Thursday, January 05, 2012

Creative Destruction: Kodak Teeters on the Brink

Rochester-based Eastman Kodak has been around since 1894, and was a blue-chip Dow Jones Industrial Average stock from 1930-2004.  The company has been on the annual Fortune 500 list of America's largest companies every year since the rankings started in 1955.  But the company hasn't turned a profit since 2007, and is now on the verge of filing for bankruptcy, according to an article in today's Wall Street Journal.

Here are some excerpts:

"Eastman Kodak Co. is preparing to seek bankruptcy protection in the coming weeks, people familiar with the matter said, a move that would cap a stunning comedown for a company that once ranked among America's corporate titans.

That Kodak is even contemplating a bankruptcy filing represents a final reversal of fortune for a company that once dominated its industry, drawing engineering talent from around the country to its Rochester, N.Y., headquarters and plowing money into research that produced thousands of breakthroughs in imaging and other technologies.

 The company, for instance, invented the digital camera—in 1975—but never managed to capitalize on the new technology.

Such uncertainty [about the company's future] was once unthinkable at Kodak, whose near-monopoly on film produced high margins that the company shared with its workers.

Former employees say the company was the Apple Inc. or Google Inc. of its time." 

MP: The rise and fall of Kodak is a great example of several economic principles including Schumpeterian "creative destruction," "consumer sovereignty," market competition, and the discipline of the market.  It also illustrates the economic reality that even a firm with a dominant, near-monopoly status in the short-run (Kodak, IBM, ALCOA, Microsoft, etc.) will be unable to maintain that position in the long-run due to innovation, advances in technology, changes in consumer preferences, competition, substitute products, etc., usually even without antitrust enforcement.

As further evidence of the constant "churning and creative destruction" of a dynamic market, I reported recently on CD that only 67 companies on the Fortune 500 list of the largest U.S. companies in 1955 were also on the Fortune list in 2011.  In other words, only about 13% of the Fortune 500 companies in 1955 were still on the list 56 years later in 2011, and almost 87% of the companies have either gone bankrupt, merged, gone private, or still exist but have fallen from the top Fortune 500 companies (ranked by revenue).
 
HT: Wayne Sanman

Update: See WSJ editorial The Kodak Lesson: "Still, the Kodak story is a reminder that nothing is forever in a free-market economy, and that it's important to keep in mind how consumers have benefitted from what has brought Kodak low."

26 Comments:

At 1/05/2012 11:13 AM, Blogger Tom McMahon said...

Originally an engineer for Kodak in Rochester, N.Y., Len Mattioli came to Madison in 1969 to help his dying brother close his business, a television store called American TV on Atwood Avenue. "It was a very small business," he says. "There were probably only 12 or 14 TVs in the whole place." http://onmilwaukee.com/buzz/articles/tvlenny.html
Now it's a big 10-store chain in Wisconsin. Would it have been safer to stay with Kodak. Sure, in the short term. Long term, you never know ...

 
At 1/05/2012 11:27 AM, Blogger PeakTrader said...

Yahoo may be another one, because of poor management in recent years.

Also, Yahoo has been known for one of the worse board of directors (including turning down the $47.5 billion or $33 a share offer from Microsoft a few years ago).

However, there are new members on the board who are trying to turnaround Yahoo.

It may sell its Asian assets for $14 a share (or $17 billion in a tax free deal), and focus on its U.S. core business.

If Yahoo approves the sale of its Asian assets, then the current price of Yahoo stock at $15.50 is less than the Asian assets and the cash on its balance sheet, i.e. the U.S. core business is worth less than nothing.

That's why I bought a heavy position of YHOO Apr 16 calls today, because Yahoo could rise to 19 if it sells its Asian assets, perhaps in a few weeks, and rise to over 21, perhaps by mid-year.

 
At 1/05/2012 11:41 AM, Blogger Hydra said...

So, with plenty of time and millions of dollars to work with, why wasn't kodak able to reinvent itself?

 
At 1/05/2012 11:43 AM, Blogger Benjamin said...

