No clear path to success for Kodak

This story appeared in the RBJ’s commemorative 30th Anniversary section. See more content related to the RBJ’s anniversary here.

Eastman Kodak Co. employs some 1,640 workers here, making it the 16th-largest employer in the region. If not for its history, the firm would simply be a decent size local company, currently making a profit and looking to boost its sales.

But Kodak is measured by its former status as global icon and dominant local employer. Its local workforce has dropped some 97 percent since 1982, when it peaked at 60,400 and employed more than the region’s current three largest employers—the University of Rochester, Rochester Regional Health and Wegmans Food Markets Inc.—combined. Kodak’s global employment peaked at 145,300 in 1988.

The company plummeted from the pinnacle of industry to bankruptcy in 2012. Now, five years after it filed for Chapter 11, it still faces an uncertain future. Its decline changed the meaning of a Kodak Moment.

For the Rochester region, the decline meant the loss tens of thousands of good-paying, great-benefit jobs along with a cascading impact on vendors, retirees, retailers, service firms and nonprofit organizations.

Still, the loss of so many jobs could have decimated the community. That the impact did not reach that level is a credit to the resiliency of the local economy, the power of the educational institutions here and the gradual nature of the fall of Kodak, which averaged a couple thousand job cuts a year for decades.

In addition, the spinoffs and sales of some Kodak units spawned strong local companies, which employ thousands of workers here.

George Conboy, chairman of Brighton Securities Corp., said the impact was lessened because the decline took so long and gave the region’s economy a chance to shift and rebuild. But the economy is more modest now than it would have been with a strong, though smaller, Kodak, he said.

“It didn’t go out over 90 days. It happened over 30 years,” he said. “The region has moved past the bankruptcy. … It would have been stronger if Kodak had 16,000 employees instead of 1,600.”

Readers of the Rochester Business Journal in July overwhelming selected the decline of Kodak as the top business story over the past 30 years. See the RBJ 30th anniversary poll results on page 16.

Five leaders—three career Kodakers and two outsiders—steered the onetime photo giant during its 30-year decline into bankruptcy.

With varying degrees of urgency, Colby Chandler, Kay Whitmore, George Fisher, Daniel Carp, Antonio Perez and their management teams mapped out paths to when film would be replaced by digital imaging. None of those paths led to the brass ring.

Paths to the future

A possible route to a new future for Kodak began in the 1970s. Kodak in 1975 entered the copier or electrophotographic business with the debut of the Kodak Ektaprint 100 Copier-Duplicator. Kodak and Xerox Corp. became the two major players in the central reproduction office business. Kodak ultimately sold its copier division to Danka Business Systems PLC, a move that proved disastrous for Danka.

Also during the 1980s, Kodak launched Ektachem blood analyzers, based on film technology, which became a successful business. That Kodak division was sold to Johnson & Johnson in 1994. It continues to operate in Rochester, as part of Ortho Clinical Diagnostics Inc., with some 1,250 employees.

Under the leadership of Chandler and Whitmore, Kodak saw an opportunity to leverage its organic chemistry research capabilities and intellectual property in the pharmaceutical industry, which in the late 1980s was highly profitable, even by Kodak and film standards. In 1988, Kodak made a leap into that arena by acquiring Sterling Drug Inc., a maker of prescription and over-the-counter drugs.

In 1994, with Fisher at the helm, Kodak sold off pharmaceutical and consumer health products subsidiaries and used the proceeds to pay down debt. It also marked a sharp turn away from diversification to a focus on core imaging technologies, including digital imaging. Ultimately that move, however, would not bring about the growth he envisioned and did not succeed in finding a profitable path to take the company into the 21st century.

Another firm sold off by Fisher was Eastman Chemical Co., founded by George Eastman in 1920 to provide the chemicals the film giant needed. Some company observers point to how well Eastman Chemical has done compared with Kodak and suggest the company missed an opportunity to focus there.

Kodak spun off the Tennessee-based chemical firm in 1994 as the 10th-largest chemical company. Today Eastman Chemical has 14,000 employees worldwide and 2016 sales of $9 billion. Its market value is nearly $12.3 billion, compared with Kodak’s current market cap of less than $325 million in late August.

In a 2012 interview with the Rochester Business Journal, Lawrence Matteson, executive professor of business administration at the Simon School of Business and a former Kodak executive, talked about that possibility. Kodak had begun talking about selling off Eastman Chemical in the late 1980s. By then, the chemical operation had ventured into new areas and played a much smaller role in providing chemicals for Kodak. He described it as a lower-profit business—certainly less than film—but well-managed and growing.

“Could (Kodak) have kept it and focused on it? Yes, (but) that would have meant saying, ‘Stop doing what you are doing in Rochester and focus on the chemical business in Tennessee.’ It would have meant not leveraging any of the strengths (of Kodak)—not leveraging the R&D, not leveraging the manufacturing and not leveraging the brand.

“You had 100,000 people (in) the photographic business in one way or another,” he noted. “If you go into the commodity chemical business with the demand for 10 to 20 percent of the people, and a slow-growing business, does it make any sense? I think it made sense to sell it off in the ‘80s.”

Carp, who succeeded Fisher as CEO in 2001, took the reins as a Kodak insider. Yet as CEO he put in motion efforts expected to sever the direct link with film. As CEO, Carp ordered a multiyear effort to reshape Kodak Park. The multimillion-dollar project involved demolishing buildings; selling properties, including the Henrietta campus; and revitalizing some sites.

Still, Carp misjudged how fast film would decline, company watchers said. But Kodak appeared to be developing into the consumer photographic company many thought it logically should be.

Kodak under Carp built a leading brand in digital cameras. Kodak’s EasyShare models reached the No. 1 spot in U.S. market share when Carp departed as CEO and were believed to rank No. 3 worldwide. Kodak also had a leadership spot in kiosks. But beneath that success emerged structural issues.

