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Kodak and HP Dissolve Partnership

May 15, 2003 at 09:59 GMT

Kodak may have to write off "tens of millions'' of dollars invested in a failed venture with Hewlett Packard, called Phogenix, that was making picture-developing kiosks. Kodak was counting on the mini-labs to catch up to Fuji Photo's five-year head start, instead it will now focus on a development agreement with Noritsu Koki Co. of Japan as its "core'' mini-lab.

Kodak to Write Off Investment in Hewlett-Packard Kiosk Venture

Rochester, New York, May 15 (Bloomberg) -- Eastman Kodak Co., the world's largest photography company, may have to write off "tens of millions'' of dollars invested in a failed venture with Hewlett-Packard Co. that was making picture-developing kiosks.

Kodak was counting on the mini-labs to catch up to Fuji Photo Film Ltd.'s five-year head start in offering in-store kiosks that people use to develop pictures taken with digital cameras. Analysts estimated Kodak spent at least $50 million on the Hewlett- Packard project, which the two companies dissolved yesterday.

Kodak will now focus on a development agreement with Noritsu Koki Co. of Japan as its "core'' mini-lab, spokesman Anthony Sanzio. Kodak gets about 71 percent of its revenue from selling film and the chemicals and paper needed to develop photographs. The popularity of digital cameras, which don't need film, has contributed to three straight years of declining sales at Kodak.

"Fuji is farther along with digital technology that Kodak,'' said Richard Stice, an analyst with Standard & Poor's Investment Research Inc. who rates Kodak stock a "sell'' and doesn't own it. "Kodak was late to the game and now they have to play catch up.''

Fuji introduced a free-standing digital kiosk in 1997 that makes prints while customers wait. Kodak had just started taking orders for its Phogenix machine developed with Hewlett-Packard and had expected the venture to generate $500 million to $1 billion in sales by 2005. No Phogenix machines had been installed.

"Based on the anticipated return on invested capital for the parent companies, each company has separately decided to focus'' on other opportunities,'' Kodak said in a statement yesterday.

The financial implications of ending the venture are being considered and are "not likely to be very material'' Sanzio said. Details will be given when earnings are reported in July, he said.

Shares of Kodak fell 17 cents to $29.95 as of 6:40 p.m. The stock had dropped 9.8 percent in the past year.

Moving On

Kodak will begin shipping to retailers this month mini-labs it's making with Noritsu, Sanzio said. Noritsu's technology uses the traditional photographic processing technology called silver halide, unlike the Hewlett-Packard inkjet technology.

"Inkjets are getting better and better every day, but silver halide is still higher quality,'' Sanzio said.

Hewlett-Packard believes that the quality of its inkjet prints is "absolutely on par'' with silver halide prints, company spokeswoman Jennifer Boggs said.

The Phogenix labs, small enough to fit in stores typically unequipped to house typical automated film-developing machines, would have cost retailers about half the $100,000 price tag on the Noritsu product. The slower inkjet technology could produce only about 250 prints an hour, compared with more than 1,000 for the Noritsu mini-lab, Sanzio said. Fuji's system costs $139,000 to $245,000, analysts estimate.

Convincing Retailers

Kodak had hoped to persuade retailers like Walgreen Co. and CVS Corp. to replace their film-developing labs with the Phogenix models, which were to be able to develop film, scan the negatives and turn them into digital files and make prints. Walgreen is one of Kodak's largest on-site photofinishing customers and develops about 40 million rolls of film a year.

Other kiosks made by Kodak, Fuji and companies like Sony Corp. have become attractive to retailers because the machines produce wider profit margins for the stores, analysts said.

"Digital mini-labs will take the lion's share of the digital output market, and kiosks and home printing options will only play a small part in overall digital output,'' said Caroline Sabbagha, a Lehman Brothers analyst who rates Kodak stock "underweight/neutral.''

Kodak Chief Executive Officer Daniel Carp had said repeatedly since announcing the Hewlett-Packard venture in 2000 that Kodak was hoping its new mini-lab would spur demand for digital-based prints and stir competition with Fuji.

Two days ago Kodak agreed to buy Applied Science Fiction Inc.'s rapid-film-processing technology. The system develops conventional film without chemicals, converts photos into digital files, prints pictures and stores them on a compact disc.

Kodak also has hired people experienced in digital imaging, including former Hewlett-Packard Co. executive Antonio Perez.

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