A Century on Film How Kodak Succumbed to the Digital Age


Part 2: Nostalgia and Pride

During our drive through Kodak Park, Shanebrook ponders questions more fundamental than technical: How could his company have gone bust? How was it possible for a company to go out of business when, in the 1970s, it was making fully 90 percent of all the films exposed in the United States and 85 percent of all the cameras sold? Could such a thing really happen to one of the most valuable and well-known brands of the entire 20th century? How did Kodak miss the dawn of the digital era? How could a company that had always been one of the world's most innovative, implode so dramatically that its share price fell to below 50 cents at the start of the year, prompting the company to be delisted from the New York Stock Exchange?

If you want to know the answers to these questions, you must be prepared for a few surprises. To start with, who would have believed that it was actually Kodak that developed the world's first digital camera in 1975? Robert Shanebrook recalls seeing the first prototype and can describe its size with his hands. Together with all its parts, the device was about three times as large as a shoe box. The camera, which was invented by Kodak engineer Steve Sasson, took a single, appalling black-and-white photo comprising a total of 0.01 digital megapixels. Likewise, Shanebrook remembers that saving the image took a full eight minutes rather than the mere 28 seconds one can find people claiming online. For these reasons, Sasson's device didn't seem like a very marketable product.

But the Kodak technicians continued researching and doggedly improving the sensors that would soon be found in military equipment and, later, in both Nikon and Leica cameras, the latter costing as much as a car. Indeed, executives in Rochester weren't dozing off. Rather, they were wide awake -- but facing a nightmare scenario.

A One-Way Street to Oblivion

Larry Matteson, another Kodak veteran, remembers those days well. Matteson was a manager in the company for many years, and even a senior vice-president. Today, he is a professor at Simon Business School at the University of Rochester. Four years after the invention of the digital camera, Matteson was tasked with drafting a report about the future of digital technology for the company's executive board. In hindsight, his report seems almost prophetically accurate.

Matteson tells me by telephone about the report he made more than 30 years ago. Judging by his voice and the picture on the university's website, one would think he's a good-humored elderly gentleman. Back in 1979, he summarized the prospects for digital photography in a series of rapidly rising exponential graphs. The graphs showed that -- inevitably, if not immediately -- all the products Kodak had been successful at selling -- film, photos and cameras -- would switch from analog to digital by 2010 at the latest. The world as Kodak knew it was destined to vanish, and its business would shrink to practically nothing. Almost overnight, Kodak found itself heading down what seemed like a one-way street to oblivion.

From an objective point of view, there were two particular things that the company did extremely well: First, Kodak was a world leader in organic chemistry. And, second, thanks to its unparalleled experience in making films, it had become expert in coating surfaces of all kinds with extreme precision and at lightning speed. "But you can already see where that was heading," Matteson says. "Both were qualities that were no longer needed in the production of digital images."

After focusing on chemicals and film for several decades, it would have probably been impossible -- if not insane in business terms -- for Kodak to try to reinvent itself as an electronics company. What's more, its film business was still booming in the late 1970s and promised to bring in outstanding profits for many years to come.

In addition, it was easy to figure out that the meager margins of the digital market could never hope to match those of analog film or to keep a company like Kodak above water. Thus, as many as 30 years ago, Kodak seemed to have one of two choices: to commit suicide right away or to put it off until later.

Digitalized to Death

"The mistake," Matteson says, "if you want to talk about a mistake at all, was that Kodak could never separate itself from the notion of being a company about images." There were apparently repeated, although half-hearted, attempts to reorganize the company and completely change its direction. Every new board came up with a different strategy. Kodak invested in the hope of expanding its chemicals division into the pharmaceuticals business. It also spent a lot of money trying to dominate the market in digital printing -- a plan that was pursued, abandoned and then revived once again.

Bad luck also played a part in the company's eventual demise. Kodak tried extremely hard to survive the competition between analog and digital technology. It scaled back its film production in as controlled a manner as possible, while ratcheting up its digital capacities. As a result, Kodak was the leading manufacturer of digital cameras on the American market as recently as 2005.

Unfortunately, the next technological leap was just around the corner, and the first smartphones were already replacing digital cameras. Indeed, people soon stopped using normal cameras to take photographs, preferring instead to snap pictures on their phones. This, in turn, triggered a race to the bottom in terms of camera prices and, by 2007, Kodak had slipped to fourth place on the American camera market. Three years later, it was seventh. One by one, Canon, Sony, Nikon and all the other camera manufactures overtook Kodak. Their products were just as good or better, and they looked nicer, more colorful and fresher.

In Tokyo, managers at the rival company Fujifilm came upon the idea of converting their chemical business into a cosmetics one. But Kodak executives couldn't come up with a radical solution that could save their company. Other similarly outside-the-box suggestions -- like using their outstanding coating technology to print wallpaper or to manufacture sandpaper or Post-it notes -- were only given brief consideration before being dismissed as undignified. Rochester was gripped by an understandable but still fatal attitude: They had given the world pictures from the surface of the moon, they reasoned, so someone else could give it wallpaper.

A Rosy Future for Rochester

Visiting Rochester today, you find a city that seems like no stranger to bad news. The downtown area is a collection of office towers, many of which are for sale. Streets are filled with cars, but there are only a few people on the sidewalks. The skyline is dominated by office blocks belonging to Xerox, Bausch & Lomb and Chase Bank. Kodak's headquarters is also downtown, though a bit off to one side, and it can be seen from afar, especially at night, when its old-fashioned logo shines brightly in fiery red.

From there, it's just a few hundred steps to the point where the Genesee River plunges 30 meters (100 feet) into the heart of the city. The base of the waterfall is surrounded by crumbling, abandoned factories older than Kodak's, the remnants of early 19th-century Rochester. The city has long sought to transform the ruins into a fashionable nightlife district, but the efforts thus far have failed. Restaurants and bars have opened up only to close a few months later.

Still, Rochester is doing far better than its cityscape suggests. One reason for this is the fact that Kodak's decline has been rather drawn out. A slew of Kodak executives and researchers left the company to start their own businesses rather than manning the bridge as the ship was sinking. The behemoth that had once, like a Soviet collective, done everything itself -- including printing and folding its own cardboard boxes -- gradually broke apart into smaller units.

Kodak's decline has brought healthy change to the city by spawning new businesses whose products are better-suited to 21st-century needs. One corner of the industrial zone has been taken over by the Eastman Business Park, which Kodak holds a stake in. This cluster of 35 companies already reportedly employs a total of 6,500 people. If correct, this figure almost matches Kodak's remaining workforce in Rochester.

Johnson & Johnson is developing medical-diagnostic tools in the park, while LiDestri Foods is cooking up huge amounts of spaghetti sauce in the massive structure on Lee Road. But there are also small and mid-sized firms with between five and 50 employees. These include the solar-cell company Natcore Technology and Cerion Energy, which was founded by former Kodak employees who have developed a diesel additive that is supposed to dramatically lower fuel consumption.

Given these developments, it would be a stretch to say that Rochester is almost panicky about its future. The city is home to a respected university as well as the Rochester Institute of Technology, which is sometimes mentioned in the same breath as MIT, its illustrious counterpart in Cambridge, Massachusetts. In fact, the future actually looks rosy in Rochester: The region now employs half a million people, fully a fifth more than were there in Kodak's heyday, and unemployment is below the national average.


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