The rise and fall of Kodak: $30B to bankruptcy

At its peak, Kodak Corporation had research capabilities and scale even rivaling the US government. They had 188,000 employees in Rochester, New York, and a bunch of other places, and they operated a 3-pound uranium nuclear reactor at their headquarters for a period of years. But by 2012, the entire corporation was bankrupt and liquidated. This video is the rise and fall of Kodak, and I know what you're thinking. Oh, you know what killed Kodak? Digital cameras. Well, it turns out the story is a lot more complex than that, and that's what this video is about. The story starts in 1874 with a young bank clerk named George Eastman, and he wanted to take photos while he was out on vacation. The problem was, back then, photography required cameras the size of a microwave, a darkroom, a bunch of chemicals, and a bunch of expertise. So like many entrepreneurs of this era, Eastman spent countless hours after work at his mom's kitchen table, experimenting with ways to make it simpler, easier, and cheaper. In 1888, he'd invented the first disposable roll film camera. He called it Kodak, and the slogan was, "You press the button, we'll do the rest." In 1900, Eastman introduced the first camera called the Brownie and priced it at $1. The first year, he sold 15,000 of them, and it was an instant hit. Within 5 years, he'd sold 10 million of the cameras. The idea of the snapshot and the point-and-click, well, it had come, and photography was suddenly not the purview of kind of experts. It was for everybody. Over the next century and more, Kodak became one of the most dominant corporations in America. In fact, when Neil Armstrong stepped on the moon in the 1960s for the first time, he took photos using a Kodak camera. But Kodak really wasn't a camera company. Turns out they were actually a film company. Cameras were just the delivery mechanism. This was the classic razor blade and disposable razor situation. You sell the razor for cheap and then you sell the blades for, well, a high markup and a lot of profit. And that's exactly what Kodak did. Film itself had 80% profit margins. In 1985, one Kodak executive told the Wall Street Journal, "It is hard to find anything legal that is as profitable as selling film." To show you their dominance, by 1976, Kodak accounted for 90% of the film sold in the United States and 85% of the cameras sold. They had only one real competitor, a Japanese company called Fujifilm. and together they dominated film sales worldwide. And this Fuji company will be pretty important in the story. They'll come back later. By 1982, Kodak employed 60,000 people in Rochester, New York, alone. In 1996, Kodak reached its financial peak— revenue of $16 billion a year, real money back then compared to now, and a market cap of $30 billion. And that's when everything started to go wrong for Kodak. But this is where the story also gets interesting. Kodak knew exactly the doom that was coming for them. You see, in 1976, a Kodak engineer named Steve Sasson had invented the world's first digital camera. This first digital camera weighed 8 pounds, was the size of a toaster. It did 100 by 100 pixels and took 23 seconds to capture an image. Steve showed it to executives and his bosses at Kodak. He'd walk into meetings, plug the thing in, attach it to a television, take photos. And show them the magic. Kodak management at this point even commissioned a study to find out when digital photography was going to be prevalent in the world. They said, you got about 20 more years. And then they did something really interesting. They went to Steve and said, cute experiment, bro, but keep it to yourself. We're not going to do anything with this. And it was easy to say these Kodak executives were stupid. In fact, and especially because they understood exactly what Sasson had built. And well, it turns out that was the problem. If you look at a big corporation like Kodak, everybody has incentives on how to act and how to behave. Middleman in this situation are bonus based on how much money the corporation makes. Senior executives are hooked to the idea that they need to make sure shareholders get paid this year. And when the film margins are 80% and digital cameras are maybe 5%, that's not a motivation that's going to cause them to do anything. And what about board members? Well, their idea is to take care of shareholders today. Not future people in 2015, 20 years later. So top to bottom, everybody in the corporation, from the individual cleaning the toilets to the CEO and the board members, has rational reasons to protect the golden goose and the cow that's producing all the money for as long as possible. Nobody was motivated to say, how can Kodak be thriving 2 or 3 decades from now? And this is made worse by the way Kodak was structured and how big it was. It had 188,000 people working there, and they were what was called vertically integrated to an almost obsessive degree. They owned coal mines that produced the power that could power their plants. They owned factories that processed cow hooves to create the gelatin