Kodak: they've given us those nice bright colors, but will a sagging stock price spell the end of sunny days?

Investors embraced a bearish outlook for Eastman Kodak Co. after news surfaced that the company had recently hired Jones Day to provide restructuring advice. Kodak’s stock price sank over 50 percent this past Friday despite reassurances from executives that the company had no intentions of filing for bankruptcy. Indeed, a company spokesperson reiterated Kodak’s magic elixir: monetizing the company’s vast intellectual property portfolio.

The company is seeking to ride a recent bull market for patents that are seen as critical ammunition in a new 21st Century arms race.  Technology heavyweights such as Apple, Google, and Microsoft are currently engaged in a struggle for mobile computing supremacy reminiscent of the days of mutually assured destruction.  In July, the now-defunct Nortel Networks agreed to sell more than 6,000 patents to an alliance made up of Apple, Microsoft, and other technology giants for $4.5 billion in cash.  Who was the losing bidder, falling $100 million short?  Google.  The company’s general counsel admitted that the Google bid was intended to create a disincentive for competitors to sue Google for patent infringement as the company moves deeper into the mobile computing business.  Implicitly, Google was threatening to use the Nortel portfolio to countersue any adversaries (not to be outdone, Google eventually acquired Motorola Mobility and its patents for $12.5 billion).  Annihilation would be met with annihilation.  Does this sound familiar?

From 2004 and 2009, the number of patent infringement lawsuits skyrocketed 70%.  This trend has caused a “patent bubble” in the mobile communications sector where both industry players and non-practicing entities (affectionately called “patent trolls”) attempt to amass as many patents as possible for both defensive and offensive postures.  Commentators argue that the only “winners” from these practices are the lawyers, who litigate the disputes, and the patent holders, who may or may not be the the original inventors.  The “losers” are the American consumers, who ultimately pay the price of this litigation, and potential inventors, who are either deterred from innovating or are sued after the fact.  The ultimate casualty may be the American economy, which becomes less competitive with every lawsuit.  Optimists hope that the America Invents Act, which was passed in September, will address some of the patent system’s shortcomings, while critics have already labeled the Act as a boon to big business.

Now, Kodak is trying to get in on the action.  After struggling with the transition to digital cameras and losing much of its traditional film business to foreign competitors, Kodak nonetheless finds itself the belle of the ball with multiple suitors lining up to purchase the company’s digital patent portfolio.  Lawsuits and patent licensing have helped keep the company afloat in recent years, but persistent operating losses have necessitated a fire-sale so that the company can attempt to reinvent itself.

However, one is left to wonder: once Kodak has sold its trove of patents and other intellectual property, what will be left of this one-time blue chip company?

– Niels Melius

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3 Responses to Momma Don’t Take My Kodachrome Away

  1. Michael Dearington says:

    Kodak apparently made almost two billion dollars between 2008 and 2010 in patent-licensing fees. Presuming many of these most lucrative patents may be subject to the announced patent-sale plans, it is hard to see a bright future for Kodak. Given the value of its patents to the corporation, and the inability of Kodak to utilize its patents in the market, Kodak’s sale of a great number of patents smacks more of bankruptcy than Kodak is willing to admit. Bankruptcy may not be imminent, given that Kodak took on an extra $160 mm in debt last week. Moreover, the sale may make financial sense in light of Brian Taylor’s (Fitch) comment suggesting that financial difficulties makes it more and more difficult for Kodak to successfully litigate with Apple over patent disputes. With the surge of patent litigation, perhaps Kodak isn’t financially situated to adequately use and defend its patents. As noted by Mr. Melius, if Kodak is not poised for bankruptcy, it will be interesting to see what kind of competitive advantage it can assert after sale of a significant number of lucrative patents. Perhaps Kodak plans to stick with its area of expertise, selling film made for traditional cameras. Nonetheless, it is hard to imagine anything but negatives in its future. Puns aside, it will be interesting to see how this develops.

  2. Kevin Lumpkin says:

    I wonder how Kodak will go about reinventing itself without owning any of the patents it needs to do much of its business. Maybe they’ll open a chain of frozen yogurt shops.