The business section of the Los Angeles Times had its take on the Kodak announcement today, and suggested that one of Kodak's goal was to increase its market share of film and would do so by lowering prices.
The business section of the Los Angeles Times had its take on the Kodak announcement today, and suggested that one of Kodak's goal was to increase its market share of film and would do so by lowering prices.
John D., I agree with many of your points. I too believe that Kodak's management, in the recent past, and currently as well, has given ample evidence of being rudderless in these tumultuous, changing times in the photographic industry. Their forays into areas outside of their core business have been disastrous for the company and its shareholders. I am in complete agreement with you on this issue.
However, here, in a nutshell is where I think we are in disagreement. I infer from your posts (correct me if I am wrong) that you believe that Kodak should not pursue digital technology at all? In fact, you state "[Kodak has to]...be realistic about their place in the world. Which is, I believe, a large, lean, conventional film producing firm generating very nice margins." Nothing else? No pursuit of digital technology at all? Just film?
A couple of questions: Do you deny that the film market is in decline, and that digital photo technology is on the ascent? Twenty years out, where do you believe the film and digital markets will be, relative to each other?
I suppose that Kodak could eschew digital technology altogether and focus totally on film. But if they do, twenty years from now they will become a quaint little film company, generating nice margins, competing with Bergger and J & C, and employing about 100 people. (And de-listed by the NYSE.)
Moreover, I stand by my ascertion that most new technology is unprofitable in its early stages. Just because Kodak's digital business is unprofitable today is no prima facie evidence that it will not be profitable tomorrow. Kodak may screw this up as well; neither of us has the answer to that question. But I contend the current malaise at Kodak is not due to its decision to put a larger emphasis on the digital segment of the photographic industry.
To deny that the digital market is a growth industry, and that the film market is a mature, shrinking industry is to argue that 2 + 2 = 5. To survive as a viable, growing company into the future Kodak must pursue digital technology (this is not, by the way, limited to inkjet printers). Hopefully, they will pursue digital advances and bring the film segment along with it, much as Fuji is doing today.
I plan on loading film into my Wisner until the day I die; hopefully, some of it will come out of those bright, yellow boxes. But, if not, well, I'll get it from someone else. Anybody seen my buggy whip?
Cordially,
Hello Jeff,
I think you and I agree on the basic facts - digital is growing and film is declining, though quite slowly overall, given growth in lesser-developed markets. The question is "Can Kodak make money in non-film markets?"
The antics of Kodak are nothing new - when Kay Whitmore announced his retirement in 1990 the stock increased by over $900 million, without an announced successor. That is how bad it was.
The shrink-and-be-profitable strategy is exactly what I am advocating. The value will decline through time, though increase dramatically, initially, without the albatross of the impending digital error. This is in contradistinction to the 25% instantaneous loss stemming from the announced digital strategy. The stock has to go up by 33% just to get back to zero! Kodak will lose money in the growing but incredibly competitive printer (and other digital) markets. They will get creamed and decline at a much more rapid rate than the overall change in the conventional film market.
Entering markets that have overall growth is no guarantee of profitability. Wal Mart became America's most valuable corporation in the same market that put K-Mart into bankruptcy. One has to generate cash at a rate that justifies the investment, not just enter "growth" markets. The management of Kodak should scuttle the current plan, focus on film, and pay out the free cash flows to investors, so that they may invest them in enterprises with some real opportunity to generate inframarginal returns, or at least return the cost of capital. Kodak will turn bread into rocks and destroy shareholder value.
How can you justify the current strategy - one that has wiped out 25% of shareholder's equity?
Would you put your own cash into Kodak?
John, I disagree with every sentence in the third paragraph of your previous post (excepting the mathematical fact about the climb back to the previous stock price). You cannot state with absolute certainty that the 25% stock price drop is solely, or even partially, attributable to Kodak's digital strategy. I contend that the immediate plunge is attributable to the announcement regarding the dividend.
Kodak is currently being run by a bunch of blockheads; you'll get no argument from me. I just don't agree with your "nothing but film" strategy.
