How Kodak Engineered Its Own Demise (Literally)

Kodak didn’t make a mistake. The digital camera was invented in their own building but it was missing more than film. It was missing a business model. 0:00 Intro 3:15 Two Truths & A Lie 4:15 The Man Who Gave Everyone A Camera 15:40 Advertising Done To Perfection 23:06 Welcome Steve 35:25 The Point 39:15 The Ending 44:10 Two Truths & A lie Madmen Scene - https://www.youtube.com/watch?v=rq3n2sJ43Hg&t=4s A Long Time In Finance w/ Steve Sasson - https://open.spotify.com/episode/407q6PT4umq9BVECyJsLhy Hosted on Acast. See acast.com/privacy for more information.

• 0:00Speaker 00

  This is the story I probably talk about the most. I talk about Kodak in speeches, in videos, in interviews. I talk about why the story surrounding the digital camera is so relevant today. The way it was created inside the world's biggest film company, the way it was swept under the rug, and what happened once it eventually found its way out. I'll give the game away early here. I think that Kodak is a perfect allegory for what's happening with AI right now. And hopefully you'll see what I mean soon. But before we get into those lofty comparisons, let's get into what might be one of the greatest business downfall stories of them all. I'm Chris Cole, this is how we got here. And today we are talking about Kodak. I'm joined as always by my producer, Rob.

• 0:43Speaker 01

  Rob? Hello.

• 0:44Speaker 00

  What do you know about photography? He asks as I'm surrounded by cameras.

• 0:48Speaker 01

  Yeah, there's a few cameras in this room. I'll reveal a little secret off the top of the show. I failed photography 101 at university. So just triple checking everything's in focus today, but yeah.

• 0:59Speaker 00

  Didn't hold you back. Here we are.

• 1:00Speaker 01

  Didn't hold me back. Look, if that teacher could see me now.

• 1:03Speaker 00

  Exactly. Cop that, do you remember the teacher's name?

• 1:05Speaker 01

  No, I can't.

• 1:06Speaker 00

  All right, no shout outs to that teacher, but everything's in focus, everything's going well.

• 1:09Speaker 01

  Everything's on, everything's on, we're recording.

• 1:13Speaker 00

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• 2:32Speaker 00

  Kodak doesn't actually mean anything. It's a totally made up word. George Eastman started the company in his mid twenties and he needed to name the business something. Now, the story goes, he just liked the letter K. So he wanted to have it in there twice. And then he just sort of doodled different words on a notepad until he landed on Kodak. Kind of amazing how this one guy wrote something down that became a worldwide household name. Now, Eastman is the first of two revolutionaries in this story and we'll kick off with him in a second. But all this talk of made up words brings us to our increasingly divisive two truths and a lie segment. Some people clearly don't like it. I read the comments.

• 3:18Speaker 00

  Rob, are you seeing these comments? Some people don't like it.

• 3:20Speaker 01

  I read the comments.

• 3:21Speaker 00

  Yeah, yeah, be nice. Some people do. I'm going to keep doing it. So here we go. I'm going to plant three facts in your head. Now, two of them are true. One is a lie. See what you think now, then see which one you think it is at the end. Fact number one, or lie number one. At peak profitability, Kodak controlled about 70% of the US film market. And it was making a margin of about 40%. So it's kind of two facts, 70% of the US film market, but it was making a profit margin of 40%.

• 3:53Speaker 01

  Believable.

• 3:53Speaker 00

  Fact number two, in 2018, Kodak announced its own cryptocurrency. Kodak Coin, the price tripled in three days, but the coin never actually launched. That's number two.

• 4:05Speaker 01

  Also believable. I feel like every, everything had a coin at one point.

• 4:08Speaker 00

  Everybody had a crack. Fact three, Kodak operated a small nuclear reactor in the basement of its Rochester building from 1974 to 2006. Rob, what's the lie?

• 4:22Speaker 01

  I'm gonna say three if I'm being, if I'm being honest with you. You know, I've, I've seen the Chernobyl mini series. I know how dangerous reactors can be. And I don't know, I feel like people making film and nuclear reactors don't really marry up. So that, that seems like a lie to me.

• 4:39Speaker 00

  I'm being disciplined here. I'm not going to give you any more information.

• 4:42Speaker 01

  Okay.

• 4:42Speaker 00

  Until it becomes, you know, the time to do so.

• 4:44Speaker 01

  Okay.

• 4:45Speaker 00

  Right. Let's get into it. George Eastman is the genius behind Kodak. He was born in Rochester in 1854. Now, it's a smallish town in upstate New York. And his life was pretty normal in the beginning. Youngest of three kids, his mum's name was Maria, his dad's name was George Washington Eastman. Hell of a name.

• 5:05Speaker 01

  Good name.

• 5:05Speaker 00

  Good name. Unfortunately, George Washington Eastman passed away when George Junior was eight. And the family started running out of money pretty fast. By the time he was 13, George, which we will now call him, not George Junior. He left school to become a messenger boy to help his family. Despite no school as a teenager, he was smart and curious. And he became really interested in photography parlors, which had just begun popping up all over the place. Not that he could afford to get his picture taken. He just liked looking at them a lot and asking the photographers lots of questions as they were coming and going. Kind of bugging them a lot, that sort of thing. When he was 20, George got a job at the bank and he started making a bit more money.

