Bumbling the future: a tale of two companies
Disclaimer: I have no financial interest of any kind in Eastman Kodak, either long or short, and no plans to take any position in the company - ever. I have never held any shares of EK so what follows isn't sour grapes. I am not an insider and have no inside information.
Latest update: January 19, 2012: It's over - Kodak declares bankruptcy.
Back in 1988 Douglas K. Smith wrote a great book called Fumbling the Future: How Xerox Invented, then ignored the First Personal Computer. He went into fascinating and gory detail of the fumbling and bumbling that went on in Xerox management that led to one disastrous blunder after another.
What does this have to do with Kodak? The parallels are striking. Both companies are based in Rochester, NY (Xerox subsequently moved their headquarters to Connecticut but maintains its base of operations in Rochester). Both companies were started by men of genius with a unique product and boundless drive. Both companies grew like mad on the success of their products and innovation.
And both companies subsequently lost their way. Xerox invented the world's first viable personal computer and Kodak invented the first digital camera. Both companies failed to realize the significance of that. And just as the PC demolished Xerox's highly profitable core business of photocopiers, the digital camera killed Kodak's main profit center of photographic film.
Both companies went through a series of strategic blunders. I'll leave Xerox now with the suggestion that you read Smith's book and concentrate on Kodak. As this posting has expanded since I originally wrote it in September 2011, I've added some items that provide historical context and aren't necessarily disasters in and of themselves, though there's certainly still plenty of those to go around.
A timeline of shame
|World's 1st digital camera|
|Kodak instant film camera|
Kodak was obligated to stop making that product and never returned. The irony is that Kodak instant prints were far superior to anything Polaroid had. The further irony is that Polaroid then completely squandered their windfall and ended up going bankrupt in 2008.
|Kodak Ektaprint 150 copier|
In 1982, Kodak employment hit 60,000 in Rochester alone. It is Kodak's heyday. It's the largest employer by far in the Rochester region. Local stores run full page ads targeting Kodak employees to spend their bonuses with them. They're particularly popular with car dealers. Times are good.
|Kodak 4000 disc camera and film|
1983: Colby Chandler takes over as CEO from Walter Fallon.
|Kodak 8 mm video cassette deck|
|They didn't keep going|
They spun off a company, Ultra Technologies in Newark, NY to handle the job. But by 1991, Kodak sold off its interests in Ultra which then renamed itself Ultralife and is still making batteries today.
1987: Kodak invents the OLED (organic LED) - and proceeds to ignore that too for 20 years.
1990: In a gorgeous coffee table book titled The Story of Kodak, author Douglas Collins proclaims, "film remains and will continue to remain the preferred medium for picture taking." New hires in the Kodak Research Labs get a free copy of this book as a welcome gift.
The DCS series continued in production until 2005.
1992: In another bid to "go digital", Kodak introduced the Photo CD (originally announced in 1990). This was a CD that could hold up to 25 images at resolutions of up to 6144 x 4096 in a proprietary format. The Photo CD was accompanied by a range of products for scanning photos to CD and consumer Photo CD players designed to play back images on TV sets, with the slogan "Now View Photographs On Your TV".
While initially fairly popular with consumers, Photo CD suffered from a number of technical problems and more marketing miscues. The quickly growing size of hard drives along with the increasing popularity of jpeg eventually led to the demise of Photo CD. By 2004, processing labs were giving away the scanners for free to anyone would would haul them off.
|Short answer: no|
1994: Kodak spins off its chemical division into a new company called Eastman Chemical. This one move was probably the worst decision Kodak ever made. Kodak's fate was sealed from this moment on. Eastman Chemical opened in 1994 at 21.12. It most recently closed at 38.19. Kodak opened 1994 at 44.19 and now trades just above one dollar.
Kodak also sold its holdings in drug maker Sterling Winthrop to Sanofi Aventis. And Kodak also sold its rights to Bayer aspirin and the Bayer name and trademarks to SmithKline Beehcman for $2.9 billion. 1994 was a big year for Kodak. They also sold their cllinical diagnotics unit to Johnson & Johnson for yet another billion dollars. Where did all this cash go? Read on.
