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Kodak Prepares to Sell 10% of Patent Portfolio to Stay Viable


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: November 5, 2011 @ 1:56 pm
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Earlier this week, on Thursday, November 3, 2011, Eastman Kodak Company (NYSE:EK) reported that it was continuing its march forward toward becoming a profitable and sustainable digital company. A sustainable digital company? That type of announcement is not they type that typically instills confidence, and the news did not play well, although Kodak stock is already so low that relatively little additional loss was felt. Not much good can be happening internally when a company feels the need to announce that they are making steady progress toward becoming sustainable.

In filings with the Securities and Exchange Commission Kodak also explained that moving forward it’s intellectual property strategy has three goals: “To provide the company with design freedom to develop and introduce innovative new products, to provide access to new markets and new partnerships, and to generate income and cash.”  How will Kodak seek to generate cash from its intellectual property portfolio? The company is shifting gears and is pursuing a plan to sell 10% of it is patent portfolio to attempt to raise cash to remain in business.

The Kodak story in a nutshell can be told by a quick look at the company’s stock price. The chart below shows the price of Kodak from 1995 to the close of business on Friday, November 4, 2011. A high of nearly $93 a share was recorded on February 14, 1997. The stock closed yesterday at $1.16.

 

 

But how did this happen to the once mighty company that invented the digital camera, which is nearly ubiquitous throughout society today? A recent Associated Press report sums it up accurately by saying: “for too long the world’s biggest film manufacturer stayed firmly focused on its 20th-century cash cow, and failed to capitalize quickly on its new-wave know-how in digital photography.”  Indeed, technology giant after technology giant, generation after generation, suffers the same fate.  Marrying yourself to the business model that got you to the pinnacle is a recipe for catastrophe.  Too much invested in the past and current business models leaves openings for those that are hungry and willing to pursue the future.

The continued fall and now near collapse of Kodak comes on the heels of lofty recognition for one of the most famous inventors ever to work for Eastman Kodak.  At a time when the former photography juggernaut is scrambling to stay viable and become relevant as a digital company, Steven Sasson, the inventor of the digital camera, was honored less than 1 year ago with the 2009 National Medal of Technology and Innovation.  Just 6 months ago Sasson was inducted into the Inventors Hall of Fame in a ceremony at the old Patent Office building, which now the Smithsonian American Art Museum.  

As an inventor Sasson captured he spirit of challenging the established orthodoxy.  As a young engineer working for Kodak, the 23 year old Sasson was tasked with a simple project.  He took it upon himself to make the project more grandiose and difficult, placing upon himself the goal of making a camera that could capture and display an electronic image.  At his induction into the Inventors Hall of Fame in May 2011, Sasson jokingly explained that in retrospect calling his creation “filmless photography” probably wasn’t the best choice he could have made given that the Kodak empire was created on film photography.  Nevertheless, Sasson ultimately demonstrated the world’s first digitally captured image shown on a television screen, a .01 megapixel image.  Of course, the rest is history.

In 2008, over 24 million digital cameras were sold in the United States, generating $7 billion in revenue.  Virtually all of today’s digital cameras still rely on the structure invented by Sasson in 1975.  To the credit of Kodak, the invention of the digital camera was not scuttled, but it is hard to ignore the irony.   Because Kodak did not embraced the technology as it could have and should have the company responsible for inventing the first digital camera may not be able to remain profitable and sustainable.

In recent years Kodak has actively monetized its intellectual property through a series of individual transactions as a way to fund its digital transformation. Throughout this period the company has contemplating a shift in its monetization approach. Given the recent trends in the IP marketplace, and a heightened demand for premier intellectual property portfolios, Kodak says now is the time to make this change to its monetization strategy.  In  July Kodak announced its intention to explore strategic alternatives for approximately 1,100 U.S. digital imaging patents, which represent about 10% of its patent portfolio.  Kodak says these 1,100 patents are not core to its current or future business, but that the prospect of a sale of this portfolio has generated a lot of potential interest.  Kodak is banking on the fact that the sale of these 1,100 patents will materially increase its cash balance.  Said another way, Kodak is hoping that the sale of its non-core patent assets will save the company.

