Kodak Launches a Printer Offensive

CEO Antonio Perez wants to grab market share from Hewlett-Packard with less expensive ink and long-lasting color

Antonio Perez left the inkjet printer business seven years ago, after he lost out to Carly Fiorina in a bid to run Hewlett-Packard. But it has never been far from his mind. That's why, a few weeks after he joined a struggling Eastman Kodak as president on Apr. 2, 2003, he was peering into a microscope in a lab in Building 82-A on Kodak's sprawling Rochester (N.Y.) campus. Perez was amazed at what he saw: droplets of a new ink produced by Kodak scientists that could yield photo prints with vivid colors that would last a lifetime. "It was the Holy Grail of inkjet printing, and they had it here," recalls Perez.

Since then, Perez and Kodak (EK) have been working on a top-secret plan, code-named Goya, to make a big entrance into the consumer inkjet printer business. For the past year, a Kodak development team has been putting the finishing touches on printer technologies in a nondescript building across the street from HP's inkjet printer lab in suburban San Diego. On Feb. 6, it becomes clear what they were up to when Perez, now Kodak's chief executive, announces a new product line of multipurpose machines that not only handle photographs and documents but make copies and send faxes.

The new Kodak printers are designed first and foremost to print high-quality photos: The ink is formulated so prints will stay vibrant for 100 years rather than 15. But the printers are also intended for standard document printing—and copy and fax, as well. Most impressive of all, replacement ink cartridges will cost half of what consumers are used to paying.

Disrupting the Industry

If Kodak pulls this off, it could pose a huge challenge to the $50 billion printer industry, which relies on a bait-and-hook strategy, often discounting the machines and making most of its profits on expensive replacement cartridges. "We're very proud that we're coming to market 20 years late," Perez says with a devilish grin. "We think it will give us an opportunity to disrupt the industry's business model and address consumers' key dissatisfaction: the high cost of ink."

In particular, Kodak's strategy is an assault on the profit engine of industry leader HP (HPQ). Printing supplied 60% of HP's $6.56 billion in operating earnings last year. Still, Perez claims he has no malice toward his former employer. "I spent my life there. I respect them," he says. "I'm doing this for Kodak."

The new printers will arrive in stores starting in March, priced at $149 to $299. Kodak is targeting consumers who print loads of photos and are willing to pay full price for high-quality printers. Black ink cartridges will cost $9.99, color $14.99. Kodak's bet is that if its ink is much cheaper than that of the competition, consumers will buy it and print more pictures—and, of course, they will print with Kodak printers and Kodak ink. "It's really a revolution of thought in how to bring the price of printing down and encourage people to print more," says David Morrish, senior vice-president of merchandising for Best Buy (BBY), which has an exclusive on the product for three months.

From Roots to Results

Even with such low ink prices, Perez expects inkjet printing to produce Kodak's best profit—in double digits after a three-year investment phase. He predicts it will become a multibillion-dollar business. It's a crucial piece of Perez' turnaround plan for Kodak, which is suffering a rapid decline of its traditional photo-film business. In the fourth quarter, the company posted its first profit in two years—a reflection of cost cuts, not rising sales. Reversing the revenue slide will depend in part on the success of new products (see BusinessWeek.com, 2/1/07, "Kodak's Turnaround Keeps Developing").

The product launch signals the end of a remarkable three-and-a-half-year march to get a potentially revolutionary product out the door. Perez built his team by matching a slew of former HP colleagues with Kodak chemists and nanotechnology experts. Perhaps never before has a challenge to a major company been launched by a rival that knew it so well.

Seeds of the project were planted in the late 1990s, when HP briefly considered acquiring Kodak. During a 15-day due-diligence process, Perez looked over Kodak's patent portfolio. Although HP's board nixed the merger, Perez' prowling later resulted in a joint venture, established in 2000, to produce high-quality inkjet photo printers for retail outlets. The project, Phogenix Imaging, was ultimately a bust, a victim of conflicts between its owners. On May 14, 2003, with the first machines ready for shipment on the loading dock and only a month after Perez had joined Kodak, the two sides announced they would part company.

Big Risks and Rewards

But Phogenix wasn't all for naught. At Kodak, Perez had hired two former top HP printer executives, Bill Lloyd and Philip Faraci, to help him evaluate the consumer inkjet business. In 1979, Lloyd had led the HP team that came up with a key advance in inkjet printing that spawned the industry. As soon as the Phogenix news came down, Lloyd and Faraci were on the phone with about 40 key recruits, many of them former HPers. They couldn't talk about Perez' ambitions yet, but "we called them up and asked them not to take other jobs," recalls Lloyd, now Kodak's chief technology officer.

The crucial go/no-go meeting came on June 25 in Perez' conference room on the 19th floor of Kodak headquarters. Lloyd and Faraci laid out the arguments, pro and con. The risks were enormous. Kodak would be entering a mature business already dominated by a handful of leaders. And with Kodak's turnaround in question, Perez couldn't afford an expensive failure.