• 5:48Speaker 00

  After a couple of years of that, he had enough saved and he was helping his family enough to start enjoying himself. And he decided what he wanted to do was to go on a holiday. And he bought himself a camera to take photos. Now, that seems really normal now. It was extremely unusual when he did it. Because you needed about 25 kilograms worth of stuff to take a picture. Massive camera, tripod, curtain. And at the time, the pictures were taken with dripping wet glass plates that had to be developed immediately. So you needed to bring a black tent with you. In fact, here's a list of the stuff. Plate holder, glass plates, trays, bottles of chemicals,

• 6:32Speaker 00

  including corrosive silver nitrate, stirring rods, measuring glasses, jugs for water, dark tent, tripod, camera. Developing the picture was really tricky. I mean, Eastman's first outing was a full afternoon. He took three pictures. Rob, I mean, imagine being in that in summer in a, in a tent, trying to do chemistry projects.

• 6:53Speaker 01

  Yeah, I mean, it's a lot of work for a selfie.

• 6:57Speaker 01

  There's also, you know, today.

• 6:58Speaker 00

  Good we've got it.

• 6:59Speaker 01

  Yeah, today, but obviously today with technology, you can take a photo so very quickly. And quickly you go, oh, that photo doesn't look good. You think about it, how much time is going to go into this? And then you go, oh, it's blurry.

• 7:11Speaker 00

  Imagine.

• 7:11Speaker 01

  Oh, this just doesn't look right.

• 7:13Speaker 00

  Imagine, I mean, and it's so fragile. Slight, a slight mistake with the chemistry or you, you, you, you stuff up and you drop the glass plate and it shatters. I mean, unbelievable.

• 7:23Speaker 01

  What could go wrong?

• 7:24Speaker 00

  George, I mean, he had friends. None of them could figure out why he was doing this. It'd be like your friend telling you that they're commuting to work by hot air balloon or something. Very, very weird behaviour, Rob.

• 7:35Speaker 01

  Yeah, I see a lot of hot air balloons every morning and I do wonder why people do that.

• 7:38Speaker 00

  I don't know, it's kind of nice. I'm not sure it's practical though, is the point.

• 7:42Speaker 01

  It's good to know he had friends, it's important.

• 7:44Speaker 00

  Yeah, it is. I think it's important. George is a normal guy, except for this one weird thing.

• 7:48Speaker 01

  Yeah.

• 7:48Speaker 00

  He was doing a really expensive hobby.

• 7:51Speaker 01

  Yeah.

• 7:51Speaker 00

  That was hard. But Eastman wanted to take pictures and so he kind of went all in. So he bought all this stuff. He took this gear out into the field and immediately discovered all of these problems.

• 8:02Speaker 01

  How long do you think this whole process takes? From photo to it being done?

• 8:06Speaker 00

  Yeah, so apparently, once you're set up, click of the camera to being finished developing is an hour or so. So these glass plates, I mean, they're really, really thin.

• 8:16Speaker 01

  Yeah.

• 8:16Speaker 00

  They have to be dripping wet with just the right type of chemical composition and you can smash one really easily, as mentioned. So apparently that first full afternoon in the field, he ended up just with three pictures. And this is why in the field photography is so rare and there are so few landscape pictures of this era, because basically every other photographer was doing it in parlors. Anyway, he immediately set about trying to figure out a better way because he wanted to keep at it. He started working at night on a system where the glass plates could stay dry. That was his first mission. And one day he actually just nails it. Or at least he thinks he does.

• 8:56Speaker 00

  He starts selling this dry glass plate system where they have this gel emulsion on them. He quits the bank and he starts the Eastman Dry Plates Company in 1881. But his first order's come back because the pictures are coming out red and hazy. So he does another 470 separate experiments to figure out what was going wrong. Turns out, it was just one bad batch of gelatin. I mean brutal. 470 experiments later, he realises he's just got a bad barrel of this one ingredient.

• 9:30Speaker 01

  Oh my god.

• 9:31Speaker 00

  Which is brutal, cop that.

• 9:32Speaker 01

  It's hard.

• 9:32Speaker 00

  He keeps experimenting though, he doesn't stop. And by 1885, he figured out how to swap out the glass for paper with a thin layer of this emulsion on it, which he called film. So in a pretty short period of time, he totally changed the chemistry of photography, which is not bad for a guy who left school at 13. In 1888, he changed the name of the company to Kodak, as mentioned. That is a random word that he just made up. And his first massive project was bringing out a new $25 camera, which if you adjust that for inflation, it's about $875 today, which sort of seems kind of in the ballpark.

• 10:16Speaker 00

  This camera was handheld, it was lightweight and it was small. And when someone bought the camera, it was already fully loaded with this new film product and they could take as many as 100 pictures. Then, once they're finished and it's full, they'd send it and $10 back to the Eastman Company. So they're sending the whole camera plus 10 bucks back to Rochester HQ. The pictures were then developed, then the pictures and the camera were sent back. So that was the whole system. Obviously, that $10 for developing the film is quite a lot. That's 40% of the value of the whole camera. So straight away, this is a business that is about film, not the hardware.

• 11:02Speaker 00

  Here's where Eastman really gets impressive, I think. Cause he could have kept that up for ages. But instead, he keeps improving and figuring out how to make this whole thing cheaper. And by 1896, Kodak brought out a new $5 camera called the Falcon.

• 11:18Speaker 01

  Great name.

• 11:19Speaker 00

  Great name.

• 11:20Speaker 01

  Great name.

• 11:20Speaker 00

  A really good name.

• 11:21Speaker 01

  Yeah.

• 11:22Speaker 00

  I mean, he's got a knack for this advertising thing.

• 11:23Speaker 01

  It's better than name Kodak, but I like Falcon.

