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.