But the opportunities were huge, too. Perez decided to sleep on it. He tossed all night at his home in the posh Pittsford suburb of Rochester. In the morning, he made his decision. "The industry had been doing things the same way for 20 years, and it was time for a change," says Perez. "I called up Bill Lloyd and said, 'Go ahead. Let's launch a full program.'"

Startup Mentality

A few days later, a dozen former Phogenix employees were invited to lunch at the suburban San Diego home of David Clark, who had been the Phogenix research and development chief. They sat by Clark's backyard pool with a view of the rugged Poway Hills in the distance, munched on chicken salad, and listened raptly while Clark laid out Perez' audacious plan.

"At first, we thought it was a far stretch. We know how capable HP is and how much technology it has and how much money they spend," recalls Susan Tousi, a 10-year HP veteran who now runs research and development for Kodak's inkjet business. Still, within a few days, all but one of those who had sat by Clark's pool decided to sign on. Tousi did so because she liked the startup mentality and wanted to keep working with people who had become close friends.

Perez wanted to get to market quickly, with a target of three years, so the InkJet Products Group leaders made choices designed to speed up the development process. They worked with technology partners, such as chip-design specialist SigmaTel, rather than trying to design everything from scratch. And once they established their market goals, in late 2003, they never veered from them. The result: a process that took years less than it might have and that required just a $300 million investment.

Last-Minute Crisis

One of the key decisions was choosing pigment as the basis for Kodak's ink, rather than the usual dye. Pigment-based inks hold their colors longer, but typically the colors aren't as vivid. So Kodak engineers had to come up with innovations in ink chemistry and nozzle technology to produce a new kind of ink and printer head and paper that would produce vivid colors that also last.

The inkjet printing process is a wonder of modern computer technology and chemistry, and Kodak's take on it required several twists. Software in the printer evaluates each image and determines what's in it (faces, trees, sky), optimizing the process based on that analysis. Ink is boiled and sprayed through 3,840 nozzles at a rate of 24,000 drops per second. The tiny pigment particles are designed to sit on the surface of porous paper while the liquid they're suspended in is absorbed. Drying takes just 15 milliseconds, so there are no worries about smearing the prints, which take 28 seconds to produce.

With any new technology, there are invariably glitches. The team faced a near-disaster a year ago when they discovered that the pigment particles in their inks were settling at the bottom of the storage containers, like sediment in a wine bottle. Unless the situation was remedied, image quality would suffer.

A Stickler for Quality

The problem came fairly late in the development process—the team had already "frozen" the ink formula so they could design other components of the printer to go with it. The temptation was to try to fix things without changing the ink recipe. The scientists considered putting a small mechanical mixer in the storage tank. But in the end they decided it was too risky to do anything but reformulate the ink. That led to a day-and-night work marathon. A month later, the team had its solution: milling the pigment particles much smaller, so they would stay suspended in liquid. The formula was set, and Tousi came up with a motto: "Don't dink with the ink."

Throughout the whole process Tousi was the stickler for quality. Dubbed "Queen of the Geeks" by her employees, Tousi carries a loupe for magnifying photographs practically everywhere she goes. She even takes prints into the parking lot to study them under harsh sunlight. Time and again, Tousi sent engineers back to the drawing board because their results weren't up to her standards.

Last June, it was Tousi who had to tell Perez that they weren't going to be able to begin marketing the printers for last year's holiday shopping season. She felt more tests were necessary to assure the highest print quality. In an effort to boost the team's morale, Perez flew to San Diego to meet with the entire engineering staff. He stood on a table so he could see over their cubicle partitions. He recalls telling them: "Slipping by a quarter doesn't matter that much, but you have to promise me that these printers will work perfectly. We have only once chance to do this right. If our first introduction fails, we fail."

HP Downplays the Threat

Analysts who have seen Kodak's printers have come away impressed. "The print quality is really good. They're at least as good as everybody else," says Larry Jamieson, director of industry-watcher Lyra Research. But Perez and Kodak face daunting challenges as they enter this market. HP dominates with a 33% worldwide market share and a sterling reputation among PC and digital-camera users. "HP has a lot of customer loyalty. They build a great product. The printers don't break," says analyst Alyson Frasco of market researcher Interactive Data.

HP downplays the threat from Perez. "He's going into a gunfight with a knife," taunts Nils Madden, marketing director for HP's inkjet business. Madden says HP is spending tens of millions a year on improvements in inkjet technology to make better prints and printers that work faster. He says consumers shouldn't be put off by ink prices. If they buy HP's economical Photo Value Pack, which combines paper and ink, the cost per print is about 29 cents.

What's next? Plenty of uncertainty. Analysts expect HP to sit tight for now and see whether Kodak gains a troublesome amount of market share. If it does, HP and the others might be forced to discount ink. So it's up to Perez and Kodak to show they have a truly game-changing product.

Perez seems immune to negative thoughts. He tells a story that shows just how confident he is of success. "J. Paul Getty said you have to do just three things to be successful: get up early, work hard, and strike oil," says Perez. "I didn't strike oil in my career, but I did strike ink."

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