Three years ago, Eastman Kodak Co. (EK) stunned investors when it slashed its dividend 72% and said it would use the savings to help fund a huge bet on commercial printing. Shareholders fumed as the stock lost a quarter of its value in a week. Kodak's turnaround was supposed to be a grand digital strategy, but many saw printing as a dying, dinosaur business.
Today, printing could be Kodak's brightest hope for the future. The company reported a $1.4 billion loss last year, but since 2003 has spent $2.1 billion to emerge as a big player in the fragmented commercial printing market. And its technology could prove nearly as important an evolution in printmaking as movable type -- allowing for mass customization on unprecedented scales.
Competition is rough. In the rapidly growing market for digital printers, Kodak lags well behind leader Xerox Corp. (XRX), and Hewlett-Packard Co. (HPQ) also has designs on this business. But Kodak has pulled together a broader portfolio than rivals by picking up everything from the software and plates printers need to get a job started to the presses needed to complete it.
"The global printing industry is just at the beginning of a big digital transformation," says Bill Miller, the legendary stockpicker at Legg Mason Inc. (LM) and Kodak's largest shareholder. Since Dale Wettlaufer, a Legg Mason analyst whose father was a printer, sold him on the promise of the business, Miller has become a prominent -- and lonely -- Kodak bull. Shares trade near $20, but Miller sees them shooting to $45 by 2008.
Today, printers make trade-offs. They can use relatively slow digital machines like Kodak's NexPress to create personalized, glossy brochures and other documents. For large print runs -- such as BusinessWeek -- they use offset presses, which operate at blinding speed but are difficult and expensive to customize. Since 1998 a Kodak team led by chief technologist Gil Hawkins has been perfecting a continuous inkjet process, code-named Stream, that sprays ink onto paper like a machine gun. It's the best of both worlds: custom digital presses that roll at offset-like speeds, up to 24 miles an hour.
With this technology, companies like Lands' End could produce catalogs tailored to the buying habits of each customer. Similarly, direct mail could become as personalized as Internet ads. "This could fundamentally change our industry," says Michael R. Murphy, President of Minnesota-based Japs-Olson, one of the biggest printers of direct mail.
As for mass communication such as magazines and newspaper, both advertising and editorial content could change. Advertisers could do far more targeting of the audience they're trying to reach. Also, readers could tell publishers the sort of content they want; it's not hard to imagine subscribers receiving thousands of distinct printed copies of this magazine.
Problem is, so far Kodak hasn't proved its inkjet technology can deliver the same vivid, crisp colors as offset, cautions Howard Fenton, a consultant at industry trade association NAPL. But it's close enough that James T. Langley, the HP veteran recruited in 2003 by CEO Antonio M. Perez to run the Graphic Communications Group, plans to start commercializing it. "Over the next five years, Stream will become the complete foundation of our inkjet line," Langley says. Some outsiders concur. "No one else has a technology that's as fast or high-quality as Stream," says Frank Romano, a digital printing expert at the Rochester Institute of Technology.
It can't happen soon enough for Perez, who must complete a brutal downsizing of Kodak's film business, find a buyer for its health-imaging unit, and start making money on digital photography. "But we have a real jewel in [digital printing]," he says. He expects the group's operating margins to be 9% by 2008, or nearly twice the ambitious 5% he wants from digital photography. That would be a welcome boost for the flagging corporate icon.
By William C. Symonds