Digital photos: Out of focus?

Kodak announced Tuesday that it would slash 10,000 jobs and take a $1 billion charge as it began a major restructuring that would include consolidating parts of its digital camera operations. Even as it was announcing the bad news, however, the company said sales of its consumer digital cameras are exceeding its targets.

The apparent contradiction begs an obvious question: Why is a company that's so successful in a new market laying off thousands of employees?

Welcome to the business of digital photography, where nothing is quite as it seems. Reflecting a trend seen throughout this burgeoning industry, Kodak is seeing sizable increase in digital camera sales--but the growth has come at a steep price.

To win market share, Kodak must spend enormous amounts of money and resources on technologies, with little guarantee of their individual success. And despite the uncertainty, the company can scarcely proceed otherwise, given that the very future of Kodak--whose name has become synonymous with photography--rests on the digital revolution.

"Kodak has been working on [its digital cameras] for several years," said Jeff Pittsburg, an analyst who follows the film and camera maker for Goldis-Pittsburg Institutional Services. "They've looked over the mountain and have seen a pot of gold. But they have to get over the mountain, and it's higher than they think."

The obstacles along the way include competitive landmines laid by companies far from the traditional photography sector. Although it faces familiar rivals like Olympus, Ricoh, Canon, and Nikon, Kodak is also racing against companies from the computing and home electronics arenas, such as Hewlett-Packard, Intel, Sony, Casio, and Epson.

It is easy to understand why the PC and entertainment electronics companies are looking to tap into photography. Both sectors are facing saturation levels in their primary markets and are looking for new frontiers to expand.

"Digital cameras are expected to grow 37 percent by the year 2001, and that's pretty high and is a pretty hot market," said Ron Tussy, a digital camera analyst for IDC Research. "PCs are only growing at an 18 to 20 percent rate."

Tussy said improved image quality and declining prices are fueling sales of digital cameras. But that is only the beginning.

"What's going to really drive the market is four things," said Joe Runde, spokesman for Kodak's digital and applied imaging division: high-quality cameras that allow consumers to easily print out images, devices that print the images with resolution equal to photographs, a price under $500, and ease of use in shooting and printing images.

Digital cameras have reached the "mega-pixel" range of 1 million to 1.5 million, with Kodak being the first to debut one of these high-resolution cameras in the consumer market for less than $1,000 this year. Tussy said the price on the mega-pixel cameras are expected to fall to about $500 by mid-1998.

As for improvements in resolution, current digital camera models are a far cry from the earlier models of last year. Digital cameras under 640 by 480 pixels are not selling well because of poor image quality, Tussy said.

He cited a consumer study showing that, even though digital camera prices are falling, the U.S. consumer is still only willing to spend 20 percent more on a digital camera than the price of a traditional one. As with all new consumer devices, however, this could change quickly depending on what the technology can provide.

Already, the market is witnessing the development of a split in the type of functions digital cameras have to offer.

"Late spring, two paradigms emerged with digital cameras," Tussy said. "One is a thin camera and one is a fat camera."

Thin cameras are designed to download images to a personal computer, whereas fat cameras can either download images into a computer or bypass the PC and download directly to a printer. These cameras are designed to be linked to PCs because the microprocessor is limited--hence the need for the computer, Tussy said.

Fat cameras, with their greater microprocessor capacity, can process the work inside the camera and are designed as standalone products. These cameras can work with outside media like printers. Connecting to PCs is secondary.

Intel earlier this month debuted its thin camera. The 971 PC camera kit comes with a reference design, hardware, and software. Several companies already are planning to use its architecture to build their cameras. (Intel is an investor in CNET: The Computer Network.)

"Intel is a player in the thin camera [arena], and its goal is to push PC sales into the home," Tussy said. He added, however, that its camera does not allow users to download images unless it is on a computer.

At the other end of the spectrum, the principal fat-camera makers are traditional camera companies Kodak and Nikon. Kodak will test-market its DC-210 digital camera with a new printer in Japan later this month, Runde said.

"Consumers will get a printer that comes with the DC-210 that we already sell," he said. "This printer can work with the computer or can bypass the PC. By transferring the image directly onto the printer, the picture is printed quicker and it increases the ease of use."

Whichever way digital cameras go--thin or fat--the convergence of photography and personal computing seems to be accelerating rapidly.

"By this Christmas and through 1998," Tussy said, "I won't be surprised to see retail stores selling flash memory cards right next to film."  

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