Saying 'Cheese' to The Digital Camera

But Kodak must simultaneously protect its analog film business

The venerable Eastman Kodak Co. has long wavered in defending its analog film business against the digital revolution, but with a series of moves, CEO George Fisher has made clear that the company's long-term future is digital.

Defining the future, however, won't make Fisher's job any eaiser. Now he faces the prospect of building a new line of business -- digital cameras and all the attendant technology -- and pitching it as a long-term alternative to Kodak's traditional analog film franchise, the firm's cash-cow.

How long the two strategies can coexist at one company is anyone's guess.

"We used to be in the film business," said Jerry Magee, product manager for electronic imaging products. "Now we're in the sensor business."

That essentially means billions of dollars in film revenues will sooner or later give way to a business based on the electronic capture, storage, manipulation and printing of images.

So as Kodak milks as much as it can from the old analog film business, it must simultaneously build a new company based largely on imaging sensors originally developed for U.S. spy planes. That's right -- U.S. spy plane sensors. These devices are now at the heart of a series of new digital cameras that Kodak hopes will be the forerunners of standard cameras used by professionals and amateurs by the end of the century. They are the guts of Kodak's digital cameras, and the firm believes these sensors -- combined with devices to store, print, communicate and edit digital images -- will ultimately replace the analog film cartridge and camera.

Is such thinking warranted? Wall Street apparently thinks so, pushing the stock up to near its 52-week high of $54.25 per share -- despite lower reported earnings and only a slight revenue increase for the company's second quarter.

Meanwhile, larger forces of change suggest the soundness of Fisher's strategy.

Consider this: The digital realm has so far taken over every analog competitor it has faced off against -- typewriters, vinyl records, toasters, refrigerators, telephone operators. Analog cameras, along with television, are beginning to look like the next victims.

So rather than fight a losing battle -- or depend exclusively on beating lean competition such as Fuji in the core film business -- Fisher has joined the digital enemy. His first move came last March when Fisher created a new division called Digital and Applied Imaging to lead the company into the digital world. And he recruited one-time Apple CEO John Sculley as an outside consultant to expand on his view of digital imaging to executives at the nascent division. Just weeks later Carl Gustin, who worked closely with Sculley at Apple, was hired as chief of the new division.

To Gustin falls the task of kickstarting demand for new digital cameras in niche markets -- print shops, law enforcement, the military. From there he will attempt to finesse the technology's spread to consumer markets, even while satisfying investors, board directors and staving off competitors.

If all goes according to plan, Kodak figures digital cameras should rapidly displace analog counterparts by the end of the century -- much as audio analog technology is now giving way to compact discs and digital tape.

The relentless advance of digitalization appears to be on Fisher's side. Twenty-five years ago, Intel Corp. first conceived the idea of a computer on a chip, the microprocessor. Since then, microprocessors have sparked the personal computer revolution and worked their way into nearly every appliance, automobile, telephone and stereo. By some estimates, 10 billion microprocessors and microcontrollers are now in use. Few of today's writers could pursue their craft without the cut-and-paste capabilities of word processors. Computer-aided drafting tools have become standard in the engineering and design professions. And even most new analog cameras contain digital processors that automatically focus images and adjust shutter speeds.

So why do images, and the processes that create them, remain analog? Unlike ASCII text or even graphics, images are extremely data-intensive. So even the zippiest computer chips have lacked the raw processing power to create images quickly and with the clarity, brightness and tone of analog counterparts. But Fisher, a former CEO of chip maker Motorola, is well aware of something called Moore's law: The number of transistors crammed into the same space of silicon doubles every 18 months. That should permit competitive, consumer-level digital cameras by the end of the century.

Kodak's newest digital cameras, the third generation since 1991, attempt to ride the unstoppable momentum of this relentless march.

So what, exactly, is a digital camera? Conventional photography involves three distinct processes -- exposure, development and printing. In a digital world, capturing images with a sensor essentially replaces exposure and development. Once in digital form, the image can be easily edited using a software program such as Adobe's Photoshop. Or the image can be printed out on a printer.

In Kodak's newest offering -- attached to the back of a Nikon N90 -- credit-card-sized devices known as PCMCIA III cards serve as the equivalent of film. They are capable of storing 105 megabytes of information, good for 17 color pictures. The PCMCIA storage card -- which is rapidly increasing in storage capacity -- takes the digital image file from the actual sensor device. The sensor delivers a total resolution of 6 million pixels, or picture elements, per picture. That's up from 1.3 million in earlier versions, but still far from the 15-million pixels in a conventional 35mm analog print.

How does it do this? The sensor itself divides the image area into a grid containing these pixels, assigning computer instructions to each pixel for brightness, location and color. The greater the number of pixels, the higher the resolution -- just as in conventional photography finer film grains provide greater detail.

Performing these tasks quickly, over many millions of pixels, demands prodigious processing power, both in the camera itself and in the PC that eventually displays, manipulates and prints the images. And all this capability must come in a camera weighing less than two pounds.

Batteries have also been a nettlesome engineering challenge. The first cameras introduced in 1991 sported clunky, one-pound batteries. Later versions needed 10 AA batteries that would last for only 70 pictures. But today's nickel hydride battery pack is able to take 300 pictures between charges -- and it takes only one hour to recharge with an AC adapter. However, a photographer must also wait 12 seconds between taking shots.

The camera also comes with another nifty feature allowing users to record voice annotations for pictures on the same PCMCIA card. When photos are downloaded, a speaker icon at the bottom of the screen can be activated to play back these annotations -- a boon for professional photographers, cops at the scene of an accident, or Army intelligence. But recording annotations also soaks up additional power and memory.

Then there's the price. Even the cheapest of the new cameras goes for $10,995. The top-of-the-line product sells for $26,995. "You can buy a pretty decent car for the price of this camera," said Kodak's Magee.

Still, Moore's law suggest these deficiencies will be surmounted as faster, cheaper chips drive down pixel-processing costs. If Kodak can kickstart sales, manufacturing costs for sensors should also begin to fall.

It is perhaps instructive that the cost of geolocational receivers dropped from nearly $30,000 when they first emerged in the mid-1980s to just hundreds of dollars today. "Everything is based on the cost of the sensor," said Magee.

And Kodak has one key advantage. Years of working for intelligence agencies using advanced imagery have helped the firm hone skills in digital image sensing equipment. So it already has the core technology, and potential customer base, needed to make and sell the first generations of digital cameras. The challenge now is to convert that technology into a consumer product, first by tapping niche government and professional photography markets willing to pay big money, and then using revenue from those sales to move down the price ladder to the consumer.

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