Kodak Is Revamping for a Digital World

Rohit Khare (khare@w3.org)
Mon, 2 Dec 1996 13:44:20 -0500

December 2, 1996

Kodak Is Revamping for a Digital World


OCHESTER, N.Y. -- Robert Unterberger, president of Eastman
Kodak Co.'s two-year-old
Digital and Applied Imaging Division, loves telling this

It seems his wife, Mary Ann, wanted their daughter Kathy to pick
out a sweater as a birthday gift.
But the Unterberger's live in Rochester, and Kathy lives in
Austin, Texas.

Not a problem. Mary Ann Unterberger took her Kodak digital camera
to a store and photographed
three pink sweaters. Back home, she sat at her computer and
converted 540,000 pixels of pink
wool into three electronic "postcards," which she e-mailed to
Kathy. Kathy e-mailed her mother
back, saying which sweater she liked best. Mom went back to the
store, and the sweater was
shipped that same day.

To Unterberger, that's the Kodak Moment of the '90s. So what if
hardly anyone has a digital
camera yet. Commercial photographers, advertising agencies and
other power users of photography
can use Kodak digital scanners to upload film-based prints.
Consumers, too, can use scanners,
software packages and all sorts of devices that turn snapshots
into bits and bytes, to be absorbed,
used, manipulated and sent hither and yon, just like any other

"Photographs aren't just memories anymore," Unterberger said.
"They are information."

That's a pretty radical comment from a Kodak man. This is the
company, after all, that made an art
form out of feel-good advertising that urged people to capture a
moment, unchanged, forever.

But now that computers have created endless ways to massage data,
Kodak must convince the
world that photography and photographs are still relevant -- that
Kodak can, to quote its new
advertising slogan, indeed "take pictures further."

Kodak is part of a growing cadre of companies trying to tailor
their paper-based businesses to a
world in which electrons rule. Hewlett-Packard is devising
low-cost machines that can print
photo-quality images from digitized snapshots. Xerox is pushing
digital copiers, which put images
into computer-readable language that can be transmitted to
computers, printers and other copiers.

These companies are not abandoning their old technologies. Analog
products still deliver reliable
quality at low prices, and they are likely to enjoy many years of
sales growth in Asia, Latin America
and other developing areas. Moreover, digital products are still
too new to be profitable.

So Kodak and its document-processing cohorts are traveling dual
paths. One leads to digital
products. The other leads to ways to let customers digitally
manipulate their photos and documents,
while still using their familiar analog cameras, copiers and

Kodak's theory is that the more people can do with a picture, the
more pictures they will take --
and the longer that Kodak can maintain the silver-based film and
paper business that with its profit
margins of 20 percent or more is one of the most profitable
product lines extant.

The task facing George M.C. Fisher, the chief executive who
joined Kodak from Motorola three
years ago, is to make electronics enhance, not usurp, silver
halide film. Depending on how well he
accomplishes that task, Kodak will emerge as either a star
example or a cautionary tale of what
happens when a company stops fighting new technologies, and
embraces them instead.

He has clearly made progress. Under his tutelage Kodak, once the
most insular of companies, has
formed joint ventures with competitors, computer companies and
retailers. He has peppered its
management with executives from IBM, Digital Equipment, Microsoft
and other information
companies. They, in turn, are infusing Kodak with an
electronic-age culture that revolves around
rushing to market products that customers want to buy, rather
than slowly perfecting products that
Kodak wants to make.

"We need a system where new ideas can attain escape velocity,"
Fisher said.

Wall Street seems to be in Fisher's corner. Kodak's stock was
trading in the $40s when he came. It
has steadily risen since, trading in the $70s throughout this
year. It closed Friday at $81.125, up 50

The applause is tempered, though. Analysts gripe that Fisher has
been too slow to attack swollen
inventories of everything from silver to office supplies,
overstaffing and antiquated accounts
receivables systems that continue to dog Kodak. They question why
he has not embraced digital
technologies that streamline the editing process for movies, or
that let companies transmit
photographs via satellite.

Still, complaints about what Fisher has not done are often
drowned out by applause for what he has
accomplished. "They always had good technology," said Jack L.
Kelly of Goldman, Sachs & Co.,
"but he has instilled a sense of urgency about translating it to

Indeed, in just a few years Fisher has divested Kodak of some
$7.9 billion of tangential businesses
and revamped those that remained into seven profit centers.
Recognizing that sophisticated digital
technologies were as out of place in Kodak's silver halide
research labs as the computer industry's
first word processors would have been in a typewriter factory,
Fisher consolidated all digital
research and development into Unterberger's division.

