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Eastman Kodak (NYSE: EK) is the worldwide leader in imaging products and services, with 2008 net sales of $9.4 billion down 8.6% from 2007.[1] Kodak develops, produces, and sells both digital and traditional imaging products worldwide. Though perhaps best known for its iconic disposable cameras, Kodak invented and developed the digital camera, as well as its easy-to-use imaging technology. Kodak is undergoing a major restructuring initiative to focus company efforts on digital imaging from traditional film. Traditional film has been rapidly declining over recent years due to the rise and advancement of digital camera technology. In order to help cut costs and increase margins, EK has decided to outsource its digital camera production. Kodak has also entered into the inkjet printing market with a new pricing strategy to help beat the competition. Kodak is an iconic photo company that has revolutionized the imaging industry. Therefore, protecting its intellectual property and patents will be important for Kodak to stay afloat in the declining traditional film industry and compete in the digital imaging industry. Kodak is has had some difficulty during its stratetgy shift as it operated at a loss of $442 million in 2008 as compared to a profit of $676 million in 2007.[2] These struggles have continued into the first quarter of 2009 as Kodak had a $353 million net loss. Much of these losses can be attributed to the economic downturn. A bright spot within Kidak has been Digital Capture and Devices and Consumer Inkjet Systems which had volume growth in 2008..[3]
[edit] Company Overview
Eastman Kodak is most known for its products and services for capturing and printing images. Kodak offers cameras and printing services for both digital and "traditional" films. Kodak's business can be broken down into four segments:
- Consumer Digital Group (CDG): CDG consists of digital cameras, retail printing services, picture kiosks (imaging), and Kodak's all-in-one inkjet printers.
- Photofinishing Group (PFG): The photofinishing segment makes up almost one-third of sales and includes Kodak's traditional film products and services, as well as products used by the film industry to reproduce and distribute motion pictures.
- Graphic Communications Group (GCG): GCG is Kodak's largest division and has grown tremendously since 2003. This segment includes document imaging and digital printing services for businesses.
- Health Group: The Health Group's sales decreased 13% over the past year, contributing only 20% to Kodak's overall revenues. The Heath Group specializes in health imaging products such as x-ray devices and specialized film. Kodak sold its Health Group in May of 2007 to Onex Healthcare Holdings in a deal valued at up to $2.55 billion.
| Annual income data, in millions | 2002 | 2003 | 2004 | 2005 | 2006 |
|---|---|---|---|---|---|
| Net Revenue | $12,549 | $12,909 | $13,517 | $14,268 | $13,274 |
| Operating Expenses | $11,381 | $12,607 | $13,623 | $14,900 | $13,476 |
| Operating Income | $1,168 | $302 | ($106) | ($632) | ($202) |
| Net Income | $770 | $253 | $544 | ($1,261) | ($601) |
[edit] Decline of Traditional Film
Kodak is most known for its iconic disposable cameras, but traditional film sales have been declining due to the increasing popularity of digital imaging technologies. Since digital cameras been replacing traditional film, Kodak's Photofinishing Group experienced an 20% decrease in sales in 2006.
The traditional film segment has two main parts: consumer film and entertainment film. The graph on the left shows the steep decline in consumer film revenues over the past two years. The loss in revenues can be attributed to a massive shift towards digital cameras, as well as consumers' use of online photo sharing websites or their own digital printers rather than the Kodak kiosks found in many drug stores. The entertainment film business should remain a fairly stable source of revenue since traditional film is still the industry standard for the distribution of movies. Any decline in movie attendance, however, could harm Kodak as moviegoers opt for venues other than cinemas.
The significant decrease in traditional film sales has caused Kodak's management to refocus the companies efforts on the digital imaging market. This trend shows no signs of reversing, meaning that Kodak's Photofinishing Group is likely to continue decreasing both in terms of overall sales and in significance to the company as a whole.
[edit] Focus on Digital
In September 2003, Kodak's management team announced that it would change Kodak's main product focus from traditional film to digital products, such as cameras and snapshot printers. Since Kodak announced its turnaround plan, the Consumer Digital Group has grown rapidly. From 2005 to 2006, net earnings from the digital segment increased by nearly 400%, rising to a record $343 million. This steep increase can be attributed to stronger pricing across the board and especially high growth in Kodak's graphic communications and consumer digital businesses.
When Kodak entered the digital world, it wanted to create an entire system to help tie all of its digital products and services together. Kodak develops and markets digital cameras and printers, operates photo kiosks, and provides online photo sharing and photo merchandise. As such, Kodak is able to capture revenue from its customers at several points; consumers can buy a Kodak camera, print photos on Kodak paper using a Kodak printer, and purchase high-quality digital prints from Kodak's in-store kiosks.
[edit] Digital Cameras
The digital camera could be considered Kodak's most notable innovation. Kodak has made a number of modifications to the digital camera in an effort to set its cameras apart from its competition's, including the addition of full-color displays and producing the smallest digital cameras on the market.
[edit] Outsourcing to cut expenses
Kodak has had problems maintaining strong profit margins since its entry into the digital imaging industry, leading the company to outsource its digital camera production and distribution to Flextronics International (FLEX). This strategic move will help Kodak keep operating expenses down, maintain efficiency, and achieve higher profit margins. Kodak will still conduct research for, design, and own the intellectual rights to its digital cameras, easing fears that Kodak's reputation for quality might be jeopardized.