used to make film. They had their own fire department and railroad. Rochester, New York was basically their company town. They were that big of an employer there. So on top of all these financial incentives, this vertical integration and dominance for so long created basically a fortress mentality inside the company. A ton of these rise and fall stories come down to the same factors over and over again, so I put them all in a new ebook on why businesses win and why they lose. You can download it for free at girdley.com/why-they-win. Link in the description below. Now back to the show. The problem that they had was a thing called the innovator's dilemma. It was put forth by a Harvard professor named Clayton Christensen, rest in peace, uh, who put forth the idea that the very things that create your company are the things that prevent you from identifying when it's about to be disrupted. And reacting appropriately. Kodak isn't alone. Blockbuster Video had the chance to buy Netflix early on. I did a video about them that you can click on the link here if you're interested. Nokia and BlackBerry both saw smartphones coming and they missed their shot. In my video here on Sears, I talked about how they killed their catalog 2 years before Amazon was founded. You see, all of those folks and Kodak saw the threat coming and none of them were structurally capable of responding appropriately. That's where the pattern emerges. And the pattern amongst all these companies is they were all missing one thing. And the hint actually lies in the venture capital industry. There are many firms like Andreessen Horowitz and others that will only invest in companies where the founders are still running the company and they hold a significant ownership stake. If you look at Kodak, nobody around the table was a founder with a significant ownership stake and who was working in the business and had the ability to enact the kind of bet your business changes would have been required to save the thing. To be fair, the hired gun management and board did try to respond to the coming disruption, and they tried a bunch of stuff. They just never bet the company on the change coming. They were structurally incapable of doing it. In 1996, the year that Kodak should in fact have been pivoted and going all in on change, they invested $500 million in bringing out the Advantix line of photography film. In other words, they invested nearly $1 billion over the coming years to launch a slightly better version of film. Just as digital was arriving. They launched digital cameras and actually grabbed 27% market share by 1999. But because they were addicted to film-level profits, they treated digital cameras like they did regular cameras. Analysts estimated that Kodak was losing $60 on every camera they sold back then, hoping to make it up on printing paper and printing services. But to the sadness of Kodak, people didn't treat digital cameras like they did regular cameras. People didn't want to print their digital photos. They wanted to keep them digital and share them that way. So while Kodak was trying to fit digital photography into their old world thinking of film, they tried to also diversify using their cash hoard to go after other businesses. In 1988, they had bought Sterling Drug, a corporation, for $5.1 billion. Their logic was, hey, like, We know chemicals because we've been making film forever. Drugs are chemicals, right? We'll do great in this business. But it turns out selling aspirin is nothing like selling film. This added debt to the corporation, caused them to lose focus, and didn't kind of help with the disruption that was coming. They eventually sold off Sterling Drugs piecemeal, taking a loss on the whole thing. They also had a profitable healthcare imaging division selling things like X-ray films and that type of equipment. But because they had been slow in these early missteps, meant by 2007 they had to sell it off just as it was about to take off to fund their ailing film business. In 2001, Kodak had bought a site called Ofoto, basically an early version of what the idea of what would become Instagram a decade before that one was founded. But they didn't see Ofoto like what it would become in a highly profitable social network. They just saw it as a funnel to get more people printing photos. And while Instagram would eventually be sold to Facebook for an unheard of at that time price of $1 billion, Instagram, a company with only 13 employees, bought today by Facebook for $1 billion. Ofoto sold for just $25 million when Kodak later declared bankruptcy. All these missteps meant that the film cash cow kept decreasing as digital photography and eventually smartphones became a thing, and nothing stepped up to replace it. In 2001, film sales started to decrease and Kodak had nothing to step up. And take its place. From 2003 to 2011, Kodak shed 47,000 jobs. They closed 13 film manufacturing plants and shed 130 processing plants. In 1999, Kodak made a $2.5 billion profit. By 2011, they showed a $222 million loss. In January of 2012, Kodak filed for Chapter 11 bankruptcy. It