Kodak's Photo Op

By Daniel Eisenberg/Rochester

Let Kodak CEO Daniel Carp focus the future of photography for you just as sharply as he can: for all the talk about the digital revolution, the rumors about the death of film--and along with it, Kodak--have been greatly exaggerated. Sure, a growing number of shutterbugs are capturing pictures on microchips instead of silver halide. But more than 90% of us, he points out, are still happily taking shots the 19th century way.

Even as more people switch to digital cameras to share and edit photos online, Carp adds, they are going to need Kodak's paper, chemicals and technical savvy to complete the picture and make great prints. And in key emerging markets like China and India, where a digital camera can cost a month's salary, film will remain king for a long time. In the U.S., single-use film cameras are flying off the shelves as never before.

"We'll be by far the leader," says Carp, a tall, hulking, 30-year Kodak veteran and an avid hoops player who took over the helm from George Fisher more than a year ago. "You trust your memories to a brand synonymous with pictures."

Yet Kodak's strategy of playing at both ends of photo technology isn't developing as planned. Last week Big Yellow, blaming a flagging film market on the nationwide economic slump, announced that its first-quarter net earnings were off almost 50% from the prior year. More troubling to Wall Street was that Kodak, citing the soft outlook, backed away from its previous forecasts for the second half of the year. "These are my picture takers that companies are laying off," Carp told analysts. Kodak is adding to the pile too. As part of its streamlining, the company will cut 3,000 or so jobs from an already depleted workforce. As Carp put it, "I think we're a bit in the eye of a storm."

When the current downturn ends, though, the $14 billion-a-year image maven faces a much more serious threat on the digital horizon. As prices for digital cameras continue to fall, consumers will abandon film in greater numbers. That means Kodak's high-margin film franchise, which brings in about a third of the company's profits, will bear the brunt of the switch. So even though Kodak has lost some market share over the past few years in a brutal price war launched by Japanese rival Fuji, it still captures a commanding 65% of a sunset business. "I don't see how Kodak can be as profitable, or have the same level of dominance, as before," says Douglas Rea, professor of digital photography and imaging at Rochester Institute of Technology. Many skittish investors agree. In the past year, Kodak stock has dropped 30%, hitting a six-year low last fall and ending last week at $43.

In this new digital arena, Kodak isn't the yellow monster. It's just one of the pack, which ranges from such tech titans as Sony and Hewlett-Packard to brash online photo start-ups like Shutterfly, Photopoint, Ofoto, Zing and Snapfish (see box). Says Eva Manolis, co-founder of Shutterfly: "We're driving our business by hope of gain rather than fear of loss."

Kodak has a lot to lose. More than 4 million digital cameras were sold in the U.S. last year, a number that is expected to nearly double in 2001 and outpace the stagnant, traditional camera market within a few years. Consumer appetite for film in the U.S. has almost peaked, at slightly more than 1 billion rolls a year. Indeed, much to the dismay of some amateur enthusiasts (including, perhaps, Paul Simon), Kodak is quietly phasing out much of its trademark Kodachrome line of film.

To make up for that potential lost revenue, Kodak has to persuade people to turn pixels into paper. This week it is rolling out a new digital camera-and-software system, dubbed EasyShare, that is intended to eliminate the hassle and confusion of uploading photos to a PC and the Internet. Meanwhile, the company is busy partnering with hardware makers like Lexmark to offer Kodak-brand printers and scanners for the home, where most digital prints are now made.

There are some clear victories. The company is providing materials, photofinishing and patented technology to many of the same online players that were supposed to destroy it only a year ago. And like Fuji, it is selling its retail partners on do-it-yourself picture kiosks and professional digital minilabs that can easily scan traditional film onto the Net and convert digital shots into hard copies.

Kodak's troubles exemplify the difficulty that any company has in handling paradigm shifts caused by technology. It has plowed billions of dollars into the digital business, which by 2005 should account for almost half its revenues. But its digital-camera division has yet to enter the black. "If you look at the hardware business alone, you'd probably never get into it," says Willy Shih, head of Kodak's Digital and Applied Imaging unit. Kodak is the worldwide leader in film cameras and has lately produced some sleek units. But in digital, Kodak trails Sony in the U.S. and blew the Christmas season because it was slow to offer the hot-selling, lower-priced, low-resolution digital models used mostly for capturing and e-mailing photos.

In the digital age, Carp believes, Kodak will make most of its profits after, not before, a picture is taken, helping customers store and print their digital images in all sorts of new ways and charging a premium for the service. That means everything: adding borders or frames, turning color into black-and-white, eliminating red eye and fashioning posters, homemade greeting cards, glossy album pages, calendars, T shirts and maybe even wallpaper.

Unlike Fuji, which views the Net as just another outlet for its retailers, Kodak is making a concerted effort to grab online photo consumers. To Kodak's eye, info imaging, as it has dubbed the digital space, remains more of an opportunity than threat, representing a vast market worth $225 billion, catering to everyone from real estate brokers to doctors who want to incorporate digital photos into their work. "Images," says Patricia Russo, a former Lucent executive who has just joined Kodak as its president, "are the most powerful form of communication."

Still, retooling Kodak won't be a snap. Consumers can be more selective with digital cameras, previewing their shots and paying for only the prints they really like. And for the moment, at least, they seem content to leave many of them as pixels. "There's a digital void right now," says Howard Lee, CEO of Photoworks, one of the leading online photo processors. "Many people are using their digital cameras but not printing much out." If that doesn't change, Kodak may soon end up like so many of its devoted customers years after a great vacation, combing through a scrapbook and longing for the good old days.