When Antonio Perez arrived at Eastman Kodak Co. in April 2003 as president and chief operating officer, he found an iconic company struggling to develop a new business model for the digital era. The former Hewlett-Packard Co. executive assumed oversight of day-to-day operations of most Kodak businesses and units, and also began to map a strategy to transform the photo giant.
Today, Kodak is a much smaller company-it employs some 7,400 workers here and last year generated $7.6 billion in revenues, compared with 22,000 employees and $12.8 billion in sales seven years ago. It also is a dramatically reshaped one. Under Perez, who took over as CEO on June 1, 2005, Kodak has become a digital enterprise with a large bet placed on consumer and commercial inkjet printing while it also aggressively seeks to capitalize on its intellectual property portfolio. A native of Spain, Perez also is pushing Kodak to grow more globally, especially in Asia.
Kodak's chairman and CEO recently talked with Rochester Business Journal editor Paul Ericson in a wide-ranging interview. An edited transcript follows:
ROCHESTER BUSINESS JOURNAL: A few weeks ago you marked five years as CEO. Is Kodak today where you thought it would be five years ago when you first started? And what has been the biggest surprise, the biggest challenge you didn't anticipate?
ANTONIO PEREZ: You know the answer to the second question already. (Laughter.) Given the economic circumstances, I feel comfortable where we are. I wish we didn't have to go through the recession that we are still dealing with, by the way. Putting that aside, I'm very pleased where we are, and I'm giving you this answer with the perspective of what is it that I came here to do.
In 2003 the (Kodak) board realized that film was in secular decline. Some would argue that it was a realization that should have taken place before; whatever it was, the fact was at that time the company was committed to finding another path for growth and we didn't have one. They called me because in the past I had shown a lot of interest especially in the IP portfolio of the company when I was working for another company. And I was fascinated by the digital technology of this company for many years. I was fascinated as well by the fact that the company wasn't doing much with it. I think that was one of the reasons why the board and Dan Carp called me. I've known him, you know, for a while.
So I came here on the directive from the board to create a new company based on digital technologies that would use the know-how and the assets that the company has. We were late; I think it's fair to say we were late. Some would say we were 20 years late. And this is not a criticism of the past; I know the people that managed this company before, and I think they were very competent people. Things happen in industries and technologies, and the life cycle of certain technologies may last longer or not as long as you might think they will. In this case film obviously was not lasting as long as the company thought it was going to last. In fact, it was disappearing very rapidly-maybe even faster than any other technology that we know that has disappeared. So that made the task of creating a new company slightly more difficult.
The good part of the job was that we had a lot of technology to work with; the negative side of that was that the technology wasn't packaged; it wasn't ready to be commercialized. It was in the labs, basically. The other good thing about the task was that we had a great brand, a very powerful brand-with some connotations that are negative because for many we are still viewed as a film company, and therefore it's hard for some people to accept that we actually are one of the leading digital technology companies in the world. In the making, but nonetheless when you look at the breakthrough technologies that we brought to market in the last few years, I think it's formidable. I've been around technology for many years, and what this company has done ... bringing to the market really breakthrough technologies in the last four years, I think is amazing.
Now financially, the fact that film (was) disappearing more rapidly than anyone thought and that was the cash generation of the company, that created an issue and elevated a sense of urgency, obviously. On the positive side, when we started actively to monetize the intellectual capital that we have in our patents, things have worked very well for us. So when you look at this company now, the way I look at it, I look at two different companies. I look at a traditional company that was the majority of the company when I came. The revenues at that time were probably 80, 85 percent based on silver halide technologies, and our profits were probably 130 percent based on silver halide technologies. I look at the company today and 70 percent of our revenues are now based on digital products and 60 percent of our profits based on digital products. And we've really just begun this journey.
A new company
Let me mention some of the things that we've done as a company that we all feel very proud about. Consumer inkjet, a market that was dominated-still is dominated-by three or four companies: We've been in that industry for 20 years and we came out with a breakthrough technology, a breakthrough business model and a value proposition that is unbeatable; and we've been gaining share, year after year. We have now over 5 percent market share in the U.S., we probably have close to 15 percent in the U.K., (and) we're making a lot of progress in Germany too. We keep gaining share. I believe that is a $50 billion market, and we have great aspirations as far as who the leader is going to be in this market. The plan was from the beginning that we were going to break even in 2010. With the recession we delayed that one year, we've been saying now for a year and a half that the break-even point will be during 2011, (and) 2012 we'll be a very successful profit-generating business with very high growth and new product lines.
