Kodak: The Challenge of Consumer Digital Cameras*
In early 1997, George Fischer, the CEO of Eastman Kodak Corp., was pondering the future of the consumer imaging business: specifically, the role that the relatively new digital camera technology would play. Kodak had been a pioneer of this new technology in the late 70’s and 80’s, yet a decade of effort in the field had failed to result in profits for the company. Fischer was now under increasing pressure from the Board to cut costs and improve profitability. With competitors becoming more aggressive in its traditional film and paper businesses, and new powerful competitors emerging in the digital camera business – should digital cameras remain a part of Kodak’s strategy, and if so, how?
The Early Years
In 1888, George Eastman revolutionized photography with the first Kodak camera – an invention that reinforced his commitment to bring photography into the hands of the greatest number of people at the lowest possible price. Eastman’s company introduced its first portable camera in 1888, which included a 100-picture film for $25. After shooting the film, the owner sent both the film and camera to Rochester for processing. For another $10, the company sent back the developed prints and the camera loaded with a new roll of film. This breakthrough is considered the birth of snapshot photography. At this time, Eastman trademarked the "Kodak" brand, and with the slogan "You push the button - we do the rest," George Eastman put the first portable camera into the hands of consumers. This was the beginning of Kodak’s century-long history of mass marketing cameras and supplying the rest of the film, development, and photo-printing value chain.
Eastman Kodak had four basic principles for the business - mass production at low cost, international distribution, extensive advertising, and a focus on the customer. Eastman saw all four principles as closely interrelated. From the beginning, he imbued the company with the conviction that fulfilling customer needs and desires is the only road to corporate success. The history of Eastman Kodak Company is an amplification of these basic principles and policies. The company continued improving the imaging technology and widening its applications continuously through focused scientific research.
This continued research led to many hailed products: its turn of the century cameras. Kodak produced cameras geared towards family extensions such as the Boy Scout Kodak of the 20’s and 30’s; the 1963 35mm cartridge loaded Instamatic camera, the "point and shoot" camera, and the Funsaver single-use and disc film cameras of the 1990s. These were all in addition to its more "back office" film and processing innovations.
The Later Years
Beginning in the 1950s and 1960s, Kodak faced intensified competition from Japanese manufacturers in both film and camera, particularly from Fuji Photo Film Co., Ltd. in film, and camera manufacturers such as Olympus, Nikon, Canon, and others.
Though other filmmakers made inroads, Kodak’s film brands remained market leaders in the United States through its power with distribution channels, quality, and a series of linked film technology and marketing innovations. Kodak’s film brands, photopaper, and processing/printing remained well known for quality film and new innovations. Their major challenger in the filmmaking market has been Fuji, which dominates the Japanese market.
In camera production and sales, however, the company enjoyed uneven success, at times being out-competed on cost and quality by various competitors. For instance, in 1963, Kodak introduced the 35mm cartridge loaded Instamatic camera. This "point and shoot" camera was one of the most successful and efficient cameras, selling more than 70 million worldwide.
When Kodak introduced its instant camera, however, the company was faced with production problems and a patent infringement suit from Polaroid. Although Kodak captured 25% of the market during its first year, Polaroid responsed with another new instant camera, stifling Kodak’s sales. Polaroid went on to successfully exploit the business applications of instant photography, such as identification cards, and has retained its strong position in the market.
Facing stiff competition from the Japanese, Kodak eventually abandoned 35-mm camera production altogether in 1970. In 1985, Kodak reentered the 35mm camera market with a product made by Chinon Industries of Japan.
Innovation and R&D
By the 1980’s Kodak placed a stronger emphasis on non-camera products with high profit potential, which included a more aggressive approach to its photochemical imaging capabilities, a broader international marketing strategy, and a sharper focus on making acquisitions to bring the company up to speed technologically, including electronics.
In 1987, Kodak introduced the first single-use camera. Through the 1990’s, Kodak continued to improve the single-use cameras with features such as waterproof designs, dust-proof designs, flashes, and telephoto lenses. The global market for single-use cameras in 1993 was more than 25 million units worth more than $200 million. Sales in the early 1990’s more than doubled each year, making it the fastest growing segment of 35mm cameras. Kodak led the market in the U.S. with 70% share throughout the early 1990s. Fuji trailed behind Kodak with only 20% of the U.S. market.