Also in 1994: Apple introduces the world's first consumer digital camera, the Quick Take 100. Ironically, it is actually made by Kodak. This camera wasn't a big hit for Apple, mostly because people didn't associate them with photography back then.
Also in 1994, Fisher says "Our copy products business is not for sale, and we have no plans to sell it." Three years later, I guess the plans changed. The whole thing went to Danka..
In 1995, a year after the Quick Take 100 Kodak finally got into the consumer digital camera business for itself with their first offering, the DC-40, which was essntially the same camera as the Apple QT-100. While it was well-made, full-featured and took great photos (for that era), with a hefty price tag of $995 back when that was a lot of money, this was still not exactly a mass market item.
1996: A year after the DC-40, they came out with the DC-20, a horrible cheaply made product that took absolutely awful pictures, even by 1996 standards. At $350 back then, the DC-20 was not a hit. They cut the price of the DC-40 by two thirds and cut the image quality by a factor of 10. Digital was always the poor stepchild at Kodak - mostly because it wasn't film. By the time they finally got serious, the market had moved on again.
Today, digital cameras are losing ground to the ubiquitous camera-equipped cell phones. One has to wonder what they were thinking, replacing a high profit low-competition item like film with a low-profit product like digital in an industry with cut-throat competition.
|Kodak Advantix APS film|
Technically well-executed, feature-laden, and visually appealing, APS nonetheless was unable to stem the digital tsunami. Advantix film production ceased in 2011.
|EK monthly, 1997-2002|
Also in 1997, Kodak finally threw in the towel on copiers, selling its entire Office Imaging business to Danka Business Systems.
In 1998, Kodak opened a plant in Ireland to mass produce writeable CD's, just before CD's became a commodity item. The world was awash with CD's (remember getting one in the mail from AOL once a week?) Then hard disk drive storage capacities exploded, first through multimegabytes, then gigabytes, and now terabytes, obviating the need for CD's entirely. In 2001 Kodak exited the CD production business. Also in 1998, Kodak shut down their disc film line.
In 1999, Kodak continues cutting its way to success by selling its digital printer and copier division to Heidelberger Druckmaschinen AG.
|Would you buy a used camera from this man?|
"Dan Carp had better watch out. As chief executive of Eastman Kodak Co. since Jan 1., he has already run into deep trouble, even before finishing his first year on the job. Now, he faces the prospect of joining the list of Kodak executives who have bungled the company's transition from traditional film to the digital world"
In 2001, Kodak acquired online photo sharing business Ofoto and renamed it Kodak EasyShare Gallery. Subsequently renamed again simply Kodak Gallery in 2005, they managed to run this into the ground too, announcing in late 2011 they were trying to unload it.
Talk of a business they never should have entered. This is a low profit, low barrier-to-entry operation, the exact opposite to what Kodak does best. Anyone with a PC and a big hard drive can start a photo sharing service. Another what were they thinking moment.
|Revolving Door Russo|
Acoording to a 2003 article in Businessweek, "Russo likes to recite Winston Churchill's famous quote: 'Never, never, never give up.'" Except for Kodak, I guess. There's a funny story about Kodak and Russo contributed by a reader, but you'll have to buy the upcoming book to find out.
In 2002, Kodak announced that they were cutting their dividend to pay for a strategy concentrating on growth in digital. Also in 2002, Kodak moved the production of disposable "single use" cameras to China and Mexico. Another 500 Rochester workers are now jobless. 23,000 now remain.
In 2004, With its stock now in the mid-20's, Kodak was kicked out of the Dow. Also in 2004, Kodak sold its Government Systems group to ITT.
|"This company will be booming!"|
- "by 2007 this will be a $60 stock.'', Ulysses S. Yannas, a broker at Buckman, Buckman & Reid. I'll bet he regrets that now. (By 2007 it was a $25 stock).
- ''By 2008, Kodak will be the digital company I came here to run'', Perez to investors meeting, Sept. 28, 2005. I think he forgot to add "into the ground".
|Bldg. 69 going up in smoke, 2007.|
Also in 2007, Kodak resigned its membership in the Better Business Bureau, before it was about to be kicked out.