• 11:26Speaker 00

  Yeah, I mean, look, this is actually quite important, the sort of the way it was marketed to people. The first camera, it was, the whole tagline was you push the button, we do the rest. That is, you buy this thing, you take as many pictures you want, you don't really worry about it. Then you send the whole thing off. So it was all about ease, it was all about marketing. So Falcon kind of played into that quite well. Then four years later, they launched another camera targeted to kids. It was only $1. So this was really never about cameras. He always wanted to make them as cheap as he could. It was always about the film because the margin was so incredibly good. And the margin for film always stayed high. And that is such an important part of this story. I'm going to talk about it a lot.

• 12:09Speaker 00

  Film has been a goldmine from day one. Once you have the chemistry and ability to print, I mean, it is huge.

• 12:19Speaker 01

  What sort of margin do you think we're talking here?

• 12:21Speaker 00

  70 to 80%. I mean, it's just, that is kind of the dream, really. It rarely gets better than that.

• 12:30Speaker 01

  Wow.

• 12:30Speaker 00

  So Eastman becomes a total millionaire. And by all accounts, he's a pretty nice guy about it. Buys his mama mansion. He builds a dental clinic in Rochester because he remembers what it was like to have a toothache as a kid and not having enough money to deal with it.

• 12:44Speaker 01

  Great.

• 12:46Speaker 00

  Then he builds a hospital, lots of scholarships for young, smart people who can't afford a good education. The business is now completely established. It's advertising all over North America. It's an absolute success. Doesn't take long for photography development to leave the Rochester HQ and for places to start popping up all over the place. And that's okay. Kodak is still selling the film and that is where the money is. So to recap. In less than 20 years, he took photography, the whole concept of taking a picture from something that was really difficult, expensive and professional only, to something that absolutely anyone could do. That's huge.

• 13:30Speaker 00

  People obviously jumped at it and it changed the world. I mean, think about it. The 20th century is about a million times better documented than any other century in human existence. Weddings, you know, birthdays, Christmases, first day of school, holidays, the lot, because of affordable cameras. It's, I don't know, it's kind of one of those really rare inventions that makes a massive amount of money, while also ostensibly making the world, I mean, it sounds lame to say, kind of a better place.

• 14:01Speaker 01

  Well, that's up for debate. I feel like I see a lot of videos and pictures online that I'm like, that doesn't need to exist.

• 14:06Speaker 00

  Fair point. I think we supernova, supernova on that.

• 14:09Speaker 01

  Yeah, we did. We hit the threshold, we were like, yeah, we should have stopped.

• 14:13Speaker 00

  We blew straight past it. But like, you know what I mean? I mean, that's why I kind of said on the surface of it, it looks like it made the world better. And I think for a while it did.

• 14:20Speaker 01

  It definitely did. I mean, think about ye olde photos and, you know, think about our last episode with Kellogg's. And the photos of John Harvey Kellogg are those old photos where someone is sitting there, you know, often frowning because the old technology, you had to sit there for so long on the parlor and not move. And then suddenly, oh, now we can take a photo of anything.

• 14:39Speaker 00

  Literally anything.

• 14:40Speaker 01

  We can see the real world moments.

• 14:41Speaker 00

  Yeah, yeah, that impromptu stuff. Um, I mean, and as I'll get into, it's, this has massive implications for the way the world operates in terms of surveillance, in terms of, you know, entertainment, everything. I mean, he really did change the world. So, I mean, the thing about Eastman, as I've said before, is that he keeps pushing. He didn't stop at glass plates, he didn't stop at single sheets of film. Keeps going until the whole thing was much cheaper and easier and it worked in a way that he liked. Then he got old and he died.

• 15:13Speaker 00

  I mean, I didn't mean to say it like that, but that's the reality of the situation. Kodak lived beyond him. He got old and he passed away and the company was put in the hands of a bunch of guys who were custodians more than creators of this amazing business model. Not a group of people who really wanted to change it or keep pushing. And that is really important to the next part of this story. By the time the Kodak moment campaign launched in the early 1970s, the company had been in business for nearly a century and had basically invented the entire industry it sat smack bang in the middle of. Totally dominant, huge contracts in the military and Hollywood.

• 15:54Speaker 00

  And obviously they had millions of consumers eating out of the palm of their hand because there really wasn't that much competition. They had 70% of the market after all, or possibly more. In fact, the season one finale of Mad Men is about how Don Draper comes up with the idea of selling Kodak alongside nostalgia. For anyone who hasn't seen it, it's really worth a look because I suspect it's not that far from how it actually goes. We might put the, Rob, can we put the, um, that link in the show notes somewhere?

• 16:24Speaker 01

  I'm sure we could. I'm sure we could.

• 16:25Speaker 00

  Figure that out.

• 16:25Speaker 01

  Yeah, Kodak.

• 16:26Speaker 00

  Mad Men needs the shout out. It's not a very successful show.

• 16:29Speaker 01

  Yeah, Kodak. It's toasted. That's it.

• 16:31Speaker 00

  It's an incredible scene. The guy, there's a guy that runs out of the room crying. Anyway, watch it. I like to think that that wasn't that far from how the ads were actually worked out. This idea of the Kodak moment, I mean, it became an important responsibility that goes beyond the ads, particularly for parents. I mean, it was all emotion. The idea being that if you don't capture this important memory, it'll be lost and you'll regret it. It's really powerful. In fact, the words Kodak moment were added to the dictionary this century next to this definition. A nostalgic, charming, or highly sentimental event that is perfect for capturing in a photograph. I mean, safe to say, Rob, that parents, I know you're a parent, I am too.

• 17:16Speaker 00

  Parents carry this responsibility to this day.

• 17:19Speaker 01

  Yes, I take a lot of photos of my son.

• 17:22Speaker 00

  How many, how many, like, gigs, gigs worth?