Kodak also developed several sophisticated new photographic technologies during the 1990s. In 1992, the Photo CD System was introduced. With this system, customers could take pictures with their 35mm cameras, send the film to Kodak for processing. Instead of giving the customer printed pictures and negatives, Kodak would develop the film, take high-quality digital images of the images on the film, and return these digital images to the customer on a compact disk, readable by personal computers.
Kodak had also invested R&D resources to investigate new digital technology and manufacturing of digital camera hardware for both commercial and consumer use. One of the first applications was for photo professionals who need to quickly send pictures and easily manipulate the images. Kodak realized that software was key to digital photography and established relationships with software companies, such as Adobe, Microsoft and LivePix to develop imaging applications that allow users to easily make sophisticated manipulations to images.
By 1994, Eastman Kodak Company had grown into a $20 billion multinational company with diversified manufacturing in photographic equipment and supplies, chemical, health care products, and information systems. A financial summary is given below.
Five Year Income Summary
1996 Income Breakdown by Business Segment
The Consumer imaging segment includes amateur films and cameras, photographic papers, chemicals and equipment for photographic imaging and photo finishing operations. The Commercial Imaging segment includes x-ray, motion picture, professional and graphic art films, microfilms, copiers, printers and other equipment for information management.
Digital Camera Technology
Digital cameras allow users to take pictures in the same fashion as a regular 35mm camera. However, the mechanics of the camera do not involve the use of traditional rolls of film or film development in a darkroom. Pictures are first taken with the digital camera, saved into the camera’s memory and then downloaded to a computer for manipulation. Once the picture images are resident on the computer, the images can be extensively manipulated through software programs to produce desired results. The final output can either be printed on a laser or ink-jet printer, saved on the computer for later retrieval, or posted onto the Internet to be viewed by others.
Digital cameras use a photosensitive device called CCD (charge-coupled device) to capture and process an image. This innovation allows the image to be saved in the memory of the camera. The clarity and resolution of the picture, measured in pixels, is based on the size of the CCD.
In 1997, an "entry level" digital camera would typically have a 640x480 resolution (that of a standard computer screen) which would relate to a CCD with approximately 0.25 million pixels; a mid-ranged digital camera would have 1 million pixels and a high-end camera would have 6 million pixels. Imaging experts agreed that 1 million pixel CCD can produce an image or a quality that is equivalent to standard 35 mm film when used for up to a 5 x 7 printed image.
Digital cameras allow consumers to replicate traditional 35mm camera functions. For instance, assuming that the consumers have access to a personal computer, they are able to print out pictures for use in photo-albums, mailing to friends, etc. In contrast to traditional 35-mm cameras, however, these benefits are achieved with a very different set of actions on the part of the consumer and supplier value chain. (See Exhibit 1)
In addition, digital cameras provide consumers with other features. First, they allow the consumers immediate access to their pictures without having to wait for the film to be developed in the photo lab. They can even view the picture while the subject is still posing to assure the lighting was correct, or that the subject’s eyes were open through LCD screens built into some cameras. Images are also immediately available to be printed or sent in digital format over the Internet. Finally, the digital format allows users to edit (eliminate "red-eye" for instance), enhance, enlarge their pictures using PC software.
Like many electronic components, the price/performance of the major components of digital cameras, including the CCD (millions of pixels vs. price) and memory chips (millions of bits vs. price), had improved since the introduction of the technology. In general, the more pixels in an image, the more personal computer processing power and the higher quality computer printer was needed to best take advantage of the benefits of the higher quality image. (See Exhibit 2 for select market data on the U.S. industry for household consumer electronics.)