There's this story that I like to tell because it's probably one of the most impactful experiences that I had when I came to this company. It was the first time that I went to see how we make film, which I didn't know anything about. I was fascinated. I believe that film-making technology is the most elegant, the most enduring, fascinating technology of the last century. I don't know if you've ever seen that, but it's basically a huge machine tool that gets a piece of plastic of about a few feet and that piece of plastic is moving at incredible speed and you have to deposit 16, 18 different coatings in the right place so you can create film. To make it more complicated, you have to do it in the dark, because it's photosensitive.
When I saw that I said, what if instead of plastic we put a piece of paper, which is a much nicer receiver than a piece of plastic that we use in film? What if instead of 18 coatings we put four inks or six inks, we lower the speed, we switch on the light? We will still have the most complicated press that I've ever seen in my life, (but) there is a world of opportunity there for us and we have in house most of the most precious technologies that you need to create commercial presses-because in fact making film was, you know, like printing.
I could tell you stories. The first few months when I was going through the labs and I saw the technology we had-fascinating. I mean, this company had a MEMS lab probably earlier than anybody that I know. This company was working in microfluidics and thin-film technologies and nanoparticle technologies way early in the development of the technology. You put all those things together and I saw that we could actually make an inkjet head of a better quality and a lower cost and more productive than whatever was in the market with companies that been working in the market for 20 years.
The experience with ink was fascinating because in the consumer space most of our competitors use dye-based inks. The reason to use dye-based inks is because dye bases, they are very fluidic; therefore they don't clog the nozzle. But the industry always had an aspiration to use pigment-based inks; the pigments, when they get deposited in the paper, stick to the fibers of the paper. You create more vibrant colors, but as well they last forever. But the industry could never do that because when they tried to use pigment-based inks they would clog the nozzle, so therefore they had to go back and use a much inferior quality ink, you know, dye-based ink. When I asked this question to the people of Kodak, they said not a big deal-it was part of the nanoparticle technology that they had and obviously their understanding of pigments and inks and how to deposit substances. Deposition is one of the strengths of this company. And sure enough, we came out of the chute with a pigment-based ink that has incredible performance compared to our competitors.
While we were going through all of this it became very obvious to me the strength of the new company was going to be based at the intersection of digital imaging and material science. Material science was kind of an obvious choice, you know, 100 years of doing that. Digital imaging came because this was the first imaging company in the world. They were called a film company, but in fact they were an imaging company. They started to develop digital imaging technologies way before anybody else. That is the portfolio that we have as well in IP.
We knew that we had to stick to our knitting; we knew that we had to stick to the strengths of the company, and the strengths of the company were at that intersection. Still, we were small, competing with very large companies, and we were late. So we said to ourselves, (we need) a business plan that has three demands before we choose a business. (For) any of the digital businesses that we are going to get into, we would only get into those if we had three things. Number one, we have to have a breakthrough technology. We're late; we can't go with just as good or similar to what exists. So breakthrough technology was first. Second, we have to have a better supply chain. Funny enough, when you are late (that is) one of the things that you can get easily better than the incumbent because incumbents have to create the supply chain, the auxiliary industry that is supporting that. For us that was easy; we just went out and picked the partners that were created by our competitors at the beginning; now they could help us. So we could come out with a very good supply chain. Then third, a value proposition that has to be innovative because again we're coming late. If it is for retail-the shelf space-the retailers, they're not going to give us the space unless we have something better, significantly better for the customer, for the retailer, for the industry.
And we went on through that process; that's how we created 11 product lines that we started with. I remember telling the board at that time-it was a process of about six to nine months to do that-I said, well, I know about 30 percent of these product lines are the wrong ones; I just don't know which ones. But we will know along the way, you know, the ones that will perform better. There's always things that you don't know in the market, technologies you are not aware of, competitors' moves that you don't kind of predict.