Similarly, Kodak built a leading site for online photos, the Kodak EasyShare Gallery, but profits proved elusive. A key element in Kodak’s consumer digital strategy failed: printing of images. The company planned to make money off thermal printing ribbons and paper. That was key, in part, because despite the market share and ratings, Kodak did not make money on its cameras.

In the end, its digital strategy lacked the razor blades necessary for the razor-and-razor-blades model to work, analysts said.

Kodak leaders also severely misjudged how little demand would exist for hard copies of pictures. Its mantra for years had been that a massive upsurge in the number of photos taken digitally would compensate for a reduction in the percentage of photos printed. However, the Internet made viewing and sharing easier, changing consumer behavior.

Perez, who become CEO in 2005, gets a great deal of criticism for failing to make Kodak profitable, yet few can argue that he chose a bold new path—though ultimately not successful—for Kodak. He turned it chiefly into a printing company, focused on a trio of initiatives: consumer and commercial inkjet, workflow software and services, and packaging solutions.

George Conboy is one of those who pan Perez, whom he calls incompetent. Conboy criticizes the stock buybacks under Perez’s watch as Kodak failed to invest and ultimately used up its cash and ended up in bankruptcy.

Some company watchers similarly criticized the buybacks under Fisher in the 1990s. They ponder what Kodak could have done if it invested those billions back into the company or into acquisitions.

Kodak began to see it could not fund all of its promising businesses. Its Health Group was sold in 2007 to Onex Corp. The business would become Carestream Health Inc. Some thought that business, which employs 1,250 people here, could have become part of Kodak’s future as well.

Kodak divested its remote sensing systems operation in 2004 to ITT Corp., and the operation is now part of Harris Corp. Kodak also sold various smaller pieces such as organic light-emitting diode and sensor businesses.

“They never found a very powerful or profitable substitute for a business that required film,” Matteson said in the 2012 interview.

Not idiots

Kodak, he and Conboy said, had not been led by idiots, as some pundits claim. Such an analysis ignores the magnitude of the task faced by Kodak leadership. In Matteson’s view, this challenge far eclipsed those encountered in remaking Intel Corp., IBM Corp. and Apple Inc.

“It was one of the most difficult transformations any major American company has had to face,” Matteson said. “Not only were they dealing with major shifts in their marketplace but they were dealing with major shifts in obsolescence of their core research, production and manufacturing capabilities in the photograph markets that they served.
  “Customers found entirely different ways of doing things that obsoleted the competitiveness of Kodak. There are not many companies that face the same sort of disruption.”

Critics point to engineer Steve Sasson’s invention of the digital camera at Kodak in 1975 as prima facie evidence of Kodak’s blunders in the digital era.

Back in 1979, Matteson—then at Kodak doing advanced development work on consumer cameras—analyzed the impact of electronic photography on the film business. His study predicted digital would replace film by 2010 across the company’s categories, beginning with government and military applications and culminating with consumers. He was off by a few years as the transformation largely was completed early in the 2000s.

Starting in the early 1980s, Kodak leadership widely acknowledged the impending transformation and its impact, Matteson said. Its existing lifeblood would dry up as digital imaging replaced the silver halide-based photographic industry that fueled Kodak’s success and generated billions in revenues and profits. Kodak’s leaders knew digital would be far less profitable: where film generated a profit of as much as 70 cents on a dollar, digital imaging might make a nickel.

The bankruptcy

Shortly after 1 a.m. on Jan. 19, 2012, Kodak announced its filing for Chapter 11 bankruptcy protection. The company listed some $5.1 billion in assets and $6.75 billion in debts. In late 2012, the company agreed to sell and license its digital imaging patents for some $525 million. The long-awaited move was key to its efforts to emerge from Chapter 11 bankruptcy in 2013.

The sale of the 1,100 patents initially was projected to fetch as much as $2.6 billion in a Bankruptcy Court auction. Kodak had begun the effort to sell the patents in 2011. Kodak emerged from bankruptcy Sept. 3, 2013, 19 months after filing. Final steps in its restructuring included the spinoff of its Personalized Imaging and Document Imaging businesses to the U.K. Kodak Pension Plan.

Kodak Alaris Inc., which was created from the businesses spun off to the U.K. Pension Plan as part of the bankruptcy, employs 656 and ranks as the region’s 50th largest employer.

The future of Kodak now is under the guidance of Jeffrey Clarke, who began as CEO on March 11, 2014 with a big challenge ahead: taking the company that emerged from Chapter 11 bankruptcy and building it into a successful, profitable firm.

Kodak on March 7 this year reported its first annual profit since emerging from bankruptcy, but its revenues continue to decline. Kodak expects 2017 revenues of $1.5 billion to $1.6 billion, down from $1.64 billion in 2016 and down from $6 billion in 2011. The company said it planned to lay off more than 30 employees in November at Eastman Business Park and Kodak Research Labs.

The company is building around its “growth engines”: Sonora and Flexcel NX plates, Prosper Inkjet and the Software and Solutions Division. These growth areas are delivering growth, and represented 27 percent total company revenues in the second quarter, Clarke said in July.

Its strategic mature businesses represent 64 percent of revenue and are being managed to reduce costs and optimize returns.

Conboy acknowledged the company’s success in turning a profit in 2017, but pointed to its continued difficulty in growing the top line.

“Unfortunately, clouds are gathering at the new Kodak,” he said, adding its stock is trading at a fraction of where it began trading after the bankruptcy. “Top line growth is still a problem. You can’t cut your way to growth.

“Financial results are still very tenuous.”

Mike Dickinson is the former managing editor of the RBJ and covered Kodak for more than 20 years.