Transcription
In 1976, nine out of every 10 rolls of film sold in America had Kodak printed on the box. 85% of the cameras sold that year in the United States carried the same yellow logo. Eastman Kodak was a Dow Jones Industrial Average component. It would stay there for 74 years. At its peak, the company employed 145,000 people worldwide. 60,000 of them lived in a single city, Rochester, New York. The company carried a 70% gross margin on film. One Kodak senior vice president told the Wall Street Journal it was very hard to find anything legal that made money like color photography did.
But fast forward to January 19th, 2012, and Kodak files for Chapter 11 bankruptcy. The stock that once traded at $94.75 is worth 36 cents. 56,000 retirees lose their health care. The factories in Rochester, the ones that had run three shifts for a century, are imploded with dynamite building by building on the local evening news. Total disaster.
Now, there is a simple villain in this story. His name is Steven Sasson, the engineer who built the camera that killed Kodak. Except Steven Sasson did not kill Kodak. Steven Sasson worked for Kodak. He built the world's first digital camera inside a Kodak research lab in 1975. And what his bosses said next is the reason an American company that survived two world wars and the Great Depression could not survive the future it invented itself.
To understand what was lost, you need to understand what Rochester actually was. Kodak was not just the largest employer in the city, it was the city. George Eastman, the founder, paid for the University of Rochester. He paid for the Eastman School of Music. He built the Eastman Theatre. He funded Strong Memorial Hospital. When he gave money to MIT, he gave it anonymously and signed it Mr. Smith. Eastman gave away the equivalent of $100 million in early 20th century money. By the time he shot himself in his Rochester home on March 14th, 1932, the note he left on the bedside table said only this, "To my friends, my work is done. Why wait?" He was 77 years old.
Kodak Park, the manufacturing complex on Lake Avenue, stretched almost 4 miles long. It had its own power plant, its own fire department, its own railroad spur. At its peak, it covered 1,300 acres and contained more than 200 buildings. 20,000 people walked through those gates every morning. The company nickname in Rochester was the yellow father. Kodak paid an annual employee bonus that, at its height, was equivalent to 2% of the entire metropolitan Rochester payroll. Bigger than Christmas in the local retail calendar. Apprentices started at 15 and stayed for life. Fathers brought their sons in. Sons brought their daughters. The phrase locals used was that everyone in Rochester was a Kodaker or married to one or hoping to be.
The product matters. In 1935, Kodak introduced Kodachrome. It would become the most beloved film stock in American history. Paul Simon wrote a song about it that hit number two on the Billboard charts in 1973. National Geographic shot the famous Afghan girl cover on it. Every family snapshot, every birthday, every Christmas morning, every wedding, every funeral for two generations of Americans was a Kodak moment. The company made it the official slogan of an advertising campaign in 1992 and the phrase entered the English language.
By the late 1960s, Kodak controlled 90% of the film business in America and 85% of the camera business. The order books were loaded. The empire was at its peak. But here is something I find genuinely shocking the deeper I dig into this story. While the chemists in the lab and the workers on the line took real pride in what they were making, the men running the company were already preparing to ignore the most important invention in their entire history. And it was happening in their own building.
It is December 1975. In a back lab on the second floor of building four at the Elmgrove plant in Rochester, a 24-year-old electrical engineer named Steven Sasson finishes assembling a prototype the size of a toaster. It weighs 8 lb. It uses a Fairchild 100 by 100 pixel image sensor. It takes 23 seconds to capture a single black and white photograph and write it to a digital cassette tape. The resolution is 1/100 of a megapixel. By any modern standard, it is hopeless. By any historical standard, it is the most important camera ever built because Sasson did not just build a camera, he built the future of photography.
The first digital image in human history is a picture of a Kodak lab assistant named Joy Marshall. Sasson is not a maverick. He is not breaking the rules. He has been at Kodak 2 and 1/2 years. The project was assigned to him in what he later described as a 30-second conversation with his supervisor, Gareth Lloyd, who asked whether you could build a camera using a solid-state sensor. Sasson said, "Yes." Then he went and did it.
Throughout 1976, he begins demonstrating the prototype to Kodak executives. He calls his demonstration filmless photography, a choice he later admits was, in his own words, one of the most insensitive choices of demonstration titles ever. The executives ask reasonable questions. Why would anyone want to view a photograph on a television set? How would you store these images? When could this technology actually reach a consumer? Sasson and Lloyd file a patent. United States patent 4,131,919. Granted December 26th, 1978. It describes the architecture of every digital camera that would ever be built afterward. Kodak owns the patent. And then, in Sasson's own words from the New York Times, the reaction from management was, "That's cute, but don't tell anyone about it."
Sasson runs the math himself. Applying Moore's law to his own architecture, he tells the executives that this technology will reach the mass consumer market in 15 to 20 years. The men in the room look at each other. They're running a company with a 70% gross margin on film. They are not going to volunteer to compete with themselves. They thank Sasson for the presentation. They put the camera in a cabinet. They go back to work.
