bankruptcy last week. For years, this company was visibly a dinosaur.
It had no visionary leadership. The senior managers had the wrong
vision. The company had lots and lots of debt, which indicates
how blind its creditors were. This
brief report was published by the New York Times in
Investors Service cut the rating on the $3 billion of debt of
the Eastman Kodak Company to the lowest investment grade as a
drop in film sales drained cash. The company's long-term senior
unsecured rating was lowered to Baa3 from Baa2, Moody's said.
Moody's and Standard & Poor's had cut their ratings earlier this
year on concern that Kodak's acquisitions and weak cash flow from
film sales would hinder debt repayment.
Baa3 is just
above junk bond status.
bankruptcy killed $1 billion in debt. Citigroup has announced
that it will loan another $950 million as a debtor in possession.
Why didn't Citigroup bail out in 2003? Or 2005? It was all downhill
it watched digital dissolve its high-margin film business, Kodak
has shed 47,000 employees since 2003, closing 13 factories that
produced film, paper and chemicals, along with 130 photo laboratories.
The restructuring has already cost $3.4 billion, because it was
done "in a socially responsible" way, said a spokesman, Christopher
were its stock investors. This company was doomed because it sold
film. Film as a technology was clearly doomed a decade ago. Nevertheless,
there were blind investors who paid $40 a share in 2003. It fell.
It rebounded to $35 in 2005. It fell. It rebounded to $30 in 2008.
Then it went over the cliff. It was at 31 cents when it filed
for bankruptcy. You
can see the 10-year chart here.
eternal. So do losses.
In an article
on the British operations of Kodak, the author interviewed a Kodak
executive who quit in 2010. The poor guy had hung on faithfully
for a decade longer than he should have. But, finally, he abandoned
the capsized ship. He
also told of a baffling conversation with a member of Kodak's
management, revealing: "Just last week a Kodak executive came
to me and said 'I think film will make a comeback', and I'm thinking
'who are you kidding?' That's the mentality that's stuck in that
company and you've got to break that and they've never been able
the company in 1994. It spun off Eastman Chemical Company. That
firm has had to compete internationally. A decade ago, you could
have bought it at $22. Today,
you would pay $46.
a classic story of a fat and sassy firm with a near monopoly in
its field that did not bother to adjust to changing customer demand.
Its executives had no perception of the fact that the new technologies
would kill it if it refused to alter course. They thought they
were immune because their industry was immune internally. But
it was not immune externally.
refused to develop digital cameras because they feared that the
new cameras would destroy their business. They feared cannibalizing
their own company. But as Steve Jobs famously said, "If you don't
cannibalize yourself, someone else will."
to promote the PC in 1981. They consigned it to a remote location,
Boca Raton, Florida, far away from Armonk, New York. They let
the people in Florida do whatever they wanted, but without much
money. Not having software development capital, the people at
Boca Raton went to Bill Gates to buy his software. Gates didn't
own any software to sell them. He told them no. He and Paul Allen
immediately put up $50,000 to buy Q-Dos. (It's nice to start out
well off.) Then he called back. Yes, he had the software, but
he would sell it only if he could retain the rights to it. The
IBM guys said OK. They were in the hardware business in Boca Raton,
not software. Why not?
The PC sold
well. IBM could have made the next breakthrough in 1986: implement
Intel 386 chip. But they were afraid that the PC would cannibalize
the entry-level mini-computer market which IBM dominated. IBM
skipped the opportunity. Compaq used the chip in a new computer.
It took away the PC market from IBM. IBM finally sold its PC line
to China in 2005: Lenovo.
made a fundamental mistake in 1975. This mistake is almost universal.
It did not understand what business it was in. If you had asked
a Kodak executive what business the company was in, he would have
said "the film business." Kodak was famous for its film. But it
was not in the film business. It was in the photography business.
Kodak film buyers bought the film in order to get pictures.
a means for a customer to get a picture. For as long as the customer
could get his pictures only by means of film, he remained loyal
to Kodak. Only Fujifilm gave Kodak a run for the money. It was
never a serious contender in the USA. The only reason Fuji had
any market share is because Kodak deliberately did not compete
head-on. Kodak feared antitrust action from the U.S. government
if it crushed Fuji, which it could have done easily. It had been
hit with antitrust injunctions in 1921 and 1954.
