Knowledge Bridge

Global Intelligence for the Digital Transition

Media Forum 2012: Kodak, a cautionary tale for news organisations

During the opening panel of Media Development Loan Fund’s* recent Media Forum, Bambang Harymurti, CEO and chief corporate editor of Indonesia’s Tempo International Media, warned the journalists and media leaders in the audience, “Don’t make the same mistake that Kodak did.”

The Wharton School of business summed up the photography pioneer’s mistake as this: “Kodak’s Chapter 11 bankruptcy filing on January 19 culminates the company’s 30-year slide from innovation giant to aging behemoth crippled by its own legacy.”

Many news organisations are facing the same challenge that photography pioneer Kodak did. Kodak was killed by its cash cow: its profits peaked in 1999 at $2.5 bn, but a little more than a decade later it was forced to file bankruptcy and is still haemorrhaging cash.

In the US, where newspapers have suffered more than almost anywhere else, advertising revenue peaked around the same time and since then have collapsed. Adjusted for inflation, ad revenue has now fallen to a third of what it was at its peak.

As new technologies disrupted Kodak’s traditional film and chemicals business, they saw the digital future but were unable to adapt their business to take advantage of it. While Kodak’s photography business may seem to have little in common with news and journalism, the film maker’s decline is rich in cautionary tales in how not to respond to digital disruption.

Beware of obsessively defending the legacy business

The irony is that Kodak saw the digital future, and its labs created the first digital camera in 1975.

Furthermore, Larry Matteson, a former Kodak executive, wrote a report in 1979 predicting how various parts of the film business would transition to digital, according to an article in The Economist. With frightening accuracy, he predicted that the entire transition would happen by 2010, an estimate off by only a few years.

The problem, according to George S. Day, co-director of The Wharton’s Mack Center for Technological Innovation, was that Kodak was too worried that new digital businesses would cannibalise its existing cash cow, its film business.

It’s a problem that many news outlets now face. Too many news organisations won’t pursue digital businesses early on because the returns are small compared to their traditional businesses in print and broadcasting. In contrast, new companies like search engines Google and Yandex start from these low margins to build dominant positions in digital advertising that news groups later have difficulty challenging.

Adjust to changing customer needs

Kodak was too focused on its existing business to adapt to the changing needs of customers. It wasn’t an entirely illogical business choice because their existing business delivered high margins and fat profits.

“Accustomed to the very high film margins, the company tried to protect its existing cash flow rather than look at what the market wanted,” according to the analysis by Wharton.

Again, this accurately describes the failure of newspaper management in the US, UK and other developed markets. While their audiences shifted to digital, news outlets didn’t follow for a number of reasons, but in particular because they didn’t see high enough margins to warrant investing in the huge change that would be required.

Innovation isn’t just about the technology

Kodak had the technology. The company had a rich tradition of research and development, and it developed and patented many technologies that underpin digital photography. However, innovation wasn’t enough to transition its business to digital.

Wharton management professor Rahul Kapoor sums up the issues facing both Kodak and news organisations: “The challenge is not so much in developing new technology, but rather shifting the business model in terms of the way firms create and capture value,” he said.

News organisations are quick to highlight the value they create, but the challenge for them is not in creating social value or valuable, quality content, it is in capturing that value, generating revenue as customers shift to consuming that content digitally.

News outlets are quite capable of attracting large audiences to their content on digital platforms. Often they reachReach1) unique users that visited the site over the course of the reporting period,…

Those news organisations that are succeeding in creating sustainable businesses in the digital age are finding effective ways to capture value, to earn revenue, from their digital efforts through a range of revenue streams.

Develop new business lines while your old business is strong

The Economist compared the fortunes of Kodak and its Japanese competitor Fujifilm. Both companies saw the disruption that digital would bring to their companies in the late 1970s and early 1980s.

Fujifilm still enjoys a multibillion dollar market capitalisation while Kodak is a shell of itself, its stock value below a dollar. What has made the difference for Fujifilm?

It developed a three-pronged strategy: to squeeze as much money out of the film business as possible, to prepare for the switch to digital and to develop new business lines.

All this doesn’t mean that Fujifilm hasn’t gone through painful changes. Revenue from film at the company has dropped from 60 percent in 2000 to next to nothing now but, unlike Kodak, it was able to generate new revenue streams. In order to achieve that, it had to go through massive restructuring.

Like the difficult changes at Fujifilm, navigating the digital transition is challenging for news organisations, but the failures at Kodak and the success at Fujifilm provide some excellent lessons on mistakes to avoid and strategies to seize the opportunities provided as consumers shift to digital.

* The Knowledge Bridge site is a project of Media Development Loan Fund

Article by Kevin Anderson

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