So now we have four very fast-growing product lines. One is consumer inkjet; another one is digital presses; the third one is workflow software; and the fourth one is packaging. They're very large industries, especially packaging, you know, digital presses and consumer inkjet. A relatively moderate success in those four will give us a very successful company. In the meantime we have to deal with the decline in film, which without any doubt has been the hardest job. Building the new company is exciting-there's a lot of positive emotion in doing that. Dealing with the decline of such an enormous business with so many assets all around the world and so many people attached to it is not an easy thing to do.
The right strategy
RBJ: You've mentioned a couple of times the recession. I assume that has in some respects slowed the progress that you'd like to make but hasn't fundamentally changed the strategy or core business model that you have.
PEREZ: It could have, but it didn't. It could have. At one point in time we felt that maybe we were not capitalized well enough to keep the same strategy. That's why we recapitalized the company last year. And once we were able to do that, then we stuck to the same strategy we had because we believe-the board believes, I believe, my management team believes-it's the right strategy. Maybe the only strategy, but it's the right strategy and it's working. It has traction.
The high-growth products-we just introduced the first digital press based on a Kodak technology that is named Stream. I don't know how many people realize how fundamental this is. Let me describe it to you. The printing industry is about 76 trillion pages every year. Contrary to what most people think, there's been very little decline in that number; it's been very stable for the last 20 years, basically growing with the GDP, 1, 2 percent worldwide. The best proxy to see the health of the printing business is the printing paper industry, and it's very well-documented-you can see where the growth is. Obviously different segments are going through different areas. Newspapers in the U.S. are suffering, maybe because we have too many newspapers to start with.
RBJ: Thanks for pointing that out. (Laughter.)
PEREZ: Maybe because some of the newspapers, they didn't have sufficient value added. But we're only 5 percent of the population of the world; sometimes we tend to forget that. Because our economic power is so high against the rest of the world, we forget that really in businesses that are driven by the number of people we're really not very relevant; neither is Europe, by the way, something that Europe tends to forget as well. Europe is what, 7, 8 percent of the population of the world? There is a whole world out there with billions of people that have just begun to read in many ways, just begun to have a decent income.
The point I'm trying to make is that out of this 76, 77 trillion pages, less than 10 percent is printed with digital technologies. Again, most people do not realize that all the printing that you normally see, which is your office printing, your laser printer in the office, your home printing, the copiers that you see, the digital presses that you may see here and there-all of that is 10 percent of that. The rest is done with analog presses, the very same press that was invented 400 years ago to do the Bible.
The reason why the analog presses-which are called offset presses, as you probably know very well-still are there dominating the industry is because they have four characteristics that are hard to beat: very low cost, less than a cent a page; about 4,000 pages a minute; photo quality; and a great variety of substrates on which you can print. The combination of those four up until now has been unbeatable by any other technology. They have one flaw, and it's that they cannot do variable data printing; it's an analog press.
So digital printing is bringing the variable data printing, which is very valuable when you want to print a different page all the time, different content on the page. When it comes to the other four characteristics, the only one they have really achieved is the photo quality, which they can do. The rest, instead of less than a cent a page, it's more than 6 to 9 cents a page. Instead of 4,000 pages a minute, it's a ridiculous speed of 100, 120 pages a minute. And they're very limited in the type of substrates that they can print off.
What the Stream technology at Kodak brings is less than a cent a page, 4,000 pages a minute, a great variety of sub-strates, photo quality and variable data. We've been saying that the industry will never be the same. Now it's taken us a few years to turn out this incredibly complex technology, to package it and to put it into the market. We said we were going to introduce it now this year, and we did. We have four presses in the market now. I can assure you that we have hundreds of letters of intent from people that want to buy the press. We will only be able to build a few dozen this year. We're obviously trying to accelerate that as fast as we can. So that's another example of incredible breakthrough technology that was in the company with enormous possibilities and that we feel is getting tremendous traction, and we feel very excited about it.
RBJ: You've described how you have breakthrough or transformative technology on the printing side. In terms of consumer digital capture, do you feel you have it there as well, or do you need it?