In the free market, you survive only as long a you offer the best or at lead equal option to competitors.

If you are a federal agency, such as the USDA or Defense Department, you survive forever.

Probably all federal agencies should be sunsetted every 20 years.

 
At 1/05/2012 11:45 AM, Blogger Benjamin said...

Park Trader:

Microsoft? Will there be a Microsoft in 40 years? 30 years?

IBM had to reinvent itself.

Does make an interesting question for shareholders. What do you own? An entity that could get wiped out, now, or in 10 years, or 20 years. Eeentually, what you own will cease to exist.

You should demand dividends.

 
At 1/05/2012 12:03 PM, Blogger VangelV said...

Probably all federal agencies should be sunsetted every 20 years.

and..

You should demand dividends.

Two of the smartest things you have ever written.

 
At 1/05/2012 12:35 PM, Blogger Buddy R Pacifico said...

From the 2010 Kodak Annual Report and 10-K:

"The Company’s key goals for 2011 are:
• Increase revenue from our digital growth initiative businesses – consumer inkjet, commercial inkjet, workflow software and
services, and packaging solutions."


A "digital growth iniative" would have been encouraging in 2001, but too late in 2011.

 
At 1/05/2012 12:45 PM, OpenID Sprewell said...

Wow, what a morbid end to the linked article, talking about how the founder committed suicide years ago. I liked that the writers had the guts to end it that way but it was a bit jarring, perhaps only because it's so uncommon.

Vange calling Benjie's statements smart: I think the world is about to end, cats and dogs living in harmony! ;) Of course, Benjie is dead on, this is why the govt sector wastes our money year after year, while the market keeps improving. In the Darwinian jungle of the market, obsolete firms like Kodak are continually put out to pasture, replaced by new firms like RED, which makes the high-end digital cameras for filmmakers that have replaced Kodak and their film. Meanwhile, the SEC is so incompetent that they didn't even understand how derivatives work, or the evidence that a whistleblower was sending them for years about the Madoff Ponzi scheme. What happens to the SEC afterwards? They want an even bigger budget, saying they'll get it right this time, and they get rewarded after repeated failure. This is why govt regulation is a joke and the only regulation that works is market regulation. None of the big Wall Street banks put their money with Madoff, because they knew it had to be some kind of scam: it's only that kind of knowledgeable self-interest that works.

 
At 1/05/2012 2:03 PM, Blogger Benjamin said...

Vange!

I guess after reading your posts, I am getting a higher IQ.

BTW, a book by Redleaf and Vigilante, "Panic" offers a hardcore right-wing view on modern-day shareholders, and it is not pretty.

Passive, diffuse, in mutual funds, the results are that modern-day shareholders are little better than sheep.

Still, the modern-day corporation, even with mediocre management, is a far better thing than a federal agency, such as the Defense, USDA, Commerce, Labor etc departments.

 
At 1/05/2012 2:22 PM, Blogger Benjamin said...

Sprewell said "Benjie is dead on."

Have I died and gone to Heaven?

2012 is going to be a great year!

Except for this:

Fed to US Economy: Drop Dead.

Check out something called the "divisia" money supply. The Fed is passively tightening the money supply---extending our recession.

A guy named Woolsey at "Monetary Freedom" has a good post on it.

 
At 1/05/2012 2:38 PM, Blogger VangelV said...

BTW, a book by Redleaf and Vigilante, "Panic" offers a hardcore right-wing view on modern-day shareholders, and it is not pretty.

Passive, diffuse, in mutual funds, the results are that modern-day shareholders are little better than sheep.

Still, the modern-day corporation, even with mediocre management, is a far better thing than a federal agency, such as the Defense, USDA, Commerce, Labor etc departments.


Thanks for the book recommendation. I am always looking for a decent read and the book may be one. I do not believe though that you can characterize Redleaf and Vigilante as hardcore right wingers. From what little I have seen so far they seem to take the Hayekian approach to their analysis, which is similar to that of Nassim Taleb, who has slammed the arrogant empty suits on Wall Street for believing that they know much more than they actually do.