[edit] Photo Printers
Kodak invented the first printer with a built-in dock for digital cameras in 2003, and the company is still a leader in at-home photo printing. Kodak kiosks, which provide photo printing services, operate in major chains such as CVS (CVS), Wal-Mart Stores (WMT), and Target (TGT). Printing has become an increasingly important aspect of Kodak's focus on digital imaging. Kodak's customers include large corporations and other businesses of various sizes who turn to Kodak for their printing needs, as well as consumers who use its photo printers in their homes. In addition to producing strictly photo printers, Kodak also released three all-in-one inkjet printer models, hoping to leverage its brand reputation in order penetrate the non-photo printing market.
[edit] AIO Inkjet Printers
For its inkjet printers, Kodak employ a rather unique pricing strategy; the printers themselves are relatively expensive, but their ink cartridges cost around half the price that Kodak's competitors charge. At $149.99, Kodak's cheapest model costs the same as a higher-end Hewlett-Packard Company (HPQ) or Lexmark International (LXK), but ink refills are substantially cheaper for the former. Kodak's different approach banks on customers' readiness to pay a premium upfront in order to save money on future ink cartridge purchases. To make its pricing strategy successful, Kodak is striving to educate consumers about the potential savings over the total life of the printer.
The pricing strategy will most likely attract consumers who print large quantities of documents and images. The majority of consumers, however, are more attracted by low upfront costs than they are by potential future savings. This pricing strategy is somewhat unorthodox for a printer manufacturer, but it could, if successful, substantially alter pricing practices throughout the industry.
| Printer | Price | Ink Price (Bk/Cr) | (AIO) | Photo Capabilities | Print Quality | Rebate Offers |
|---|---|---|---|---|---|---|
| Kodak 5100 AIO | $149.99 | $10/$15 | Yes | Yes | High | No |
| HP Photosmart C4180 AIO | $149.99 | $24.05/$28.55 | Yes | Yes | High | Yes |
| Lexmark X8350 | $149.99 | $24.95/$29.95 | Yes | Yes | Medium | No |
[edit] Photo Sharing and Additional Merchandise
The Kodak Gallery, a part of Kodak's network of digital imaging products and services, is a photo-sharing website that sells photo merchandise like frames, customizable calendars, and photo books. The Kodak Gallery also allows its 50 million members to print photos from their computers. Though it has a number of partnerships with large companies, the website doesn't generate a significant amount of revenue; it is used more as a marketing tool for Kodak.
[edit] Patents Risk
Kodak has a huge patent portfolio that covers all of its products and proprietary technologies. Its most noted inventions are the roll of film (which made photography accessible to the average person and made motion picture film possible), digital cameras, and a digital camera with e-mail capabilities. One of Kodak's most recent inventions is a light sensor technology that will eliminate the need for a flash. These inventions were, or will be, revolutionary to the photo industry and set Kodak apart from its competitors.
Considering the lucrative nature of Kodak's past inventions, intellectual property and patents are among the company's most important assets. As such, the protection of these intangible assets is one of Kodak's top priorities. Any expiration of one of its patents could harm Kodak's profits, as once-exclusive technology becomes available for other companies to replicate. While this is unavoidable, violations of any patents still in effect is another area of concern for the company. Any violation of Kodak's patents would surely harm the company's earnings, making it important for Kodak to protect its intellectual property by any means necessary, even litigation. The opposite is true as well; if Kodak were to use another company's patent-protected technology, it would likely be the target of a lawsuit, which can be costly and damaging in terms of investor confidence.
[edit] Kodak versus the Competition
- Traditional Film: Kodak's main competitor in the traditional film segment is FUJIFILM Holdings (FUJI). Although Kodak is straying away from traditional film towards digital imaging, it still has a strong hold on the traditional film segment. Kodak's brand recognition and effective marketing (such as the famous "Kodak Moments") have made Kodak a household name for any and all things photography.
- Digital: Kodak faces tough competition in the digital industry, including electronics giants such as Sony (SNE) and Canon (CAJ). Although Kodak invented the digital camera, it has fallen behind in efficiency, profit margins, and sheer sales. Kodak has developed a strategic plan to minimize production costs and increase efficiency, with the goal being to establish itself in the digital imaging market as it has for traditional film.
| Company | Total Revenue | Earnings | Sales Growth | Operating Margin |
|---|---|---|---|---|
| Eastman Kodak | $13.3 B | -$601 MM | -7% | -1.5% |
| Canon (CAJ) | $35.25 B | $3.95 B | 12.6% | 17.42% |
| Sony (SNE) | $68.42 B | $1.04 B | 12.6% | 1.11% |
- Printers: Kodak is a new player in the printer industry, which is dominated by Hewlett-Packard Company (HPQ) and Lexmark International (LXK). Its introduction of three all-in-one (AIO) printer models, aimed at competing with HP and Lexmark, shows Kodak's determination to establish itself in this market. Kodak has also taken a different approach to pricing, hoping to shake up the competitive landscape. It remains to be seen whether Kodak's limited product line, with its unusual pricing strategy, will be successful at stealing market share from these well-established industry leaders.
- Online Photo Sharing: The Kodak Gallery competes with websites like Shutterfly (SFLY) and Photobucket, but it has something of a leg up on its competitors as a result of its recent partnership with Martha Stewart to design and sell photo products in her name. The Kodak Gallery is also partnered with major companies like Apple (AAPL), Microsoft (MSFT), and Amazon.com (AMZN).
[edit] References
- ↑ EK 2008 10-K pg. 4,33
- ↑ EK 2008 10-K pg. 33
- ↑ EK 2008 10-K pg. 34
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