Photography Icon Kodak Declares Bankruptcy, a Victim of Creative Destruction

question 80

Essay

Photography Icon Kodak Declares Bankruptcy, A Victim of Creative Destruction

Having invented the digital camera, Kodak knew that the longevity of its traditional film business was problematic.
Concerned about protecting its core film business, Kodak was unable to reposition itself fast enough to stave off failure.
Chapter 11 reorganization offers an opportunity to emerge as a viable business, save jobs, minimize creditor losses, and limit the impact on communities.
_____________________________________________________________________________
Economic historian Joseph Schumpeter described the free market process by which new technologies and deregulation create new industries, often at the expense of existing ones, as "creative destruction." In the short run, this process can have a highly disruptive impact on current employees whose skills are made obsolete, investors and business owners whose businesses are no longer competitive, and communities that are ravaged by increasing unemployment and diminished tax revenues. However, in the long run, the process tends to raise living standards by boosting worker productivity and increasing real income and leisure time, stimulating innovation, expanding the range of products and services offered, often at a lower price, to consumers, and to increase tax revenues. Kodak is a recent illustration of this process.
Founded in 1880 by George Eastman, Kodak became the latest giant to fall in the face of advancing technology, announcing that it had filed for the protection of the bankruptcy court early in 2012. Kodak had established the market for camera film and then dominated the marketplace before suffering a series of setbacks over the last 40 years. First foreign competitors, most notably Fujifilm of Japan, undercut Kodak's film prices. Then the increased popularity of digital photography eroded demand for traditional film, eventually causing the firm to cease investment in its traditional film product in 2003. Although it had invented the digital camera, Kodak had failed to develop it further, announcing on February 12, 2012, that it would discontinue its production of such cameras. Kodak's failure to move aggressively into the digital world may have reflected its concern about cannibalizing its core film business. This concern may have ultimately destined the firm for failure.
Kodak closed 13 manufacturing plants and 130 processing labs and had reduced its workforce to 17,000 in 2011 from 63,000 in 2003. In recent years, the firm has undertaken a two-pronged strategy: expanding into the inkjet printer market and initiating patent lawsuits to generate royalty payments from firms allegedly violating Kodak digital patents. Kodak technologies are found in virtually all modern digital cameras, smartphones, and tablet computers. Kodak had raised $3 billion between 2003 and 2010 by reaching settlements with alleged patent infringement companies. But the revenue from litigation dried up in 2011.
With only one profitable year since 2004, the firm eventually ran out of cash. Its market value on the day it announced its bankruptcy filing had slumped to $150 million, compared to $31 billion in 1995. Kodak said it had $5.1 billion in assets and $6.8 billion in debt, rendering the firm insolvent. The Chapter 11 filing was made in the U.S. bankruptcy court in lower New York City and excluded the firm's non-U.S. subsidiaries. The objectives of the bankruptcy filing were to buy time to find buyers for some of its 1,100 digital patents, to continue to shrink its current employment, to reduce significantly its healthcare and pension obligations, and to renegotiate more favorable payment terms on its outstanding debt. Kodak had put the patents up for sale in August 2011 but did not receive any bids, since potential buyers were concerned that they would be required to return the assets by creditors if Kodak filed for bankruptcy protection. While the firm's pension obligations are well funded, the firm owes health benefits to 38,000 U.S. retirees, which in 2011 cost the firm $240 million.
Kodak also announced that it had obtained a $950 million loan from Citibank to keep operating during the bankruptcy process. Moreover, the firm filed new patent infringement suits in March 2012 against a number of competitors, including Fujifilm, Research in Motion (RIM), and Apple, in order to increase the value of its patent portfolios. However, a court ruled in mid-2012 that neither Apple nor RIM had infringed on Kodak patents. In early 2013, Kodak announced that it would put additional assets up for sale (including its camera film business and heavy-duty commercial scanners and software businesses) since the sale of its remaining digital imaging patents raised only $525 million, much less than the nearly $2 billion the firm had expected. The sale of these businesses would cement Kodak's departure from its roots. In late September 2012, Kodak announced that it would suspend the production and sale of consumer inkjet printers. Kodak also received permission from the bankruptcy court judge to terminate the payment of retiree medical, dental, and life insurance benefits for 56,000 retirees at the end of 2012.
Kodak has to demonstrate viability to emerge from Chapter 11 as a reorganized firm or be acquired by another firm. The firm has pinned its remaining hopes for survival on selling commercial printing equipment and services, a business that generated about $2 billion in revenue in 2012 but that may lack the scale to sustain profitability. If it cannot demonstrate viability, Kodak will face liquidation. In either case, the outcome is a sad ending to a photography icon.
-Comment on the fairness of this transaction to the various stakeholders involved. How would you apportion the responsibility for the eventual bankruptcy of Tribune among Sam Zell and his advisors, the Tribune board, and the largely unforeseen collapse of the credit markets in late 2008? Be specific.

---

Definitions:

Specific Phobias

Anxiety disorders characterized by excessive and irrational fear of specific objects, situations, or activities, leading to avoidance behavior or significant distress.

Controlled Research Studies

Experiments that include a control group and are designed to minimize the effects of variables other than the one being studied.

Psychotherapy Treatment Format

The structure or method through which psychotherapy is administered to clients, including individual, group, or digital sessions.

Psychoeducational Groups

Groups designed to educate individuals about their conditions and how to cope, often used in mental health and substance abuse treatment settings.