• 17:24Speaker 01

  Yeah, we'd, we'd be in the gigabytes. We'd definitely be in the, in the gigabytes. Also, just like the photos where he would take, he takes the phone, you don't realise, you pick it back and there's this like 50 shots of like the underside of his nose and his eyes because he's been sitting there just pressing the button, not realising what's going on.

• 17:42Speaker 00

  Yeah.

• 17:42Speaker 01

  Yeah, there's a lot of those.

• 17:43Speaker 00

  This is a problem, isn't it? You take so many photos now because it's so easy. It's hard to kind of delete them. You feel like it's a little minor betrayal.

• 17:50Speaker 01

  It is, it is a little bit.

• 17:51Speaker 00

  I checked with my wife, Susan, she's got thousands and thousands. And of course, I mean, this is possibly a conversation for another episode, but you end up, instead of paying to develop the photos, you end up paying monthly subscription fees to store it all in the cloud.

• 18:05Speaker 01

  Correct.

• 18:05Speaker 00

  Fun how they get you like that.

• 18:06Speaker 01

  Correct, correct. Yeah, maybe I'll just buy a printer and print them off the old fashioned way.

• 18:10Speaker 00

  Far out, it wouldn't be that much worse, would it? But while parents were being trained to feel guilty about not capturing the moment, Kodak was making most of its real money somewhere else entirely. Two places, actually. Hollywood and the Pentagon. First, Hollywood. When you went to the cinema in the seventies and eighties, nineties and two thousands, I mean, the film running through the projector was almost certainly Kodak. Basically all of it. By 1920, Kodak had made 94% of all film on planet earth. For 40 years, basically every movie you've ever seen ran through Kodak stock.

• 18:49Speaker 00

  US federal government tried to break up that monopoly twice in 1921 and again in 1954. Kodak signed consent decrees, promised to behave and then just kind of carried on, running about 90% of the world's most profitable industry just on its own.

• 19:07Speaker 01

  As you do.

• 19:08Speaker 00

  Not bad, right?

• 19:09Speaker 01

  Yeah, it's a good business.

• 19:10Speaker 00

  You got ticked off, but it just kind of kept on going. And the second thing is kind of why? Because the Pentagon, I mean, a whole chunk of Kodak's research division was dedicated to taking pictures of the Soviet Union from space. From the early 1960s onwards, Kodak designed and built cameras inside America's spy satellites. First one was called Gambit, great name.

• 19:33Speaker 01

  Great name.

• 19:34Speaker 00

  X-Men fans will know.

• 19:36Speaker 01

  Yep.

• 19:36Speaker 00

  It's a ripper name.

• 19:37Speaker 01

  Yep.

• 19:38Speaker 00

  Then it was Gambit 3, then Hexagon. Hexagon is the one I find craziest, I guess. It's a 60 foot long satellite loaded with 60 miles of film, flew over the Soviet Union taking photos and then dropping capsules of the film back to earth, which were caught mid-air by US air force planes flying with just big nets.

• 20:01Speaker 01

  Feels like there's an easy way to do that.

• 20:03Speaker 00

  They just went hard.

• 20:04Speaker 01

  Yeah.

• 20:05Speaker 00

  It was one of those things like, we're just gonna really over-engineer this. I mean, who am I to say it's over-engineering?

• 20:10Speaker 01

  Yeah.

• 20:11Speaker 00

  Might be the simplest way to do it, I don't know.

• 20:12Speaker 01

  It is incredible though, the amount of technology that goes into surveillance, because the average person, you say camera, you think about the everyday moment, but there is this huge industry. Now, I know someone who I won't name for obvious reasons, but when I spoke to them about what they did, they said, "We make cameras that go under planes." And I'm like, "What is that for?" And then I thought about it, I'm like, "It's like drone surveillance."

• 20:33Speaker 00

  Ah.

• 20:34Speaker 01

  That's what they do. They make surveillance for drones. But in my head, I'm like, "Do pilots need to see the tarmac as they're landing?" No, no, no, no. It's for the other stuff.

• 20:42Speaker 00

  Yeah, I mean, like, everything to do with surveillance is about pictures. And then at this stage that we're talking about, everything is about Kodak pictures. So, I kind of couldn't really be bigger. I mean, the whole program was so secret that most of the Kodak employees building these cameras for surveillance didn't actually know what they were doing. And this might have actually been why the US government never fully broke up Kodak or really had a proper go at it, because they needed them to win wars, which is important, absolutely crucial. But the thing is, it was right about this time, when everything was going about as well as it possibly could be going, that Kodak developed a secret. It looked at its own downfall square in the face

• 21:25Speaker 00

  and then swore everyone to secrecy. Stay with us, the digital camera is coming up right after this word from our sponsors.

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• 23:06Speaker 00

  Welcome back as we talk about Kodak. Now, I said George Eastman was the first of two geniuses in this story. Steve Sasson is the other. By 1976, Kodak had 85% of all camera sales in the US and 90% of all films sold in that country was Kodak film. So they've barely lost any of their market share over quite a number of years. And as mentioned, they had an enormous margin. And I find this is where people start making assumptions about Kodak. I did a video a while ago on the invention of the digital camera. Did it a couple of years ago and it did quite well. It got about 18 million views and the comments were all pretty much the same, which were, how could they have been so stupid?

• 23:50Speaker 00

  They had the inside track on this incredible invention and they did nothing.

• 23:56Speaker 00

  And to be fair, that is how I presented the story. But I actually don't like that video very much anymore. I don't think it captures the reality. It's too simplistic and it's kind of not really fair. Kodak spent an enormous amount of money on research and development. It had whole divisions dedicated to finding new technology. They wanted the new stuff in photography and film happening in-house. And that's what happened. That's where Steve comes in. Steve Sasson was hired straight out of college as an electrical engineer, which was kind of unusual at Kodak because they had lots of mechanical engineers and lots of chemists, but not many electrical engineers. Now, Steve was told to get to work on something that was just starting to show up elsewhere.

