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Kodak stays in the digital picture

August 6, 1999
Web posted at: 3:07 p.m. EDT (1907 GMT)

by Art Jahnke


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(IDG) -- The timing of Wayne Neale's arrival at Kodak in the summer of 1994 was not comforting. The Rochester, N.Y.-based Eastman Kodak Co. was watching 30 percent of its film market slip away into the hands of Fuji Photo Film Co. and other competitors. It was winding up the restructuring of a previous restructuring—its fifth, for those who were counting. More than 40,000 jobs had been cut, and many of the remaining 90,000 employees were keeping their resumes up to date. Everyone was wondering how long it would take for digital technology to eat the rather sumptuous lunch that chemical-based film had provided Kodak for more than a century.

Kodak's own research indicated that digital imaging would continue to grow, chipping away at the film market until, 20 years out, an estimated 80 percent of pictures taken worldwide would at least be influenced by digital technology. And in the United States—Kodak's major market—that influence would be even more profound.

Kodak's response to that prediction was twofold: First, it decided to position itself as a company that was "in the picture business, not the film business." Then it tried to get into the picture business, investing hundreds of millions of dollars in digital technology.

Neale's situation at Kodak was unsettled. He had come, with his recently awarded PhD in psychology, to help the company explore the potential of new technologies such as interactive television. Yet shortly after he arrived, Neale learned that his predecessor, who had left the company, had declared that medium all but devoid of potential. As much as he would have liked to, Neale couldn't find any reason to disagree.

He believed, however, that he could see two points of light at Kodak. One was George M.C. Fisher, the company's newly hired CEO. Fisher was the man who had put Motorola Inc. back on top, the man who had turned down an invitation to run IBM Corp. and the man who was going to place Kodak back where it had been for most of its 111 years. Fisher brought to Rochester the less-than-reassuring awareness that while Fuji's inroads were a real and immediate problem, the war for the future would be fought against the Sonys, the Hewlett-Packards and the Microsofts.

The other bright spot emanated from a technology that Neale had been introduced to in graduate school. It was called the Internet, and Neale thought it had the potential to be big. In fact, Neale, who is now the director of the customer experience group and product marketing manager of Kodak Picture Playground Online, believed it might even pick up the ball that had been dropped by interactive television. Neale imagined a day when families across America would use the Internet to share their lives with written and voice messages and, most important, with pictures. With the right browser, he thought, friends could swap photos the way they swap jokes over the telephone.

Neale's opinion, however, was not widely shared. "Most people didn't even know what the Internet was," he says. "It was hard to convince them of its potential. I got a lot of resistance."

Kodak moments

One person who did share Neale's vision was Terry Lund, now director of Internet initiatives. Lund, who in 1994 was managing the imaging science division, had been working since 1990 on what he calls a skunkworks effort to build the PhotoCD. That project kept him deep in the realm of digital technology and also brought him into contact with Kodak's higher-education group, which focused on college-level marketing. Lund learned from his colleagues that university representatives had been encouraging Kodak to build a stronger presence online, and he thought it was advice worth listening to.

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Some people did listen. Around Kodak, says Lund, there was scattered interest in building a corporate Web site, but that interest was bubbling up in isolated corners of several divisions. There was no central leadership and no money for development. Lund, Neale and those other evangelists scattered throughout the company knew that before they could build a successful corporate Web site, they would need support from the top.

Neale took the first step toward that goal and managed to get an audience with CEO Fisher. "We showed him an internal site that some engineer had put up," recalls Neale. "It had one big picture of a box of film and another big picture of a PhotoCD. That was the home page."

At the time, Web technology was one of the smaller morsels on Fisher's plate. The CEO was struggling to get the company back on track.

He had started selling off those parts of Kodak that were unrelated to photography. He had cut cycle times and tried to capture overseas markets,particularly those in Russia and China. He split the photographic business into two parts: one for traditional chemical-image processing and one for digital imaging. And, like most people at Kodak, he was wondering what to do about digital photography.

Neale and Lund had some ideas about that. They recognized that the impending digitization of pictures was an opportunity that Kodak could not afford to miss. It was also, happily for Neale, one that could exploit the potential that he saw in Internet technology. Having stumbled through his first Web page presentation to Fisher, Neale tinkered with the design and structure of a new Web page, then set up another appointment with the CEO. Fisher's response this time was more encouraging.