"If we had allowed digital to remain fragmented, we'd never have
attained critical mass in any
product line," Fisher said.

But, perhaps most important, Fisher has shifted Kodak's focus
outward. For the first time, scientists
and factory floor workers are listening to customers. That is no
small change: Kodak's Photo CD,
which transferred snapshots to a compact disk, bombed after its
introduction in 1992, when
consumers balked at paying around $20 each for the 24-exposure
film disk and $400 to $800 for
the photo-disk players.

Consumer focus groups, in fact, had presaged the debacle. "We
asked, but we didn't listen closely
to the answer," said David P. Biehn, president of the Consumer
Imaging business.

They are listening now. In Kodak's photo-paper plant in Harrow,
England, shop-floor workers who
used to make paper for stockpiling now call photofinishing labs,
their main customers, to see what
paper types they want, and when. Customers get quicker delivery,
while Kodak is able to reduce
inventories and free up working capital.

Through customer surveys and on-line chats that Fisher and his
executives held earlier this year on
Kodak's Web site (www.kodak.com), Kodak learned that consumers
have trouble transferring
images from a digital camera to computers. So Kodak developed new
software, which it now
provides free with its digital cameras, that makes it easier for
customers to upload and manipulate

Kodak programmers, given a task and left alone to do it, wrote
Picture Postcard, the program Mrs.
Unterberger used to e-mail the sweater images, in three months;
Unterberger guesses that in the
"old" Kodak, where management meddled in every step of product
development, it would have
taken a year.

The changes come none too soon. Numerous studies show that prime
picture-taking ages are 25 to
35; that cohort is shrinking, while the oldest baby boomers turn
50 this year. "Kodak is moving into
a demographic head wind," warned B. Alexander Henderson of
Prudential Securities Research.

Kodak is counting on products like its new Advantix camera to
appeal to a younger, more
technologically attuned clientele. The camera automatically
"senses" the lighting conditions and the
picture's scope -- panoramic, close-up or in between -- and
digitally encodes the film with that
information, enabling the processor to yield a higher quality
print. Early orders are brisk, analysts

But the Advantix faces intense competition. It is an outgrowth of
a joint development project
involving Kodak and Canon, Fuji, Minolta and Nikon. The companies
avoided a costly technology
war, like the one between Beta and VHS formats for videocassette
recorders, but each sacrificed a
chance at a market coup.

Kodak is also facing hefty competition from Fuji on the lucrative
processing-paper front. And, it
faces an uphill trek in getting photofinishing stores to install
and actively promote its do-it-yourself
machines for enlarging or cropping snapshots.

Kodak may have an even harder time juicing up its commercial
businesses. Only its $700 million
motion picture business seems unscathed for now: film makers
still use silver halide film to shoot
their movies, and distributors need lots of film to serve the
growing number of multiplexes.

But microfilm, microfiche and graphic arts paper (used in color
printing) are all under siege from
technologies that bypass film and transfer images directly into a
computer. Kodak's $1.2 billion
X-ray film business is coexisting nicely with CAT scans and other
nonfilm diagnostic tools, but the
cost-cutting mania that has swept hospitals and clinics has
pushed prices and margins down.

"Consumer imaging may be a mature cash cow, but Kodak's
commercial business is over the hill,"
said Henderson, the analyst.

Maybe so, but at least this time around Kodak is trying to
salvage its film business. And that is a sea
change from the late 1980s, when its strategy for fighting the
digital behemoth was to run from it,
and toward a series of disastrous acquisitions like the $5.1
billion purchase of Sterling Drugs.

"Kodak was the classic promiscuous conglomerate, trying to move
in too many directions," said
Nell Minow, a principal of the Lens Group, an investment
partnership that bought a chunk of
Kodak stock in the early 1990s.

Fisher, unlike his predecessor Kay Whitmore, agreed. Soon after
joining Kodak, he put Sterling up
for sale, and started a fire under digital.

Now the question is how long Fisher will stick around. He is
unlikely to stay until 2005, when he
turns 65. For now, Daniel Carp and Carl Kohrt, two longtime Kodak
executives who share the title
of assistant chief operating officer, are front-runners to
succeed him, but the floor is open for dark
horse entries.

"I'll leave when I feel the company is running well and I have a
team that can take over," Fisher said.
Which puts shareholders in the odd position of hoping that the
man they have anointed their savior
leaves soon.