In the words of Lee Corso from ESPN’s College Football Gameday fame — “Not so fast my friend!”  While Kodak is quick to tout the great interest in its patent portfolio; a premiere and desirable portfolio, reality and legal requirements forces the company to realistically temper expectations.

Concern was brought to bear thanks to the 8-K filed by Kodak with the Securities and Exchange Commission on Thursday. The Wall Street Journal sounded the alarm, reporting that Kodak explained to the SEC that it would not be be able to fund its businesses if it can’t squeeze more money out of its patent portfolio or raise new funds by selling debt.  These types of warning statements are commonplace in SEC filings, but the fact that they are commonplace when a company is make certain forward looking statements does not mean that they do not raise real concerns.

In the 8-K filing Kodak specifically warned that many important factors that could cause actual events or results to differ materially from the forward looking statements suggesting that things may turn out alright.  In addition to the typical warnings about the potential worsening of the economy, potential loss of market share and the need to attract and maintain a competent workforce to achieve a turn around, Kodak expressed specific concerns relating to the generation of cash.  Kodak says one factor that may make its forward looking statements inaccurate is the fact that it might not be able to generate or raise cash and maintain a cash balance sufficient to fund continued investments, capital needs, restructuring payments and debt service.  Kodak also warned that there is concern associated with whether it can raise sufficient proceeds from the sale of non-core assets and the potential sale of its digital imaging patent portfolios.

Kodak explained in filings with the SEC: “We remain confident that we are creating a digital Kodak that will help our customers grow their business through high-quality and innovative products and services. We continue to make progress against that goal, and we look forward to reporting additional progress in the months ahead.”

Whether Kodak’s confidence is misplaced or not will likely be determined by just how much they can obtain for the non-core patents they are not preparing to sell.  Some experts estimate that the portfolio might be sold for somewhere between $2 billion to $3 billion, but others think that the price Kodak could fetch would be substantially higher.  There is some reason to believe that Kodak could be looking at a bonanza.  Recently an Apple-Microsoft alliance purchased patents from Notel Networks for $4.5 billion, and then Google later bought the Motorola Mobility patent portfolio for $12.5 billion.  Indeed, some of the valuations of patent portfolios seem quite high, perhaps irrationally high.

Patent portfolio prices, such as the Nortel and Motorola deals, may be exceptionally high value deals thanks to so many tech companies sitting on many billions of dollars of cash.  But a desire to keep patents out of the hands of an ever growing number of patent trolls and non-practicing entity companies that buy patents to license them (i.e., Intellectual Ventures and Acacia, for example) could be what drives the Kodak portfolio quite high.  Indeed, there is real reason to believe that a Kodak patent portfolio of even 1,100 patents could fetch an amount that will make your head spin.

For now that story of Kodak is a cautionary tale about missed opportunities.  In the end it might be their patent strategy over so many years that salvages the company and allows it to obtain the cash it needs to remain a going concern.

 

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Posted in: Business, Gene Quinn, IP News, IPWatchdog.com Articles, Patent Business & Deals, Patents

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

10 comments
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  1. “Because Kodak did not embraced the technology as it could have and should have the company responsible for inventing the first digital camera may not be able to remain profitable and sustainable.”

    Did you mean Kodak did not apply a patent for what Sasson had invented?

  2. bluez-

    I’m not saying Kodak didn’t seek patents, but they just didn’t aggressively follow the digital camera market as much as they could. They were always a film company, so they held on to the traditional business model and didn’t really appreciate where people were heading with respect to taking pictures.

    -Gene

  3. Gene -

    Two comments:

    That Kodak can monetize its IP through sale is an object lesson to small companies and independent inventors who do not believe in patenting. In many cases the IP portfolio is the core value of the company.