was 131 years old. They listed assets of $5 billion and debt of over $7 billion. The stock price had gone from just a few decades earlier of over $90 to just under $0.15. But it didn't have to be this way. Do you remember Fujifilm? They were Kodak's only real competitor back in the duopoly days when they owned the film market. Fuji faced the same timeline, the same disruption, the same threats. They knew everything was coming just like Kodak did. Just they acted differently. In the year 2000, 60% of sales and 70% of profits for Fujifilm came from film sales. In a decade, that entire part of their business was destroyed. Yet today, Fujifilm is a conglomerate worth $30 billion and Kodak is bankrupt. The difference between the two is a man named Shigetaka Komori, an executive at Fujifilm. When he became CEO of Fujifilm in 2003, he did something that no executive, owner, our investor at Kodak could do. He recognized that the film business was dying and he stopped trying to save it. He started to shut down most of Fuji's film processing plants and labs, and he shut down the manufacturing as well. But unlike management at Kodak, he used that money to start doing genuine transformation of the Fuji business, not the surface-level stuff that the Kodak people did, and especially the things Kodak did trying to keep their film business golden goose producing eggs. Kodak executives had asked What businesses sound familiar to film? And we can get into those. But Komori instead asked, what specific competitive advantages and knowledge and capabilities do we have that could give us an advantage in other industries? Then he went out to go find those industries. As an example, it turned out that Fuji and Kodak both had 80 years of experience in producing gelatin, which had been a key ingredient in making film. And Fuji in particular knew more about oxidation and fading than virtually any company on Earth. In 2011, Fujifilm introduced a new product line called Astalift, a skincare routine, an anti-aging cream that became a hit in Japan, not because, quote unquote, chemicals are chemicals, but because they knew they had a competitive advantage to produce something in the world that would be better than anybody else could. They did the same thing in medical imaging, given their experience in making X-ray film over the decades. They did the same thing for LCD protective coatings using their basic expertise in that area as well. I remember that healthcare imaging firm that Kodak sold in 2007 during their wind down. Well, Fujifilm got into that business right at that time when it was about to take off. And today, photographic film is less than 1% of Fujifilm's total revenue. And today they're a cosmetics, healthcare, and film conglomerate worth nearly $30 billion. In the end, Kodak executives were incentivized to say, how can we protect what we have now? Whereas Fujifilm's leadership took a step back, did the courageous thing and asked, how can we become something amazing for the world as our core business dies? Kumori was willing to accept short-term pain and career risk to ensure long-term survival for the company. And it comes back to this idea of founder-led businesses often have somebody in this position willing to bet the whole thing and think in decades as Kumori did, because it's pretty rare to see somebody do what he did. Even still, Kumori admitted that he got lucky. He said later on that if they had waited just another year or two when the 2008 Great Recession hit, they might not have been able to make the turnaround happen at all. They would have just run out of money. And remember engineer Steve Sasson, who had invented the digital camera when working back at Kodak? Well, he retired in 2009, and his original prototype is now hanging in the Smithsonian Museum, a testament to the future he had envisioned and invented. Just sadly, he had been working for a company who wouldn't be able to capitalize on it. And interestingly enough, all the folks who came in and created digital cameras specifically that kind of disrupted Kodak. Well, they also got disrupted on their own. Today, the cameras we all carry in our cell phones have caused digital camera sales to crater and many of those folks to go bankrupt as well. It's easy to get disrupted when you're the disruptor. While the destruction of companies like Kodak is inevitably sad, and it makes me sad because I remember a youth with Kodak in it, it's the way the system's supposed to work. It's supposed to be hard when you enter a competitive market. Everybody competing to provide the best things to consumers, you end up where we are today after years and years, which is human beings living at the highest level of standard from technology and healthcare and everything that we ever have. But it's also why when you have a friend who's running a business and they say it's hard, well, it's supposed to be, and it's also true. Owning a business is ridiculously difficult, and I don't know a better way to describe it than that. All right, that's the story of Kodak. Let me know what you think in the comments below. See ya.