AT KODAK PATENTS HOLD THE KEY TO THE FUTURE

[Anonymous]

http://online.wsj.com/article/SB10001424052748703757504575194331184972428.html?mod=WSJ_earnings_LEFTTopHeadlines
AT KODAK PATENTS HOLD THE KEY TO THE
FUTURE
As Eastman Kodak Co.
struggles to turn itself around, a patent countersuit brought against it
by Apple Inc. highlights the camera and printer maker’s continuing
reliance on income from its intellectual-property patents.In a claim
filed Thursday, Apple charged that Kodak has been using the computer
maker’s digital-processing technology. Kodak filed lawsuits against
Apple and BlackBerry maker Research In Motion Ltd. earlier this year,
and they are pending.

Kodak moved late to digital technologies,
and it has been trying to catch up under Chief Executive Antonio Perez, a
former Hewlett-Packard Co. executive who joined Kodak in 2003 and
became CEO in 2005. Amid restructuring and efforts to build new
businesses, Kodak has reported only one full-year profit—in 2007—since
2004.In recent years, aggressive litigation has become an increasingly
important part of Kodak’s corporate strategy. Income from patent-suit
settlements—including $550 million from Samsung Electronics Co. and more
than $400 million from LG Electronics Inc. in the past 12 months—has
helped to support Kodak as it struggles to complete the switch from film
to digital technologies.

But some analysts fear that Kodak is
running out of companies to sue and that its intellectual-property
income can’t cushion its operational turnaround much longer. The
majority of the deals Kodak has struck have been nonrecurring, lump-sum
arrangements.”At this point from the standpoint of type of [intellectual
property], the low-hanging fruit has been picked,” said Shannon Cross, a
Cross Research analyst.A Kodak spokesman responded that the company’s
operational turnaround is succeeding and that its profitability is
improving. He added that Kodak has a “rich patent portfolio” and has
other licensing opportunities. He declined to be specific.Although Kodak
invented the digital camera in 1975, it didn’t move quickly to
commercialize it. But many of its patents are in digital imaging, and it
began licensing intellectual property in 2000 under ex- CEO Dan Carp.

When
Mr. Perez became CEO, he took a more aggressive approach. Thus, in
2008, Kodak set a goal of generating an average of $250 million to $350
million a year in intellectual-property licensing through 2011,
including suit-related settlements. This year, Kodak extended that goal
to 2012. Kodak has been able to meet the goal for the past two years and
will do so again this year thanks to the Samsung deal. Kodak spokesman
David Lanzillo said the company has 30 licensing agreements in place and
both one-time and recurring deals.”This was a good bridge strategy”
while moving to digital, said Robert Sethre, an analyst for Woodford
Group.Indeed, since 2004, Kodak said, it has sued or struck deals with
about a dozen electronics makers and tech companies over intellectual
property, including Samsung, LG, Nokia Corp., Sony Corp. and Motorola
Inc.

With demand for film shrinking, Mr. Perez has also pushed
Kodak more aggressively into digital cameras, digital picture frames and
consumer ink-jet printers, but consumer spending has slowed amid the
economic slump. In 2009, sales of Kodak’s Consumer Digital Imaging Group
business fell 15% to $2.6 billion.

Kodak also has high hopes for
its consumer and commercial ink-jet printers, which compete against H-P
and Canon Inc. on the higher end and Lexmark International Inc. on the
lower end. Kodak believes it has an advantage because of its inexpensive
ink cartridges, but it doesn’t expect its consumer and commercial
ink-jet printer businesses to be profitable until 2011 and 2012,
respectively. Its entertainment film business is also coming under
pressure as more studios and theaters adopt digital cinema systems.”The
problem is that excluding IP income generation, they are burning
hundreds of millions of dollars in cash flow in operating businesses,”
said Chris Whitmore, a Deutsche Bank analyst.

Kodak’s Mr.
Lanzillo said earnings could be higher, but the company is choosing to
invest in technology for printers and printing-production software. He
acknowledged that intellectual property helps to generate cash and
earnings but said Kodak also uses it in its own products, which are
attracting customers.

The number of households with Kodak
printers doubled last year to about two million on the consumer side,
Mr. Lanzillo said. Excluding intellectual-property income, Kodak’s
overall profitability improved by more than $100 million in the 2009
fourth quarter compared with a year earlier, he added. For the fourth
quarter, Kodak also swung to a profit of $443 million from a year-ago
loss of $918 million, and sales grew 6% to $2.6 billion.”We continue to
invest in building these new businesses,” the spokesman said “and
customer response to these new offerings has been very strong.

[Author]

April 26, 2010 at 10:46 AM