PEREZ: Well, we had to make a choice whether to license our technology or use it for ourselves only and stop other people from using it. You cannot have a very successful IP program, which is based on licensing your technology and getting the monies for it, and at the same time expect that the others are not going to use that technology. The market was very developed at this time. The only choice we had was to negotiate licenses; we couldn't ask people to stop doing things that they were doing for a good number of years simply because we had those patents because we never exercised those rights thoroughly enough.
We feel that we have a know-how in digital capture that is very substantial, but the differentiation is less than it is when you get this intersection. Again, if you compare us against another digital imaging company, we're one of the top, but the differentiation against the others is less. If you compare ourselves against one of the material science companies, you'll find the same thing. We're right at the top, but we're right with them. If you look at the intersection, if you look at businesses when you need to be excellent at both, we're the No. 1, and that's why we look for businesses where you desperately need to be the best in both of those; those are the businesses that we seek.
RBJ: You've talked about Kodak's patents, the IP portfolio, and how you've aggressively tried to capitalize on that. One of the ways you've done that is through litigation. There seems to be a disconnect in the way that you view it and the way Wall Street analysts do. Some of them view it as capitalizing on something that is past research that the company cannot continue to take advantage of in the future to the extent it is now. I'm pretty sure you disagree with that, but maybe you can talk about that a little bit.
PEREZ: You can't make statements like that with such lack of information; that's my opinion about that. First of all, we are top generators of new imaging IP in the world. So this thing about the past, I don't know where it's coming from. Certainly we had a lot of patents in the past, so we have them today. What is very important to understand is that you sue a company with one or two patents, but you negotiate with a portfolio. The monies that you get are not because of those two patents; the monies that you get are because of the power of your portfolio. That's what at the end, when you sit down with another company, you get. If we had only the patents we had 15 years ago, we wouldn't be getting any money. They will just be waiting until those patents go away. So the case is badly understood, in my view.
Secondly, we really didn't litigate up until last year. We had one case in litigation since we started with this in 2004. We've been talking to companies; we've been letting them know that this is our portfolio, you violate our portfolio, and why don't we talk about this? We've been able to do that very well until last year when the crisis came; then companies took a different stance. Cash was very important for everybody, and we noticed that they were not willing to engage in the negotiation that way we wanted to. That's why we went to court. We would have avoided going to court as much as we could because it's expensive and it's lengthy and all that. So only last year we started to do that, when we saw what was coming.
No, we have a very active portfolio that is very complete. We had very good patents 15 years ago and we are generating 400 to 600 new patents, very powerful, and we are very careful the way we generate patents. We have a sophisticated system that looks for fundamental patents; it's not the number of patents. It's the good patents that count. And we are very careful not to simply have a large number of patents; they're very expensive to keep anyway. So you want to have the minimum number-that will cost you less-but obviously a portfolio that goes into the fundamentals of the technology.
This company had a research department that was always first-class for years and years and years. In fact, many companies on the East Coast have that. I worked many of my years on the West Coast, and I noticed a significant difference between the commercialization process in the East Coast companies and the West Coast companies. This is a simplification, but East Coast companies, they tend to have an enormous amount of patents and a lot of research, (but) they commercialize very little of it. West Coast companies, they have a few patents, they come out with five products, three fail, two go well. It's a different view of the world. I think we're trying to learn a little bit from the West Coast business model, and obviously the West Coast companies these days, they spend a lot more on research as well. The two worlds are colliding, so to speak. But we had a lot of patents and we still generate a lot of patents. But what you're saying about some of the analysts, I remember in October 2003, the first time that I presented a plan for the company, I claimed-I think for the first time; I don't recall any other person that ever claimed this-that we have a very powerful digital IP portfolio and we were going to monetize that. You still hear this noise, "What is he talking about?"
So, a lot of people, they still see us as a film company. It's funny because actually as far as IP, it's public, you can go to the patent office and see what we've done. It's not a secret. It's a lot of work, but it's not a secret; it shouldn't be a secret. And the comments that you just (cited) about our patent portfolio were said in 2004, then in 2005, and then in 2006 and then after that-they keep saying the same things, but every year we generate around $300 million (in IP revenues). So something is working for us that I guess some people still have doubts about. It's really working now for a good number of years, and we have a long run on this.