In August 1981, Sony unveils the Mavica, the world's first commercial electronic still camera, in Tokyo. Kodak's internal employee newsletter responds with a single sentence. "Technical capability," it says, "does not necessarily mean mass market capability." That same year, a Kodak executive named Vince Barabba, the former director of the United States Census Bureau, is asked to commission a deep market intelligence study on the digital threat. His conclusion is that digital photography will replace film and Kodak has approximately 10 years to prepare. Two years earlier, in 1979, another Kodak executive named Larry Matteson had written an internal report predicting that digital would dominate by 2010. Matteson was off by only a few years. Both reports land on the desk of the chief executive. Both are filed. The film business keeps making 70% gross margins and that is the only argument that matters.
What the engineers in Rochester do not realize is that the threat is no longer outside the building. It is inside their own filing cabinet and every year that the toaster sits on a shelf in building four, the Japanese, the Koreans, the entire global semiconductor industry get closer to making it small, cheap, and good enough.
Now, here is where the story gets darker because Kodak is not failing for lack of money. Kodak has more money than it knows what to do with. The problem is what the company does with the money. In January 1988, Kodak's chief executive, Colby Chandler, announces a $5.1 billion acquisition of Sterling Drug, a diversified American pharmaceutical company. The strategy is to diversify away from photography. The strategy is also a disaster. Six years later, Kodak's next chief executive sells off Sterling Drug in pieces to recover roughly $4.5 billion, less than Kodak paid plus six years of interest and operating losses. The film business is still printing money, so nobody really notices. Kodak stock between 1987 and 1993 rises about 2%. Film market share drops five points.
Then, in July, Polaroid wins a 15-year patent infringement case against Kodak. The settlement is $925 million, largest patent settlement in United States history at the time. Kodak is forced to immediately stop making instant cameras. 16 and a half million Kodak instant cameras already in customer hands have to be recalled. Customers mail in the camera name plate for a rebate. The chief executive at the time, Kay Whitmore, calls it a 50-year distraction. He keeps protecting film. There is a story in Kodak corporate history that during one of the most important meetings of his tenure, a presentation about the digital threat from Bill Gates of Microsoft, Whitmore fell asleep at the table.
In 1993, the board fires Whitmore. They bring in an outsider, George Fisher, from Motorola. Fisher actually understands digital. He says all the right things. He spins off Eastman Chemical, the chemicals division, on January 1st, 1994, in what is now considered one of the worst decisions in American corporate history. Eastman Chemical today does over $9 billion a year in revenue, nine times what Kodak does. Kodak gave it away. Fisher's signature project is a film format called Advantix, launched in February 1996 in partnership with Fuji, Canon, and Nikon. Kodak spends approximately $500 million developing it. 80 million more is spent on a single advertising blitz during the Atlanta Olympics. Advantix flops. It flops because by 1996, the same year it launches, the digital cameras Sasson predicted in 1976 are finally reaching the mass market. Why would anyone buy a new kind of film when you could just buy a digital camera and stop buying film altogether?
In November 1997, Fisher walks into a press conference at the Hudson Theatre in New York. He announces 10,000 layoffs, raised within weeks to 16,600. He says, and this is a direct quote, "We are out of denial now. We were wishing the problems would go away. We are clearly mad, mad at ourselves for the most part." The Kodak stock falls 6% on the day. It will never fully recover. By the time Fisher leaves at the end of 1999, Kodak is 20 years late.
His successor, Daniel Carp, finally pivots the company hard into digital cameras. By 2004, Kodak's EasyShare line is the number one selling digital camera in America. Sounds like a turnaround. It is not. Kodak is losing approximately $60 on every digital camera it sells. The film business that subsidized everything is collapsing. Film sales drop 18% in 2005 alone. And then, on January 9th, 2007, Steve Jobs walks on stage at Macworld in San Francisco and holds up an iPhone. It has a 2-megapixel camera built in. Three years later, the iPhone 4 adds a front-facing camera, and the entire digital camera business begins to die, too.
In October 2010, two graduates from Stanford launch an app called Instagram. 18 months later, on April 9th, 2012, Facebook acquires Instagram for $1 billion. The company has 13 employees. Three months earlier, Eastman Kodak had filed for bankruptcy. The Kodak moment is now an Instagram post.
But this is the part that still gets me. While Kodak is dying, it is sitting on inventions it does not even understand. It has In October 1982, a Kodak research scientist in Rochester named Ching Wan Tang patents the world's first organic light-emitting diode, OLED, the technology that powers every modern television and every modern smartphone screen. In 2009, Kodak sells the entire OLED patent portfolio to LG for $100 million just to raise cash. The OLED display market today is worth more than $50 billion a year. Kodak invented two of the most important imaging technologies of the modern world. It walked away from both of them. And now, the bill comes due.