I think that the book fits in with my own analysis. In the real world anyone who has a bit in savings and access to the capital markets should be able to become very wealthy by limiting risk and betting on mispriced markets. This means buying during consolidation periods after triple waterfalls and hanging on through the secular bull markets that follow and staying away from overvalued asset classed. My example is Jim Rogers who made a killing, sold most of his equities near the top, and took the next two decades off until he finally saw a bottom for commodities. If you wish, James Sinclair followed a similar pattern. For the record, both of those gentlemen saw the bubble in the housing markets and were warning about it for several years before the final crisis.

 
At 1/05/2012 2:43 PM, Blogger sethstorm said...


IBM had to reinvent itself.

As a company that is generally hostile to the US, versus being a US-based manufacturer of superior-quality hardware and provider of services?

If it takes political action to reverse their potentially treasonous course (started with their former CEO, exemplified with the 2005 sale of IBM's PCD to an enemy of the US), fine. The tools are there, even if it would be a great shame to have to use them.


RED, which makes the high-end digital cameras for filmmakers

Which puts them outside of Kodak. Now if RED wasn't arrogant enough to pursue stuff that was in the range of mere mortals, perhaps you might have a point.

 
At 1/05/2012 3:22 PM, Blogger morganovich said...

benji-

i don't think you understand how divisa money supply (a highly subjective, assumptive, and frankly damn near useless measure) works.

divisia money is return weighted money supply with a pile of assumptions baked in and no explanatory ability on inter asset causality.

thus, the very policies that you so vociferously champion (printing money, monetizing debt, etc) kill return on monetary assets (low yield) and tighten "divisia money" through effects on other assets.

he laments the lack of a role for commercial paper, but with rates like this, of course that market is stagnant.

i also recommend you read his second post, where he admits that, after feedback, he has realized that his first post was all wrong.

http://monetaryfreedom-billwoolsey.blogspot.com/2012_01_01_archive.html

woolsey seems not to understand what he is talking about. if you want to understand, read barnett, but i'd advise against it. the d-money methodology is so full of questionable subjective assumptions that it occludes more than it reveals (which is why no one uses it).

put simply, it is the very policies you advocate that are causing the "problem" you just complained about.

printing money right now is just pushing on a string.

it's cargo cult thinking that because growing economies demand money that printing money creates growth.

the opposite has been the case in pretty much every developed economy for 100 years and now, more so than ever, the velocity of money can more easily take up slack than anything else.

the problem right now is that after decades of easy money and a huge debt and demographic bubble, we are going to need to deleverage. demand for money is going to be low. printing scads of it has accomplished nothing.

woolsey has all his causality backwards. it was not money leading growth and employment, it was a peak in growth, employment, and debt that led to a slow down and lower money demand.

 
At 1/05/2012 8:07 PM, Blogger Craig said...

Living in Buffalo, my Rochester friends used to gloat that their burg was high-tech instead of steel-based as Buffalo had been. How odd now that Xerox has faded in the face of Asian competition and Kodak has cut 50,000 Rochesterians out of a job and now faces bankruptcy.

Tends to make one consider the possibility that we're not terribly innovative anymore. Wonder why that is.

 
At 1/05/2012 8:21 PM, Blogger Che is dead said...

"Vange! I guess after reading your posts, I am getting a higher IQ." -- "Benji"

I've never laughed so hard in my life.

 
At 1/05/2012 10:51 PM, OpenID Sprewell said...

Seth, if you knew anything about anything, you'd know that Kodak was a major player in the film industry long before they were ever making consumer cameras. Perhaps RED will also follow them downmarket someday.

Craig, there's plenty of innovation, it's just moved west to places like Cupertino and Mountain View and Redmond and Austin. ;)

Benjie, as Vange says, I think only you and maybe Mother Jones would call Redleaf and Vigilante "hardcore right-wingers," but they're definitely right of center on these financial issues. And while I haven't read more than a couple reviews of their book, I think they're absolutely right that current financial markets aren't real markets. They superficially resemble a market but they've become a big casino, where all the bettors drive prices much more than fundamentals.

