Kodak Announcement

[Scott Killian]

I hope my original post isn't taken to mean that I disagree with Kodak's decision or results in another digital vs film debate (which has been beaten to death here). As a user of film, I'm personally disapointed, but as a businessman I also understand this move and would likely do the same if I ran Kodak. They can no longer rely on film alone to satisfy shareholders and it makes no sense to invest in shrinking niche markets when the rest of the universe is moving to digital.

I've made this anology on the forum before, but people are still buying sail boats and the combustion engine has been with us for over a century. We all know that practical concerns are not driving this demand and the same is already largely true with film. Niche players will pick up this slack, just as they have in other industries. This is the discussion I was hoping to have here.

Perhaps the ideal situation would be for Kodak to license some of these classic products and sinply collect royalties. There are other industries doing this - why can't this one? I would imagine that one of the smaller players without the pressures of being a publically traded company could step up and capitalize on Kodak's (and to a lesser extent, Agfa & Ilford's) eventual disinterest in the product. In the meantime, they will continue to make these products as long as they generate strong cash flow, but we know the niche stuff is going to get whacked first, followed eventually by the consumer products. I'm just wondering if any of the niche players have approached Kodak with a succession plan of this sort?

[John Downie]

Sorry to go on, but since the announcement Kodak has shed almost $1 billion of market value. It would be nice if they would spin off the film business to fund their adventures in foolishness. The value of the division as a stand-alone company would be far more than in the Kodak corporate sieve (umbrella sounded too "safe"), and we could have an owner that optimized the film portfolio instead of the grandiose catastrophes for which Kodak has a penchant.

[John Bailey]

For those of you who have access to today's edition of the Wall Street Journal, there is a most informative article about Kodak, their future, their existing issues and the prospects for film from Kodak. This is a very interesting article and well reported without rumor or slant.

Regards,

John Bailey

[John Downie]

According to the article ALL of Kodak's operating earnings come from conventional film and photography, and digital is losing money. The strategy is to move more and more into areas that are losing money. The digital wave is inevitable, it just seems unlikely that Kodak can catch it.

[Bill_1856]

I suggest that the company (and the world) would be better off if Kodak's executives would only follow George Eastman's example. Smith & Wesson .32, as I recall.

[Bruce Watson]

Scott, you can ask for Tri-X in readyloads. I did. All the way up the chain of command to that poor dumb accountant Carp. Out of fifteen letters, I got one reply, and it wasn't from their "cosumer advocate" either.

It's a good thing that when they buried George Eastman, they installed the body into magnetic air bearings. At the rate he's spinning, normal roller bearings would have long since worn out.

[John Downie]

The bloodbath results:

Downgrade on the debt to BBB-, one tick above junk.

Losses on the equity approaching $1.5 billion, or one fifth of the company's value.

One hopes the management re-examines its plans before instituting them, given this thumbs down from the market. A terrifying piece of the film strategy - focus on market share as opposed to price. This appears to be the digital strategy - sell below cost but make it up on volume. Oh well, should mean some cheap film while it lasts.

[John Bailey]

Dear John

Forecasts for film indicate a decline, according to the article in the Wall Street Journal, from $9.5 billion to $6.5 billion before 2006. How much film, paper and chemical product are you willing to commit to buy to compensate for the loss of revenue? While LF incrementally might be profitable, overhead absorption is generally spread over divisions, product lines and an array of products. When volume declines, the buying power to purchase raw chemicals, gelatin and the like will diminish if not spread over a greater number of units manufactured.

Prosaic wishes and blaming management without specific knowledge will only go so far. The truth lies in the fact that digital photography exists! The invention of an alternative technology does not mean that film is irrelevant, but it does pressure existing companies to find ways to make a profit. I personally do not believe that Kodak has looked at professional/prosumer/amatuer photography and their needs and decided blithely to ignore them. However, the market is speaking and saying they do not want to buy as much film today as was purchased five, ten or fifteen years ago. The fact is that less film is being sold to this catagory of user in 35mm, 120 and LF sizes. Yes, maybe this is becoming a niche business, but for the reality of the present film is not where buyers are looking. The salary of the reps and the guys on the loading dock are spread over lots of boxes of film sold.

