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Kodak and the future of film

The Wall Street Journal's Heard on the Street column reports that a group of Kodak shareholders wants the company to undo its plans to move away from film into digital technology (see Investors Seek to Rewind Kodak - subscription required to view article).

I found this article pretty interesting because the first time I heard that Kodak was going to move away from film in favor of manufacturing inkjet printers, my reaction was that the management at Kodak must be deluded if they think they can compete successfully against established printer manufacturers such as Epson, Canon, HP and Lexmark.

Having personally used many of the products that Kodak plans to compete against, I think that it's highly unlikely that Kodak can come up with better products that are price competitive yet still profitable. Apparently, some Kodak investors agree with my point of view. They don't want Kodak to waste the shareholders' money on a futile attempt to play catch-up. They believe that Kodak should just continue to make profits from its film business, even though it's a declining business.

The concept that a company should just be happy making money in a declining industry is rarely endorsed at American corporations. In corporate America, growth above all else is the religion, and to speak out against it is heresy.

In addition to demonstrating the herd mentality of corporate management, the Kodak story also provides an example of how corporate management often works against the interests of the shareholders in order to satisfy their own personal goals and ambitions. I'm sure it's more exciting for the top managers at Kodak to get involved in new and sexy digital businesses, rather than just preside over a company with negative growth. But how does this benefit the shareholders? If the shareholders really wanted to own a digital company instead of a film behemoth, they'd sell Kodak shares and buy shares of something else. The other company they'd buy shares in is probably much better equipped to compete in its technology than Kodak.

I believe that Kodak can make money from film for many years. Despite cries from digital photography zealots that "film is dead", with the announcement from Kodak being used as further evidence, I find it highly unlikely that film use is suddenly going to collapse. It is true that for commercial and high end amateur photography, digital has mostly replaced film. But at this point in time, I fail to see the benefit of a digital camera for people who don't own a computer, or for people who own a computer but don't know how to print a JPEG file. I know that computer people think it's really easy to print a JPEG file, and maybe it is, but I would judge it harder than learning about f-stops, and the majority of people who use cameras these days don't know an f-stop from a truck stop.

Digital zealots think that Moore's Law will overcome everything, and within a few years a cell phone camera will take better pictures than a medium format film camera of today. They don't understand that Moore's Law no longer applies to digital cameras. Moore's Law isn't even a law, it's an observation that computing power doubles every eighteen months. With computer chips, it works because engineers are able to fit more transistors on the same or smaller sized chips. With digital imaging chips, making smaller chips with more transistors isn't going to create a better image. And the other key component of a quality image, the camera lens, can be quite expensive to manufacture. Because lenses aren't computer chips, Moore's Law has no effect on them.

My observation of digital cameras is that they have reached a plateau. Each year they still get a little better and a little less expensive, but the rate of improvement is no longer very rapid.

Living in developed countries, we forget that there are two billion people in China and India, most of whom are too poor to afford to buy a computer and invest in expensive digital camera equipment. But they can afford to buy and develop a roll of film, in conjunction with an inexpensive film camera. They can also afford to use a single use camera, which is the fastest growing segment of the film market.

My observations about the continued use of film should come as a relief to silver investors. The film photography industry is a major user of silver, and if film use were to suddenly disappear, it would have a negative impact on the price of silver. But I find the scenario of film disappearing to be highly unlikely.

posted Tuesday, October 21, 2003