A big part of it is that shareholder governance has been almost demolished by slicing the shares of stock in most companies into so many millions of pieces. Another part is that many companies pay out no dividend, even though they may be sitting on billions of dollars in retained profits, like say Apple or Google. The truth is that Google shares are not a stock, they are a private currency, since their publicly traded stock gives you almost no voting rights and they say you'll never get any dividends either. What do we call such an intrinsically worthless token that many people nevertheless want to trade for? A private currency, that's what. One of the many businesses that the PC and the internet are about to destroy is the financial business, likely including the massive hedge funds and their billionaire managers, because these "markets" have become fundamentally corrupted and are in many ways markets in name only.

 
At 1/05/2012 11:04 PM, Blogger VangelV said...

Tends to make one consider the possibility that we're not terribly innovative anymore.

I do not believe that this is true. Americans are very innovative and can be very productive. The problem is that the regulatory and political environment make it far more difficult to succeed in the US so many companies build their products elsewhere.

Wonder why that is.

Look no further than Congress, state governments, municipalities.

 
At 1/06/2012 11:09 AM, Blogger Hydra said...

If you are a federal agency, such as the USDA or Defense Department, you survive forever.

Probably all federal agencies should be sunsetted every 20 years.

==================================

But that is an advantage government has, not (necessarily) a liability. Government is able to take a view of things that is longer than the next quarter.

 
At 1/06/2012 11:12 AM, Blogger Hydra said...

while the market keeps improving.

==================================

Have you tried to repair anything lately? I am not at all convinced that the market has improved much of anything other than hour selection of incipient junk.

 
At 1/06/2012 11:43 AM, Blogger Hydra said...

This is why govt regulation is a joke and the only regulation that works is market regulation.

==================================

Now that is a joke.

If the big banks knew Madoff was a scam, why didn't they do something about it? In this example, they were no better than the regulators, and as I understand it, some supposedly sophisticated investors did get taken in.

A problem with market regulation is that it is often slow. A company can make a shoddy product, sell a million of them and close their doors before the failures are discovered.

Madoff is now as destitute (or more so) than his victims, but Ken Lay died rich, and his ill gotten gains passed to his family without recourse. Corzine will probably keep the bonus he got months before MF Global collapsed.

Honda is facing class action suit over poor milage results for its hybrids, and the honda buyers will get what, a coupon worth $500 off on their next Honda?

The internet makes such failures easier to detect, but can also lead to mass hysteria events like the Toyota runaway situation (or mabe global warming). Even so, gross failures are often detected by sheer luck, as when a night worker observed the heat pump repair truck making multiple visits to his neighborhood.

On the other hand,the Chevey Volt problem was discovered by government testing, not by the market.

Sometimes the market works, sometimes it works eventually, and sometimes it doesn't work.

Same as government.

 
At 1/06/2012 11:53 AM, Blogger Hydra said...

Americans are very innovative and can be very productive. The problem is that the regulatory and political environment make it far more difficult to succeed in the US

================================

If it is so difficult to suceed here, how come america is one of the most productive nations, whether you are talking GDP per person or GDP per energy unit consumed?


The regulatory environement we have is one we got because people demanded it. They demanded ot because of screw ups by businesses.

We could have a lot less regulation if we had a system that quickly and easily held businesses liable. I imagine businesses would like ahigh liability standard even less than they like a high regulatory standard, especially when the regulation is mostly without teeth.

 
At 1/06/2012 12:15 PM, Blogger juandos said...

"The regulatory environement we have is one we got because people demanded it. They demanded ot because of screw ups by businesses"...

So apparently hydra thinks that pandering to the stupids and the whiners is a good thing?!?!

 
At 1/06/2012 3:20 PM, Blogger Ian Random said...