• 24:41Speaker 00

  It was called charge couple imaging. It was very basic, but it used silicon and it arranged pixels in a new way. And we're talking like 10,000 pixels, by the way. New phones, I think, have about 28 million pixels. So it was early days. You're not really talking about pictures that you can easily recognise what they are yet. But Steve, he's a bit of a gun and he works really hard to improve it. The bosses aren't paying too much attention to him, but Steve decides on his own that it's possible to use this type of technology to take a picture, store it digitally using numbers, and then look at them on a TV using a totally different playback device, which you could also install in the main camera package,

• 25:26Speaker 00

  which is kind of complicated stuff. It took him almost two years, but he did it. And by the time he presented this to the board in 1976, it was a complete digital photography system where anyone could take a picture and show it without using any film at all. I mean, Rob, nobody expected Steve to do that.

• 25:48Speaker 01

  How big of a device are we talking here? Like, is this portable?

• 25:52Speaker 00

  It's certainly meant to be portable. It's four kilograms, he says. When he showed it to people, they said it looked like a toaster with a lens. And if you're listening to this and you wanna see this first digital camera, Rob's just pulled it up on the screen. You can kinda see what we're talking about there. It's like blue, it's got a big lens in it. Yeah, I mean, does it look like a modern camera? Absolutely not. But this is a totally brand new device. So theoretically portable, but way, way less convenient than the other cameras they had that were using film at the time. When Steve demonstrated it, he took it to the boardroom and he took a head and shoulders photo of someone who was kind of, you know, sitting away from the window. It was totally novel. I mean, they were kinda smirking here.

• 26:36Speaker 00

  The photo was still captured fast. I mean, we're talking one twentieth of a second. But then the tape started whirring and it would record for 23 seconds. This is a cassette tape. Took the tape out, gave it to his work friend Jim, who had brought the playback system with a TV. So about 30 seconds after that, the image is popping up on the TV, which is totally revolutionary. Everyone in the room understood that it was revolutionary straight away. And Steve's only about 25 years old.

• 27:05Speaker 01

  That's incredible.

• 27:06Speaker 00

  It's incre- it is incredible. He's a genius. He's one of those 20th century geniuses. But here's the thing, before I get into what happened next, I mean, these are the things you gotta know about Kodak. And I, look, I know, Rob, we've spent a fair bit of time talking about the size and success of Kodak, but I think it does need to be hammered home here. Kodak employed about 145,000 people globally at this point. 60,000 of them were in this Rochester head office. He was in the boardroom showing off this new invention. 60,000 people sitting literally below him. Consolidated sales around 5.4 billion US dollars. It's about 30 billion if you crudely adjust for inflation and currency today. It was central to the US government's surveillance and space objectives. In fact, the building was literally sitting on top of a nuclear reactor

• 27:51Speaker 00

  that it had in the basement. It had, it had that from 1974 to 2006 and it had one and a half kilograms of weapons grade uranium to use. This is such a weird fact.

• 28:06Speaker 01

  Wow.

• 28:07Speaker 00

  This is such a weird fact and I, I need to give it the proper breathing space here. Between 1974 and 2006, it had one and a half kilos of weapons grade uranium and it used that to test photo quality. The president had to sign off on this. This is incredible. I mean, Kodak, it finally gave the uranium back in 2007 and the government provided an armed escort in the middle of the night because it was worried that terrorists were going to steal it, like something out of a Mission Impossible movie.

• 28:39Speaker 01

  Yeah, if, if, if we can go back a second, I, I'd like to imagine the conversation that occurs where said government person says to Kodak, man, we need to take photos to know if the Russians have uranium.

• 28:51Speaker 00

  Yep.

• 28:52Speaker 01

  And the Kodak guy goes, what does that look like? And he's like, oh, you make a good point. All right, back to the, and then two government guys have to go, well, they need uranium so we could take photos of it so we know what it looks like.

• 29:02Speaker 00

  Maybe that's how, maybe that's how it went down. Look, just give us a little bit, I'm talking one and a half kilos. We couldn't build a bomb with that, even if we wanted to.

• 29:09Speaker 01

  Yeah.

• 29:09Speaker 00

  You know?

• 29:10Speaker 01

  Where there's a heap of engineers.

• 29:11Speaker 00

  We're just, we're just gonna nerd out over it.

• 29:13Speaker 01

  With heaps of chemicals that might be explosive around here.

• 29:16Speaker 00

  My favorite thing to think about is the fact came out in 2012. I like to think of the Rochester local fire department. They had what?

• 29:26Speaker 01

  Excuse me?

• 29:26Speaker 00

  They had what?

• 29:27Speaker 01

  Excuse me?

• 29:28Speaker 00

  This is sitting in a building just randomly.

• 29:31Speaker 01

  Why does the Kodak studio always glow at night? I don't know, man.

• 29:34Speaker 00

  No, people are very sick when they come out of the Kodak building.

• 29:39Speaker 00

  Unreal, true fact. The point is they are a bit arrogant. I mean, they've got all this cool stuff. Look, you might argue that this digital camera invention terrified Kodak bosses a little bit. They were, I mean, they were being shown a system of taking pictures that didn't need film. It's gonna test their arrogance. Steve says they weren't terrified though. He says they were curious, that they asked a lot of questions. Some he had the answers for and some he didn't. Now, the first question was, when will the quality of digital photos overtake film? Steve said it won't be for another 15 to 20 years. Another good question was, is this always going to be a system of showing pictures on a television?

