Kodak losing out in digital market
By Matt Krantz, USA TODAY

Rather than grabbing the family camera to catch a Kodak moment, many vacationers this summer are reaching for their digital cameras and snagging a SanDisk moment.
While SanDisk may not have the name recognition of Kodak (EK), it is one of many fast-growing companies that are cornering key parts of the digital camera business and quickly replacing film in camera bags.

For the first time, more digital images will be taken this year than film snapshots, according to industry-tracker IDC. It's a radical shift that has turned the photography industry upside down. Lesser-known companies that dominate the still relatively small but fast-growing area of digital cameras are at the top of a trend that's changing one of the nation's oldest industries and the way millions of people take pictures.

The change has been too rapid for Kodak to handle. That's why, even though shutterbugs are snapping more photos than ever before, Kodak's stock is tanking.

Shares of the world's leader in photography gear have sagged 23% this year, making them the worst performer among the 30 stocks in the Dow Jones industrial average and one of the 10 worst in the Standard & Poor's 500. And Kodak's stock price isn't the only thing not picture perfect: The company's profit plunged 60% in the second quarter, and it plans to slash up to 6,000 jobs this year. Among the culprits: Kodak said consumers are going digital much faster than it earlier thought.

But Kodak's woes have been a major windfall for shareholders of the smaller companies that dominate digital, says Richard Gould, portfolio manager of the Rockland Small Cap Growth fund. "Digital cameras are taking over film, and people are not going back," he says.

The two key areas of digital photography:

Digital film.

If there's a Kodak of the digital era, it's SanDisk. This 15-year-old company is the leading maker of digital film memory cards that slide into digital cameras and store images that are taken.

The company can hardly keep up with demand. Shutterbugs worldwide are now expected to buy up to 45 million digital cameras this year up 10 million from earlier forecasts and up from the 25 million bought in 2002. And they'll need digital film to go with those cameras. As a result, while Kodak struggles, SanDisk posted net income of $41.3 million in the second quarter, up 357% from a year ago.

This year alone, the stock has gained 159% blowing away the performance of the Nasdaq composite index, which has risen 27%.

And make no mistake SanDisk's good fortunes are directly tied to photography. The company gets 80% to 90% of its revenue from consumer electronics products most of which are currently used in digital cameras, says Nelson Chan, senior vice president of the retail business unit.

"The crossover to digital has already crossed," he says.

Lexar is one of the largest makers of digital film, behind SanDisk. Like SanDisk's, its stock is on a tear, having gained 99% this year.

But Lexar takes a slightly different approach in that it attempts to aim primarily for the professional photographer. For instance, the company is currently shipping the first digital film capable of storing 4 gigabytes of data or enough to hold 45,000 photos. It beat SanDisk, which also plans to ship such a high-capacity card that can be used in a wider array of digital camera, in two months.

Lexar also tries to make its cards different by adding features pro photographers can appreciate. Some of its cards, for instance, let photographers permanently delete images so they cannot be recovered.

Sensors and lenses.

Several publicly traded companies are focusing on making the guts of digital cameras. For instance, OmniVision and Zoran make sensors the costly computer chips that give digital cameras the ability to see. Their shares are up 220% and 70%, respectively.

And then there's Concord Camera. Over just the past three to four quarters, the company has increased to 40% the revenue it gets from selling lenses used in digital cameras, says Michael Kim, analyst at Roth Capital Partners.

Kodak says it's too early to pronounce film dead. It continues to find strong demand for its film products in areas such as China, India and Latin America, not to mention professional areas such as in health care and movies, spokesman Anthony Sanzio says. The company isn't going to yield to these smaller companies without a fight. Kodak is introducing several digital cameras of its own this year.

The smaller companies face risks, including rising competition from low-cost rivals in the Far East.

Still, the upstarts have gotten such a lead that Kodak will now have to figure out how it will fit into the newly shaped industry. For the first time in history, Kodak isn't the first name investors think of when it comes to photography. "Digital will change the game," Kim says.