Kodak’s greatest traditional competitor has been Fuji. Through the 1970’s and 1980’s Fuji has been the Kodak’s major competitor overseas, particularly in Asia where each have about one-third market share. In the United States, Kodak had held a strong, but declining marketshare of 80% in the beginning of 1997. However, with strong financial strength and aggressive cost cutting strategies, Fuji has been able to reduce Kodak’s U.S. marketshare by about 2% per year and take about 70% of the Japanese market. Between 1996-1997, Fuji has spent over half a billion dollars in new photographic paper plants in the United States to double their capacity and to be more responsive to the needs in the United States. Through aggressive marketing and developing strong relationships with distribution outlets, Fuji has also established a worldwide reputation for price, quality and marketing which has allowed it to have a strong following amongst professional photographers and gradually with the traditional consumer.
With a consistent 7% R&D budget, Fuji has also been able to develop new technology. In 1986, Fuji and Kodak partnered with other companies to introduce a new 24mm Advanced Photo System (APS) film, which uses a new generation camera, a hybrid between digital and traditional systems. The new APS system was a great success for Fuji in Japan. Fuji, however, has also been equally challenged by the digital age with new competitors and changing technologies.
Since the mid-1970s, Kodak had been a leader in the development of digital image capture devices for commercial use. In 1986, Kodak scientists designed and fabricated the world's first megapixel sensor – a sensor capable of recording 1.4 million picture elements.
Kodak launched its first digital camera in 1991, the Kodak Professional Digital Camera System (DCS), a high end camera allowing photojournalists to take electronic pictures with a Nikon F-3 camera equipped by Kodak with a 1.3 million pixel sensor. Kodak was lauded in 1997 for deploying the first 1 million-pixel resolution digital camera (the DC210 Zoom) for under $1000 retail price.
Over the past two years, Kodak and other entrants began to introduce digital cameras aimed at the consumer market. These entrants included Apple Computer, Canon, Casio, Chinon, Epson, Fuji, Hewlett-Packard, Minolta, Nikon, Olympus, Panasonic, Sony, Toshiba, and others. So far, electronic makers such as Casio, HP, Canon and Sony, with their relatively lower prices, had experienced some success in the digital market over traditional camera makers, but these were very preliminary results. In 1997, Intel announced the "971 PC Camera Kit" (which included a CCD) to make it easier and affordable for OEMs to develop and produce digital cameras.
These digital cameras were sold not only in traditional venues such as camera shops and drugstores, but also at consumer electronics and computer stores. The product replacement cycle for digital cameras during the period was six to nine months (vs. annually for traditional cameras), with new models costing less.
As of fall 1997, a digital camera with a 0.25 million pixel CCD cost from $250 to $500, while a camera with a 1-1.25 million pixel CCD cost $750 to $1000. (See Exhibit 3 for a list of some competitors)
Challenging Kodak’s photographic paper and processing side are companies that have developed technologies that allow consumers to see images without having to purchase photography paper or develop their pictures. The latest generation ink-jet printers can create high-quality prints of the digital images that can be printed on standard office paper. Companies such as Canon, Epson, and Hewlett-Packard offer these printers. The print quality has been on par with the resolution delivered by standard 1 million pixel digital cameras. Hewlett Packard also has printers that are dedicated solely for digital images that give greater resolution and printed on coated paper.
Impact of the Digital Technology
The decision-makers within Kodak faced some difficult dilemmas - including assessing the impact of digital cameras on Kodak’s existing businesses. Should Kodak push a technology that cannibalized its existing photochemical development infrastructure and products? So far, it was not clear that the digital cameras were going to catch on anywhere but Japan and Kodak has weak market presence in Japan. The following information on sales was available:
Unit Sales of Digital Cameras
Even with so many companies entering the digital camera market, the total volume of digital cameras sold outside Japan in 1997 was estimated to be only 400,000 units, compared to tens of millions of traditional camera units and 17 billion film-based photographs taken every year. So far, demand for digital cameras has mainly come from heavy users of personal computers – many thought this was due largely due to the poor image quality (relative to film-based cameras) of most consumer digital cameras sold for under $500. Analysts estimate that the market potential of digital cameras may grow to 1.8 million units in 1998, but the estimates varied widely.
Within Kodak, there were many differing views about digital camera technology. Various company literatures gave a conflicting outlook. Some felt that digital imaging would not overtake traditional film technologies and believed sales would be restricted largely to computer users, at least for the next two decades.
