography shindig, Photokina, in Cologne, Germany. Among the innovative offerings were memory cards featuring a special corral for storing users' camera and caption settings; rugged, stackable card readers; and encrypted flash cards that will protect images from unauthorized access.
These products will probably please pro digital photographers. Stockholders shouldn't get too excited. In fact, they might be disappointed to hear about them at all. That's because it costs a few bucks to appease that small, professional market, and in the meantime, Lexar's been losing money on its consumer sales and seriously underdelivering for shareholders.
Its last earnings report showed just how tough it can be to play second fiddle in this industry. While larger rival SanDisk (NASDAQ:SNDK) thrives during the price war of its own making, Lexar's margins have been decimated. Gross margins came in at 3% of product sales last quarter. That's a drop of 20% from the prior-year quarter. With sales and marketing costs nearly doubling over the same period, it's no wonder the bottom line was red, with more bleeding to come.
Shareholders might see some hope in a partnership with Eastman Kodak (NYSE:EK), a firm with troubles of its own -- and that was before it made what looks like a risky move to enter the fragmented, specialized, and commoditized imaging chip market. Personally, I doubt that Kodak's dusty old brand name is as important as others seem to think, and its recent record of capitalizing on new technology is patchy at best.
The bottom line is that Lexar's problems aren't related to innovation or product quality. The business is just bad. The company's relationships with flash suppliers and resellers put it in a precarious position. Shares have recovered some ground from their late-August swoon. But SanDisk, by pushing down flash card prices and making money on higher-margin products and IP licensing, is emulating McDonald's (NYSE:MCD) founder Ray Kroc's famous, if macabre, recommendation: When your competitor is drowning, stick a hose in his mouth and turn on the water.
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Seth Jayson still prefers good old-fashioned film. At the time of publication, he had positions in SanDisk, but no other companies mentioned. View his stock holdings and Fool profile here. Fool rules are here.