Also in 2007, Kodak sold off its health care imaging group to Onex, a Canadian company. Digital radiography was arguably the one business they had with growth potential, where they had a decent presence. So they dumped it. What were they thinking? Now called Carestream Health, they're doing quite well. I guess the need for cash is already showing.
2008: Kodak stock opens at $21.81. It closes the year at $6.58. This is the company Perez said he "came here to run" in 2005? By golly he really did mean "into the ground".
Also in 2008, Kodak finally remembers they invented the OLED 20 years earlier and makes a half-hearted effort to productize it with a 7.6" OLED digital picture frame - for a whopping $999. It was not a big seller.
|R.I.P. Kodachrome, 2009|
Also in 2009, Kodak announces it will stop making Kodachrome film, arguably the most popular and successful film in history.
Also in 2009, Kodak sold its OLED business to LG.
January, 2010, David Cok, Senior Research Associate, Kodak CTO, Imaging Science Lab director, bailed out after 28 years in the Research Labs (not to retire either).
On December 17, 2010, Kodak was kicked out of the S&P 500. Stock price now around 5 bucks.
2011: Kodak is no longer Rochester's largest employer. It's not even its second largest. Or third. With less than 7,000 employees remaining, it ranks behind the University of Rochester, Xerox Corp. and a local supermarket chain.
On February 23, 2011, President Obama appoints CEO Antonio Perez to his Council on Jobs and Competitiveness, for reasons that are still unclear but do make me wonder about his judgement. Obama obviously does not read the Night Owl. Or perhaps Perez was appointed as an example of what not to do, since he has clearly demonstrated he knows nothing about either competitiveness or jobs. Destroying yes, creating no..
March 31, 2011: Kodak sold 850 patents to Omnivision Technologies for $65 million. That works out to $76,471 per patent.
April 5, 2011: Kodak sold parts of its microfilm products and equipment business, along with its data conversion services business to a company called Eastman Park Micrographics as part of its strategy (if you can call slowly bleeding yourself to death a strategy) "to fund the completion of its transformation to a digital company."
|EK monthly, 2007-2011|
In July 2011, Kodak announced that it was shopping its patent portfolio around to create a "digital profitable and sustainable company by 2012." (see the 2000 announcement above). They are bandying about numbers like one or two billion dollars for 1,100 patents. But recall that they only got $76K per patent for a sale of 850 patents earlier this year. Assuming the same rate of return, the whole portfolio is worth only $84 million. Even if this estimate is low by an order of magnitude, they're still under a billion.
Also in July, Perez tells analysts in connection with inkjet printers,
“You will see that that business is going to be a gorgeous business for this company,”Is he serious? By now inkjet printers are a commodity item. They come as prizes in Crackerjack boxes. The ink is more expensive than the printers. And now laser printers, which are far superior to inkjet in every respect, are in the same price range as high-end inkjets. And as far as photo printing goes, fewer images are being printed at all in favor of viewing on smart phones. A gorgeous business? I think Perez is giving Kodak the business.
On August 1, 2011, in a further sign of just how deeply their management is in denial, Kodak put in the poison pill to prevent a takeover, arguably the one thing left that could possibly still save this train wreck of a company.
|EK daily, Sept. 1-23, 2011|
In August, 2011, Jiebo Luo, a young 15 year veteran Principal Senior Research Scientist and high-ranking member of the Inner Circle of Kodak's Imaging Science Laboratory in the legendary Kodak Research Labs in Rochester quit the company to take on a position as an Associate Professor at the University of Rochester.
Now why would such a highly placed individual, who can basically write his own ticket, bail after 15 years? Suddenly decided he wanted to teach? Mmm hmm - could be... (not).
Kodak currently lists all of 15 jobs openings in Rochester. One is for an intern, 5 are for financial auditors, and none are in the research labs. 10 years earlier, there were hundreds of jobs listed at any given time.
On September 23, 2011, Kodak withdrew $160 million from its revolving line of credit.
|Too late for Fisher|
September 26, 2011: Thomas Berarducci publishes an ebook called What Not to Do in Business. Amazingly, he got George Fisher to give this testimonial: "A great collection of lessons from the trenches rather than from the ivory tower." I guess if you want an expert on what not to do in business, George is your man.