"George looked at it and said, 'There's a pony in here somewhere,'" remembers Neale. "Then he turned to his assistant and said, 'We're going to do this.'"

Just for clicks

Thus began the hurried journey to Kodak's first corporate Web site. Today it is a vast corporate resource with 30,000 pages that markets to 16 countries and saves the company more than $10 million a year in transaction costs for software downloads alone. Ten years from now, it may become the company's single best tool for maintaining worldwide recognition of the Kodak brand.

Building the site, however, was a learning process that lurched forward, backward and sideways. "Everyone at first wanted to think about the site with the same departmental divisions that they saw when they thought about the company," says Neale. "We knew that was a mistake, so we tried to imagine how a consumer would think about the company."

And then there was the struggle for control of the site, even before it was built. "A couple of people involved were from IS," says Neale, "and they thought it should be an IS activity. That presented problems."

Despite the discord, Kodak's Web effort moved quickly, and in February 1995—six months after George Fisher encouraged Kodak to drive deep into the Internet—the company launched its first company site. "It was made up of any content we could get our hands on," says Lund. "We had some basic information about cameras; we had a story about a couple of people who were using digital cameras. We even had a guy put up 40 or 50 of his own pictures."

Lund and his team encouraged all the business units to contribute content, and they did, although their contributions were sporadic. By the end of the site's first year, of 1,200 pages of content, 50 percent to 75 percent was product information. Lund was pleased, but he knew now that the Web was more than a brochure; he knew that it had the potential to be nothing less than Kodak's biggest store.

"It was clear that e-commerce was going to be a big deal," he says. "And we did our initial e-commerce pilot in the beginning of 1996. We started by selling NASCAR racing memorabilia—Kodak was a sponsor of NASCAR races, and it was a way to learn about e-commerce without having any of our own business units involved."

At least one of Kodak's business units could have used some involvement. Kodak had just begun to sell its Advantix Camera, a hybrid of digital and film. According to Fortune magazine, Kodak spent close to $100 million on the Advantix launch and then put too few cameras on the shelves of retailers.

In those days of doubt, the Web was not thought of as a valuable marketing tool. That began to change within months, with the introduction of the DC20 Digital Camera. Before the DC20 was released, Kodak's marketing people used the Web site to offer a chance to win a free camera. Contest entrants were asked to fill out a 40-question marketing survey. Kodak's marketing department was surprised to learn that despite the number of questions, more than 14,000 people filled out the online survey.

The Kodak Digital Science DC20 Web Camera Kit had the honor of being the first Kodak product to be sold online, and it was chosen as such for a good reason: The camera was not available through regular retail channels, and its online sale was unlikely to rankle brick-and-mortar partners.

Someday my reprints will come

Fear of channel conflict ran deep at Kodak, and even today it determines what the company does and does not sell online. In November 1997, when the company opened its first online store with Kodak inventory, all 30 products were digital cameras that were hard to find in most retail stores. These days, on a robust and heavily trafficked site with more than 30,000 pages, Kodak does not do online sales of film, its best-selling product.

"It's a question of managing the channel issue," says Lund. "And determining what is the right thing to do. We are continuing to explore that."

Such a gingerly approach to business was apparently reserved for external business partners. Inside Kodak, Fisher seemed not at all reluctant to slash away, particularly after his company took a loss of $440 million in 1997. Fisher fired the heads of three divisions: consumer imaging, Kodak professional and digital imaging. He eliminated 200 managerial positions and more than 16,000 other positions.

Deep inside that tornado, Neale, Lund and others continued their push toward what they believed to be the real potential of Web technology at Kodak: getting people to put their pictures online. What they had in mind was more than a place for Web geeks to do cool things with JPEGs and GIFs. Because Kodak earns much of its revenues from selling reprints, any program that could encourage more people to order more reprints had promising implications on the business side.

"In late 1997 it became obvious to a few senior management folks that this needed to come together into one thing," says Neale.