• 30:22Speaker 00

  Steve said, no, it'll probably end up being on personal computers. Again, Steve's a total genius. I mean, think about the way he was able to think ahead on this stuff in the mid to late 1970s. One of the most important inventors of the 20th century, no doubt. The question he struggled with, however, was how do we Kodak make this as profitable as film? Couldn't answer that. Nobody has ever been able to answer that.

• 30:52Speaker 00

  And this is the whole point of this story. It can all be summed up in the silence that follows that question. How do we make this as profitable as film? Because the truth was and is, this will never, ever be as profitable as film. Profit margins on film were as high as 70 or even 80% and it's a consumable. People have to keep on paying for it. Sensational. It's one of those dream business models and there's a few like this. The entry point is relatively cheap and then the ongoing costs build up like a Gillette razor. You buy the first razor and you get the handle and then you need to keep on buying the razor blades

• 31:35Speaker 00

  that click into the handle that you've got and those blades aren't cheap. Or maybe an espresso coffee machine. You get the coffee machine, sure, but you have to keep on buying the pods from us. Printers that have certain kinds of ink cartridges, medical devices, certain kinds of testing strips. There's plenty of examples. It is the best type of business to be in.

• 31:56Speaker 01

  Can I rant about printers for a second?

• 31:58Speaker 00

  Please do, mate.

• 31:59Speaker 01

  There are times where it's cheaper to throw the printer out and buy a new one than buy the ink cartridge.

• 32:05Speaker 00

  Makes you sick.

• 32:06Speaker 01

  Someone running a small business, that is very frustrating.

• 32:08Speaker 00

  Yeah, yeah. I mean, this is the thing though, like Kodak is in that business. You can't, you kind of have, you have to have the film. You have to keep on buying it. My camera takes film. You're the one who's got the dominant market position selling the film. I have to just pay what you ask.

• 32:22Speaker 01

  Yeah.

• 32:23Speaker 00

  I mean, innovation alone does not solve this big question of profitability. Kodak might have immediately understood that the digital camera was going to eventually make film obsolete, but that doesn't mean pivoting is the right thing to do. I think about this all the time. And I think this is actually where Kodak kind of starts looking smart. They patent that digital camera pretty much immediately and then they tell Steve to get back to work. They tell him not to tell anyone about his work. In fact, he wasn't allowed to fully tell his story about inventing this digital camera until 2001. Then Kodak

• 33:06Speaker 00

  just sort of went about its business, making money. Because here's a fact, the peak of film sales in the US wasn't until 1996. People looking at the video will see this chart that I'm talking about, the Kodak sales chart. Now, digital camera sales, they didn't overtake film camera sales until 2003 and Kodak film sales, actually, you can see in this chart, they held up until the mid 2000s.

• 33:32Speaker 01

  Do you remember going to get photos developed?

• 33:35Speaker 00

  Totally. It's one of those, it's one of those core kind of adolescent memories, like alongside the blockbusters of the world where you go and you're looking for the one hour photo. Kind of have your own, you know, it was new. It wasn't like your parents' photo album. It was like your one, you know?

• 33:48Speaker 01

  Yeah. And the one near us was in the arcade is now a Chinese restaurant. But do you remember going to get your photos and then you take them and you open them and you're like, who are these strange people in the photos that I collected?

• 34:01Speaker 00

  No.

• 34:01Speaker 01

  These aren't my family or friends.

• 34:02Speaker 00

  Did that happen to you?

• 34:03Speaker 01

  That happened to me, where I just got like some woman's holiday.

• 34:06Speaker 00

  Oh my God.

• 34:07Speaker 01

  And like, I was picking up some photos from my mum. Mum was like, oh, you're going to be near the train station where the place is. Can you pick them up? And I remember opening them and I'm like, I don't think mum's friends with these people. Who are these people?

• 34:17Speaker 00

  That's, that seems like a big stuff up.

• 34:19Speaker 01

  It's a big stuff up. And I think this happened quite a lot. And particularly if you were a person who may have been interested in taking some lewd photos.

• 34:25Speaker 00

  Oh, huge problem.

• 34:26Speaker 01

  You know, then suddenly firstly, the guy at the store is going to see them all. And then secondly, you might end up in the hands of the wrong person.

• 34:32Speaker 00

  I suppose you have to reckon with that. You have to be like, how badly do I want these lewd pictures? Enough to let the guy at the store see them too.

• 34:39Speaker 01

  Yeah, exactly. This is, this is, this is pre the sliding into DMs days. So you've got to be pretty tactical about your photography.

• 34:45Speaker 00

  This is super analog.

• 34:47Speaker 01

  Yep.

• 34:49Speaker 01

  Um, but like, this was happening when we were, you know, kids and teenagers. Like, do you think that this could have happened a little bit earlier?

• 34:56Speaker 00

  I think it probably could have. The thing about it was quality. I mean, Steve told them right at the outset that there weren't enough pixels to compete until probably the late eighties or nineties. But Kodak kept on investing because they knew they had time. And they used that time to ride their existing business model right into the ground for four more decades. And in hindsight, that was exactly the right thing to do. Here's the point. Today, pictures cost zero dollars and zero cents. There is pretty much no direct business model at all. Some of the best cameras that we've ever seen are thrown in with the phones that we buy.

• 35:40Speaker 00

  Not even an optional extra, just here you go. I said at the start of this episode that I tell this story a lot. And the reason I do it is because this is how I think about AI. It's a bit like we all have Steve Sasson standing in our boardroom right now, metaphorically speaking. Steve's showing us how these apps can do a lot of the things that we're charging good money for. He's explaining how lawyers, accountants, journalists, researchers, analysts, everyone has a new free competitor. And we're asking that Kodak question. How does this affect my profitability?