"The keys to Eastman's success in making photography a popular leisure-time activity for the masses were his development of roll film and the inexpensive box camera. Although film and cameras are far more sophisticated and versatile today, the fundamental principles behind his inventions have not changed." (Quote from Kodak corporate literature)
"More than a century ago, George Eastman unleashed an entrepreneurial spirit to simplify the complex art of photography. Today, at the company Eastman founded, that spirit remains alive. An outpouring of new camera films for consumers and professionals has resulted from new film emulsions designed in Kodak's worldwide research laboratories. These films set new performance standards in film speed, grain, sharpness and color reproduction. The foundation on which many of these improvements are based is the company's breakthrough development of KODAK T-GRAIN emulsion technology. This innovation, coupled with others that improve all parts of the photographic process, will enhance and extend traditional silver halide photography as the highest quality imaging technology. While electronic or digital technologies will continue to provide many enhancements for home and commercial use, film will remain the highest quality medium for image capture well into the 21st century." (Quote from Kodak corporate literature)
However, others within Kodak believed digital cameras would be a great growth opportunity.
"Four years ago, when we talked about the possibilities of digital photography, people laughed. Today, the high-tech world is stampeding to get a piece of the action, calling digital imaging perhaps the greatest growth opportunity in the computer world. And, it may be." (Quote from Kodak corporate literature)
Still others emphasized the advantages of Kodak’s hybrid technology CD system.
Kodak's development of the Photo CD, in conjunction with N.V. Philips of the Netherlands represents a quantum leap in electronic imaging. It provides consumer and commercial users alike the benefits of electronic manipulation with the high quality of silver halide imaging. And the system has been designed in such a manner that the end user can obtain these benefits at very low cost from the same photofinishers that handle film processing." (Quote from Kodak corporate literature)
Even with the evidently conflicting visions and lack of profitability in digital cameras, George Fisher remained positive on the long run outlook:
"We continue to be optimistic about our long-term prospects for profitable growth in both traditional and digital photographic markets, however, as in the first quarter, revenue growth and profitability have fallen short of expectations. These unsatisfactory results reflect continuing problems executing some of our business plans, as well as the very significant impact of adverse foreign exchange and an intensifying competitive environment. These factors, plus the continuing heavy investment in aggressive marketing of our Advantix (Kodak’s APS system) products and strategic investments in our digital products and services, will make it very difficult to grow 1997 operating earnings per share beyond the 1996 level."
"Although losses from digital products increased during the second quarter, Kodak remains committed to growing its digital portfolio in a value-creating manner… We continue to take the long view, investing for growth, particularly in Advantix, emerging markets and digital products, while managing our core consumer business both for share growth and market expansion." (From Second Quarter Fiscal 1997 Financial Statement)
"Our aim is simple: To enable everyone to take more pictures more easily, more creatively and less expensively than ever. We have many exciting products in the pipeline, all geared to allow our customers to realize our slogan: ‘Take Pictures. Further.’" (From 1996 Annual Report to the shareholders)
Kodak has been extremely successful over the last century in film sales and film development. How should it respond to the challenge of digital cameras? Can Kodak continue the Eastman Kodak legacy and follow Eastman’s four basic principles to survive in the new competitive environment? Does it have the internal resources to continue spending money investing in new technology? What type of strategy should it use to enter the digital camera business and how will Kodak leverage its strategic resources? Should it continue to research and produce digital camera technology alone, or look for partners? How will it cope with their existing and new competitors and how will it build a strategic advantage over other companies?
Comparison of Value Chain Activities, Analog vs. Digital Camera
Process of taking birthday pictures and enlarging three of them (to 5 x 7)
|Travels to store
|Travels to store
|Buys camera ($250)
|Buys camera ($500)
|Travels to retailer
|Buys film ($2.50)
|travels to retailer
|(waits 1 to 24 hrs)
|travels to retailer
|(waits 1 to 24 hrs)
|Travels to retailer
|Prints enlarged pictures
Exhibit 2: Select U.S. Market Data on Consumer Electronics
Source: Consumer Electronics Manufacturers Association
Exhibit 3: Digital Cameras