Kodak's digital business, as suggested in the BARRON'S article, is aimed at producing revenues from processing digital images--sending the via email, storing them on line, ordering prints online, etc. Notwithstanding the respect that many analysts have for Kodak as an honest, well managed company headed by a marketing expert, there are fundamental weaknesses, which I have mentioned several times previously, and which I will summarize here:
1. The strategy of preserving conventional film profits conflicts with digital, as it restricts going forward in many digital technologies that are now dominated by other companies.
2. The notion that a casual photographer would take digital photos and transmit them to an online host for storage, printing, or emailing is based on the assumption that one could use digital cameras containing a fairly large embedded flash memory instead of removable memory serves no use other than to underline a strategy that simply ignores how more and more people are using digital photos: They process the photos themselves, using ever easier and better printing equipment and software, with or without a separate computer. By ignoring the increased demand for removable compact flash, Kodak effectively has waived the equivalent of profits from sale of conventional film.
3. The analysts who think Kodak is a superb company obviously haven't talked to rank and file Kodak employees who work at the lower supervisory levels or on the factory floors. It is a company almost wholly lacking in entrepreneurial spirit. Big BUREAUCRACY prevails at Kodak and is really responsible for the misplaced strategy of protecting conventional film products, at almost any cost (including innovating in digital). If Kodak were to go more agressively into digital, it would be often at the expense of conventional film and paper and would result in a lot of lower level executives and managers losing their jobs.
So if one is a little skeptical about whether Kodak can succeed in digital, that skepticism can lead to a lower valuation of the stock. Apparently that is the main reason why Kodak does not sell at a higher price-earnings ratio.
Finally, I see no changes for the better at Kodak. Its digital cameras, while doing an adequate job, are not on the cutting edge of technology, style, or price. It has turned away from profits generated by the sale of removable flash memory, choosing to buy flash cards from the lowest cost supplier, rather than to own a portion of companies that produce flash memory. It has adopted this strategy not on the basis of long term profit potential but to protect its conventional film business by making digital more like conventional and less a unique, photographer oriented process where the photographer not only takes the photo but makes the prints and copies as well.
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