• 36:17Speaker 00

  It's a good question. It's a hard question. And the hard answer is, you know, this is the future and the future might be less profitable.

• 36:29Speaker 00

  The big difference is Kodak had visibility over the change and was able to keep making money the old way for decades. We don't have that luxury these days. The horizons are so much closer now. I mean, it feels like AI can make a sector basically obsolete in a matter of months. But the point is, it's always going to be about profitability. Existing businesses almost never reinvent themselves if the new version of itself is going to be less profitable. I mean, there's no way. If you have shareholders, they just, they wouldn't allow it. So I don't think Kodak were idiots or asleep at the wheel. Steve Sasson, I mean, he's in his mid 70s now.

• 37:14Speaker 00

  He doesn't think that they were idiots either. In fact, he speaks about his old bosses quite fondly. He fully recognizes and understands that dynamic. Here he is speaking in a recent interview on the A Long Time in Finance podcast. The episode is called Turning Point: Kodak's Digital Asteroid. Have a listen.

• 37:35Speaker 02

  Kodak spent billions, tens of billions of dollars in R and D. Most of the intellectual property that went into the fundamental architecture around digital cameras as we accept them today, was invented by Kodak. And that was borne out by a lot of intellectual property values in the early 2000s. We were not asleep. No one was asleep. We were working on this very much, but we didn't want to publicly talk about it because we felt in order to replace film, you have to be every bit as good as film, not only in terms of color and pixel density, but in terms of reliability and cost of implementation and training for someone.

• 38:09Speaker 00

  That whole interview is really worth a listen. We'll put the link in the show notes if we can, Rob, can we?

• 38:13Speaker 01

  We certainly can.

• 38:14Speaker 00

  We can do that. We will do that. It stands out to me that Steve worked there for basically his whole career. I mean, he wouldn't have done that if he thought that they didn't take him or his work seriously. He's rare, I think, in that he didn't get frustrated. He seemed to fully understand this key part of business. In the late 1980s, Kodak brought out a digital camera that he says was pretty good, but it had to remain a small part of the business. Here he is again.

• 38:43Speaker 02

  When we offered, for example, in the late eighties, a DSLR that used a one of Kodak's megapixel sensors with image compression very similar to JPG that you use today, it was a pretty practical camera. And the professional marketing people said, no, we don't want to do this. Why would we sell this? Where's the business model that replaces the one we have? Well, it's show me the money, basically.

• 39:07Speaker 00

  Show me the money. The four most important words in the business universe.

• 39:15Speaker 00

  So what happens? Well, you know, you're probably watching or listening to this on the answer. Digital camera sales end up taking over film camera sales in 2002. And between 2002 and 2006, conventional film sales fall by 60%. So it takes a long time, but then it happens really fast, once it starts happening. And in 2007, the first iPhone arrives. So the nails get hammered into the coffin really fast. And Kodak files for bankruptcy in 2012. It didn't disappear. It continued to bump along doing weird stuff like adding its name to one of the worst camera phones of all time, the Extra. One famous review said, it's bad at being a camera and bad at being a phone, which is brutal,

• 40:00Speaker 00

  but

• 40:01Speaker 01

  Not good.

• 40:01Speaker 00

  sums it up. That's a bad review. In 2018, Kodak announced a crypto effort called the Kodak Coin, which was meant to be a way to pay licensed photographers using the blockchain technology. The value jumped and then it crashed. It never actually launched. So

• 40:18Speaker 01

  Did Kodak rug everyone? Is that what happened?

• 40:20Speaker 00

  Maybe.

• 40:21Speaker 01

  Kodak ran a rug game.

• 40:22Speaker 00

  Maybe it did.

• 40:23Speaker 01

  Oh, no.

• 40:24Speaker 00

  Certainly, there was a bit of that going on. So maybe Kodak was more flailing than bumping along. But before they descended into the weird ways to capitalize on their brand recognition, they were fully aware that they were going down with this ship. And going down with a ship still made lots of money. In 1996, Kodak was still the fourth most valuable brand in the entire world, behind Coca-Cola, Marlboro, and IBM.

• 40:54Speaker 00

  I mean, think about those other names. I mean, this is a different time.

• 40:58Speaker 01

  Is this when disposable cameras were a thing? Because I remember they were everywhere when I was younger.

• 41:03Speaker 00

  Bang in the middle of that time, absolutely. And that's kind of a really important part of it. The way that they were able to monetize and capitalize on what was becoming the death rattle without consumers really knowing it. Annual revenue at that time was $16 billion, market capitalization $31 billion. I mean, here's the thing about Kodak, people still like film. I mean, to your question about disposable cameras, I mean, I was at a wedding a few months ago. The bride and groom both work in the film movie industry. The bride is actually a world-class cinematographer. I hope she's listening to this, actually.

• 41:41Speaker 00

  They handed out Kodak disposable cameras at the wedding so that we could all take pictures and hand them back in at the end. I mean, that's how she, a professional, wanted to remember the day with amateur photography.

• 41:54Speaker 00

  The memories are fixed. There's no digital touch-ups or AI. I mean, I kind of like that. I like it. It's cool. And I'll tell you this about Kodak, its share price, because it is still listed, is up about 65% in the last 12 months as I say this, because people are reaching for analog film again. It's obviously a fraction of its former self, but it was always a film business. It couldn't really pivot, never really stood a chance in that whole digital pivot. But in the end, it grew pretty much consistently for over a century. And your hat kind of has to come off to it for that. Maybe you wonder about today's major businesses that are trying to grow in an AI world.