Kodak charged Fuji with trade violations in Japan. Kodak complained
to the U.S. government under section 301 of the U.S. Trade Representative's
rules. The government in 1996 prudently turned the case over to
the World Trade Organization, which had opened for anti-business
in 1995. This was the first case where the WTO decided on an antitrust
issue, took Fuji before the World Trade Organization. It lost
the case in late 1997. From the beginning, Kodak had a hard time
proving its case. Japan had eliminated all tariffs on imported
film in 1994. It had been slowly reducing tariffs on film for
years, yet Kodak could not increase its market share in Japan.
Fuji blamed Kodak's lack
Here is the
irony of Kodak's case. In 1994, Kodak had brought a lawsuit against
the U.S. government asking that the antitrust limits placed on
the firm in 1921 and again in 1954 be removed. Kodak had a dominant
share of the U.S. market, the government claimed. "Only because
we offer better products," Kodak replied. Kodak won the case.
The limits were removed. Then Kodak asked the government to go
after Fuji in Japan.
of Kodak is obvious to anyone who understands economics. The company
believed in domestic dominance apart from antitrust, but it also
believed in antitrust intervention in Japan. It was focused on
government, not customers.
worrying about Fuji. It should have been worried about digital
photography, a technology it invented and immediately dropped
the same time as these antitrust cases, the World Wide Web was
beginning as a result of the introduction of a graphical web browser,
Netscape. Lew Rockwell got the Mises Institute online in 1995,
the year after Netscape was released. I got GaryNorth.com
online in 1996. A couple of guys in the boondocks could see what
was coming. Kodak executives didn't. They were too busy worrying
about film sales in Japan. They were hypnotized by film. They
were not focused on pictures. If anyone wants an epitaph for Kodak,
I suggest this: "out of focus."
that is run by people who do not see the future clearly is in
big trouble. Senior managers must decide what is coming next,
and in what order, and how soon. Then they must allocate the firm's
resources to meet expected future conditions.
This is why
great success in the past can blind decision-makers. This
was Kodak's problem.
were a company stuck in time," said Robert Burley, an associate
professor at Toronto's Ryerson University who has photographed
shuttered Kodak facilities in the U.S., Canada and France since
2005. "Their history was so important to them, this rich century-old
history when they made a lot of amazing things and a lot of money
along the way. Now their history has become a liability."
and creditors who thought that Kodak was a viable company did
not recognize the truth after 2003. Kodak was a company with a
great future behind it.
AND THE FUTURE
from one source: accurate forecasting. People buy low and sell
high. They see what is coming when the competition doesn't. They
can therefore buy low. If everyone saw it, they couldn't buy low.
market allows people to invest their capital in terms of their
vision of the future. Most people will guess wrong. A few will
guess right. The customers are benefitted by this system of rewards
and penalties. They are served by forward-looking decision-makers
who see in advance what customers will want to buy and at what
problem is this: decision-makers find it difficult to keep seeing
the future accurately. They are committed to one way of doing
things. It is expensive to change. They don't want to change.
They want high salaries, stock options, and leisure. But customers
are a fickle bunch. They keep asking this: "What have you done
for me lately?"
with brand loyalty are set . . . for a while. Their customers
don't change brands very often. But there is always a generational
problem. Their customers die off. A new generation of not-yet-customers
buy new products that produce the same results in a new, better
way. Then the newcomers brag to the old-timers.
bragged to oldsters: "Digits are better than film." The old-timers
slowly saw that this is true. The price of the new technology
falls. Then the old-timers finally shift.
a serious photographer in 1957. I spent a lot of money for a teenager
on gear. I bought a Konica 35-millimeter camera with a 1.8 lens
in 1958. I bought an electronic flash unit when hardly anyone
had one. These were expensive. I paid with my own money that I
earned selling records. (Remember records?) I upgraded in 1971.
