Kodak gambles all on its digital vision

Photographic film giant enlists powerful allies in a hi-tech strategy that could backfire. Paul Rodgers reports from San Francisco

EASTMAN KODAK, the world's largest photographic film company, with a market capitalisation of $18.6bn (£11.7bn), is talking of "eating its own babies".

The company has launched a series of initiatives aimed at making it the leader in digital image processing. The danger, as its officials admit, is that low-margin digital technology may cannibalise its lucrative but slow-growing traditional business in silver halide film.

At a flashy presentation in San Francisco last week, the New York-based company revealed alliances with companies ranging from the computer manufacturers IBM, Apple and Hewlett- Packard, software houses Microsoft and Sega, and the telephone upstart Sprint, to such relative minnows as Kinko, a chain of quick-print shops. The object was to create a system of capturing, processing, storing, modifying and printing pictures that industry observers say is likely to become the global standard.

In its most advanced form, the system would allow a photographer to take pictures with a digital camera loaded with a computer disk instead of film. The images could be sent down a phone line to a home or office computer to get rid of red-eye or other unwanted features.

From there the photographs could be sent electronically to, say, an advertising agency on Madison Avenue or Grandma's home in the Australian Outback.

A simpler version of the technology has already proven itself to professional photographers. During the Kobe earthquake in Japan earlier this year, Associated Press snappers used their digital cameras hooked up through mobile phones and satellite links to deliver views of the carnage to newspapersaround the world.

The photographic company brings several skills to the table in its new partnerships. The main one is colour management, a system of calibrating equipment so that the colour seen in prints or on-screen matches exactly what appeared in the viewfinder.

Its compression technology is so advanced that it can store sketchy but recognisable pictures in the leftover space on a credit card's magnetic stripe - a security application it is exploring with IBM.

A system called Fits, developed by a French company in which Kodak has a stake, promises to cut the time taken to transmit high-resolution photographs from more than 35 minutes a frame to less than two. To gain industry acceptance for the package, it is opening up many of its proprietary technical standards to competitors.

Kodak's new strategy is a dramatic break with its history. Since 1879, when George Eastman took out his first patent in London for a photographic coat plating machine, the company has been a loner. Its obsession with doing everything in-house gave it enviable control over quality and helped build a global brand identification that rivals Coca-Cola and Ford. But it was a liability when trying to break into the far more complicated, fast-moving, multimedia field.

The attitude change came with the arrival of George Fisher from Motorola 18 months ago. The new chief executive found himself with a moribund company, in which the share price had underperformed the stock market for a decade, and set about turning it around. Kodak made $557m last year on sales of $13.6bn, after a consolidated loss of $2.17bn a year earlier. It refuses to release market share figures, and insists it is still ahead of Fuji and Agfa, but admits it is slipping in the rankings.

Using his fabled gold Rolodex filing system, said to contain direct- line numbers for thousands of top executives, Mr Fisher sold five subsidiaries, from pharmaceuticals to household cleaners, in nine months, raising $8bn - most of it to pay off the company's debt. Six months after joining Kodak he had set up a digital science division. Within 18 months, he had formed key alliances with almost a dozen companies. "We're entering a brave new world where we don't have the capability to stand on our own," he said.

This is not Kodak's first foray into digital technology. Five years ago it announced its Photo-CD product. The system stores photographs on compact discs so that they can be replayed via television and computer screens or sent to photo shops where prints can be made. But it now concedes that the marketing was bungled. It was aimed at consumers who were not ready for it, rather than the small businesses that have embraced it.

The company also lacked commitment to new technology. Like other film companies, it feared that digital imaging would gobble up its existing business - at much lower margins. Silver halide, the technology used in all colour-film photography, involves complex chemistry and expensive front-end investment, so the barriers to entry are high. Digital technology is far easier to break into.

Mr Fisher argues that if Kodak does not enter the field, other players will. He predicts that old-fashioned film will be around for at least another 20 years, buoyed by growing sales in developing countries.

"Digital only made up sales of $500m last year. It's the fastest-growing part of the business - 20 to 50 per cent a year - but even after five years it's still going to be smaller than the traditional business," he said.

The company's strategy is three-pronged: silver halide, which makes up the bulk of its business; pure digital; and a hybrid, in which people take pictures on film and have them scanned into digital format.

The dangers of this for Kodak are twofold. First, the system could be ignored by customers, or be overtaken by rivals. Secondly, and more serious, is the possibility that it will be too big a success. Critics warn that if sales of CD-Rom-equipped computers soar and the cost of digital cameras falls below about £150, Kodak could see the cash cow it is counting on slaughtered.