Kodak Digital Cinema continues to defy gravity. Over the past two years, Kodak’s stock has fallen by over 75%, reducing its market cap to around $1.9B. While some industry execs have speculated that Kodak should buy Cinedigm, perhaps Dolby is in position to buy Kodak.
Kodak’s digital cinema team reportedly has created a top line of digital cinema server and TMS products. It is not surprising that Kodak would develop quality products. What’s missing, however, is a sales strategy. This is repetitive behavior for Kodak, which botched the strategy for its Cineon digital intermediate processor in the 90’s. Kodak bundles TMS and server in a VPF financed deal, which only one studio (Paramount) has signed. It also tries to bundle this with its cinema advertising system, which has around 2100 screens today, compared to over 15,000 for NCM (who isn’t selling a digital cinema system). Even if Kodak were to succeed in signing VPF deals and attempted to self-finance installations (unlikely in the current market), there is considerable doubt in the marketplace that Kodak is committed to its cinema products. In the products space, Kodak will experience fierce competition, and will need to support warranties, product maintenance, and upgrades. After all, its history is as a film company, where competition is limited, and servicing and field upgrades are not required.
As odd as its strategy-of-sorts may be, Kodak is unlikely to change. Kodak Digital Cinema may not have the internal visibility needed to invoke change, but it offers the company a chance to preserve its name in the cinema space, and will likely be left alone. Should it fail, then management has a plethora of cinema patents that it can enforce as a result of its engineering investment.
In the meantime, Kodak, with its film hat on, plays havoc with studios and virtual print fee financing. VPFs are structured so that the cost of a digital print plus VPF is equal to the cost of a film print. In other words, to the studio, there should be no difference on its books whether digital or film product is shipped. By dropping the price of film, Kodak tilts the distribution cost equation in favor of film, and has forced studios to pay more for digital distribution with VPFs than it pays for a film print. In doing so, Kodak has caused studios to lower the VPF amount they are willing to pay in new negotiations, reducing the total dollar amount that studios will pay for equipment, and making digital cinema less attractive to the exhibitor. This game is likely to continue.