Kodak had the cash cow, so why couldn’t they successfully transition into a digital company when they invented digital photography?

Dave Young:

Welcome to The Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those.

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Stephen Semple:

I have a special guest with me today. I have Gary Bernier with me, and Gary has been hounding me for months to do this specific topic. And I finally broke down and said, “Okay, Gary, we can do a podcast on this.” So, Gary, what is it that you wanted to talk about? Because this is all about you today, dude.

Gary Bernier:

Oh, it’s all about me. Sure. You invite me on to talk about the demise of an empire, the fall of an empire. That’s what we’re going to be talking about today. Geez, that’s what I’m going to be associated with, Steve. You get to be associated with building empires, and I guess I’m going to be associated with the demise of an empire. The empire we’re going to talk about today is Kodak, the guys that owned the photography and film business for years and years and years, and what a lot of people don’t know, actually got into the digital space early on.

Stephen Semple:

Well, the more you talked to me about it, my resistance to doing this came down because I actually think, even though this was a big company and it was a demise, actually, the more I looked into it, felt like there is a really, really good lesson here. So it is an interesting story, but there is a great lesson. So I really encourage people holding on to the end. But it’s really interesting. When you think Eastman was, first of all, the Eastman Dry Plate Company is how it started before it changed its name to Kodak. It started in 1881 and seven years later changed the name to Kodak. But if you think about it, what’s really crazy is they invented snapshot photography. And when you and I were kids, they were huge. In 1976, when they peaked in the U.S., 90% of film sales and 85% of camera sales in the United States was Kodak.

Gary Bernier:

That’s kind of a big deal, isn’t that? 85%?

Stephen Semple:

Yeah. Oh, God. How many businesses get to that? And in 1996, two-thirds of film sales worldwide was Kodak. In 1996, they were the fifth most valuable company on the planet. 16 years later, 2012, they went bankrupt. So what happened? It’s really interesting. When you read these stories of what happened, people will say, “Hey, they didn’t see what was coming.” And that’s my favorite one. They didn’t see what’s coming. And they knew what was coming. They invented the digital camera. In 2001, they were number two in digital camera sales. In 2005, they became the best-selling digital camera in the United States. They had a home printer. They even had an online photo service that they bought in 2001. They even had developed blockchain technology for our photographers. So they saw this thing coming. There’s no question about it. They were actually developing a lot of the technology that’s being used today in digital. So they saw it coming.

Gary Bernier:

So I’m on top of the film world. I see this digital thing sneaking up. I’m putting efforts into it. How come 12 years later?

Stephen Semple:

Well, the other reason that I’ve heard people say is they were too early. They were on the bleeding edge of the technology. And I had a hard time with that one as well. So if you think about it, let’s walk through some timelines. 2001, they’re the second largest digital camera sales. Also, in 2001, they buy an online photo service. And then 2005, best selling digital camera, 2007, they become number four, 2010, number seven. But-

Gary Bernier:

They hit the peak of the dot com boom was around 2006, 2007, was the peak of the dot com boom. They were right there with the right technology.

Stephen Semple:

They were right there with the right technology, and the year they went bankrupt… So in January 12, 2019, they went bankrupt and they sold their online photo service to Shutterfly for $23 million. 81 days later, Facebook buys Instagram for a billion. And today it’s estimated that Instagram is worth $100 billion. And Kodak was right there with a brand name.

Gary Bernier:

They had the brand, they had the peoples’ trust, they had the technology. So what’d they screw up?

Stephen Semple:

Here’s what I think they screwed up. When you read, or in other words, when Steve went back and read old annual reports.

Gary Bernier:

Oh, joyous.

