Xerox vs. Kodak: Where Kodak Went Wrong

Includes: KODK, XRX
by: Dana Blankenhorn

The new millenium has not been kind to two of the 20th century's great names, Kodak (EK) and Xerox (NYSE:XRX).

Kodak defined photography, and America's business culture in the first half of the century. Its cameras, film, paper and processing were enormous cash machines. Its business model of making money after the sale, its success as a brand, were examples the world sought in vain to follow.

Xerox helped define America's business culture in the second half of the century. Its copying machine was a technological marvel in the early 1960s. Its Palo Alto Research Center (PARC) became legendary, practically inventing modern computing with its windowing interface.

But digital photography was already making Kodak obsolete in 2000, and Xerox had been hammered by Asian competitors by that time, while its failure to capitalize on what PARC was doing became a legend of a different type.

Both companies needed reinvention. How did they do?

Kodak focused on what it called “infoimaging” doubling down on imaging products and seeking the business market.

Xerox, after flirting with bankruptcy, gradually reinvented itself as a services company, and that turn became complete when Ursula Burns became President in 2007.

Kodak's move has been a failure. It has been reduced to hoping the International Trade Commission gives it a big win against Apple (NASDAQ:AAPL) and RIM (RIMM) for patents it filed in the 1990s on digital photography.

If you buy Kodak today (and it is super-cheap at $2.35 per share) you're buying a patent troll. Its entire future is predicated on getting a huge settlement of its patent claims, or selling its entire 1,100 patent portfolio. Kodak is so cheap Apple might be better advised to just buy the company than settle.

Burns' big move was to buy Affiliated Computer Services in 2009, for $6.4 billion. The move followed HP's purchase of EDS and Dell's purchase of Perot Systems. It transformed Xerox from a products company to a services company.

What few analysts understood at the time was the nature of ACS' service niche. It was mostly a health IT company. Xerox bought it just as the Obama Administration was launching its $19.2 billion health IT stimulus program, dubbed HITECH.

While most of the focus of HITECH has been on what I have dubbed the “sweet, sweet stimulus cash” for buying hardware, software and medical record systems, cashing in requires proving what the government calls “meaningful use” of what's bought.

That means consulting, ACS' business. Not only can ACS help its clients cash in on their investments, but it can act as a trusted tech adviser long after the carrot turns into sticks, as failing to meet meaningful use guidelines could cost clinics and hospitals money after 2015.

Xerox is leveraged towards this opportunity. That is fueling top-line growth and it should start fueling bottom-line growth going forward.

Xerox will announce its quarterly earnings on Friday and, while they won't be blowout numbers, most analysts on the stock are now bullish. At its current price of about $10 per share, it's still not back to the level where Burns found it, but it has both a viable niche and a dividend, as well as a P/E of almost 16.

The lesson for technology investors is that you need to focus on tomorrow, not yesterday. Neither Xerox nor Kodak has done great by investors over the last five years, and those who bought Xerox have lost 20% of their money. But those who bought Kodak have lost nearly all of it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.