On January 19th, 2012, just after 1:00 in the morning, Kodak files Chapter 11 bankruptcy in the Southern District of New York. The stock that peaked at $94.75 in February 1997 closes the day of filing at $0.36 a share. The company that once had a market capitalization of $31.4 billion is worth $130 million. 25 days into the bankruptcy, the company files a motion to terminate healthcare for 56,000 retirees and their dependents. People who built their entire working lives at Kodak, who took the deal of lower wages in exchange for cradle-to-grave benefits. The benefits are gone. The company saves $10 million a month. The patent portfolio that Kodak's bankers projected would sell for two and a half billion dollars goes for $527 million. Apple, Google, Microsoft, Facebook, Amazon, and seven other technology companies split it among themselves. Sasson's original patent, 4131919, expired in 2007. Kodak never made a single dollar from licensing the architecture of every digital camera ever built.
Rochester gets gutted. From 60,400 Kodak employees in 1982 to roughly 1,300 today, the buildings come down one at a time. Building nine imploded June 30th, 2007. Building 23 imploded the very next morning at 8:00 a.m. July 1st, 2007. Building 53, where Kodak made film negatives for 92 years, imploded July 18th, 2015. 18 seconds, 100 lb of dynamite, 1,500 tons of concrete and steel turned to rubble in a single morning. Local families drove out to the edges of the property to watch the buildings their grandfathers had worked in disappear into a cloud of dust. The coal-fired power plant that ran Kodak Park burned its last load of coal on March 13th, 2018. The city of Rochester has lost roughly 34% of its peak 1950 population. Manufacturing jobs in the metro area have dropped about 40% in a single decade.
Across the Pacific, the contrast is brutal. Fujifilm, Kodak's smaller Japanese competitor, faced exactly the same digital wave. In 2000, photographic film was 60% of Fuji's sales and 70% of its profits. Fuji's chief executive, Shigetaka Komori, did what Kodak's six successive chief executives refused to do. He cut 5,000 jobs in the first round. He acquired pharmaceutical companies, including Toyama Chemical and the American firm Cellular Dynamics. He acquired cosmetics companies, building a skin care line called Astalift on Fuji's collagen and antioxidant chemistry. Color film, it turns out, is roughly 50% collagen, the same protein the cosmetics industry uses for anti-aging products. Today, Fujifilm does roughly 19 times the revenue of Kodak. Komori's most quoted line about his American competitor is this, "Kodak's monopoly was the problem. It always believed it had a god-given right to 100% of the market. It never bothered to look over its shoulder at what was coming up from behind."
In 2015, Steven Sasson sat down with The New York Times. He said this, "When we built that camera, the argument was over. It was just a matter of time. And yet Kodak didn't really embrace any of it. That camera never saw the light of day." The original prototype, the 8-lb toaster from 1975, sits today in the Smithsonian National Museum of American History in Washington. Written on the back of the camera in marker are five words, "Please return to Steve Sasson." He never got it back.
What finally ends in 2012 is not just a company. It is an unbroken chain. The chemists who learned the trade from Eastman, the engineers who built the Brownie and the Instamatic, the workers whose grandfathers had clocked into the same gates a century earlier. The supplier networks, the dealer relationships, the craft passed from one generation of Rochester families to the next. All of it dissolves when the bankruptcy filing hits the courthouse in lower Manhattan. That is not something you rebuild. You can start again, but starting again is not the same thing.
There is a Kodak still trading on the New York Stock Exchange today, ticker symbol KODK. It makes commercial printing equipment and motion picture film. The company that emerged from bankruptcy in September 2013 does about $1 billion a year in revenue. To put that in perspective, the spun-off Eastman Chemical, the division Kodak gave away in 1994, does over 9 billion. The pension plan that ended up owning Kodak's consumer film business, Kodak Alaris, is run out of the United Kingdom by the retirees who built the company. Their pension fund, in effect, owns the brand their work created. It is the most poetic detail in the entire story.
The toaster is still in the Smithsonian. The patent expired. The factories in Rochester are gone. And Steven Sasson, who is now in his 70s, lives quietly outside Rochester. The man who built the future and employer refuse to step into it. President Obama gave him the National Medal of Technology and Innovation at the White House in 2010. As the citation was being read, photographers in the back of the East Room snapped pictures. Obama looked at Sasson and said, "This picture better be good."
The question nobody at Kodak ever properly answered is the same question every American company asks too late. What does it cost to be afraid of the thing you yourself invented? Eastman Kodak found out. 56,000 retirees found out. A city of 200,000 people in Upstate New York found out. The wider lesson runs through every story of American manufacturing decline in the last 50 years. The threat is almost never the foreign competitor. The threat is the boardroom that protects yesterday's profit margin against tomorrow's customer. Every great company eventually meets a moment like the one Kodak met in 1976. The ones that survive are not the ones that see it coming first. The ones that survive are the ones that have the nerve to act on what they see.
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