RBJ: Do you think the fact, as you say, that some people still look at Kodak as a film company maybe has something to do with the tough times your shares have had? Over the past five years they're down about 80 percent. When do you think the market is going to start realizing the value in the company that you're talking about?
PEREZ: When this business is mature, when the new business is mature. Obviously, if the value of the company is based on the performance of film, the value of the company we knew was going to go down because film was going down. There was nothing we could do about that.
PEREZ: So again, we're building a new company.
RBJ: And the market is just a bit behind the curve, just not realizing the value of it?
PEREZ: Isn't that always (the case)? Isn't that always?
RBJ: I thought the market was supposed to be ahead of us.
PEREZ: Oh, really? There was this old advertising piece; I always thought it was intelligent. It was a company that was trying to (get) consumers to do trades individually. And it had an advertising piece a few years ago that said, well, if your broker, your analyst, is so good, how come he is still (working)? (Laughter.)
The market, more than ever, has a sickness that we can call short-
termism. We just went through the results of short-termism a few years ago, I mean in the last two years. The market is very short-term-very, very short-term. Very few investors are long-term. It's very hard to be.
PEREZ: So anyone that is building a new company has to accept the fact that few are going to give you the benefit of the doubt; the most are going to wait until you're already there and then they will give you the credit for being there.
You have to realize certain things as well. We're an old company; we have a lot of liabilities. You know, in the U.S., the number of retirees that we have is four times the number of employees-a lot of cost is associated with that. We feel obliged to take care of those costs. But the analysts, they look at those costs and say, well, you have those costs for a long time. That's part of the company we are. It was those retirees that gave us some of those patents we have too.
We have to accept what the company is. The company was a very successful company for 100 years that then forgot to look for another path and stayed too long in the old path. And then we're trying to recover from it and it's going to take a while. You can't create a $10 billion company in revenue with digital products in a short period of time. And we are ambitious and we want to create a larger company than we used to have before and as successful a company as we had before. We could have settled for less. I wouldn't have taken the job, but I have complete faith this is going to be the best turnaround in the industry that I've ever heard of, and so does my team and the board.
We're not going to get discouraged because someone that wants to make money in six months thinks they shouldn't invest in our stock. I understand. If that's what they have to do, they shouldn't invest in our stock, if all they want is to make money in the next six months. You know 2011 is a critical year for us; 2012 will be a much easier year; and 2013, because we've been investing hundreds of millions of dollars every year to build all these new businesses. The first one that's going to get to the break-even is consumer inkjet in 2011, and all the others follow. So it will be exponential, but we have to get there.
RBJ: How would you describe yourself? As a person, as an executive? Antonio Perez as a boss?
PEREZ: As a boss! I'm not the right person to answer that question. I like working with people; I like working with people. I like debate-I love debate. I work 24 hours a day, if that helps. (Laughter.)
I love the work I do. I think there is nothing more important for the success of an institution than creating a culture of healthy debate where everyone has the opportunity to argue. And I use the word "argue."
RBJ: Is that something different for Kodak? Do you think that there was ...
PEREZ: I don't know. They ask me things about it. I wasn't here; I don't know. But the industry was different before too. The situation was different; they were implementing something that was done already, the technology was done, they were packaging the technology different ways. We're creating something new; we need a lot of arguments here. We need to argue a lot because there are many choices and many opinions, so we need to argue a lot. Without everybody's brain we can't do this. It's too difficult. So I'm very demanding, if that helps, but I'm demanding with myself too. I'm demanding. But you should ask David (Lanzillo, director of corporate communications), not me. I don't know.
DAVID LANZILLO: I'd agree with him.
PEREZ: Yeah, yeah. (Laughter.)
RBJ: You got an extension last fall with your contract. Do you expect to be here another couple of years?