The wrong stuff, too little, too late
|From despair.com, the Kodak memorial poster.|
And it would be one thing if it was just denial, but denial coupled with arrogance is guaranteed fatal. For example, Dan Carp, then CEO, stood up in Kodak Theatre (a vast private auditorium in the Kodak Park complex) at a Research Division meeting one cold winter day in the early 2000's and announced that things weren't looking so hot. But the problem, he went on wasn't management's plan, it was the failure of the workers to execute the plan. That one statement speaks volumes and sums up Kodak's problems in a nutshell.
Clearly, this company is not long for this world, no matter what its delusional CEO has to say on the matter. It's really sad to see another great American icon go out in such a pathetic manner, and infuriating because it didn't have to end this way. Poor George Eastman must be just spinning in his grave. Bye bye, Eastman Kodak, it was fun while it lasted.
Updates since the original post
|EK, Sept. 2011|
"Kodak's long-term performance is simply unacceptable, and as such it has not earned the right to remain an independent company. Kodak's management has been given more than enough time and still has been unsuccessful in unlocking value for stockholders or bondholders."Big uh oh. (See the full story in the local Rochester paper here) And I'd say Gregg was being highly diplomatic there.
And finally, in a possible coup de grace this afternoon, EK crashed again, this time trading as low as 54 cents, after both Bloomberg and the WSJ reported that the company was considering filing for bankruptcy. It then recovered, if you can call it that, to close at 80 cents. Yikes. Get the trumpet out, it's almost time to play Taps. Very very sad.
October 5, 2011: Just when it seemed like there wass really nothing else left to sell, Kodak sold its silver business, arguably the heart of the entire company, to an outfit called Rochester Silver Works. Contrary to rumors, Antonio Perez's office desk is not for sale. Yet.
October 12, 2011: Collins Ink Corp., which apparently made the ink used in Kodak's inkjet printers (I thought they made their own ink), cancels their contract with Kodak, citing "Kodak's financial condition".
October 13, 2011: Kodak makes the NYSE's "Threshold securities" list for the 6th consecutive day, reflecting its astonishing 27% short float.
October 14, 2011: In a dose of its own medicine, Kodak gets sued by Fuijfilm over digital camera patents. Sow the wind, reap the whirlwind.
October 20, 2011: Kodak sues Collins Ink (see Oct. 12 above). Apparently, Kodak's main product is now lawsuits. Also, it comes out that Kodak apparently has yet to pay Collins for $2.5 million worth of ink.
October 21, 2011: According to the WSJ, a group of Kodak bondholders have hired a lawyer of their own to "protect their interests". Also Kodak hires restructuring consulting firm FTI Consulting Global. And according to Debtwire, Kodak is meeting with Cerberus and Silverpoint Capital Management. Kodak short float is now 29.29%.
Also, the ITC kicks the can down the road again on its long awaited Apple/RIM patent decision. Supposedly, it's going to be November now, or maybe the "end of the year". Not quite sure which year though.
October 24, 2011: Kodak kicked off the S&P Midcap 400. Kindred Healthcare also had the honor of getting the boot today but while they were "promoted" to the Smallcap 600, Kodak was not.
October 25, 2011: Kodak and Collins Ink kiss and make up, resuming their ink arrangement - for an entire week. The whole deal apparently expires at the end of the year anyway, making one wonder just what all this odd posturing was about in the first place.
November 3, 2011: Kodak reports some stunningly bad Q3 numbers with a loss of 83 cents per share versus estimates of 44 cents. In an SEC filing, they state "The Company's ability to continue its operations ... is dependent upon the ability to monetize its digital imaging patent portfolio through a sale or licensing of the relevant patents and/or the successful execution of the alternative actions, which could include the issuance of additional debt, listed above," This sort of announcement does not exactly give one the warm fuzzies.
Antonio Perez concludes his presentation with "I kept saying that by the end of 2012, we're going to get to this self-standing digital company.". Oh puhleeze. EK stock closes at 1.12. (Transcript excerpt from Seeking Alpha, full transcript can be found here.)