Stephen Semple:

Oh, joyous. And the letters from the CEOs and things like that, what you found overwhelmingly, when they’re withdrawing themselves from a particular business, what they would talk about how it was low margin and the margins were not as good as the film business. Or what would happen is they would do something for a few years, like the blockchain technology, and then abandon it because it’s low margin and it’s not making money. Or they weren’t sure how to make money on it. But what was constantly happening, it was a constant comparison to the film business and also this recognition that it was replacing the film business and the margins weren’t as good. So there was this constant resistance to going down that path. And I think that got in their way.

Gary Bernier:

So are you saying they couldn’t flip their mindset to a dot com startup? That we’re just going to get eyeballs and we’re just going to grow and we’re going to own the marketplace and later on we’re going to figure out how to monetize it?

Stephen Semple:

They absolutely were unable to do that. But what’s really interesting is if you go back and take a look at both Hershey’s and Intel, go back and look at those two stories. Hershey’s, in particular. I see a lot of parallels between Kodak and Hershey. So Hershey was in the caramel business, as you know from that story. And they pivoted to the chocolate business and the chocolate business… Caramel business was in decline. Chocolate business was higher volume, the future, lower margin. Sound familiar? What Hershey did was he sold the caramel business and went whole hog into the chocolate business. And I think one of the things that that does is it removes the distraction. I think if Kodak had done this in their analysis, I think they would’ve landed in a different place. And I know I’m playing arm chair quarterback.

Gary Bernier:

We’re talking about it after it fell. It’s like pulling out and saying, “Well, the Romans would’ve gotten defeated over here if they hadn’t done this or so and so…” Sure. We’re talking about it after the fact.

Stephen Semple:

This is a tool for analysis that I really like and I’ve used with a lot of businesses, especially when it comes to a product or a division or things like that. And I’ve modified this tool, but I didn’t invent it. This is the Boston Consulting Group created this idea called the Boston Consulting Grid. And they talk about market share in it. I like to talk about opportunity instead. And really when you take a look at their analysis around market share, it’s really about opportunity. So it’s really simple.

You draw a horizontal line. One side of the line, you say little opportunity. The other side of the line, you say huge opportunity. So that’s about your future. Small future, big future. You do a vertical line. Generating cash flow, not generating cash flow. Okay. So you now have this quadrant where there’s four possibilities. So one of the possibilities is no future, not generating cash flow. You call that your dogs. And if you have a business that’s a dog, you get rid of it as quickly as possible. You’ve also got one that is it’s taking investment, taking time, energy, money, but has a huge future. That’s called an investment. And then you’ve got your stars. That’s the one everybody wants, which is generating cash flow and got great future opportunity. Those are the things that, frankly, Kodak and the film business had a star for decades.

Gary Bernier:

That’s where it was running before digital started disrupting, right?

Stephen Semple:

Right. And then you have your cash cows. And your cash cows are things that are generating lots of money, but don’t have much future. So your dogs, you get rid of. Now, so if you think about it, here’s what happened to Kodak. And this happens with every industry. They had a star in the film business and then all of a sudden, and they knew it, all of a sudden the future started to decline on that. It became a cash cow.

Gary Bernier:

So it moved quadrants. It went from being the superstar to just being a cash cow.

Stephen Semple:

And what they knew is they needed a new star. And so you’ve got to do investments. So you take the cash from the cash cow and you put it into investments and you want one of those investments to become a star.

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

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Dave Young:

Let’s pick up our story where we left off. And, trust me, you haven’t missed a thing.

Stephen Semple:

So, in fact, they were doing all the right things except one. When they looked at investments, they didn’t look at them as investments. They wanted them to immediately become stars. They didn’t give them time. And one of the places that you can see that best is how they went into the home printer business. So think about their history in cameras. What did they do? Give people a camera cheap, make money on the consumable. That was their history.

Gary Bernier:

The consumable was the cash cow.

Stephen Semple:

Right. Guess what they did in the home printer business? They went with a high price printer and less expensive ink than their competitors. They didn’t want to lose money on printers. “Oh, no, no, God. We’re making these printers. We’ve got to make money on it.” Where everybody else is like, “We’ll lose money on the printers. We’re making the money on the ink. We’ll lose money on the cameras, We’ll make the money on the film.”

