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.