    As to Kodak itself, it is difficult to feel sorry for it. I had purchased a Kodak digital camera some time ago. After installing the supplied software, I learned that the programs did far more than provide drivers for the camera. They had replaced a lot of programs that had nothing to do with cameras or digital imagery. All my email files had been deleted. It took me two days to recover from the Kodak mess. I mentioned this to other computer nerds and the reply was universal: “Stay away from Kodak.” Without doubt there are some users who will not have these problems but there was no reason for Kodak to stick its fingers in areas beyond imagery.

    T

  4. Should expand on the above. Kodak’s problems might have as much to do with how it treats its customers. When it dominated the camera business, it could do as it pleased. It continued this attitude. Now, it may be paying the price.

    T

  5. tifoso-

    First, you scooped me! I am planning on writing about what the Kodak patent sale should tell people about the value of a patent, even a non-core patent. Look for it at some point this coming week.

    Second, excellent point about Kodak. Like many large companies that perceive themselves as dominant, they try and over dictate and that frequently turns competitors off. It also typically provides an opening for the next generation of tech company that is willing to be more nimble, aggressive and consumer driven.

    -Gene

  6. So, Gene. Is EK a buy or a sell? What about options? Come on. That’s all some of us REALLY care about.

  7. Gene –

    Apology for the scoop. Will wait for the article with ‘bated breath.

    Tifoso (Italian for Fan and that I am of your blog)

  8. Jojo-

    I always shutter to give direct buy and sell advice and try and stick with the facts. Markets do strange things, as you know. I remember years ago thinking that WorldCom was way under valued and it turned out that the books were cooked. Obviously those with money knew the books were cooked, although not to the level they were probably. So over the years I guess you can say that my record has been uneven.

    Having said that, at the moment the stock is trading at $1.14. I wouldn’t put in college money or the money to pay the mortgage, but if you have a little mad money I would be a buyer. The name and brand are great and if they can generate the cash to keep going and the patents they sell are truly not core patents, they should be able to pull out of the nose dive and then bump across the bottom until they can gain altitude.

    For those out there who are looking for short term, I think buying now and then riding it through what will likely be some eye opening sale numbers re: the patent portfolio probably makes sense. Of course, with a stock like this you should pay careful attention and manage it. This is not one of those buy and forget about it stocks at this moment in time.

    -Gene

  9. Kodak is way yo big of comapny to fail as for financail issues is not all what appears to be most of is assumptions of wall street . As for quality of digital cameras i own a dx6490for many years now.Kodak soft ware has made this camera better every year. All these nay sayers about kodak probley ones shorting the stock . Seeing there are 100 million shorting kodak stock alot people stand to make ton money if stock goes down . Seeing it go down from 1.38 to 1.14 made alot people happy 11/17/2011. Hopefully they keep up good work an stock continues to go down for shorts. Theres probley right about stock market is up today an kodak is down . So probley ton of buying shorting kodak stock today. Koak will set world record if hasnt allready for shorting stock Time to sell other stocks an buy 5 million shorts kodak will be .30 cents by end of year

  10. Kodak will never sell those patent are way to valueable of asset . They can wait forever for ruling on apple an rimm case because longer takes more settlement will get intrest. Plenty of companys using patent with out license so after apple they probley got pick of at least 10 other companys who are infringing on patent. If they had any intention of selling it would already happen. Only thing wil happen is kodak wil get there chance to december 30 to recemmit the case before another judge agun . Rimm be smart to settle now only going to cost more in end same is true with apple. Thats why samsung was so quick to settle with lg they saved billions a millions to legitgate a case wont win . i give Kodak alot credit they offered companys the choice to buy patents but wall street took it as if they where desperate for cash. Another misconception on wall street kodak still earning a profit maybe not tens billions but better then they where in 1970 an stock was selling for 20 dallors then . Same 20 dallors today is probley worth 200 dallors. But stock is only selling for 1.15 . Good for kodak they can repurchase their stock for pennys for what they sold for 20 dallors . Win win kodak