I wish there was a way to conduct the following hypothetical experiment: Monday morning, acting on your strategy, Kodak's management team announces they are abandoning all digital technology, and will become strictly a film company. Yesterday's 25% decline in the stock price would be miniscule in comparison to the freefall that would follow such an announcement.
To answer your final question: No way!
This has been fun, but I gotta go. Take care.
Dear John & Jeff
What we may have is our own Rashimon about Kodak. We see it differently, but each of us has some truth and some misunderstanding.
Kodak does lots of things wonderfully and probably too many things poorly. Corporate cultures are difficult beasts to turn around and change. This is only further compounded when a core business comes under such sweeping change from their customers.
It might have been one thing if only the professional/prosumer/advance amatuer market who pushed for film changes and improvements and quality had defected to digital. Instead at the very same time this top level group of users began to leave, the bread and butter customers who picked up a roll or two of film at Walgreens or the local photo store also began to change their purchasing patterns.
When I first bought an early digital camera around 10 years ago, the quality of images was terrible and my printer was not helping the situation. At that time I was convinced it was a gimmick. Then the computer magazines began talking about the amazing new camera from Kodak and I saw one at Calumet during a Kodak road show. I was convinced if I could only scrape together some $28,000 or so, I would be buying a camera for the future. No way was a company going to invent or produce an affordable digital model that I could really afford, let alone affordable, easy to use digital cameras for my parents or friends.
Today most anybody and everybody seems to want a digital camera. I would love to think my nephews would want one of my film cameras to learn how to take photos. They have all bought digital so they can immediately share pictures with their friends on the Internet.
Then there is the whole printing thing. Again, I never imagined a printer on my desk that could produce 'photo quality' images. As I write this, an ad on TV touts Dell's bundling digital cameras and printers along with their computers. From what I have read, the computer makers like HP, Dell and Gateway are expanding their product offering especially in photo products to offset their lower demand and pricing on computers. This is another industry going after the Kodak core.
On one hand, Kodak has to justify strategies to its shareholders. However remember that often the price of stock relates to yield of dividends as much as other factors. Reducing the dividend will cause the price to lessen to find balance. Had they not changed the dividend, perhaps there would not have been the same decline. As I recall, they had been paying out all or more that all of earnings as payments to shareholders instead of conserving cash for purchases or investment in existing lines.
Maybe they should go into printers, maybe they should buy some other company in some other industry. Unfortunately, I do not think film this time will pull them out of the problems.
Regards,
John Bailey
Jeff,
It seems you are taking this personally - I have no idea why. Nice to bail with a logic-free final statement.
I cannot state with absolute certainty that the 25% decline in Kodak's market value, plus the reduction of the company's debt rating to one tick above junk was caused by the new strategy. It would be rather an odd coincidence, no? The reduction in dividend was to generate the cash necessary to fund the new strategy - the internal investment and $2 billion in acquisitions required by the new path. It was not a random event. Perhaps you are unaware that Kodak INCREASED its dividend just 20 months ago.
Please Jeff, give one iota of evidence that Kodak can make significant money in digital. They have crapped out on every other new major consumer venture, they have no technological advantage, no manufacturing advantage, no cost advantage, they are entering what is now a mature market against several well-funded, entrenched, and technologically-superior incumbents. Please give some evidence that this can generate positive returns for a laggard like Kodak. Please refute the market reaction with a sound argument.
Your second-to-final line answers all of the questions, I suspect.
J
No, no, no. I am not taking this personally; this is great fun, really.
I wouldn't invest in Kodak stock because I don't believe that with their current management they can execute the necessary strategy to succeed, whether they pursue your line of thinking or mine.
I just disagree with the "nothing but film" strategy. And I do contend that if the company announced such a strategy on CNBC Monday morning the stock would freefall to much lower levels.
We'll just have to agree to disagree. Nothing personal.
That's cool.
I would be interested in evidence, that's all. Keep in mind that ALL of Kodak's operating profits are generated by conventional film-based technology, according to the WSJ. Digital loses money. What is the corporate finance theory that supports the contention that adding other businesses will improve the outlook for Kodak? I am not saying that it will be good in the film-only world, just not as bad as film plus money-losing digital investment world.
I do not think film this time will pull them out of the problems.
