Today Eastman Kodak (EK), an icon of American capitalism, filed for bankruptcy. The 100-year-old company had been in trouble for many years as the shift to digital imaging dramatically reduced the demand for its products.
Early in my Wall Street career, I was a photography analyst. I was the “guru” for my firm on the photography industry and covered stocks such as EK, Polaroid, Fuji Film and so forth. I visited Rochester many times and met with EK management on numerous occasions. EK, in many ways was a victim of its own success. The silver halide technology which made photography possible also created a very, very profitable product – photographic film. By all estimates, the gross profit margin on photographic film was around 80%. EK tried over the decades to use all of its cash flow and profits to fund other businesses. None were as profitable or stable as the film business.
After a while it seemed that management was simply trying not to mess up a great business – the goal was not to move on to bigger and better things, but just try to maintain market share and hang on. By the time the digital threat became serious, EK was already far behind. It never caught up, and now the reality of the new digital age has caught up to it.
In many ways, EK is a poster child of Schumpeter’s idea of “creative destruction,” which is often used to describe capitalism’s messy way of delivering progress. Because new, potentially disrupting technology always looms on the horizon, companies must not be afraid to make dramatic changes that may hurt in the short run, but which over the long haul often prove to be a saving grace. Apple (AAPL) has done this many times over the last decade. EK did not.
This is one reason predicting the future is so difficult. The marketplace is constantly changing, and the best companies are prepared to change with it. Being big or having a dominant market share provides no guarantee for future success.
I love the idea that some large portion of jobs in the future will come from technologies not yet invented. Who knew that social media companies would become so big and create so many jobs?
One of the great pleasures I derive as an investment generalist is researching and analyzing a broad range of companies in many different industries. Along the way, I learn a great deal about how good management teams run their businesses. And the dynamism of the markets keeps me ever engaged and looking for the next bunch of really great investments. So even as formerly great companies like EK fade away, new ones will be born, small ones will get bigger, and investors who can find the gems will be rewarded for their insight, diligence and patience.