The decision to reduce the dividend according to reports was not easy. The last couple years they paid out all or more than all of their earnings. This reduction may allow for acquisitions. And there in lies another issue-should they buy another analog photographic company-Polaroid? Linhof? Schneider? Sinar? Heliopan? Who would have thought that earlier this year Hasselblad would sell to a Hong Kong based investment group! Or are the funds and yields better from another purchase. Maybe Kodak did not buy wisely when they acquired Sterling, but then again chemicals and drug manufacturing are allied industries. Maybe printers is not the optimum direction, but it has a positive growth forecast for printer demand as opposed to the 7% annual decline in film usage.

When was the last time most of us used a slide projector and carousel? We associate that with the past or a time our fathers showed family photos. Today, we all want to PowerPoint, email and post to the Internet. Some company or a group of individuals will buy that division or make similar products hopefully, but the R&D will vanish and the wide variety of products will come down to a few selections. In another thread, Michael Smith had a low production run of lens boards made for a Kodak Master View camera he uses. Large scale production went away and Michael seems to be offering a superior product with modern materials-but what volume can he sell to offset costs? Even if every owner of a Master View bought one, what are the number left? Maybe the same will be true for film, maybe not. Yes, a lower volume, boutique approach to film production might be viable, but could that company also afford to make developing chemicals and photographic paper as well? What happens when their demand drops by 7% annually?

Right direction or wrong direction, Kodak is attempting to do something to remain successful for their shareholders, employees and customers. Hindsight would have said that in 1985 or 1990 or 1995 they should have seen the writing on the wall that digital was gutting one of their core businesses. Did you have the vision to see what was happening? Now that it is happening, will you support the future by buying more traditional photographic products whether they be Kodak or Fuji or Ilford? Finally, if you believe that especially LF is a profitable business, will you put together the business plan and find the dollars to buy the LF portion of Kodak's film business or do you expect others to do so? I am not trying to indicate that it is your or my responsibility to save Kodak or film, but those are the questions on the table for you, me or some corporation if they are looking at the marketplace.

Regards,

John Bailey

[Tim Klein]

For those of you who don't have access to the WSJ site, there was some interesting information that doesn't make things sound quite as glum for film users as the CNN article does.

It doesn't appear to me from the Journal piece that Kodak plans to "dump" their film business. They just don't plan to make any significant long-term investments in film. The article contrasts this decision to the APS strategy Kodak advanced in 1996.

It goes on to say that Kodak intends to hold onto as much of its film franchise as it can and even plans to potentially cut prices to capture market share. There is also mention of making private-label films to help expand markets abroad.

Does anyone really blame Rochester for not investing a bunch of money in advancing a technology that is obviously shrinking in demand? Is there really a lot of advancment possible and/or needed in the film we use?

I suppose it's possible we'll lose some of the smaller niche products, but it sounds to me like Kodak desperately wants to hold onto the business they have (especially until they can start earning money on the huge investments they plan to make to compete in the digital arena). As long as quality doesn't take a hit, I tend to think we'll be OK for quite a while.

[John Downie]

A few points.

First - I have nothing personal against Kodak's managers.

Kodak's projected film revenues are not exogenous - they reflect the decision to harvest the business. It would be interesting to know what Fuji Film's film revenue projections are.

We should not confuse revenues with cash flow. Entering a highly competitive market with a 7% annual revenue growth number, for an also-ran product will generate less (probably negative) cash flow than a shrinking but highly profitable market where the company has valuable comparative advantages. There are a few capital markets conundra in the latter strategy, ie. how does one manage the capital structure of what is, in essence, a wasting asset, but it would not be too difficult to do better than today's massacre.

Kodak, IMHO, should keep with film standalone or divest the division. I am guessing the market capitalization of a stand-alone film division would exceed the total value of Kodak, because of the remarkable ability of management, time after time, to make money-losing, negative NPV investments. They are destroying the market value of the film division by grafting on ill-conceived products and acquisitions. If Kodak buys another company, the price paid will reflect the value in the optimal corporate portfolio. If Kodak falls short of this optimal management of the asset, then they will have destroyed shareholder value by making the acquisition.

The key problem is that it is hard to get managers to pursue a strategy that eschews growth and focuses on the prudent management of a wasting asset. It is much like a gold mine - the ore will run out eventually, but technology can improve yield, and adding on essentially unrelated investments will not enchance the value of the gold mine.