Kodak and digital imaging - From USA Today
==========================================
10/14/97- Updated 12:04 PM ET
Silicon Valley's where Kodak needs to be
HIGHWAY 101, SILICON VALLEY - In some ways, the term "Silicon
Valley" is a misnomer. No question there's a ton of high-tech companies
bunched between San Francisco and San Jose, driving the price of a
three-bedroom house up over $400,000, and causing traffic snarls that
twice daily leave this superhighway looking like it's covered with long,
slow-moving centipedes. But Hewlett-Packard Co.'s digital photography
business is based in San Diego, while Intel Corp.'s sits in sauna-like
Chandler, Ariz. Microsoft Corp. calls Seattle its home.
California's Silicon Valley is more than stock options that make
24-year-olds paper millionaires; more than drive-time radio newscasts
whose lead story is Intel's new, doubly powerful memory chip for digital
cameras; more than luxury car dealerships strategically placed along
Highway 101.
Silicon Valley is an unwavering devotion to technology, but also an
enthrallment with all the important, fun things that technology will let
people do. It's a heart-racing energy that seems to peak during the
sleepless stretches that come as a project deadline nears. And it's a
business philosophy that eschews, even pokes fun at, East Coast
conventions like coats and ties - in favor of shirtsleeves and results.
Silicon Valley is a place Eastman Kodak Co. needs to be - if not
physically, then at least spiritually. If it doesn't make this journey, then
other companies - companies schooled in the computer business - might
steal Kodak's crown as the ruler of photography.
"You are in an enviable position at Kodak - a cherished position," David
Coursey, editor of the influential coursey.com electronic newsletter,
recently told an auditorium of Kodak's aspiring digerati. "You have
created the current Silicon Valley lust item" in photographic imaging.
More than a century ago, in photography's first real revolution, Kodak
founder George Eastman took a primitive science and transformed it into
an almost magical, easy-to-do hobby for the masses. Computer
companies want to revolutionize photography again, unleashing its power
by transforming snapshots into the digital "pixels" that can be stored in a
PC or transmitted around the world.
Powerful companies - Hewlett-Packard key among them - covet that
"lust item" for themselves because of how picture-taking could
supercharge their sales. H-P markets a digital camera to capture digital
images, scanners to digitize actual snapshots, PCs (including some with
scanner drives) to process images, special "writers" to blast them onto
CD discs, and a plethora of printers to print out the images - including
large-format printers that can make poster-sized photographs. It's even
making printers for the new WebTVs.
H-P is an ambitious innovator, a relentless marketer, has a great brand
name and terrific relationships with the retailers who sell all these wares.
"Digital imaging is the 'killer app' that pulls people into PCs," said George
Lynch, program manager for imaging in H-P's Inkjet Products Group.
Surprisingly, despite their lust, many companies want Kodak to succeed
in the digital world. Chip giant Intel Corp. is working with Kodak to push
standards for digital cameras. Companies such as Microsoft, H-P, Intel
and even rival Fuji Photo Film Co. Ltd. joined Kodak Oct. 1 in a
consortium to promote "FlashPix," a file format that makes digital pictures
easier to work with. Partners such as SanDisk Corp., a tiny Silicon
Valley company that makes small memory devices for digital cameras,
are pulling for Kodak and say it has the right stuff to be a player.
"They definitely have a vision for where the industry needs to go," said
Douglas W. Fine, SanDisk's vice president for digital imaging.
The new Kodak Picture Network is an example, Fine said. The network
creates a kind of superhighway for images that will introduce digital
imaging to consumers who are already familiar with regular photography.
Other companies have, or will start less ambitious versions of the
network, but none has Kodak's visibility.
Clearly, if Kodak's picture-network and digital-camera initiatives
succeed, the company has essentially done some of the heavy lifting for
the whole industry by helping to rapidly define digital photography as a
pastime for the masses.
To understand the prodigious growth digital photography could spark,
consider the projected market growth for the miniature memory cards
such as the ones SanDisk and rivals Toshiba and Intel make and sell.
Dataquest says about 229,000 of those cards will be sold this year. But
then the business takes off: 4.91 million in 1998, 11.6 million in 1999 and
17.9 million in 2000.
"That will be principally fueled by the growth in digital camera sales," said
Bruce R. Bonner, principal analyst for Dataquest, a market research firm
for the technology industry.
The digital camera market itself will explode from $984 million in 1996 to
$3.6 billion in 2001, according to Lyra Research.
What will keep Kodak from capitalizing on all this growth? Perhaps,
Kodak itself.
The almost unanimous view from the valley is that Kodak has very smart
people and really good technology - but a culture that's left over from
another age, a time when its yellow film boxes were a near-monopoly
franchise. In the digital marketplace, Kodak is scrambling to find a
similarly lucrative business. Because there isn't one yet - and may never
be one - the company is still trying to define its identity.
"One of the issues with Kodak is that it has traditionally made money on
disposable this and disposable that," said Coursey, the newsletter editor.