PEREZ: Well, my original contract was until 2010, but the board asked me to commit myself to be here until at the end of 2013, which I did. I don't know, that's what the contract says. I am committed to do what the board thinks is good for the company. And I have to remind you that as well the reason why I did that is because CEOs, we get to go through a voting process every year. It's not the press that is voting for us; it's our shareholders, the owners of the company. Every year they vote for me. Last year I got 92 percent in favor, the year before 92 and this year again I got 90 percent. The people that I really care about-not anybody else that may have an opinion, which obviously they are entitled to-but what I really care about is the owners of the company and the employees and my customers. Those are my three references. So if my owners think I am doing a good job then I will say I did a good job.
RBJ: I have one follow-up question about the stock price. Let me ask it this way ...
PEREZ: I think the stock price is a great opportunity for everybody, including yourself.
RBJ: I would imagine, but I guess my question is, would it also look like a great opportunity for someone interested in acquiring the company? I mean, you're talking about all this value here and yet the market doesn't seem to be realizing it. Does that concern you at all?
PEREZ: Of course it concerns me. It concerns the board, and we talk often about it. We have done and we will continue to do what is appropriate to defend the rights of our shareholders.
The biggest challenge
RBJ: Looking ahead the next three to five years, what is the biggest challenge for Kodak? What is the biggest obstacle that stands in the way of achieving what you set out to do?
PEREZ: I'll say two things. We have to achieve the financial goals that we have for 2010, '11 and '12; those are critical years for us because those will prove that the traction of the new product lines is there. It will be a lot easier after that. The second challenge-and this is a challenge that most American companies have, by the way-is that 40 percent of our revenue comes from the U.S., about 30 percent of our revenue comes from Europe. That's 12 percent of the population of the world. And only about 15 percent (of our revenue) comes from Asia; the rest is Latin America and Eastern Europe. We have to find the appropriate business model to succeed in Asia. There won't be a successful company for us or for anybody else in the United States if we don't crack that nut, and it's a challenge. It's a real challenge.
To give you an example, in the first quarter the B2B business grew 25 percent in Asia. It declined in Europe, because of the economic issue, was so-so in the U.S., where we're kind of crawling out of the recession-very slowly, very slowly crawling out, and that's going to continue that way. So the importance of succeeding outside the U.S. and Europe is critical, and (for) most American companies, including us, this is a new venture. And that is a challenge we have to tackle now and we're tackling now, but it's an interesting challenge and a very important one.
RBJ: Well I'm glad you brought that up. Because that was one of the questions I wanted to ask you. I will leave the rest of my questions on the table and maybe hold them for another time. I appreciate it.
PEREZ: OK. Just one thing about the economy. We've been reading again and again and again for years that the economies of the different blocs of the world are interconnected-that if we sneeze, they get the flu. And it so happens that we got pneumonia and they didn't even sneeze. So I think we have to model better what's happening with the economy in Asia. And it's not just China. I'm talking about China, I'm talking about India, I'm talking about Vietnam and Indonesia and the Philippines. It's massive. It's a combination of population, huge population, and then an income level that increased significantly in the last 10 years and an education level that has increased very significantly in the last 10 years. You combine those three and the intra-regional trading is much more powerful than we have modeled in the past. Again going back to the point that the second challenge is to succeed in the rest of the world.
RBJ: That is interesting. Almost 15 years ago I spent a month in Vietnam. And two things struck me: One, it was probably the most entrepreneurial country I had ever visited. The other thing was the technology. It was the first place where I saw so many people with cell phones.
PEREZ: I'll tell you a story.
RBJ: They just sort of jumped over landlines.
PEREZ: There's a very interesting story about China; it was told to me by a friend of mine. In Shanghai, by the river, you see this Chinese person with a fishing rod. It doesn't look like a fishing rod, more like a stick and a rope. And you can't possibly imagine what he's trying to catch there, but he does, he catches a fish. He gets that fish and puts it on his bike, gets a cell phone out of his pocket, takes a picture of the fish, does some manipulation in the phone and all of a sudden it looks like he's arguing with someone on the phone. Finishes with that, gets on the bike and he rides. The man has done all the engineering, all the manufacturing, all the supply chain, all the delivery in one shot.
They have so much desire to succeed, so much desire. Sometimes I feel envious when I see (that). The same thing is happening with schools. Why are we getting the results with our kids that are not as good comparatively with other countries? They want it more. The parents want it more, the kids-they want it more.
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