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Tuesday, May 24, 2005

A Disastrous Kodak Moment

They say that a picture's worth a thousand words, but the photo issued in early May doesn't even begin to do justice to what's going on over at Kodak. In case you missed it, the flacks at Kodak hyped what can only be called the most curious management succession story of the year. Well, second most curious. First place still belongs to Michael Eisner and the wrecking crew over at Disney.

But back to the main story.

If you're not familiar with Kodak, it's the leading film and imaging brand in America. Um, check that. it used to be the leading film and imaging brand in America, long before the likes of Fuji kicked its silver nitrate-based ass in the marketplace. Kodak, at one time, had indeed been the leading brand in its space, with a stranglehold on everything and anything having to do with photography. If you're over the age of 40, chances are your first and second and third cameras were Kodaks. You probably loaded those cameras with Kodacolor film, which you took to your local drugstore to have processed on Kodak paper. If you were serious enough, you filled your own darkroom with Kodak processing chemicals and printed your family portrait of the dog on Kodak paper.

Life before 1980 was indeed a Kodak world. The brand was so strong, in fact, that people would squinch up their noses at the very thought of printing or processing on anything less. Full-length motion pictures were shot, edited and distributed on - you guessed it - Kodak film.

It was a fun party while it lasted. Another victim of Caretaker Management Syndrome, the boys over at Kodak barely sniffed when the folks from Fuji stepped ashore. After all, they reasoned, "We're Kodak. We're a Dow 30 component." It's true. They were.

They aren't any more.

I'm not sure if Kodak people walk around with their heads tilted to the side, but every graph you could find from 1980 onward showed a consistent trend pointing downward. Kodak was bleeding market share. Something had to be done. And Kodak did what Caretaker Managers do best:

Ignored it. Played a little golf. Sold a few more stock options.

Kodak had its big chance to get back in the game a few years later. These little toys called "digital cameras" began to appear. It was a letter-high fastball for Kodak. All they would have had to do - what their shareholders were begging them to do - was slap a Kodak logo on to a digital camera and leverage their brand strength into the digital market.

Kodak management thought it over. Played a little more golf. Sold a few more options. Then decided that they held too much interest in the silver market to actually hasten the demise of silver-nitrate based photography.

Once more, the Board of Directors sprang into action: They totally ignored the digital explosion.

I hope you've saved the May 12, 2005, edition of the Los Angeles Times. If you can, look up page C6, where you'll find a wonderful shot of two smiling, desperate executives. The shot depicts outgoing CEO Daniel Carp forcing a smile as he hands the reins of the company over to Antonio Perez. For those of you without a scorecard, Mr. Perez is charged with navigating the good ship Kodak off of the rocks on to which Captain Carp wrecked it.

Like Napoleon, Captain Carp is "leaving" an empire in a shambles. Of course, that's not how he's spinning it. Carp's flacks will likely tell you that he restored the company to profitability and "embraced digital technology." What he won't tell you is that he "restored profitability" by slashing overhead, employees and costs. He did it by completely avoiding any investment or innovation in Kodak's future. He "embraced digital technology" with two out in ninth, when it was agonizingly clear that everyone BUT Kodak was already in the game.

Cutting costs and starving the business to make plummeting revenue look good. Now there's a tough gig. Figuring out that digital technology is where the market is headed - almost a decade after everyone else has jumped into the market. Amazing.

And what are First Mate Perez's qualifications? Well, to begin with, he was hand-picked by Mr. Carp. Let's pause for a moment and consider that: The successor to the man who wrecked a brand giant was actually hand-picked by the man who engineered the brand's historic, disastrous decline. And what are Mr. Perez's qualifications for resurrecting the once-great Kodak brand? He's a statistical analyst who did hard time at Hewlett-Packard. They're bringing in a numbers guy to fix a brand problem. No wonder the two of them look as miserable as they do.

It's just another wonderful Kodak moment.

Thursday, May 12, 2005

Bronfman Serves Warner on the Rocks

Although I'm still a relatively young man, I harbor no illusions about my age. We're all growing older. I'm no exception. I do what I can to deny the aging process and one of the best tricks I've found to do that is playing with my pension fund investments.

Managing my profit sharing plan affords me the opportunity to feel like a big shot, buying and selling stocks. My Quicken program automatically updates the quotes and prices so that not a day goes by when I don't know my financial position. But the real reason why my pension fund keeps me young is that I can still tell myself, "Hey, I can afford to take a little risk here because I can't even touch this money until I retire."

And from what I can tell, retirement is still a long, long way off, which makes me feel younger. Or at least less old.

High risk is what long term accounts are for, in my book, so I always turn a scrupulous eye toward stocks whenever I think about buying or selling. I'm absolutely relentless when it comes to the riskiest issues of all, the IPO's. The first thing I look at when buying any stock - including IPO's - is (of course) the company's brand strategy.

IPO's are the acronym for Initial Public Offerings, the first day of trading when a company goes public. Most people believe that the first day of trading is the best day, with the stock doubling or tripling in value by day's end. It does happen. It also doesn't happen, as in the case of Warner Music.

In my past writings, I've pointed out the folly and pandemic spread of Caretaker Management Syndrome, the disease sweeping American corporate management in which people in ivory towers with no brand-building experience -- usually rich kids -- are left to run companies into the ground. Such was the case this week with the IPO for Warner Music.

Lest anyone overlook it, Warner Music's fate has been entrusted to none other than that poster boy for CTM, Edgar Bronfman. Bronfman, heir to the Seagram's liquor fortune, first plied his skills to Universal's entertainment, primarily music and movies. Although you can look up the details on the web, the story goes something like this:

Star-struck, failed songwriter Bronfman liquidates his family fortune to buy Universal/MCA for billions. Once in control, he issues mandates that completely ignore anything and everything having to do with the company's brand strategy, including (at one point) orders that everyone working for him wear black. By some miracle (ya think?), one of his songs ends up in as the title tune for a Universal movie. Within years, however, Universal is flat on its back, forcing Bronfman to sell out - at something like a $2 billion loss.

You'd think that a guy like this would sit it out and lick his wounds. Maybe go back to what his family knows best: liquor. But stardust doesn't wash out easily. Bronfman re-grouped and pitched as many gullible investors as he could to charge back into the music business. Strange as it may seem, he got the money and found himself, once again, at the top of a music company. This time Warner Music.

Now, let's see how qualified YOU are to run a music company:

If you watched Apple's success with the iTunes store, the re-launch of Napster and the proliferation of digital, downloadable music services, would you launch an IPO for a traditional, non-digital music company? Wait a minute. Let me add one more thing: Would you choose to launch Warner Music's IPO the very same week that Yahoo announces its own downloadable music service?

If you answered, "No," congratulations! You're now more qualified than Edgar Bronfman to run an international music company! Yup, you can throw away that resume now. Rescind all those applications for those Home Depot jobs, because you have more smarts than some rich kid who still can't manage to get a razor close enough for a clean shave.

What a dope. The guy takes one of the biggest brands in entertainment history and still can't figure out how to leverage it into a mega-brand worthy of a dynamite IPO. To add insult to injury, Warner's IPO was scheduled to go out at $24 per share. At the last minute, the price was lowered to $17 per share. At the end of the day, the IPO actually lost value, finishing out under $17 per share.

Had Bronfman known enough to build the Warner brand before trying to milk it, he may have had a chance. He didn't. And my prediction is that Warner's brand value has no place to go but further down.

They say that the rich get richer. That may be true.

They certainly don't seem to be getting much smarter.