I think perhaps it might with the correct planning. You guys are focusing in the US market, and your reasons are very good both pro and con, but south of the US border and in many more developing countries film is alive and well.
Loosing 25% of its value in two days is a message from institutional investors that for one, the stock is not making money for them any more (lets face it, if you have 1 million shares and you loose the dividends, that is a hefty chunk of money), second that they disagree with the new strategy. In essence they think Kodak is throwing good money after bad judging from their performance in the digital area, after all their digital division is sucking money out of the company faster than a teenager at the mall with a platinum credit card.
Consumer digital cameras in many countries are still the new toy and are mainly for the upper middle class, since they are the only ones who can afford them and the peripherials. This of course is the minority of the people. If Kodak took the time to develop these markets the profit potential is enormous. WIth these profits they can have some breathing room to create a sound strategy to enter the digital arena. I thought this is what they were doing some years back, but apparently is not, they have let the world market slip out of their hands and have been unable to create a profitable entrance into the digital field.
What Kodak does not seem to realize is that the fundamental bussiness of consumer photography has shifted. Digital cameras are no longer "cameras" but computer peripherials. The kid selling them at Circuit City, Comp USA knows far more about them, knows what are the best accesories and printers and can sell them much better than any clerk at a Camera store. The old maxim "you press the button we do the rest" no longer holds, now a days people press the button and do everything without even thinking about Kodak.
If I was running Kodak I would forget about trying to astound the developed world with then "new" I gig sensor camera or the ultra super duper printer. Other companies are better suited and have much greater advantage than them in these areas. I would look at developing countries as the cash cow and would make research into creating a cheap digital camera that came with a method of outputting photos on paper and would try to do what they did many years ago, when they brought photography to the rest of the world. The first company that manages to bring affordable digital methods to those countries with lower purchasing power, will be the next giant in imaging. Mark my words...
Jorge -- that's beautiful, brilliant - a digital picture spitter -- polaroid should do that. -- I want it to make phone calls, fax, gps, Flashlight, and car door key. Wait -- it's coming. Ultimately the paper will not be necessary -- because we will have displays for information built into the walls, windows and appliances of our houses. Parts of the world with "low purchasing power" are increasing their technical expertise - Many of the jobs now in the high tech industry are in India -- one of those places I would have associated with low purchasing power. Before long it won't be a question of cheap v. good, we, and they, should expect both.
I am not really an advocate of digital over film -- although it may sound that way. I am just trying to identify the truth lying ahead. Utimately, human vision is the lowest resolution device in the system, which explains why we need all these optics. And why digital images are exceptable.
Within ten years or so -- most people in the developed world will be able to shoot and print extremely high quality (possible much better than anything today's film can do) images without film, on their desktop at home, on the phone, in their car - without even a great cost. They will be able to phone them home -- and won't even need the storage in the camera. The number of people willing to tolerate the "hassle" of film will be incredibly small. Storage and data processing technology is increasing at a good pace despite the "lull" in the computer hardware industry. Within a reasonable period of time the entire consumer film market will be absolutely and completely gone.
Even in strongholds of film like the motion picture industry - there are now entire digital films shot with cameras. The consumer market already think that the images are good -- and they like the idea that a digital camera fits into their shirt pocket and can take a bunch of pictures. The image quality is bound to get better.
Every one I know has or asked me if/when I am going to buy a digital camera, shown me theirs -- or given me their polaroid. The answer is -- "When the digital cameras are better than film." Better -- of course -- is highly subjective, and for me has little to do with image quality. A digital back for my 4x5 will probably never really drop in price much -- and I like to take pictures to get away from my computer, not bring it along too. Before long the quality of images produced by consumer digital products will increase - and soon enough my 4x5 will be really obsolete (like it was - in say - 1960).
Kodak must be able to see the writing on the wall -- film enthusiasts won't -- the stockholders probably don't, and the market just continues to be fickle and buy what's in vogue, what's new, the latest gadget, because it doesn't care.
If Kodak doesn't adapt quickly, they'll be buried in film. They need to make annoucements like this - so that the rest of the world will start to prepare for the inevitable reality of not so much film.
What I think is possibly really great about this is that film (as painting was when the camera was invented) will be liberated from the responsibilty of documenting the world.
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