November 7, 2011: Kodak sells its Image Sensors Solutions to Platinum Equity for the proverbial "undisclosed amount of cash". This must mean they got a bad deal. Frankly, I was surprised to learn there was anything left over there to sell besides their much talked about patent portfolio.. It's ironic that this is the group that was responsible for the development of the digital camera, the invention that led Kodak to its doom. In addition to the mystery cash settlement, Platinum picks up the high rise research building 81 in Rochester's Kodak Park along with 200 Kodak employees, about 3% of the remaining Kodak workers in Rochester.
Also today, Moody's publishes a note to the effect that Kodak will run out of cash "by 2012" (meaning in less than 60 days) unless they get a "major infusion" of new financing. Much is still being made about their patent portfolio. See the entry for July 2011 above for an analysis of just how much they might really be worth.
November 10, 2011: Legg Mason calls it quits, announcing it dumped the last of its Kodak holdings, 7.9 million shares last month. They started accumulating shares in 2000 when the stock was at 60. It closed today at 1.14. Ouch!
November 15, 2011: A large Kodak shareholder, Investment Partners Asset Management asks Kodak to ditch the poison pill (see item from August 1, 2011 above) stating "The poison pill should be removed immediately so that the market can determine the value of the company as an independent entity or as a potential acquisition target," IPAM also wants it put to a vote at the next Annual Meeting. Kodak had no comment. Should be an interesting meeting next May.
November 16, 2011: Kodak announces that they are selling Kodak Gallery, their online photo storage, sharing and printing business. A buyer has yet to be found.
November 25, 2011: Kodak ceases production of its Advantix APS film. Since Fuji has also bailed on APS, your APS camera is now a museum piece. Story here: http://www.msnbc.msn.com/id/45439596/ns/local_news-rochester_ny/t/what-happened-kodaks-advantix-photo-system/
|Kodak HQ ghost town|
December 6, 2011: Kodak dumps restructuring advisers Jones Day for the firm of Sullivan & Cromwell. This move at least hints at the prospect that Kodak may be pursuing an alternative to bankruptcy, most likely a takeover I'm guessing. By way of "explanation" Kodak announced "we don't itemize the work any of our advisers do for us."
December 14, 2011: Perez wins the dubious honor of a spot on CNBC's "Worst CEO of 2011" awards, taking home the number 4 position. Story here. Kodak closed today at 82 cents.
December 19, 2011: Well, I guess when it rains it pours Today the WSJ reported that Kodak is having problems selling its vaunted patent portfolio. TAnd that's affecting its ability to raise cash. According to the report, Kodak "could seek bankruptcy protection during the first few months of next year".
And to add insult to injury, Kyocera is suing Kodak over an inkjet printer patent. At this point, my guess is that Kodak isn't going to be able to sell their patents at all. Why should anyone buy them? It would be more cost effective to just infringe and figure that Kodak is going to be too weak to do anything about it, asssuming they're even going to be around much longer at all. Right now EK is trading at 71 cents. Next stop - the pink sheets.
December 20, 2011: Delivering the can another powerful kick, today the ITC announces that, surprise - they're going to delay their ruling on Kodak's Apple/Rim patent dispute, previously expected right about now, until September 2012 (see previous timeline item for 10/21/11).
According to a story in the local Rochester, NY newspaper here, Kodak said it was "pleased to receive the judge's order, and it is reasonable to expect him to take an appropriate amount of time to review the case. That said, as we have stated from the beginning of this case, we believe the law and the facts are on our side, and that we will ultimately prevail." Uh, yeah - assuming they're still around by the time that happens. If it ever happens. Kodak now trading at 67 cents.
December 22, 2011: Kodak names one Laura G. Quatela as its new president. I'm sure she must be feeling a lot like Josef Goebbels did when Hitler appointed him the new head of the Third Reich a week before the end of the war in Europe. In any case, she had no comment on her promotion. Actually, she's only sharing the job with Kodak's other president (how many presidents can you have?) Philip Faraci.
Perez said the move "reflects her increasing role in the company, including the strategic importance of the intellectual property business." Interestingly, Ms Quatele is not a chemist, a physicist, or an electrical engineer. She's a lawyer. Since most of Kodak's activities these days revolve around lawsuits, I guess this move makes perfect sense. Full story here.
Also on this day, Kodak announces that they're selling their gelatin division to a Dutch company. Gelatin is literally the heart of film manufacturing. George Eastman was so adamant about the quality of his gelatin that he insisted Kodak make their own. I guess he's taking a few more spins in his grave tonight.