Gary Bernier:

Where everybody else had learned from Kodak, make your money on the consumables, Kodak couldn’t find their way around to that side of the page?

Stephen Semple:

Kodak could not learn from themselves. And I think the problem was they were looking at it going, “We have to have these things making money. We need high margin.” They weren’t looking at them as an investment. That takes time and energy. The other thing I think that happened was when you’ve got a cash cow, your objective on the cash cow is you do not want to be putting a lot of time and money and effort into it. A cash cow, you’re sucking that baby dry, recognizing eventually the cash cow becomes a dog and you get rid of it.

Gary Bernier:

When you’ve milked the cash cow, there’s a point when it comes to sell that thing for the meat that’s left.

Stephen Semple:

Right. Or you do the Hershey’s mode of, “This is still a great business, but I eventually see it going down this path, so while it’s still a great business, I’m just going to sell it.”

Gary Bernier:

Look. It’s still giving you milk. Here, take this and run with it for a while.

Stephen Semple:

Yeah.

Gary Bernier:

Is a more attractive offer than, “Hey, you want a dog?”

Stephen Semple:

Right. Yeah. Or spin it into a separate division or… There’s lots of things they could have done because it was still a very valuable business. But I think they never, with the ones that were the investment side, they were constantly looking at, “Oh, this is low margin business. This is not as profitable as the film business.” And to your point, they never embraced the digital side. They had all the tools. They had the technology for the digital camera, they had an online photo system, they had NFTs and they had brand.

Gary Bernier:

And I believe they had a bunch of patents on all this stuff, too, right?

Stephen Semple:

Absolutely.

Gary Bernier:

So anybody else that was making digital stuff was giving them patent revenue for a while too, right?

Stephen Semple:

Yeah. And, meanwhile, Instagram comes along and eats their breakfast. And Instagram, and we are going to be doing a podcast on Instagram, Instagram saw their business as a photo sharing business. Jesus Christ, couldn’t Kodak get their head around that?

Gary Bernier:

Obviously not.

Stephen Semple:

Right? Kodak started as a business for sharing pictures with your friends.

Gary Bernier:

And think about some of the other books or other spinoffs like Chatbooks and Apple Books where you can take your photographs and get them printed and they come to you as a book. I’m sure Kodak could have done that and may have even pioneered that in the first place, but.

Stephen Semple:

Oh, if I could go back in time, it would be really interesting to see what would happen with Kodak if they just basically had started, taken a whole pile of cash and started it as a separate business. And we have a clue in terms of how that would work out. They did do that with one business.

Gary Bernier:

Okay.

Stephen Semple:

Eastman Chemical, which is still around today. And Eastman Chemical recognized it had all sorts of technology for manufacturing chemicals in a clean environment. So guess what Eastman Chemical does today? Eastman Chemical makes a lot of chemicals for the medical industry.

Gary Bernier:

Interesting.

Stephen Semple:

They are still around today. But they were spun off into this separate business to figure out their own future, not distracted by what was going on with the Kodak film business. So there’s a clue there. Because they’re still around today. They’re still in business. Eastman Chemical exists today.

Gary Bernier:

Again, like we said, “You can’t serve two masters.” If they had created somebody else to lead that charge and set them up properly, maybe we’d all be using Kodak cameras on our computers.

Stephen Semple:

Kodak cameras on our computers, photo books printed by Kodak. How natural would that have been?

Gary Bernier:

Yep.

Stephen Semple:

Right? We would’ve gone there. Here’s the lesson for owner-operated businesses. With all of Kodak’s money and all of Kodak’s expertise and all of Kodak’s brand recognition and all of their future thinking, because they saw this stuff coming, with all of that, a distraction is still what pulled them down. And I think we underestimate that. When we’ve got this thing over here that is creating this problem and is constantly knocking on the door, those things can really hold business owners back.