In February 1998, Kodak purchased a majority stake in a software company called PictureVision Inc., the company behind the software that runs Kodak PhotoNet online. Three months later, Kodak PhotoNet online made it possible for consumers to have their photos posted on a password-protected space on the Kodak site. Customers simply had to place a check mark in a box when they dropped off their film and their pictures went online for 30 days. The service cost about $5, and it invited customers to order things other than reprints—gifts such as mugs, T-shirts and jigsaw puzzles that are personalized with their photos.

While such nifty applications were being tested and tweaked, the larger part of the Kodak Web site was being built into a powerful workhorse that had begun to demonstrate that it was truly good for business. Sometimes without even being asked.

"In the summer of 1998, people heard there was a new camera coming out," says Thomas Hoehn, business development manager in Internet marketing. "Somehow word got out into the newsgroups, and we started to get flamed by people who wanted information about it. Two weeks before it came out, we had messages from about 3,000 people who wanted to buy it or learn about it, so we sent them e-mail saying here's where you can go. It was the kind of marketing that in print would have cost thousands of dollars."

The incident, says Hoehn, whose job it is to encourage the various business units to use the Web site, provided a persuasive argument for other units to become more involved. And they did.

By last spring, was employing more than 70 full-time people who maintained many sections of the site, including imaging in seven business-to-business areas such as health and medical, motion picture and education. One section, Guide to Better Pictures, offers advice on how to take better pictures, and another, Shop@Kodak, sells digital cameras and other technology such as scanners and printers. The PhotoQuilt 2000 Project invites people around the world to submit a photo of themselves, which has been woven into a collage that now includes more than 2,000 pictures and is exhibited online. And the Feature Story program publishes high-quality photo essays, such as a recent segment on blind photographer George Covington and another on John Glenn's return to space.

A recent accounting of daily page views put the number at 325,000, and last year users pulled more than 400,000 free software downloads from the site. While Kodak is reluctant to talk about revenues, the company is pleased to publish estimates of monies saved. Corporate spokespeople say that the software downloads alone have saved more than $10 million, and much more has been saved from the cost of buying and distributing paper documents, such as the catalogs of Kodak products. The online government Markets Catalogue, for example, saves nearly $400,000 in printing costs, according to Kodak.

"Business units are getting into it in varying degrees," says Hoehn, who refers to himself as the ambassador of "It's a good sign."

Last April the company pushed the Kodak PhotoNet online idea one step further and launched a new section on the site called Kodak Picture Playground online. Picture Playground enables customers who log on to alter their photos in entertaining ways. Users can "antique" pictures, turning color photos into sepia—toned photos; they can turn realistic images into cartoon images and overlay a face in a photograph on the images of an animal.

"It's a pull strategy in terms of getting people to play," says Neale. "They say, 'OK, now I've got a digital file, what do I do with it?' Well, now you can share it or e-mail it. Picture Playground is intended to give people lots of reasons to do things with their pictures and to drive business through the whole network, which would be advantageous to the retailers also."

Neale and others at Kodak are hoping to establish links to Picture Playground on other Web sites with heavy traffic. "Those sites are all trying to keep people on longer," says Neale. "And one of the big advantages to this kind of thing is that it is very sticky. You can get lost in some of our applications and spend a half-hour just doing things with pictures. It's very attractive to people who are looking for sticky minutes."

While it is far too early to declare Picture Playground a raging success, the numbers are impressive. In one day, a week after its launch, the Picture Playground section of counted 32,724 page views. Kodak representatives are less eager to release numbers from the 1-year-old PhotoNet, but they say traffic is picking up. So is the spirit at Kodak. Sales for the first quarter of 1999 were up 5 percent, and in March, CEO Fisher announced his intention to sell the unprofitable Eastman Software Division, for which he paid $260 million two years ago. By May, in an announcement that did not surprise analysts, Eastman Kodak issued a statement saying that next January, Fisher would be replaced by Daniel Carp, a trusted 29-year veteran of Kodak. It was the kind of change that promised that life at Kodak would not change much more than it had under Fisher's watch.

Kodak's struggle is hardly over. The digital world is still approaching, and despite the best efforts of corporate spin doctors, thoughts of a diminishing market for film still send a chill through some corridors of the century-old company. "We say we're in the picture business, not the film business," says Hoehn, "but digital stuff scares the bejesus out of us."

Art Jahnke is a senior editor for CIO.

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