A Picture May Last Forever, But the Company that Revolutionized Photography May Not: Kodak Prepares to File for Bankruptcy and Looks to Sell Its Patents
What if someone from the future told you that 20 or 30 years from now Apple or Google would be unable to find a buyer, would have stock valued at less than $0.50 per share, would be looking to sell almost all of its patents, and would be on the verge of filing for Chapter 11 bankruptcy? You might think that they’re crazy, right? Well, for Eastman Kodak Company this far-fetched scenario has now become a reality. Headquartered in Rochester, New York, the 123-year old corporation that can be credited for the invention of the digital camera in 1975 among many other technological breakthroughs in the areas of photography, imaging, and film, has begun to make preparations for a bankruptcy filing if other last-ditch efforts fail. Once viewed as among one of the greatest American companies, Kodak has lost money in five out of the last six years and gave up investing in film products in 2003 to shift its focus to printers. Unfortunately, Kodak has had difficulties penetrating the saturated consumer and commercial inkjet printing market, which is dominated by huge companies such as Hewlett-Packard and Epson.
At one point in Kodak’s long history it held a near monopoly on film and produced such high margins of return that it would share these profits with its workers on “wage dividend days.” Initiated by Kodak founder George Eastman, on these days, all employees would receive bonuses based on results. One former employee compared Kodak in its heyday to Apple or Google of present. Young, highly talented employees could be found at lunch time watching a movie in the corporate campus’s on-site movie theater, or playing basketball on the company’s courts. It seemed unimaginable at the time that Kodak could ever be on the verge of bankruptcy. Some of Kodak’s most notable technological breakthroughs over the last 100 years or so include the invention of roll-film by George Eastman, the mass production of inexpensive “pocket-cameras,” the first 35 mm color film, the first megapixel sensor capable of producing picture quality prints, the first digital camera, the first organic light-emitting diode (“OLED”) display, and the first Wi-Fi enabled digital camera capable of emailing pictures from the camera itself.
Despite all of these amazing technological advances Kodak has not been able to capitalize on its inventions or adjust its business model after the decline of its market share in film in the 1980’s. In the last five years, Kodak has become a patent troll. In order to raise money it began enforcing its intellectual property rights and was quite successful. Overall, Kodak made around $1.9 billion between 2008 and 2010 through litigation and licensing of its IP. That money was used to keep the company afloat while it invested in its newest endeavor—printers. Kodak has had a tough time though turning a profit in the printer business and, while sales are up, the printers are still being sold at a loss to the company and income from the IP litigation has begun to run out.
The company is still litigating a major case in front of the International Trade Commission (“ITC”) against Research in Motion (“RIM”), the maker of the BlackBerry cellphone, and Apple over technology in their smart phone cameras. Kodak believes that this case could generate close to $1 billion in licensing revenue if successful. In its complaint, Kodak noted five allegedly infringed patents with two of them relating to the previewing of captured digital images. Kodak specifically requested that the ITC exclude from entry into the U.S. any RIM or Apple mobile device that infringes on these patents. Apple responded by filing patent counter-claims in a U.S. district court and in the ITC. The Commission decided not to review an ITC administrative judge’s ruling that Kodak did not infringe on Apple’s patents, but it affirmed in part, reversed in part, and remanded in part an administrative judge’s conclusion that Apple and RIM did not violate any of Kodak’s patents either. The original court date was set for August of this past year, but due to a judge’s retirement in the case, it has been postponed to September 2012.
Some commentators have noted that the delay in this case will greatly hinder Kodak’s ability to head-off bankruptcy for a couple of reasons. First, it will not have the possible monetary benefit associated with a win in this case (i.e., the estimated $1 billion in licensing fees), and second, without knowing the result of this case, Kodak’s patent portfolio is much less attractive to buyers. In fact, over the past few months Kodak has investigated its options in selling 1,100 of its digital imaging patents, but while there are several interested buyers, there has been difficulty finding an acceptable price, partly because of the delay in the infringement case against RIM and Apple. Kodak has also looked into the option of filing for bankruptcy and having a court-run auction of its patents with the hope of getting full value. The problem there is that bankruptcy would do nothing to increase the value of its patents. If the market is unwilling to pay a certain price for Kodak’s patents, then having an auction through the court system would not do anything to change that. Currently though, there is some debate as to why Kodak has been unable to command a premium for its patents given the patent wars that seem to be erupting amongst the technology industry’s largest players. Some have said that many of Kodak’s patents are outdated and are limited in scope. Others argue that Kodak’s patents are too heavily encumbered by license agreements that may not survive when placed into a different partnership, and by settlement agreements that protect against future infringement claims. Further, it is unclear that selling the patents (even if Kodak did obtain full value) would really help Kodak in the long run. Again, analysts point out that a short-term fix will not be a panacea for a long-term problem.
Unfortunately, none of these efforts may be enough for Kodak and it seems very likely that Kodak—once so important to the American economy that it was listed as one of the 30 companies in the Dow Jones industrial average—will be filing for Chapter 11 bankruptcy in the near future. So for all of you photography traditionalists out there, stock up on your 35 mm Kodak film now because it may not be around for much longer.