Kodak puts hopes in digital

ROCHESTER, N.Y. — First, it was new competition. Then new technology. Now, analysts believe struggling Eastman Kodak Co. has some two to three years to find a place in the world of digital photography.

If not, the venerable pioneer of mass-market picture-taking, which grew fat in the 20th century off high-margin, silver-halide film packaged in ubiquitous yellow boxes, could begin to fade into history.

The chemical-photography businesses that turned Kodak into an American icon with one of the most recognizable brand names on Earth has been quietly on the wane for a decade — but its decline suddenly is picking up speed as filmless digital cameras become hot sellers.

“Digital is here definitively,” said Eugene Fram, a marketing professor at the Rochester Institute of Technology. “The question is, can Kodak come up with the new products, the new insights that make sense out of digital? They have to be able to execute fast. They’ve got to differentiate themselves because they’re going very heavily into a commodity market.”

Kodak has poured more than $4 billion into digital research and related technologies in the last decade. It has secured hundreds of patents and developed a vast array of products and services — some innovative, competitively priced and proving popular with consumers, such as its Picture CD software, online photo-sharing service and easy-to-use line of digital cameras.

For all that, the world’s biggest photography company is still struggling to find its footing in this sizzling but rapidly evolving arena. Digital generated only $3.8 billion of $12.8 billion in 2002 sales, and it is having to shift its cost structure to keep pace.

Last week, as it reported flat sales and a 60 percent drop in second-quarter profits, Kodak turned once more to the corporate ax. It plans to eliminate up to 6,000 jobs by year’s end — shrinking its global payroll to around 62,000 from a peak of 136,500 just 20 years ago.

About half the cuts, targeting mainly the traditional photography divisions, will be made in Rochester, the fading manufacturing hub where Kodak employs fewer than 22,000 people. That will reduce its local work force to the lowest level since the Great Depression.

“I think we’re at the point where we have to get on with reality: The consumer traditional business is going to begin a slow decline, though it’s not going to fall off a cliff,” said Chief Executive Dan Carp, a Kodak veteran who took up the reins in 2000.

A century earlier, Kodak founder George Eastman came out with a $1 Brownie, turning point-and-shoot photography into an overnight craze. By 1927, Kodak held a virtual monopoly of the U.S. photographic industry.

By the 1980s, Kodak still cornered nearly two-thirds of color-film sales worldwide. But excessive caution in exploiting new markets, such as point-and-shoot 35mm cameras, was quickly taking its toll.

The innovative Japanese have plundered Kodak’s fat profit margins. Tokyo-based Fuji has jumped from obscurity 25 years ago to within a whisker of edging out Kodak as No. 1.

In the even faster-paced and much more crowded digital marketplace, where profit margins are far tighter, caution could spell extinction.

“They’ve got 24 months to make it all happen,” said John Larish, a consultant and writer on digital photography. “I think the optimistic side is that digital cameras will produce many more pictures to be printed, so there’s a tremendous value there potentially for Kodak.”

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