• 42:36Speaker 00

  I mean, you've got Nvidia, Apple, Microsoft, now worth a combined 13 trillion US dollars as they pile kind of further and deeper into the AI revolution. You've got millions of much smaller businesses trying to figure out if they can still exist in this new world that's clearly arriving.

• 42:57Speaker 00

  As an aside, I did some maths and I checked with some analysts. Those three companies I mentioned, Nvidia, Microsoft and Apple, they're now worth more than all of the residential, commercial and farm property in Australia combined. That's all of it. 400 million hectares of farmland, all the houses, all the apartments, townhouses, city office buildings. Everything, Rob. Crazy.

• 43:22Speaker 01

  Yeah.

• 43:23Speaker 00

  Three companies.

• 43:23Speaker 01

  AI doesn't put food on your table though.

• 43:25Speaker 00

  It does not, but this is, like, I did a video on this. And a lot of people were like, you're not comparing apples with apples. But like, one of those things actually creates apples, you know, like, jeez.

• 43:36Speaker 01

  You're comparing apples with Apple.

• 43:38Speaker 00

  With chips, you know, far out, yeah. Apple, you know, ended up gobbling up Kodak. We don't have to pay for film now, we don't have to pay for pictures now, but we do have to pay for storage to take the pictures, as mentioned. 10 or 15 bucks a month. Millions and millions of people are paying for it. That's the new business model. And once again, as always, it's about subscriptions. Funny how we always end up with subscriptions. Now, before we wrap it up, it's time to settle this whole two truths and a lie thing. Three facts, two true, one not true. Now, fact number one was Kodak peaked at about 70% of the US film market with a margin of 40%. Rob?

• 44:22Speaker 01

  Lie.

• 44:22Speaker 00

  That's the lie.

• 44:24Speaker 01

  I've been listening.

• 44:24Speaker 00

  I knew you were listening. Profit margin was way higher than 40%, it was 70 or even 80%. That is a much more reliable figure. But as a reminder, fact two was in 2018, Kodak announced the Kodak coin. Price tripled in three days and the coin never actually launched.

• 44:41Speaker 01

  And they rugged everyone who put money into it.

• 44:43Speaker 00

  Yeah.

• 44:43Speaker 01

  Thanks Kodak.

• 44:44Speaker 00

  Bit of a rug.

• 44:45Speaker 01

  Yeah.

• 44:46Speaker 00

  Fact three, Kodak ran a small nuclear reactor under its Rochester HQ.

• 44:51Speaker 01

  I can't believe this is true.

• 44:52Speaker 00

  Bonkers.

• 44:53Speaker 01

  I can't believe this is true.

• 44:54Speaker 00

  It shouldn't be true, but it's true. It's amazing.

• 44:58Speaker 00

  That first one is the whole reason we just did this episode though. I mean, if you've got a product making 70 or 80% profit margin and your shareholders know it and your competitors can't touch it, I mean, you just, you don't blow that up because some 25 year old in the basement has just come up with a digital camera shaped like a toaster, you know? You just don't do it. I think it reframes the whole way that I thought about Kodak originally. I mean, you patent that toaster looking thing.

• 45:24Speaker 01

  Yep.

• 45:25Speaker 00

  You put it in the drawer and then you keep selling film for as long as you possibly can, don't you, Rob?

• 45:31Speaker 01

  I guess, yeah, I guess so. I mean, the only people I know who bought film were the hipsters at uni who were photographers who were like, I don't shoot digital, I only shoot film.

• 45:42Speaker 00

  Yeah.

• 45:43Speaker 01

  And I guess that market is increasing as there's more hipsters who go to uni and then later in life they've got a bit of disposable income and look, it does look nice.

• 45:51Speaker 00

  It does.

• 45:51Speaker 01

  It does look nice.

• 45:52Speaker 00

  You can kind of, I mean, maybe I can't. Photography students know.

• 45:56Speaker 01

  Yeah.

• 45:57Speaker 00

  I mean, it's a bit like the vinyl thing with music though, isn't it?

• 45:59Speaker 01

  Correct.

• 46:00Speaker 00

  It's kind of like that. I mean, vinyl is now a billion dollar part of the music industry. It does build, it becomes noticeable again. So maybe that's the way it always had to be, is that it, it wasn't going to be that Kodak was the, the group to take in this next chapter. I mean, if you think about it, sure, they had the opportunity to become Instagram.

• 46:19Speaker 01

  Yep.

• 46:19Speaker 00

  You know, they had that sort of thing at their, at their disposal, but it was never really what they were there to do.

• 46:25Speaker 01

  No.

• 46:27Speaker 00

  It's an interesting story.

• 46:29Speaker 01

  Very.

• 46:29Speaker 00

  So that's Kodak, the company that invented the future, took a good, hard look at it for years and decided that it couldn't make as much money with it. That in my book is one of the most clear eyed business calls of the 20th century. Absolutely not a mistake and not the actions of executives who were asleep at the wheel. So I'm, I'm sorry to all those people who watch my skin on social media. I actually think it was kind of unfair now. I'm not going to take it down, but there you go. Thank you very much for listening. I'm Chris Kohler. As always, Rob has joined me.

• 47:02Speaker 01

  Hello.

• 47:03Speaker 00

  Thank you.

• 47:04Speaker 01

  Good fun.

• 47:04Speaker 00

  Next time on How We Got Here, system for charging people little by little for everything, maybe even for using the toilet. Stow your tray tables, fasten your seatbelt, gets really stupid. Have a nice one.

• 47:22Speaker 00

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• 48:05Speaker 00

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