"Therefore, when they look at digital photography, they think to
themselves: 'What can we sell people that's disposable?' or, 'How can we
make it disposable?' There's a tendency to try to turn the marketplace
around to fit the model they want to have. That's not how it works" in the
computer business.
Allen Baum, owner of a Phoenix business that digitizes photographs and
writes them to CD discs, sees the same affliction. Baum is part of Silicon
Valley's extended family, because he does work for Motorola and Intel,
which both have big plants near his business. And he's been a Kodak
customer for a long time - indeed, his scanning and CD-writing
equipment is sparkling-new Kodak hardware.
"What you see is a company that had market dominance," Baum said.
"With anything related to conventional photography ... they got to make
the market. They can't (stop) the move into digital imaging. There are
millions of guys making digital cameras, but no one makes pixels ... unlike
film, there's nothing to hold onto, nothing to dominate."
Kodak believes a good business will develop, and its leaders vow to be
there when it does.
"One of the things I've found very gratifying in my short time here is that,
yes, we have a lot of problems, but they're all fixable," said Willy C. Shih,
newly named president of Kodak's Digital & Applied Imaging division.
"We have some very good people here. We have some very good
capabilities. We need to work a little bit on our strategies. We need to
work on what I call 'Management-101' types of things - just basic
execution."
Shih says the digital business has costs that are too high for the level of
sales it currently has. In camera sales, D&AI is going great guns. But it's
struggling in areas such as scanners and writable CD discs. To get a
better balance, the business will have to boost sales and likely also cut
costs.
There's also a perception - right or wrong - that Kodak is afraid its digital
business will take a big bite out of the silver-halide film business that has
been immensely profitable.
"Every time they turn the corner it seems like it conflicts with their
silver-halide business," said Len Wegner, a marketing manager in Intel's
PC Imaging business.
Yet Kodak's film business actually could be a competitive advantage, if
used correctly. Under Kodak's "digitization" plan, pictures shot on film
are scanned into digital form - where they can be e-mailed, customized
and stored on a diskette, compact disc or memory card. The images can
even be printed out as a picture, a poster-sized photograph or just viewed
on a computer screen.
Digitization could be the intermediate step between the all-film world of
yesterday and the all-digital one of tomorrow.
Kodak has the broadest and best-rated line of digital cameras in the
industry, sells several scanners, and makes consumables such as
photographic paper for inkjet printers, thermal dyes for its commercial
printers, and writable CD discs. But it doesn't make or market printers,
which most experts say represents a huge hole in its product line.
One way for Kodak to catch up would be to buy a printer company,
several Silicon Valley insiders say. One suggestion: Lexmark Corp., the
IBM spin-off that has won kudos for carving out a spot in this very tough
market. Kodak Chief Executive George Fisher has said his company may
have to make its own printers, or at least strike a deal with another
company to make one under Kodak's brand name. Those could be
bundled with Kodak's cameras or scanners.
But the key ingredient of a Kodak digital elixir may be the Kodak Picture
Network, which went "live" in August. The network is designed to one
day be a miniature online community that will let consumers store their
pictures online, print them out at home and e-mail them to friends.
Unfortunately, Kodak's digital strategy is taking a worrisome amount of
time to take shape.
"This is a fast-moving market," Kodak's Shih said. "It's a very
competitive marketplace. And it's not very forgiving of mistakes. So it's a
challenging opportunity."
Kodak is spending more than $500 million - an amount equal to about
one-third of its annual $1.5 billion in digital-related sales - on research and
development. At 33%, that ratio of R&D-to-sales is far greater than
Microsoft's (17%), Intel's (9%) and networker Cisco Systems Inc. (10%)
- causing some Wall Street analysts to hyperventilate. That's about 10
times what H-P is spending, Kodak's Fisher has said. But that high level
of investment also underscores that digital photography is still very much
a startup business and that R&D spending has to be very carefully
focused, Kodak's Shih said.
There's plenty of room for Kodak to be a player in digital photography,
particularly because of all that technology simmering in its research labs.
Kodak's technology and deep talent pool is a strength, says H-P's Lynch,
who has worked with many Kodakers.
But capitalizing on that technology may require an overhaul of its
corporate culture. Kodak CEO Fisher, who previously headed Motorola
Inc., and D&AI President Shih, who joined Kodak from Silicon Graphics
Inc., "have the technology mindset to be successful if they can institute
that throughout that huge company," H-P's Lynch said. "If they don't,
they won't be around for the long term."
Kodak may need to take a hint from H-P and do some evangelizing of its
own, harkening back to Eastman's successful mantra: "You press the
button, we do the rest." Indeed, it needs to find a way to tell consumers
the story of its digital photography business just as simply as Eastman did.
Said H-P's Lynch: "They talk about Kodak color management. That's not
meaningful to my mother."
By William Patalon III, Rochester Democrat and Chronicle |
