*NEWS*XEROX & KODAK HEADED FOR TURF WAR

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Xerox and Kodak headed for turf war
For most of their 40 years of coexistence as the two biggest companies in Rochester, N.Y., Xerox Corp. and Eastman Kodak Co. have been friendly neighbors, avoiding poaching on each other’s territory. Xerox copiers ruled the office; Kodak film owned the consumer. But digital convergence and financial travails are increasingly turning the two imaging companies into rivals.
In a sign of the growing competitiveness, Xerox announced on Thursday a deal with Fuji Photo Film Co., Kodak’s longtime nemesis in traditional film, to put high-quality Xerox printers into retailers’ photo minilabs. The devices will let consumers create calendars, greeting cards and photo books at store kiosks rather than going online to Web sites like KodakGallery.com. The enhanced machines may also lure some retailers from using Kodak-made photo kiosks _ one of the company’s most successful businesses.Xerox and Kodak are already competing to sell color digital presses to commercial printers, a market that Xerox now leads and that Kodak entered through a string of acquisitions beginning three years ago. Both regard the commercial printing industry as a key strategic market, accounting for one-quarter or more of their revenue, but their product overlap remains limited.The new competition illustrates how rapidly changing technology can force companies to challenge corporations that once moved in parallel universes. Telephone carriers and cable-television companies are now battling it out, while cellphone makers will soon compete with Apple Inc. for a mobile-music market once dominated by Sony Corp.’s Walkman.Xerox and Kodak both owe their fortunes to products that place images on media. Xerox _ whose roots and biggest plants are in Rochester, though its headquarters is in Stamford, Conn. _ ruled the office market with copiers that fused toner to paper. Kodak, which long ago abandoned its copier business, has built a consumer brand, selling film and photo-finishing services.But the digital revolution hit both companies hard. First, inkjet printers slashed demand for Xerox copiers. Then digital cameras devastated Kodak’s film business. Xerox skirted bankruptcy in 2001 before beginning a painful turnaround. Kodak is still in the midst of a restructuring that will see world-wide employment cut to 28,000 by the end of this year from a 1984 peak of 145,000. In many ways, each company is a shadow of its former self. Xerox stock, which hit a high of $63 in 1999, closed on Wednesday at $17.97 a share. Kodak’s high was $85 in 1996; Wednesday it closed at $25.05 a share.

In a search for new markets, the companies have adapted their technology to digital color printing in the hope that growing sales of ink and toner will provide the kind of recurring revenue that black toner used to give Xerox and film once gave Kodak. “Increasingly, the two will be facing off,” says Matt Troy, an analyst with Citigroup who follows the imaging market.As the rivalry heats up, it “will be a battle of the titans” in Rochester, says Frank Romano, professor emeritus of printing at Rochester Institute of Technology. The population of the upstate New York city, currently 211,000, has been shrinking because of layoffs at Kodak and Xerox. Keeping secrets from each other is difficult because “people go back and forth routinely,” Mr. Romano says. “It’s hard to get talented people to move to Rochester.”To be sure, the two companies face even stiffer competition from Hewlett-Packard Co. and Canon Inc., which are much larger and more profitable and boast bigger research-and-development budgets.The biggest battleground for Xerox and Kodak is selling to commercial printers _ a big but deeply troubled industry. Mr. Troy of Citigroup says “there are 32,000 commercial printers, and they’re going bankrupt at a rate of over 1,000 a year, with profit margins of 1 percent to 2 percent. It’s a dismal business.” Even though traditional offset printing is stagnant, digital color printing of customized catalogs and brochures is growing rapidly. So Kodak and Xerox are trying to persuade the printers to invest $400,000 or more for a color digital press that can churn out more than 100 pages a minute. In 2005, Xerox’s iGen printers held 37 percent of the high-end market, compared with 21 percent for Kodak’s NexPress, according to market researcher InfoTrends in Weymouth, Mass. H-P’s Indigo press had a 33 percent share.Xerox says it spent nearly $1 billion developing the iGen presses, and it also has a broad line of slower digital presses used in print shops. Quincy Allen, president of Xerox’s production systems group, says that last year Xerox captured $4.5 billion out of what it views as an $8 billion market for digital presses and printing supplies. He says that his goal is to capture a large portion of the $17 billion color market now handled by aging offset presses. “Our page volume would dwarf NexPress or Indigo in terms of pages produced,” he adds.Kodak has long sold ink, film and other supplies to printers. Since 2003, it has gone heavily into debt, spending $2.5 billion to broaden its printing portfolio and enter the digital-printing market. Jeffrey Hayzlett, chief marketing officer for Kodak Graphic Communications, says that most print shops already buy Kodak supplies for their offset presses, giving Kodak an entree to sell its high-end presses. “We’re the only ones playing in both the conventional and the digital side,” he says. “We’ve been in this print business for over 100 years. We’ve seen a lot of competitors come and go.”Analysts say that Xerox’s broad portfolio of digital printers gives it an advantage. For example, cash-strapped printers that want to enter the digital-press business at a lower price point can buy its Docucolor line for less than $100,000. But Mr. Romano says he expects Kodak will soon start to resell some cheaper digital presses made by Canon. Mr. Hayzlett declines to comment on that but says Kodak will announce an expanded line in April.

Xerox’s new deal with Fuji takes it into the heart of Kodak’s traditional business _ consumer photo printing. Kodak has installed some 80,000 photo kiosks where photographers can make prints in retail stores around the world. It also sells home photo printers and offers online photo printing and overnight lab photofinishing. Fuji, which divided up the snapshot market with Kodak in the film days, provides digital prints only through retailers, building on its success with one-hour photo labs at Wal-Mart Stores Inc. and Walgreen Co. That has proved to be a good bet for Fuji as consumer printing has migrated from home printers; last year, 46 percent of digital prints were produced at retail outlets, topping home printing for the first time, according to the Photographic Marketing Association, a trade group.Fuji hasn’t worked with Xerox much in the past, although its parent owns 75 percent of Fuji Xerox, a Japan-based copier and printer company that is 25 percent owned by Xerox. Bing Liem, senior vice president of sales at Fuji, says, “We saw a huge opportunity. Photo books and calendars and personalized gifts have been exploding.” Xerox’s Phaser 7760 printer, which sells for less than $10,000, lets retailers offer alternatives to 4-by-6-inch prints. It can be equipped with spiral binding add-ons for calendars and hard-cover binding for photo books.The competition is likely to increase. Kodak hasn’t tried to crack Xerox’s office stronghold for awhile, but its recently announced color inkjet multifunction devices can print 22 color pages a minute _ fast enough to attract some of the small-business offices that Xerox also targets.

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February 26, 2007 at 11:45 AM