I had a friend buy me am Asahi Pentax 35-millimeter camera in
August of 1971. He was in Japan. I knew the yen would soon be
revalued. He got the camera just before Nixon's closing of the
gold window caused the revaluation. I used that camera for 30
years until it gave out. I bought nothing for a decade. I played
around with cheap digital snapshot cameras. I have just bought
a Sony A65. I'll use it until I die, I suppose. It will still
take great photos in 30 years.
at Kodak did not believe that this would happen to Kodak. They
hung on to their jobs. They could have left. They could have had
new careers in another company or another industry. But they held
on for dear life, just like the owners of Kodak stock. Just like
the bond experts at Citigroup.
change their buying habits. It is the role of the entrepreneur
to see this coming in advance and sell his shares of doomed companies
to other entrepreneurs who don't see it.
is technically superior may not be economically superior, as determined
by the people whose opinions count: customers.
I still hear
from lovers of vinyl records that records sound better than CDs.
These are invariably old people. I always hated vinyl's clicks
and pops. I abandoned vinyl in 1983. CDs do not have clicks and
pops. I have not listened to my vinyl albums in almost 30 years.
Dead inventory. Maybe I'll convert to MP3s someday. But my time
is valuable. I keep postponing this.
Young hates MP3s. The fabulously successful member of Crosby,
Stills, Nash, and Young says that MP3s are terrible technically.
They offer only 5% of what the master recordings contain.
I am an old,
old Young fan. I have a Buffalo Springfield album from before
CSN&Y. But I will probably make the switch to MP3. I am still
in CD mode. Do I care about sound quality? No. Why not? Because
I am such an old, old Young fan.
Take a look
at the hearing loss graph for men. I included it in an
article on the hi-fi gear I owned at age 17. (I overpaid.)
These days, I can't hear the difference between an MP3 and a CD.
Sorry, Neil, but we're old. And the youngsters are not audio fanatics.
They are music consumers who use cheap earbuds while multitasking.
They are not concentrating on the music. They are not audio connoisseurs.
They are the fast-food generation. Their audio sensitivity matches
their culinary tastes.
ago, I had a friend who was a concert organist, a graduate of
Julliard. Problem: he could not find enough paying concerts. Today,
he makes his living putting together high-end hi-fi systems. He
sells fabulously designed high-ticket turntables. These play vinyl
records. The clicks and pops are reproduced with magnificent fidelity.
You can also buy amplifiers that use vacuum tubes. The trouble
is, the only people who can afford amplifiers with vacuum tubes
are men who are chronologically close to being on tubes themselves.
of the marketplace is this: if you stick with producing whatever
is old, no matter how high its quality, your market will shrink,
one funeral at a time.
Do you remember
wristwatches? You could buy a Rolex for a small fortune. But then
came quartz watches. Then came LED watches. Then came digital
watches. Then came super-cheap swatches. They all kept better
time than Rolex watches. These
days, young people do not wear wristwatches, which they dismiss
as mono-function devices. You can still wear a Rolex, but you
do it as a fashion statement. You mark yourself as upper class,
meaning "money is no object," meaning you have limited good sense.
the loss of craftsmanship. Yet when it comes to precision, a third-generation
machine can usually beat a human. John Henry won the contest,
but the exertion killed him. He would not be the last.
points the way to innovators. It has a narrow market. Rich people
buy the output of craftsmen. Then comes mass production and price
competition. The precision declines, but the market grows. Then
comes high-tech precision. Prices keep falling, but precision
increases. At some point, the mass produced item vastly exceeds
the quality of the comparable aristocratic good of two generations
wrote about this in 1974. The process of technological replacement
has accelerated since then.
the digital camera in 1975. The camera was bulky and slow. Its
images could not match the precision and grandeur of film. That
was one generation ago.
as a company proved to be equally bulky and slow.
still photographers who say that film is better. There are still
audiophiles who say that vinyl is better than CDs, and that vacuum
tubes are better than digital circuits. There are still snobs
who say that Rolex is better. They can exercise their tastes if
they want to pay enough money. They are buying status, not performance.
my rule for buying audiophile equipment. "Do an A/B test. When
you can't hear the difference, buy the cheaper product." It's
a good rule for just about everything.
With my ears
these days, $300
does just fine. Sadly.