And especially when you think about time, attention, and decision making. The owner of the business only has so much time, only has so much mental space, only has so much emotional space. And there’s a certain point with some things, even if it meant losing money, you might be better off to go, “I’m just not doing that any longer. Or I’m shutting that down, or I’m getting rid of that person.” Whatever it is, distractions can really detract, especially if you put it on that grid and you sit there and you say, “Boy, I’ve got this thing that’s this big distraction and it’s not my future.”

Gary Bernier:

Yeah, that grid’s really handy. Had I pulled that grid out at one point in my life where I had started to split the business in two, you remember that? The training business, then the online training business, and again, we were trying to serve two masters with the same group of people. And both ended up going by the wayside. Probably would’ve been a lot better off splitting off an online training division and trying to make that successful on its own. Right?

Stephen Semple:

And the other part too, when you’re in the investment side, I also recognize there’s a certain point with all investments you’ve got to cut and run. But you also have to recognize investments take time and you’ve got to let them mature and you’ve got to recognize. I also think the other problem Kodak probably did is they didn’t look enough to what was going on in the technology space. There was all these things happening in the technology space with photo sharing and they kind of did. They went out and they bought an online photo service, but I think they bought it and didn’t know what to do with it.

Gary Bernier:

They brought traditional thinking to a non-traditional business.

Stephen Semple:

Yes.

Gary Bernier:

They needed that non-traditional thinking. And that’s why the Internet startups that are successful, when you look at it, they start with non-traditional thinking. They don’t have that legacy thinking in their way. They’ve blown way past that.

Stephen Semple:

I think they should have had them in a different building, a different space, a different-

Gary Bernier:

Probably should’ve had them in California instead of New York and Rochester where everybody else was.

Stephen Semple:

Yeah. And the interesting thing is, they could have gone down that and stayed true to their roots. If they said, “At our roots, we are a photo sharing company.” That was actually their DNA. Photo sharing company. That’s what they were. I believe that they could have made that happen, and it’s a real shame. It would’ve been fun to have Kodak be able to do that transition and still be around today. And the other guy who understands the whole thing of distractions, interestingly enough, is Henry Ford. So at Henry Ford’s peak, he was investing in tool manufacturing companies, he had a tractor company that he started. They even started building airplanes,

Gary Bernier:

I believe it.

Stephen Semple:

And then when Chrysler and General Motors started nipping at their heels, what’s one of the first things he did was? Got out of tractors. Basically said, “My future is cars that I’m going to focus all my energies in that.” And the other thing is with cars. It was also not a cash cow. It was a star because there was still lots of growth potential, but he recognized, you know what, it was time to get focused.

Gary Bernier:

Very true. Very true.

Stephen Semple:

So although it’s not an uplifting, motivational, fun story, and we’re going to attach that to Gary, I think there’s a lesson to be learned here about protecting our empires, but also when trying to grow one, our legacy things, we have to be careful that they don’t hold us back.

Gary Bernier:

You have to focus. Guys, we run into lots of businesses, when we work with them on the marketing side, there’s sometimes a 10% distraction, a 20% distraction in their business. And as soon as we help them focus and get rid of that distraction, their business, that empire just starts to accelerate. So there is a bit of a lesson that a lot of business owners can take from this because we all look and go, “Oh, that grass looks pretty green. We got to go into that business or we ought to add that on to the business and that’ll help us grow.” And sometimes just doing more of the same is the right way to grow.

Stephen Semple:

Yeah, absolutely. So, again, Gary, thanks for encouraging me to do this. It ended up being an interesting little exploration.

Gary Bernier:

I think it’s a great story, Steve, and I’m happy to be associated with the demise of an empire.

Stephen Semple:

There you go. Thanks, Gary.

Gary Bernier:

See you, man.

Dave Young:

Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big, fat, juicy five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions@theempirebuilderspodcast.com.