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Thursday, 1 March 2012

Kodak's IP Golem

Surely one of the most compelling figures in religious lore is the so-called Golem. For nearly two millennia, Jewish tradition has maintained multiple versions of this figure (see here and here). In its most basic understanding, the Golem is a shapeless anthropomorphic mass, usually of substantial size, that must be given form by its master in order to be of service. The challenge of the Golem and its master is to channel the raw bulk of the Golem into useful forms of endeavor. Like the Frankenstein monster (which may have been inspired by the legend of the Golem), the risk is that the transition to a productive form may not be successful, and the Golem might even run amok. The Golem's master must therefore navigate between "too big to fail" and "not too big to control."

From this basic notion, various traditions have developed about the Golem in diverse geographical settings. Indeed, anyone who visited Prague will have encountered the legend of the Golem as one of the cultural centerpieces of that enchanting city. I have thought about the legend of the Golem often in connection with the recent Eastman Kodak Chapter 11 bankruptcy in the United States. In particular, I have pondered the question of why Kodak's IP and technology bulk seems to have served it poorly in its fight to succeed in a post-camera and film world. One wonders whether, at the end of the day, all of Kodak's substantial technology and IP were akin to the legendary figure -- shapeless and without a wise master to fashion it in into successful competitive form.

 An edifying window into Kodak's IP Golem can be found in the January 14, 2012 issue of The Economist. The article, entitled "Technological Change: The Last Kodak Moment", compellingly chronicled the managerial missteps that brought about the company's bankruptcy only a few days after the article's publication here. Using Fujifilm as the point of comparison, the article asks why did Fujifilm succeed and Kodak fail in responding to the disruptive technological challenges to the camera and film business, whereby Fujifilm now has a market capitalization of $12.6 billion to Kodak's $220 million valuation (keep in mind, in 1976, 90% of sales of film and 85% of camera sales, in the U.S., were made by Kodak; in 1996, Kodak had revenues of $16 billion.)

The article points to a number of managerial errors that led to the company's decline. Notable among them are a complacent corporate culture, addled by the company's dominant position; the relative inability of the company to adjust to changing market circumstances flowing from technological changes; the company's preoccupation with perfect, rather than good-enough products; the insularity bred by the fact that the company's management was lodged in a one-company town in upstate New York (Rochester); a failure to successfully diversify; and an unhealthy dose of bad luck. These failings are all well and good in their heuristic power to help explain Kodak's decline. But if all that the article recounts is true, then what do we make of the fact that the company purports to be IP rich (as described in the article--the company is blessed "with a huge of intellectual property")?
1. As reported in wired.com_ here, "[b]ack in the summer of 2011, some analysts were of the view that Kodak had $3 billion in IP assets alone." In particular, the company had approximately 1100 patents in the digital field. Even if the estimation of the portfolio may have exaggerated the value of the portfolio, these are substantial numbers. [The company did not succeed in selling its patent portfolio before it filed for bankruptcy, but that might have been due in part to provisions of the U.S. Bankruptcy Code, which provides for the voiding of transactions within a certain time before the filing.]  
2. The article further notes that "Kodak CEO Antonio Perez is still counting on patents to pull Kodak through bankruptcy. 'Chapter 11 gives us the best opportunities to maximize the value in two critical parts of our technology portfolio,' Perez writes: 'our digital capture patents, which are essential for a wide range of mobile and other consumer electronic devices that capture digital images and have generated over $3 billion of licensing revenues since 2003; and our breakthrough printing and deposition technologies, which give Kodak a competitive advantage in our growing digital businesses.'"  
3. The Kodak brand, including the iconic "Kodak yellow", was once one of the world's five most valuable brands. Even if that it is no longer the case, the Kodak brand still enjoys widespread trust, so why not a "Kodak Inside" campaign for products such as the smartphone camera? The question -- not really addressed in the article in The Economist -- is why Kodak needed to resort to bankruptcy, if its IP and technology was so substantial. The answer seems to be that Kodak's IP was essentially Golem-like in nature. Despite the sheer bulk and magnitude of the company's IP, the company's IP position was unable on its own to fashion the company's development, products and strategy in a manner than enabled the company to succeed in the marketplace. 
Like the Golem of legend, Kodak's IP needed a sagacious master to give it form and shape, but such master was not forthcoming. I find it difficult to believe that Kodak developed IP principally to generate licensing revenues and enable it to make a distress sale of such assets against the shadow of a bankruptcy proceeding. However, what exactly the company hoped to achieve through the creation of its IP portfolio remains unclear. More generally, this Kat wonders how many companies are busily creating large portfolios of Golem-like IP rights--impressive in their size and scope, but ultimately ineffectual in serving the company's competitive interests.


guillermo hinarejos said...

Well, Kodak might be another example of the distortion of IP rights in the later years. In truth, IP rights are now used more and more as an offensive weapon seeking for money through legal proceedings instead of being a protection shield awarding the creators of innovation...

Speculation reaches all fields of human activity.

Anonymous said...

There has been much comment on the demise of Kodak on IP websites, mainly criticism of the company in not doing more with its IP and being unable to adapt in a rapidly changing marketplace.

Firstly, Kodak should be congratulated on being a fantastic company that has produced many great technological advances. As a technology company, it has lived for a very long time and cannot ever be considered a failure. The reason for the recent demise of Kodak is not its inability to adapt, but in the simple fact that the product market has moved swiftly into an area that is the core competence of other companies.

Kodak is dying a natural death. Its brand name will live on, but it will not represent the 'old Kodak.

The focus on failing to do more with an 'IP portfolio' misses the whole point of IP protection. It is there to protect a product market and not necessarily create one. It is not a box of bricks, but the cement that holds the bricks together.

Anonymous said...

Ironically, a story oft told by IP practitioners is how it was defeat in a patent action which set Kodak on its way as a successful business, and led to the demise of one of its major competitors. In particular Polaroid's victory in the patent action over instant photo film set Polaroid off down the doomed road of instant movie film, while Kodak's defeat led it to abandon instant processing in favour of short turnaround development technology and great success. Or so the story goes...

Anonymous said...

OK. The issue that should get you IP junkies flapping with incredulity is this.

Kodak is only capitalised at $220 million.

But 1/10th of its patent portfolio was recently valued at upwards of $500 million and the portfolio had generated direct licence income of $3 billion since 2003 and will continue to generate at that rate.

Now who actually believes that 80% of the value of any company is its IP when over 200% of the value of Kodak is 1/10th of its IP?

Truth? Kodak's IP although highly valuable was irrelevant to its survival. You sober now?

שרון said...

@guillermo hinarejos:
"IP rights are now used more and more as an offensive weapon seeking for money through legal proceedings instead of being a protection shield awarding the creators of innovation" - c'mon... entry barriers are entry barriers are entry barriers, whether you call it a "reward" or an "incentive", the economic value of the right to exclude others comes from its exercise, always has, always will, this weapon/shield rhetoric is just usurpers' cheap propaganda.

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