Actually, to not so bright academics, see the TED talk on income inequality, it is hard to succeed here. Since we are wealthier even with more people, it is hard to move up the income bands. To get into the top 1% in the UK it is only 149K BSP=$300K, here it is $385K.

 
At 1/06/2012 6:07 PM, OpenID Sprewell said...

Hydra, you say "Government is able to take a view of things that is longer than the next quarter." Nope, not the case. David Friedman, Milton Friedman's son, explains this concretely and succinctly in this recent lecture (skip to the 24 minute mark to see the part on why govt is even more short-sighted than most businesses). The whole video is highly worth watching, as David may be even more interesting than his dad. :)

Then you ask "If the big banks knew Madoff was a scam, why didn't they do something about it?" Simple, they're not in the business of running around telling everyone what they think is a scam and because of the proven govt failure where they could have been sued by Madoff, for libel or some such badly applied law, simply for sharing their suspicions. Still, there were some brave souls who worked at the big investment banks who felt strongly enough about it that they offered to talk to the SEC about it, when the whistle-blower Markopolos contacted them and asked them to support his claims. He forwarded those contacts and the incompetent SEC never even contacted them! The Wall Street banks were way better than regulators, as you cannot find a single one that put money with Madoff. They didn't know what kind of scam it was- they thought it might be front-running- but they knew those crazy returns had to be a scam.

And there were no "sophisticated investors" taken in by Madoff, there were only a bunch of Jews like Spielberg or whoever, because Madoff was running an affinity scam, meaning he went after people like him, and a bunch of Connecticut-based feeder funds, who claimed to invest in him after checking him out, yet were so criminally worthless that they didn't do any of that. Those feeder funds are now getting sued in massive cases and they will be hounded for that money for the rest of their days and rightfully so.

 
At 1/06/2012 6:13 PM, OpenID Sprewell said...

Why would consumers buy millions of a "shoddy product" they never heard of? That's why they rely on brands, so that they can use products they've heard of and have a previous reputation for quality. Try to sell some people a brand they've never heard of and see how much you actually sell. However, that is now changing on the internet because there's even better measures than branding. I regularly consider buying technical products with no brand name because I have even better information: customer reviews from the early adopters that try out unknown brands first and report back with their results on sites like newegg.com.

Madoff is destitute because his con ran out of money, not because the govt did anything. As for Ken Lay, that's a different situation with different results: not everything Enron did was a scam, so maybe he kept some of the money. Who cares what bonus Corzine got, he will be hounded for the rest of his life for that money, just like Fuld from Lehman is more scared of investor lawsuits than the govt. I've never heard of a Honda hybrid class-action suit, cuz I'd never get a hybrid, but I guarantee you that the billions in bad PR is worth far more to them than whatever little they gained by cutting corners. I don't think the Toyota scam had anything to do with the internet, more likely hysterical prosecutors and Congressmen, ie the govt.

Of course there will always be luck in anything but you don't need it, as in the absence of a crappy govt regulatory agency, most companies would welcome private firms like Consumer Reports doing quality inspections and certifying their products. When the govt insisted that they do their own crappy inspections first, the firms may have been happy to still get a govt seal that reassures the customer but is actually worthless. If the consumer is too lazy to check up on whether the govt inspections are useful, why should they care?

Sure, the govt might catch stuff like the Volt once in a while: the key is who performs better most of the time and that's private markets. Of course, the market isn't infallible, but that's not the question: the question is who does a better job? And the market is so much better than the govt, that it's practically infallible by comparison, because the govt is so much worse and costs so much more. Waving that away by saying both aren't perfect is just a ridiculous way of comparing the two.

 
At 1/07/2012 4:41 PM, Blogger juandos said...

hydra whines: "If the big banks knew Madoff was a scam, why didn't they do something about it? In this example, they were no better than the regulators, and as I understand it, some supposedly sophisticated investors did get taken in"...

First of all who said the banks knew what Madoff was up to?

Why didn't the people giving their money to Madoff do some homwork, it was their money after all...

I could ask, "whyd didn't the American people do something about the scams FDR ran"?

 

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