Kodak Moments (EK)

| About: Eastman Kodak (KODK)

Eastman Kodak (EK) has seen better days. Maybe. The press pounded it recently for getting its 2006 operating lose forecast wrong and changing it one day later. They later revised their Q4 loss, but in a positive direction. The company is in the midst of firing 25,000 people. And, of course, the cardinal sin is that it has a stock that traded above $90 when it was the film king. On a good day now, it trades around $27.

I am old enough to remember going to the Kodak headquarters in Rochester in the late 80s when I was the publisher of Financial World magazine. Kodak owned the city. It was not only the most important company and largest employer, it was also the philanthropic center of upstate New York.

Then the photography business got choppy and the digital world started to replace the world of the paper photo. Kodak was not ready and got slaughtered. Fuji Photo had a lower cost of production for paper photography, and the digital cameras didn't even need the stuff. It got so bad that even Fuji's paper photo business fell apart, with its CEO saying recently that the color film market is dropping 20% a year.

Eastman Kodak has started to reinvent itself, and the question is can they do it fast enough. In the most recent quarter, digital revenue exceeded tradition revenue for the first time coming in at $2.67 Billion for the quarter. The company chief, Antonio Perez, proclaimed that "Kodak is now a thriving digital company". Well, not yet.

Digital revenue is targeted to grow at 16% to 22% in 2006. In Q4 05, that number was 45%. The company expects about $400 million in earnings from digital in 06. However, total revenue grow will be negative. It almost makes one wonder why they keep the other parts of the company at all.

Kodak is not going to make it back to the "BIGS" on a 20% per annum growth in digital business while the rest of the company is a black hole.

So, what could happen?

Kodak has a couple of really nifty businesses called EasyShare and Ophoto (www.ophoto.com). You buy an EasyShare digital camera, download the software, and you can print you pictures. But, more importantly, you can share them online.

Photo posting and sharing are becoming a massive business. Yahoo! (YHOO) bought Flickr, another of these photo sharing sites, recently. Hewlett Packard (HPQ) just bought Snapfish, another one of the huge photosharing sites.(HP just announced that they are going into the $35 billion photo printing business with kiosks and in-store printing centers.) And there are a number of these photo sites that are among the most visited internet destinations in the world.
Zoto.com. SmugMug.com. Fotolog.com.

All of the huge blogging sites and community sites like MySpace have photo posting and sharing capacity. It is actually central to their appeal with visitors.

So, Kodak has the chance to miss the boat again, or use it brand, one of the most recognized brands in the world, to become the leader in online photosharing and printing. Not just one of the players, the leader. The road to photo processing and printing goes through these web sharing sites. Without them, no one is going to get and keep the lion's share of the digital photo business.

Kodak should roll-up some of the major photosharing sites. Full stop. They ought to roll up this space like nobody's business. Kodak's goal should be, simply stated, to be the dominant company worldwide in photo sharing and printing. They should have sites in every major language and they should be compatible with as much digital hardware as possible.

The Kodak software is free, for editing, sharing and storing. But, the company gets $.15 per print. So, do they want the 10% share that I would guess EasyShare gives them in the photosharing market, or do they want the 25% share that they could have with some of the other large sites rolled in?

The sites that many of these photosharing operations link to are places like EBay (EBAY) and MySpace, places where people place their photos for fun or commerce. Can Rupert Murdoch and Meg Whitman both be wrong? Photography is starting to populate the web the way that text did. People are sending images to each other with greater frequency and greater number than ever before. Flickr and Snapfish started as garage businesses. Good idea. No staff. Now, they are setting the internet world on fire.

And, the best thing about the internet is that, when you have the traffic, photo printing is only part of the business. Let's look to Mr. Murdoch again. He paid an obscene sum for MySpace, a generation X hang-out site. Why? Because according to recent audience measurments, MySpace now has more page views that Google. Has NewsCorp (NYSE: NWS) monetized it like Google yet? No. But, I think we can assume that Mr. Murdoch has plans.

Kodak has a moment, a brief one, to become the dominate providers of one of the most important services on the Internet It is one that has a proven revenue stream in printing, and another potential stream, huge traffic, that the best minds in cyberspace are figuring out how to monetize.

Mr. Perez, your photos are ready.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been President of Switchboard.com, which was the 10th most visited site at the time according to Media Metrix, and the Chief Executive of On2 Technologies, Inc. He does not own securities in any of the companies mentioned.

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