December 23, 2011: a news item that shows just how bizarre things are getting in Kodakland. It seems a disgruntled former Kodak shareholder has been charged by the FBI with making death threats against Perez. This poor guy apparently snapped on September 30th, the day Kodak suddenly sank to 54 cents (he got out at 58 cents). He allegedly called the company and left a voicemail saying, “Don’t know when it is going to happen or where, but I am going to find (Perez) and I am going to get him,” and threatened to put a bullet in his head. Holy moly! See the full story here. It pretty much speaks for itself.
December 27, 2011: Two members of Kodak's board quit today According to an AP story quoting the WSJ, Kodak "did not say why the two had resigned, but The Wall Street Journal, citing a person familiar with the matter, said they had had grown frustrated with the pace of Kodak's turnaround". Hmm, that doesn't sound particularly encouraging. EK now down to 65 cents. What is the NYSE waiting for to delist this walking zombie of a company?
December 30, 2011: Like rats deserting a sinking ship, the Kodak board seems to be getting out while the getting's good. Apparently, a third board member, one Laura Tyson, has now resigned, according to this Reuters news story. That makes three down, 13 to do. Kodak had previously announced that they would not replace the first two directors. No comment was available on their plans following this latest defection. After trading as low as 63 cents, EK closed the day and the year at 65 cents. It opened in 2011 at $5.45.
January 3, 2012: The bad news just keeps on coming. Today Kodak received a "continued listing standards notice" from the NYSE because their average closing price was under $1.00 per share for 30 consecutive trading days. Notice that I asked this very question just last week (see 12/27/11 item above). Next stop, the pink sheets. Not that it even matters much anymore. Kodak has already been a plaything for the penny stock boys for some time now. After closing at 65 cents, EK dropped to 63 cents in the after hours.
January 4, 2012: I guess when it rains, it pours. Just one day after getting the heave-ho warning from the NYSE, the WSJ reports in an article here that Kodak "is preparing for a Chapter 11 bankruptcy-protection filing in the coming weeks should efforts to sell a trove of digital patents fall through" according to "people familiar with the matter" (emphasis mine).
Considering how long we've been hearing about these patents (see July 2011 item above, "Kodak announced that it was shopping its patent portfolio around to create a 'digital profitable and sustainable company by 2012.'"), this isn't seeming too likely at this late stage in the game.
When the news came out EK plunged instantly from 65 cent to 47 cents, where it closed. Clearly, the only question left now is whether this is going to be an Enron-style, close the doors and auction the office furniture bankruptcy, or an airline-style dtich the pension plan and keep muddling on bankruptcy. Kodak's response: "we don't comment on rumors". Of course back last September when the bankruptcy issue first surfaced, they were quick to deny it.
January 5, 2012: The exodus continues as today the WSJ reported the departure of Kodak's s Chief Communications Officer, Gerard Meuchner. Clearly no one wants to be the last one out the door. Today EK closed at 42 cents. One share of Kodak and 3 cents will now buy you a postage stamp. I would not be surprised if Perez was on the horn right now to book his return flight to Madrid.
Also on this day, Moody's downgraded Kodak's debt again, this time to "Ca". Why not just cut to the chase and rate it where it deserves to be: "Zzzzzzz". The end is near.
January 6, 2012: In the continuing bizarre saga of one John Michael Paul, who allegedly issued a death threat against Perez (see December 23, 2011 above) appeared in court today, apparently to set a date for him to appear in court. Ironically, he sold his stock at 58 cents and it closed today at 37 cents, so you could argue that he did better than a lot of other folks still left holding this particular bag.
|EK daily, 2012|
A Reuters story quotes Perez as saying "The board of directors and the entire senior management team unanimously believe that this is a necessary step and the right thing to do for the future of Kodak". Shame on you, Antonio. EK closed on Wednesday, presumably its last day of trading, at 55 cents.
And so here the Timeline of Shame ends.
And here's a telling photo from Kodak's web site today. Kodak, the imaging company that defined the art of photography, chose an empty highway in the middle of a barren desert, leading to nowhere, to headline their future plans. How apropos and how sad.
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