Last week I was in Italy, where an international case competition was being held. There were several teams from different countries competing on real case studies. The competition, which has been regularly organized every year, offers student teams an opportunity to show their management and crises solving skills. This year, Kodak (EKDKQ.PK) was the primary case subject. Kodak, a 132-year-old company, has recently filed for bankruptcy protection. The Chapter 11 filing, attached to an almost $1 billion creditor-in-possession credit facility from Citibank (C), offered some relief until the company can materialize its patent portfolio. The student teams were tasked with finding an immediate solution to company's current issues, and also offer long-term survival plans. Several unique ideas were discussed, some of which are worth talking about here. Let's start with a brief history of Kodak.
Kodak's history goes back to the late 19th century. George Eastman, an innovative entrepreneur, paid a visit to London in 1879 to obtain a patent on his plate-coating machine. This business quickly became a lucrative one, which drew attention from another businessman, Henry A. Strong. The two formed a partnership in 1882 under the famous name of "Kodak."
In 1884, the partnership was dissolved and a new partnership with 14 shareholders was formed. The company was a big hit among professional photographers when it introduced world's most practical camera for a reachable price of $25. In 1900, it introduced the Brownie camera for a price of $1, which was a breakthrough in the history of photography. In 1975, Steven Sasson, an engineer from Kodak, invented the world's first digital camera. That was an invention well ahead of its time, since computers became popular only after 1990s. Interestingly, Kodak lost its market position to digital camera producers.
Realizing that the company is losing its market share in the photography business, Kodak invested millions of dollars into its printing segment. That was another bad move for the company, as the competition quickly diminished the profit margins and the market itself shrunk in size due to social networking outlets for photos.
By 2004, Kodak was delisted from the Dow Jones Industrial Average, which it was a member for 74 consecutive years. The transformation and the reconstruction efforts proved to be useless, as the company quickly ran out of cash. Kodak, which was trading as high as $80 in the late 1990s, lost almost 99% of its market cap. In 2010, Standard & Poor's removed Kodak from its index after it became a penny stock. As expected, the company filed for bankruptcy protection for its U.S. operations under Chapter 11 in January.
- Global Presence All Around the World
- Employment of Top Notch Research & Development Teams
- High Quality Perception
- A Large Patent Portfolio
- Accumulated Intellectual Capital
- Huge Pension Liabilities
- Diminishing Profit Margins
- Cash Constraints
- Wrong Pricing Strategy
- A Strong Brand Image
- Substantial customer database
- B2B -- Commercial Printing
- 3D Photography/3D Printing
- Death of Traditional Printing
- Threat from Smartphones
- Negative Cash Flow
Action Plan: Immediate
Given the company's current status, Kodak management needs to think and act very fast. The company is running out of cash, and it does not have much time until creditors knock on the doors. The company has an obvious cash flow problem, and in order to survive this year, it desperately needs immediate cash.
One of the proposed ideas during the competition was to sell its patents on an individual basis. Kodak has been trying to sell its large portfolio of intellectual property for a while. However, given the large number of patents that comes with a lofty price tag, it hasn't had any success so far. The company has more than a thousand patents in its portfolio, each of which might have more value when sold an individual basis. One of the patents that got my attention was a light sensor technology that eliminates the need for a flash. Nowadays most people use their smartphones for photography. And the competition in this area is huge. Everyone is trying to catch up with Apple (AAPL) by offering something unique that iPhone users cannot experience. The recent Lumia phones by Nokia (NOK) and its partnership with Microsoft (MSFT) offer an edge to its users. The Lumia 900 has an 8 megapixel camera with a Carl Zeiss optics system that has autofocus technology. If this partnership proves to be a substantial threat to Apple's flagship product, the iPhone, Apple might seriously consider offering extras beyond its existing attributes. Research In Motion (RIMM) has also lost its market position as its smart phones had limited multimedia capabilities. It is another company looking to re-establish its position in the market. This is why I think smartphone manufacturers might have an eye on some of the patents in Kodak's portfolio.
Another proposed idea for Kodak's management is to follow the latest trends in the world. The traditional printing business is dying. This area might be profitable for the moment, but sooner or later all paperwork will be performed online. That is why Kodak needs to switch from EasyPrint to EasyPost. EasyPrint was a great innovation. The Kodak photo printer, mostly bundled to a new camera purchase, was a convenient tool that could easily print photos. I had one of those, and I probably printed hundreds of pictures using my photo printer. However, after opening an account with Facebook (FB), the photo printer became instantly obsolete.
Nowadays, people prefer to post their pictures online instead of printing them. It does not cost anything, and it is obviously more convenient. Plus, it initiates good conversation online. Kodak has lagged this area, and it actually made a desperate decision to sell its online photo business to Shutterfly (SFLY). Surely that area was not making any money, but selling 75 million users for a price of only $25 million was not a good idea. That is only 33 cents per user. For comparison, Facebook is rumored to go public for $100 billion, suggesting a market cap of $125 per registered user.
I think Kodak should offer its users a unique opportunity to instantly post their photos online to their favorite social network. Such a "social" camera could bring substantial attention to company's traditional products as well.
Action Plan: Long Term
To survive in the long term, Kodak needs to come up with something really cool. Given the market hype for social media, obviously it should somehow relate its product lines to well-known brands in this field. One idea is to offer a Facebook photo printing application. While Kodak's existing products can already accomplish such a task, the user first needs to download the photo to the computer. A printer specifically designed to make instant prints from Facebook could bring on substantial revenues in the long term. It would also help re-establish Kodak's brand in the younger generation.
Partnerships with smartphone producers can be another option for long-term survival. An increasing number of users are giving up their traditional cameras for smartphones with high-resolution image capture properties. Nokia has already established a strong alliance with Carl Zeiss, but Apple has fallen behind. A partnership between Kodak and Apple can be mutually beneficial for both companies.
Another trend in the younger generation is 3D multimedia. The number of 3D videos is on the rise, and the demand for them is high. The 3D printing technology is a very new concept, yet some companies offer it for their customers. As far as I know, Kodak does not have such a product in the market yet. The next generation will demand such products. They will also demand cameras/smartphones with 3D image/video capturing technologies. This is one area where I think demand will outpace supply in the next decade. Companies making the first move into this area are very likely to be make substantial profits before competition gets tougher. This segment is where Kodak needs to be before any larger competitor enters.
In order to survive in a dying market, Kodak needs to re-establish itself. The idea of mass production for the masses does not seem to fit into the today's market for Kodak's products. Instead, Kodak should make use of its strong brand image and create a niche market for professional photographers where margins are higher. The traditional printing business is dying, and if Kodak wants to survive, it needs to refocus on a business-to-business model where relationships last longer. Chapter 11 might be the end for shareholders, but it does not mean the end for the company. General Motors (GM), which filed for Chapter 11 in 2009, emerged as a stronger company. If Kodak follows the latest trends and if it can survive the next six months, I think it can also emerge as a stronger company.
Disclosure: I am long AAPL.